Incorrect, but keep on assuming.
Gee, put down 10% deposit and buy and IP, that seems like betting to me.
Everything is a gamble it just depends on how much risk you can tolerate.
Cheers
Hi satano,
You give a good example of leverage on the retail side of the market, i.e. those taking out loans.
I put it to you and all others on this forum that the question we as Australian citizens - who through the Treasury have guaranteed the huuuuuuuge amounts of debt of the Big 4 banks (especially all the new foreign currency denominated debt they have issued for huge profits since 2008 guarantee came in place) - should be asking is what about the leverage of our banks?
Especially CBA and WBC who hold as more than half the "assets" on their books as mortgage debt. Banks are fully leveraged into the real estate trade - which has traditionally been "buy short sell long" or buy short term debt and sell long term debt. They have sold a lot of this debt into foreign currency denominated bonds and the like.
What will the market cap/asset book of CBA or WBC look like if house prices decline by say, 5% (so I am not accused of picking a sensational number) in a contracting credit environment where they cannot find bidders for new debt? Please ask yourself if the global market for debt is contracting or increasing.
We have already allowed these banks to take bad/nonperforming assets off their balance sheets, otherwise they would already be insolvent. So let's ignore those assets just like they do, and pretend all is rosy for a second then ask the hypothetical two part question:
1. What is the actual leverage of our big 4 banks in the residential Aus RE and Aus CRE market? Domestic demand for Aus government debt is not especially high compared to say US Treasuries, Japanese Government Bonds or German Bunds. So our banks did, do and will continue to fund our RE appetite on international debt markets. Is this leverage and method of obtaining funding sustainable from a macro perspective and ethical from our citizens perspective as debt guarantors to these banks?
2. Assuming this is not a bubble, but rather a healthy bull market, we can also assume house prices make a healthy correction of 5% at some future point before making new highs. What will happen to the balance sheets of our big 4 banks in such a correction scenario? What would be the trigger for such a correction? Are the banks or even Australian society prepared for such a trigger event?