The Wall Street Journal reports that the median price for a home in major Australian cities just hit A$471,818 (US$394,661), a more than doubling of the median price since early 2002, reports the May 28th edition of Grant’s Interest Rate Observer.
“Revealed: The home loan that could save you a fortune,” writes Nick Gardner for The Daily Telegraph.
When high prices make homes hard to buy, enterprising lenders come to the rescue: remember negative-am, Alt-A, and I-O teaser-rate products circa 2004-2006 in the good old U.S. of A? Don Koch, CEO of Australia’s fifth largest bank, ING Direct, says “There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital or not.” The people of Australia “are needlessly being denied the chance to buy a property while prices spiral out of their reach,” Koch claims. Yes, that whole down-payment and amortization requirement thing was deemed unfair not too long ago in America.
Koch goes one better, with ING Direct’s new Interest Only Perpetual Mortgage, borrowers can tote their loans from property to property, “accumulating equity from rising property prices as they go.” After all, real estate always goes up in price and ING wants to be your “mortgage partner for life.”
“Then, as they near retirement,” says Koch, “they could sell their property for a big enough profit to pay off the original loan and buy a smaller place outright, leaving them mortgage-free. Or they could keep the mortgage going and repay the original capital from their estate, after death.”
A check of the ING website reveals that Mr. Koch started with the company back in 1999 as Head of Technology and CIO. The brief bio makes no mention of Koch having any lending experience. Which may be why he claims, “There is no economic reason for banks to insist on regular capital repayment. It just makes the loan more expensive for the borrower.”
“It has worked fantastically in Europe as a way for people to get home ownership and build wealth throughout their lives. It just requires a change in mindset about how you live with debt,” says Koch.
We know how this story ends.
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I know what to short now.
I was just thinking the same exact thing.
There is nothing wrong with his analysis as long as:
1) House prices go up 8% a year.
2) People don’t refinance and take their equity out.
Capital repayment? Who needs that? It’s just a bookkeeping entry in a fractional reserve banking world. Mr. Koch is a visionary.
many of the median capital city housing prices here in australia are around 9X median earnings. this bubble is huge, and hasn’t popped yet, but sales are down compared to 12 months ago, with an increase of properties on offer. look to the government to socialize the housing debt.
hard rain’s a gonna fall.
of course aside from the credit bubble, the australian state governments have constrained supply of new housing land to placate the green lobby, and reap huge revenues from stamp duties on overvalued housing. this is a problem created by regulators in the first place.
newson, totally off-topic, but have you seen this:
http://www.libertarianstandard.com/articles/hans-hermann-hoppe/the-property-and-freedom-society-reflections-after-5-years/
no, i hadn’t. excellent. i’m translating a book from italian on hhh and paleolibertarianism, so it’s good to hear all sides to the debate, and the comments include a fair sprinkling of criticisms about the marriage between cultural conservatism and libertarianism. personally i’ve found nothing objectionable with hoppean paleolibertarianism.
ideology aside, i think hhh is on the money regarding the all-important strategic questions, i guess this comes from his knowledge of the marxists’ success in this area.
thanks for the pointer.
One other factor that hasn’t been highlighted is the role of Mainland Chinese money in escalating prices often with 100% cash down. Sort of like Southern California, Vancouver and Toronto. The Chinese have accumulated a lot of cash and have no really good investment options domestically, that combined with a desire to emigrate or provide housing to children in Australian Universities makes Australia an attractive property investment destination. I have long believe that the Chinese, have long been masters of property speculation and churn. I have not data on this, but wouldn’t be surprised if this isn’t a factor.
The chinese are so awash in cash they were buying up U.S bonds when they were a”bad” investment,then onward to buying up and /or securing resourses in canada, and austrailia even the u.s. They kept building high rise building while they sit empty. I ,m convinced their housing has busted ,but they don’t care(lots of cash). I read last week Mitsubitsui (japan) is back to buying Hi- rises in NYC. “There
‘s your sign”. IT’s not hard to speculate what china’s preparing to do when the world’s currencies are worthless and the bill’s come due.
I wonder if the Aussies have something akin to the Goldman Sachs – Central Bank – Government Treasury sluttylove triangle like we do. In that case, the only people who matter – you know, the ones at the top, not peasants like you – make money no matter what. Even better, they can buy bad debt at 10 cents on the dollar with 90% loss guaranty’s from the Government, so that they not only get full boat on the “bad” (but ohhh sooo good) debt, they also get the absolute devilish JOY of then suing the defaulting party for 100 cents on the dollar ON TOP of that.It’s good to be a member of the elite. Pass the pickled fetuses and Champagne.
note that we don’t really have an “end the fed” movement for the reserve bank of australia. unbelievable as it sounds, economics is in even worse shape here than in the us.
HL – we do have a central bank and it acts similarly to the Fed;
http://www.rba.gov.au
and yes, the bubble here is crazy, in 2008 prices actually fell but the govt. was right there with a whole host of stimulus measures, the main one being tripling the first home owners grant from $7k to $21k, on top of various state measures, plus the free $900 everyone got, plus the slashing of interest rates down to 3% (from around 9% only a year earlier).
I think it will take a while longer before it bursts though, enough people still hold faith in the idea that house prices cannot fall.
There’s nothing inherently wrong with an “interest-only” loan. In the US at least, tax laws make it so that the money you borrow for your primary residence is dirt cheap as compared to a student loan or a small business loan.
If you are an individual who has the money to pay cash for your primary residence, you’d be stupid to do so when the government is willing to give you the opportunity to borrow on the cheap. And I think these are the people the loans are designed for. If I borrow 300k for my mortgage, I can take the 300k in my bank account and buy an investment property, or start a business, or pay tuition. And why would you ever want to pay that money back? Maybe when you decide that you can’t make a 3% after tax return on your investments?
I don’t think that these kind of loans caused the housing crisis. It was the “zero down”, “no income check”, “adjust to 9% in 2 yrs” loans that did us in. And the fact that quasi-govt agencies and institutional investors were happily taking all the risk away from the folks initiating the loans, giving them no reason to care if the borrower had the ability to pay it back.
Of course he knows how the housing bubble ended here in the U.S., so Koch is either a fool or a snake oil salesman. Just last week ING offered me a pre-approved $7K line of credit, apparently for just breathing and being a customer. Knowing a little about fractional-reserve banking and after reading this article the ING picture becomes clear. Hello Everbank! Hello more gold.
Australia is set to implode soon anyways. They are under a serious drought and the desertification of their croplands will give way to a mass exodus to other parts of the world within the next 5 years.
Making the assumption that real estate always goes up…… You dont have to look very far to see what happens when that statement dosnt hold true. Homes in Vancouver Wa have lost 30% or more in the last three years. Always and never are hard to use with future plans/
As a dog returns to his vomit, so a fool to his folly.
I can’t believe any banks would even consider this given what has happened in the US. I’ll go ahead and put a note on my calendar to find a way to profit from the upcoming downgrade of ING stock.
The people of Australia “are needlessly being denied the chance to buy a property while prices spiral out of their reach,” Koch claims.
I think that the Australian people shouldn’t deny the chance to buy property when the price is going beyond their reach though the sell s are significantly down in recent past yet it would recover from the drought of investment soon.
I’m a real estate investor/wholesaler in the Tampa FLorida area and i must say i wish I could flip some homes down under. I’m almost sure there great potential there for real estate investing as it is almost everywhere. The median for home sales is no where close to the 100s and most purchases are all cash so 300k would be a pretty steep amount. I’ve seen it happen though.
Why do we always have an excuse or someone else to blame for our personal downfall? We have to start educating ourselves on the pros and cons of spending on housing. How much is too much?
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I would like to point one thing out that these private lenders are the only solution if you want to get quick and easy financing because everyone knows that if they go through traditional lenders, then they could never think of doing business.
Australian investors can look at the success rate of private lenders in the USA as well as an example.
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