Australia’s major banks are placing pressure on business, investors, and the stability of the financial system through excessive interest rate hikes. Despite receiving the government guarantee, funded by taxpayers, and a recovery in debt markets, the Big Four continue to raise rates beyond Reserve Bank increases. Excessive margins are lifting already large profits, with interest income increasing 22% in the year to September 2009, the greatest annual increase since the turn of the century. These policies are endangering the livelihood of Australian investors, many of whom are retirees. 

There has been a great deal of media attention devoted recently to the direct impact of rate rises on mortgage holders. Less publicly acknowledged has been the indirect impact of margin expansion on investors in property trusts. The unlisted property sector holds $60 billion in investors’ funds, and has over 240,000 individual investors, a large proportion of whom are retirees. Interest rate and fee gouging by Australia’s major banks threatens the financial stability of the sector and that of its investors. 

The impact of wildly inflated interest rate margins on the unlisted property has so far resulted in:

• The suspension of distributions by many funds, meaning unit holders receive no income from their investment.
• The suspension of redemptions by many funds, meaning unit holders cannot withdraw their investment in the fund.
• The loss of millions in superannuation invested in the unlisted property sector.
• Massive erosion of unit holder equity and thus real life wealth.
• Thousands of people being forced onto the pension due to the decline in their retirement savings.
• A downward spiral in property valuations resulting from forced sales.
• The loss of thousands of jobs in the property and construction industry.

The lending policies of major banks may well cause the financial collapse of the $60 billion unlisted property sector with potentially catastrophic results. A collapse in commercial property prices would result in insolvency for many funds leading to an increase in bad debts for the banks. More importantly, however, the superannuation and retirement savings of many thousands of Australians would be decimated.

It is in the interest of Australia’s banks to promote economic stability within the commercial property market, to preserve investor confidence and build asset values long term. Major Banks should be encouraged to take a longer term, through-the-cycle view of property portfolios and review management bonus policies based increasing interest rates and fees.