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Paul,
I think there at least should be a note on the real estate area. I have watched John McGrath talking positively about the Sydney market, but as I watch people desperately trying to buy the next property even with a simple 20% deposit, I wonder what happens when the merry go round slows down. I am not talking a market collapse here by the way.
As an example, I use a $1 million property with a deposit of $200,000, leaving a loan of $800,000. If the market simply pulls back 10% (which is quite possible) the bank may look at the properties and say you need to top up. Following the example, the $1 million property now moves to $900,000, the loan is $800,000 the ratio is still 80% by the bank and so they now need a top up of $80,000 to bring it back into kilter.
If the loan ratio is further up towards 90% it gets worse.
This needs to be broached, as if this starts to occur, then there will be a serious amount of tears around the place.
Australian banks have shown themselves to be very quick to ensure shareholders funds and bonuses are not impacted by market fluctuations.
Your thoughts?
A: You make a good point.
The reason banks use an LVR of 80% (and rarely lend above this amount without mortgage lender’s insurance) is to take account of the situation you have described. Banks also factor in a higher interest rate (2 to 3% above the current rate) to make sure that you can service the loan if rates rise.
After any boom, there will inevitably be some pain and unfortunately, some investors will get stung.
