Should we hate the banks?

After the recent bank bashing from regulators such as ASIC and APRA, as well as the Royal Commission, major lenders feel unloved and are scrambling to improve their image. How should property investors react to the chorus of dissatisfaction, and what can they do about it?

The fact that the major banks behaved badly and are currently not very popular means that investors can either use smaller lenders or just put up with them and leave it to the regulator – and competition - to sort them out.

Smaller lenders usually cannot compete on rates with the larger banks, because most of their funding is from overseas markets, whereas a sizeable portion of the large local banks’ funding comes from consumer deposits, which is the cheapest way to source funds.

These smaller lenders have been shrinking their margins to compete on rates and take advantage of the majors’ battered position. This has been working as they have increased market share substantially. In addition, large lenders have had to compensate for loss of volume, by keeping rates higher than they normally would to sustain their profits to shareholders, and this also helps smaller lenders.

Lenders are a necessity, one we can't avoid, and we need them to help finance our property acquisitions. This is because of the power of leverage. Current tax concessions add to the attractiveness of property as a money-making tool. Whatever terms and conditions banks – large and small – offer, we will eventually have to accept them if we want to be successful in our portfolio building strategy. So our best bet is to step away from the emotion, navigate the lending landscape, and look for the product that is better than the others to suit our purpose.

As an investment strategy, residential property is a great way to create wealth for a number of reasons.

• Firstly, it is a low risk strategy providing that you invest in the right locations. Generally speaking, if you invest in a decent property within commutable distance to a capital city, in a reputable suburb, your investment should be pretty safe. Obviously, there can be ups and downs, but over the long term the fundamentals are sound.

• Secondly, borrowing provides leverage and this allows an investor to accumulate a portfolio a lot faster than with no leverage. Also, in a rising market, it is quite efficient. You invest, say, 20% (your deposit) in a property but you benefit from 100% of the capital growth. Of course, leverage not only magnifies gains; it can also magnify losses, which brings us back to the first point: choose your property wisely.

• Thirdly, residential real estate, with a total value in excess of $7 trillion, is the largest asset class in Australia by far. Just compare this with superannuation ($2.3 trillion) or even shares ($1.8 trillion). It is also the largest employer in Australia. It is in no one’s interest to make a mess of it. It would just destroy the economy.

In conclusion, savvy investors will always have to use bank products to advance their ambitions, regardless of the turmoil they are in. We don’t have to like them, in the same way they don’t really like us. We are all in it to advance our own interests and, once we accept this, we’ll get along fine.