It is both popular and therapeutic to bash banks. There’s a lot not to like about the banking class – they dress too well, tend to arrogance, receive ridiculous amounts of money for pretty basic work and are always on the hunt for that extra 1 basis point of rent. I like bashing banks too.
In the days before deregulation, borrowers would have to swear allegiance to a particular bank and – perhaps, if lucky enough – the bank manager might smile upon them and offer a principal and interest loan of perhaps 70 per cent of the purchase price of a home. In those days people tended to frugality and saved to buy their 9 square home. No average Australian living in the 70s or 80s would even dream of having an investment portfolio of multiple dwellings.
Now we live in an age of easy money – getting a loan at a reasonable interest rate has never been so easy (one could always borrow from loan sharks but their terms were pretty extreme). Banks have been competing with each other to get the money out the door, and it seems that many did not undertake some due diligence, perhaps trusting that the brokers were ethical and that borrowers truthfully disclosed their financial situation. Also, some of the Australian laws prevented lenders from sharing information about overly exposed borrowers. Some lenders have been happy to provide 100% loans interest only.
This might work if housing prices were monotonically increasing. But that’s pretty much a Ponzi scheme.
I do find it curious that commentators and the like complain about the high cost of housing in Australia, but no one seems to want the price to fall. Well I do. House prices are too high in Australia for a variety of reasons, including zoning practices and overly optimistic forecasting. A major correction to house prices – say a 50% fall – would help improve housing affordability in Australia.
Now the ABC on its 730 report is mentioning the case of a 71 year old nurse who owns 11 investment properties with her owner-occupied home and has over $3 million in debt. The report paints the woman as a victim of excessive bank lending.
From the report it seems the woman was taken in by some fast selling of the get-rich-quick variety.
Yes, the banks shouldn’t have lent her that much money – but it’s hard to see why a bank would want to lend money to someone who can’t pay it back.
It is notable that the woman applied for loans from multiple banks – perhaps if she had sought 11 investment loans from one bank she may have received advice that it would be too risky. Did she disclose the fact of the other borrowings to each lender? We don’t know of course, but the 730 report seems to take a firm view that she is the victim and the banks have prayed upon an innocent person. I doubt that a single bank would have lent such a sum for such risk.
Did she really think that a nurse would own 11 investment properties? Or that a nurse would have a self-managed superannuation fund?
The facts will ultimately be revealed, but one cannot exclude that the borrower was a little greedy, hoping for easy money and perhaps not understanding risk.
It does seem extremely risky and foolhardy to take out over $3 million of interest-only loans to buy some investment properties.
If one could really borrow in such a fashion and get a positive return from such a strategy it would be akin to a perpetual motion machine – it is impossible.
If it seems too good to be true, it almost certainly is too good to be true. And whenever one borrows to buy an asset, one is taking on risk. High return is not possible without high risk. And if you’re getting on in years, don’t get sucked in by the get-rich-quick scheme. Too many people have been driven to financial destitution by following the siren of the get-rich-quick scheme. And that includes the people waiting for their rich daddy or mummy to die.
Get on with your life, exploit your skills, invest wisely in a diversified portfolio, don’t overextend your borrowings and try to be debt free. Be frugal and stoic. Be honest and ethical. Treat people with respect. Take responsibility for your own decisions, and don’t play the victim. Don’t be jealous of others. Enjoy your life, whatever your circumstances. Not a very complex series of recommendations, but essential for the good life.
Sometimes – for very brief periods – I am sympathetic to the banks. They will be slammed for not lending to some borrower, but then slammed for lending to someone who cannot afford the loan. People like easy money, but not too easy – it’s very difficult to know where the dividing line should be.