We have all become skeptical of the big banks over time. In fact it’s practically impossible to go to a dinner party or backyard BBQ and not become embroiled in a heated discussion about the villainous practices lenders engage in. You could almost be forgiven for thinking obtaining a bank loan was like selling your soul to the devil himself!
At these affairs, I’m sure some of my friends believe that I like playing devil’s advocate. You see, working in the industry on a daily basis allows me to see both sides of the argument and while I certainly don’t think the banks are saints, I accept the reality that they are a business. And like any business, they are interested in one thing above all else – making money!
So what happens when the big boys owe more than they make? It might be hard to believe that the very institutions that slug the average customer with enormous fees, charges and interest repayments have to shoulder the burden of debt themselves, but this is a somewhat scary reality at present.
The cost of funding came to our attention when the banks moved on interest rates independent of the RBA late last year. They argued that rather than being the Grinch, they were simply doing what was necessary to protect their profit margins in the wake of increasing offshore funding.
Now it’s fair to say that while we rely on the banks for borrowing and stashing our savings, very few of us have much of an idea about how they come by the cash they lend us. Most of us know that some of it comes from them investing our savings, but how much do we understand about their reliance on foreign lenders to fund our mortgage market?
Late last year, the Australian Bureau of Statistics published figures that indicate an alarming debt of $352.7 billion is owed to overseas investors by our banking industry. This is equivalent to 27% of the country’s entire economic output.
Experts say the unprecedented demand for mortgages between 2008 and 2010, largely due to government incentives such as the First Home Owners Grant, stimulated buying activity and lured borrowers into the market; thus creating an increased reliance on overseas funding by the banks to meet demand.
Understandably, concerns have been raised as to the capacity of our financial system, and the question of whether it is being dangerously over-stretched is making some in the industry very nervous. Essentially homeowners will be the first in the firing line if this debt becomes a major issue; left at the mercy of rate hikes by local banks and the overseas investors who fund them.
Compounding the problem is the fact that global fund mangers are starting to get jittery about the current state of our property markets, with reports in the overseas media about our overheated housing sector and inflated values. Some are suggesting that if these lenders become too gun shy, they could start charging Aussie banks higher interest rates or worse case scenario, withdraw funding entirely.
Analysts say if overseas lenders decide to pull the pin on funding; our banking system would plunge into a catastrophic credit crunch, leading to mortgage rationing and potentially, a collapse in property prices. Comparisons are being drawn to the recent upheaval in Ireland, where a house price bubble effectively crippled the banking sector.
The good news for Australian borrowers is that our housing market is not a bubble waiting to burst, with prices here underpinned by a lack of stock and ever increasing demand due to our increasing population, among other things. Our overall economy is in good shape, as are our employment levels, so while we should be cautious, I think we can still be optimistic that such an outcome is unlikely any time soon.