If you buy a house in Australia — where housing prices are out of control, even by global standards — you can wait a couple months for the house's book value to go up, and then borrow against that "unrealised capital gain" to buy another house…and then you can do it again.
This is how so many speculators in the Australian property market have come to own several homes whose rental income can't pay the mortgage, but who are still able to borrow on those unprofitable properties to buy more unprofitable properties.
We sat through this movie, ten years ago. It doesn't end well.
LF Economics argues that while international money markets have until now provided "remarkably affordable funding" enabling Australian banks to issue "large and risky loans", there is a growing risk the wholesale lending community will walk away from the Australian banking system.
"[Many] international wholesale lenders … may find out the hard way that they have invested into nothing more than a $1.7 trillion 'piss in a fancy bottle scam'," the report says.
The report largely sheets the blame home to Australia's financial regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. "ASIC and APRA have failed to protect borrowers from predatory and illegal lending practices," it says.
Issuing new loans against unrealised capital gains has created an Australian 'house of cards'
(via Naked Capitalism)
(Image: Paul Holloway, CC-BY-SA)