When lenders moved on interest rates independent of the Reserve Bank late last year, it caused an almighty outcry from politicians and mortgage holders alike. Regularly demonised for their merciless hold over Australian consumers, many suggested this was another money grubbing ploy by the big boys.
But according to the banks, they were simply doing what was necessary to maintain their profit margins in the face of the ever increasing cost of funding. And if the level of debt the banks are in to overseas lenders is anything to go by, they might just be telling the truth.
According to a report in The Herald Sun, Aussie banks are overly reliant on foreign lenders to fund our mortgage market; official figures from the Australian Bureau of Statistics show an alarming debt of $352.7 billion owed to overseas investors by our banking industry (equivalent to 27% of the country’s entire economic output).
So why do the banks owe so much? Experts say there was an unprecedented demand for mortgages between 2008 and 2010, primarily as a result of government incentives such as the First Home Buyer’s Grant which stimulated home buying activity and enticed borrowers into the market.
This has raised concerns that our financial system is becoming dangerously over-stretched, leaving homeowners at the mercy of rate hikes by local banks and the foreign investors who fund them.
These concerns have been compounded by the fact that global fund managers are getting twitchy about reports of our overheated property market and inflated housing values. Some suggest this could see them charge the banks higher interest rates, or worse – withdraw funding entirely.
Asset allocation director with UK based Fidelity Investment says, “If the global economy recovers strongly that could push interest rates up a lot, and that’s a real risk for Australia because rates are already high and house prices are becoming an issue.”
Analysts say the big fear is that if overseas lenders decide to pull the pin on funding, our banking system would plunge into a catastrophic credit crunch, which would lead to mortgage rationing and potentially, a collapse in property prices.
Global fixed income portfolio manager for Russell Investments Gerard Fitzpatrick, said he was increasingly cautious about lending to Australian banks, citing the recent upheaval in Ireland where the house price bubble broke the banks.
“I’m not saying Australia is the same as Ireland, but there are definitely similarities,” he said.
“You’ve had a booming housing sector and rapidly increased lending by banks.
“The two situations have enough in common for bond investors to consider the consequences for the Australian housing market – and the banks that are supporting it.”
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.