Interest-only fuelled house price speculation a growing worry, warns Clime

Australians have always loved a punt but it’s usually been confined to the horses, or, when it comes to investing, some gold mine that ends up becoming a penny dreadful plaything before it eventually goes belly-up.

But just like punters who can now bet on a whole range of outcomes in major sports, there’s also a new breed of investors using interest-only loans from the four major banks to punt the property market.

A look at housing and loans for property investing shows that interest-only loans account for around 40 per cent of all lending.

According to John Abernethy from Clime, this shows just how much property speculation is going on right now as these investors only focus on getting a capital gain and not repaying the loan.

The Australian Securities and Investments Commission says in 2012 interest-only loans tallied around $88.7 billion but by 2015 it had grown to around $155 billion.

In the old days interest-only loans were often seen as too risky and home owners and investors looked to pay back the loan as quickly as they could.

More often than not they didn’t even get an option. Paying principle and interest was all they could do.

Now, however, there’s no thought given to how the loan will be repaid. It’s all a bit of a punt that property prices will just keep going up.

The fear is, of course, what happens when they don’t or if they keep getting whacked with higher borrowing costs.

Will these punters panic and sell or will they hold on for the “long term”?

Loan options

The other issue with interest-only loans is that not all the major banks can differentiate their pricing for interest-only and interest and principal borrowers. ANZ can’t but the other three can.

Clime has also taken a closer look at Commonwealth Bank’s latest profit result and say that it also shows interest-only loans have grown from 37 per cent of residential assets to 40 per cent in the past year.

“No one should be deluded,” Mr Abernathy said. “Excessive residential property prices, driven by greed, envy or excessive debt, will not create a good outcome for Australia.”

He reckons what makes this property cycle different to all the others is it has been investors driving prices higher rather than the traditional home occupiers who would do anything to repay their loans.

“The price of housing along Australia’s south-east coast has risen because of a multitude of factors: envy, greed, the poor regulation of debt, excessive taxation breaks for property investment, the lack of restrictions governing non-resident investment, population growth and high immigration, poor infrastructure development, poor urban planning and uncoordinated land release,” Mr Abernathy said.

It all comes as the local economy is generating more part-time jobs which only just encourages investors to take out these, what look like cheaper, interest-only loans.

It means a new generation of Australians are no longer dreaming of owning their own home. Instead, they are dreaming about living in their own home.

In short, they can’t afford to live in the house so they stay at home and rent out any purchase. It makes them property investors rather than home owners.

Values fluctuate

But Mr Abernathy has a warning.

“High residential property prices may be maintained for long periods when governments and regulators support them, but eventually either affordability or intrinsic value will bring prices down,” he said.

Record low interest rates, how much you borrow and what yield investors get all combine to make up the intrinsic value of a residential property. As rates rise it can change the value.

There’s been plenty of property booms and busts over the years, including a credit squeeze in the early 1960s that led to a property boom in the ’70s, particularly in CBD office space.

But then higher interest rates brought it all crashing down.

In the 1980s the banking system was in the spotlight again when 16 new licences were introduced and lending standards went out the back door.

The banks slashed interest rates on loans and reduced loan documentation to almost zero for a range of high-flying corporate raiders.

After the crash in 1987 property prices took off again but the recession of 1991 stopped it all.

Since then there’s been a golden run of growth, but interest rates are at record lows and are poised to rise and that has some experts worried it will start to unnerve the new breed of property investors.