Are you a hedge fund ?

I was reading an article earlier today talking about how the local banks are tightening their lending standards by "lifting" their loan to value requirements to say 90%.

Let's see....The major investment banks got themselves into trouble because they have an asset to capital ratio of as much as 30. It is not too shabby for an average Australian home owner who borrows 90% of the value of the asset. Put it another way, the leverage ratio is 9 to 1. Throw in the tax free capital gain concession, life is pretty darn good.

If the asset price goes up by 10% p.a., ROE is close to 100%. However, leverage cuts both ways. If the asset price drops by 10%, the leverage is enough to wipe out the equity. If it drops 15%, negative equity kicks in.

I always find it amazing reading those property magazines profiling some guys/gals somewhere having 7 properties and living happily ever after. Those articles never discuss how much debts they still owe. I often wonder if they have indeed sold some of their properties and are happily retired.

All hail the Australian government. A job well done. The First Home Buyer Grant just keeps the gravy train rolling. It ensures there are always exits for property speculators/investors. It certainly protects the economy from the negative equity spiral.

But does it ? If you are a first home buyer and you have struggled mightily to save a decent house deposit and the grant gets you over the line, how confident are you in your ability to save the necessary repayment for the next 30 years in order to service the mortgage ? 

In short, the clever country is producing a lot of small hedge funds inadvertently. To make it more interesting, mismatch of duration of assets and liabilities can be quite pronounced at these "funds". If the perpetual price appreciation myth is no more, the whole pyramid may well come tumbling down.