Would you like to buy an Australian investment property without needing a deposit?
In partnership with property marketing company Austpac, Chinese financial conglomerate PingAn is enabling punters to do exactly that. Unfortunately for Australians, the offer is only available to Chinese customers of PingAn’s banking arm, which will lend the 10% deposit required to purchase off-the-plan apartments.
Upon settlement, it will then lend an additional 20% for the down payment while the rest of the purchase price is funded via a loan from an Aussie bank.
That’s right, at least some Aussie investment properties are being purchased with loan-to-value ratios of 100%, making somewhat of a mockery of recent attempts by APRA and the big banks to try to cool the residential property market.
Unlike their customers, PingAn seems to understand the risk and so is charging 14% interest as well as obtaining security over Chinese property owned by their customers.
To be fair, it’s another way to avoid the Chinese government’s capital controls and get wealth out of China. When the Aussie property is subsequently resold, any cash left over after repaying the Aussie bank presumably remains outside China.
But as Eddie Yuen, the Shanghai-based manager of Austpac, said: ‘It will open up the Australian property market to a whole new class of investors. Investors may not have the cash now, but they can still buy a property in Australia’.
In other words, these ‘investors’ are borrowing the entire cost of the apartment, expecting to profit handsomely from what they believe are inevitable capital gains.
But in reality, those capital gains aren’t inevitable and they’re just relying on the greater fool theory. This is a risky strategy at the best of times but, in this case it’s even riskier due to 100% gearing.
The problem with this strategy is that it works right up until it stops working.
Unfortunately, house prices don’t always rise and sometimes even decline (as residents of Perth could tell you, for example).
Sooner or later – whether due to rising interest rates, tighter credit standards, oversupply, lower population growth or some other factor – house prices in those areas that are currently booming will stop rising and potentially even start falling.
Readers can draw their own conclusions about how I think those taking advantage of PingAn’s generosity will end up.
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