Risky investment lending could lead to property crash

Adam Smith 3 May 2016

house crashTwo economists have warned of banks lending to “income poor” investors who may not be able to pay the loans back.

Housing economics group LF Economics has warned the housing market could be vulnerable due to risky investment lending by banks, The Australian Financial Review has reported. The group’s co-founders, Lindsay David and Philip Soos, have claimed that lending to “asset rich and income poor” investors could signal the Australian housing market is at risk of a crash.

“Banks have consistently lent to borrowers who would never be able to repay unless they flip their house for a profit,” David said.

The group said it had examined loan application forms collected by financial services consumer advocate Denise Brailey, and found lenders had given investment loans of up to $400,000 to people with incomes as low as $23,000. The loans are often negatively geared, LF Economics claimed.

David further alleged that many of the loan applications were altered to make the borrowers appear to be a better credit risk. David said low interest rates may have encouraged investors to take on more than they can afford.

“Lower interest rates since the peak in 1990 have merely encouraged Australian households to maximise leverage and speculate on residential property. Otherwise, speculators don’t take into account what the prevailing interest rates are. They only care about capital gains,” David said.

The group has made a submission to the senate inquiry into penalties for white collar crime.

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