How to Get a $200,000 Loan With a $2,000 Deposit

On our mind is the flaky and fragile Australian banking system.

Do you remember it was only a few weeks ago that the mainstream press was telling you that the major banks were winding back their reliance on the government wholesale funding guarantee?

Well, maybe they are, but they still can’t help themselves.

According to the Sydney Morning Herald, the Commonwealth Bank has raised USD$1.25 billion last week, every last cent guaranteed by the taxpayer. And the week before Westpac raised $1.1 billion guaranteed by you and other taxpayers.

Even that wasn’t enough to get us riled this morning. It takes more than that these days.

No, there were two other things that came to our attention over the weekend that made us stagger uncontrollably about the house.

But before I get onto that, a quick follow up to last Friday’s Money Morning. Thanks to all the climate change induced rain over the weekend we were stuck inside and so managed to have a glance at the Money Morning message boards.

It seems that some readers believe we misrepresented the “Property Professor” by claiming that he believes property doubles in values every ten years. Apparently what he was really saying is that property provides you with a hedge against inflation compared with renting.

Of course, he didn’t say that at all. It’s typical of the property spruikers trying to cover each other’s tracks when their nonsense and fallacies are exposed.

Naturally, we don’t blame the spruikers for trying. They’ve had it easy for so long, where no-one has ever dared challenge their property investing falsehoods.

Anyway, for fear of being accused of misrepresenting the Property Prof, how about this snippet of financial advice from the emeritus professor of debt:

“If you could, rather than buying one $400,000 property with a principal and interest loan you’d be better getting two $400,000 properties with two interest only loans. When they double in value, sell one and the other one’s freehold. If you keep that principal and interest loan, it’s going to take you 25 years to do that. You hold two and you only need one property cycle, seven to 10 years, and the other one’s freehold.”

That little gem was from an investing round table held by The Advertiser in Adelaide.

But the argument that somehow the Property Prof was misrepresented doesn’t stack up when you read an article he wrote for Realestate.com.au:

“I have calculated capital growth of about 7% per annum, which means it doubles in value every 10 years.”

Calculations which fall apart if interest rates are higher than 6.5% and collapse completely if property turns out not to double in value every 10 years.

But never mind. As I say, that’s not what got us revved up over the weekend.

Something that did make us sit up to attention was an email from one Money Morning reader who suggested we look at an article on Ratecity.com.au which quoted Westpac CEO, Gail Kelly as saying:

“We are a very highly indebted country – on average we borrow twice what we save… we need to incentivize and drive additional savings as a nation.”

Hmm. What do we make of that? We’re not going to argue against savings. Saving money is a good thing.

The trouble is under the current banking system, saving money in a bank account only makes the problem of excess borrowing worse.

In a perverse way, people who saved money in a bank are partly to blame for the collapse of the banking system and the expansion of borrowing in the Australian market.

And it’s what makes the comments from Kelly all the more troubling. She’s making the right sounds “savings are good”, it’s just that like every other banker, when she’s got her paws on your savings, it’s just used to leverage themselves up to the housing market.

Don’t forget that around 50% of all bank lending goes towards residential real estate. The money that you tuck away in a bank account for a rainy day is used as security so house buyers can get 100 to 1 leverage on a house.

That’s the real reason Kelly and the others want you to save more, so they can lend more.

If Kelly really was concerned about the amount of borrowing then all Westpac would need to do is tighten their lending criteria.

That’s not hard is it?

Only doing so would mean the collapse of the housing market and that wouldn’t do much of the banks’ balance sheets.

And besides, now that the government has given the banks a free kick with wholesale and deposit guarantees there is no need for the banks to tighten their lending. They know they can push things to the extreme.

Which brings us to the other story that made us wince.

We tuned into the Barefoot Investor on CNBC yesterday afternoon. Hosted by Scott Pape, it’s a ‘family friendly’ investing show. He talks about budgeting and paying off debt, and all that sort of thing.

Anyway, it was the opening item that disproved all of the pap that we hear about the banks making it harder to borrow. And how the Australian banks have a much healthier balance sheet than overseas banks.

Scott interviewed a young lass from Sydney, the short story is that she had a $200,000 home loan which she took out now to qualify for the first home buyers debt.

But that’s not the half of it. The young lass looked as though she had barely graduated from high school, yet had a $200,000 mortgage which she had secured with a deposit of…

$2,000.

That’s right, two grand. In other words, 100 to 1 leverage.

Oh, and by the way, she didn’t have a full time job at the time she applied for the loan, and still doesn’t!

So how did the bank lend her $200,000? That’s simple, they got her old man to go guarantor for her.

Yep, don’t worry about income or a deposit or job security or the ability to repay a debt, as long as someone else is prepared to hock their home, the banks will give anyone a loan.

It’s a fairly sad state of affairs. And it proves that despite the propaganda from the mainstream press and the mainstream analysts, Australia’s banks are going to extraordinary lengths to make sure the lending and borrowing binge continues.

And it’s all built on the false premise that property values double every 7-10 years. The banks believe it’s true, the property spruikers believe it’s true and the home buyers believe it’s true.

The trouble is, it’s not true. When the mist clears all that will be left is a pile of bricks and mortar that’s worth 40% or 50% less than the loans covering them.

Until then, thousands more suckers will be convinced to buy into property at inflated prices under the false belief of it being an inflation hedge and a guaranteed path to millionaire status.

Cheers.
Kris.

 

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished down on Friday, by 1.33% closing at 4,685.80. An ordinary trading session on Wall Street has seen a pretty flat start to the Australian trading day.

The Dow Jones Industrial Average dropped off 23 points, finishing at 10,318.10. While traders are being told the ‘recession’ is over, they still shied away from speculative stocks. Traders chose to stick with stocks that can withstand economic uncertainty, like Coca-Cola Co [NYSE: KO] and Merck & Co [NYSE: MRK].

In the UK, the FTSE100 saw a sell-off of energy and mining stocks which forced the index to close at 5,251.41, down by 16 points.

The Nikkei had its first four week losing streak since in over a year, finishing at 9,497.68, down by 0.54%. Overall, last week the Nikkei lost 2.8%

The price of gold in Australian dollars is trading at $1,259.07, while in US Dollars it is trading at $1,151.20.

Currently the price of silver in Aussie dollars is $20.23 and in US Dollars it is $18.50.

The Aussie dollar versus the US dollar is trading at USD$0.9142, and against the Japanese Yen JPY81.21

Crude oil closed at USD$77.47

For the biggest movers on the market yesterday click here…


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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