An article in today's Sydney Morning Herald "We of the never-never home loans" highlights the recent rapid increase in the proportion of "interest only" home loans. Traditionally these were mainly used by investors to maximise the effectiveness of negative gearing strategies. But, over the past couple of years homes have become less affordable due to the 1999-2003 housing boom, so more and more home loan borrowers have chosen the lower repayments of an interest only loan to be able to buy a home.
The problem is that a large proportion of these borrowers really can't afford to service the loan, and are a risk of defaulting on loan payments if anything goes wrong.
Banks have been increasingly lending to such "high risk" borrowers in order to maintain their market share and profitability. Despite a couple of periods where stock analysts were advising that bank stocks had peaked, with their profit margins starting to be squeezed, banks have been a consistently good investment over the past decade:
Now, however, I'm thinking seriously about reducing my exposure to bank stocks. The trend in home loan defaults is a bit worrying, and may impact bank profits in the medium term:
Then again, realising capital gains is always a pain in the tax, especially this financial year when my wife is on maternity leave - any extra taxable income could impact her chance of getting any family tax benefit, which means the effective tax rate of realising capital gains this year is prohibitive. Also, as a "long term" investor, trying to dabble in market timing is generally a bad idea.
eenie, meenie, miny, moe...
Disclaimer: I am NOT giving financial advice. Do NOT really on any opinion expressed in this blog when making decisions about YOUR money. Do your own research, seek professional advice as needed. I currently own shares in the following banks: ANZ, CBA, NAB, SUN and WBC.
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