Australian Banks Shows Off As Good Investments

By Czarina Ara Lasco

Oct 18, 2016 06:00 AM EDT

Australian banks are the most expensive banks in the world. Up to now they're still very expensive. Why are they so expensive?

Joe Magyer, the chief investment officer of Lakehouse Capital in Australia, joins Gaby Lapera, the analyst of The Motley Fool to talk about Australian banks and real estate.

According to Joe Magyer, Australian banks are so expensive because the default rates are incredibly low in Australia. "The country hasn't had a recession in 25 years," he added.

Australians now have a lot of confidence as a result of this. There are professional investor who are in their early 40's who have not seen a recession in their whole career. This makes a very different world view.

Compared to American banks, Australian banks tend to make loans with a little bit more of an optimistic view. Because of that investors tend to value them more optimistically. However, there are few things on the backside. Net interest margins are getting pressed and default rates are near record lows. "I don't know when exactly they'll pop, but they won't stay that way," Magyer said.

Housing in Australia is very expensive. Jonathan Tepper and John Hempton a couple of hedge fund managers, went around and basically pretended to buy homes. They went to dozens of different banks to see what they could get loaned. They found one banks who's willing to lend them ten times their income to buy a home.

"That's lofty. I personally don't think I could afford a mortgage that's 10 times my income, or buy a property that's 10 times my income. I just think, overall, it's not as extreme as the U.S. was in terms of loose lending standards, overall. No doc loans, or NINJA loans - no income, no job - those aren't really existing in Australia," said Magyer.

Assets are freely traded though prices are high. Even though there's nothing illegal that doesn't mean that an asset can't get overpriced. That's one of the probable risk in the Australian property market today.

"If you're thinking about buying the banks, which are super levered to that and don't have much wiggle room with their payouts, and rich valuations. So, overall, I'm not predicting a crash, I'm just saying that I think the banks are basically priced as though everything will stay great. But there are many ways to lose. And I try to avoid situations like that," Magyer added.

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