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    From The Age.

    Rental investors face big losses, says Reserve chief
    December 7 2002
    By Tim Colebatch
    Economics Editor

    Rental housing investors, who now made up 25 per cent of household debt in Australia, risked "very big losses", Reserve Bank governor Ian Macfarlane warned yesterday.

    Mr Macfarlane said that with strong signs of the housing market cooling, it would be tough for "many, many people".

    "If they lose their job, or there's a divorce, and they have to sell, they could have to realise very big losses," he said.

    Speaking to the parliamentary Economics Committee, Mr Macfarlane intensified his warnings that the boom in rental housing investment, especially in inner-city apartments, was probably heading for a bust.

    He implied criticism of banks for allowing people to invest in rental property with little or no deposit, by using deposit bonds or their home as equity.

    "People on very modest incomes are being persuaded by the seminars held by development companies that they can become rich if they buy apartments," Mr Macfarlane said, backing up criticism by committee chairman David Hawker (Lib, Vic). "People can make those investments on almost 100 per cent gearing."

    Mr Macfarlane said auction clearance rates were falling and apartment prices flattening or falling in Sydney and Melbourne. Rents were falling, rental vacancy rates were rising and three apartment projects in Melbourne alone had been shelved.

    The surge in approvals for new apartments in October was "very strange", and suggested that investors had "overshot", Mr Macfarlane said.

    He warned that rental investors were far more exposed to any downturn in property markets than owner-occupiers because they were more highly geared and more vulnerable to slight interest rate rises.

    He said rental investors held 9 per cent of household debt a decade ago but now held 25 per cent of a much larger volume of debt. They accounted for virtually all the growth in home lending in the past year.

    Many investors were buying apartments off the plan in projects that would be ready to let in 18 months, when demand could be much lower, he said. "We fear many investors are just assuming that things will work out, which is a very dangerous thing to do if you are making such a highly leveraged investment."

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