Investors warned against 'Ponzi borrowing'

A prominent economic analyst has warned Australians against relying on "overvalued" property investments.

In a note to clients, Morgan Stanley chief strategist Gerard Minack claimed that local property investors and owner-occupiers are in too much debt and are taking excessive risks by relying on capital gains to repay their loans and interest repayments.

In addition, he argued that Australia's housing "bubble" could burst if the banks tighten credit or "loss-making" middle-class landlords begin to sell up.

Mr Minack suggested that the problem has been compounded by "ill-advised policy", such as the government's first home-buyers grant, which he said has contributed to making Australian houses "40 per cent above fair value".

"Investors have become Ponzi borrowers – Hyman Minsky's term for borrowers who rely on capital gains to repay debt and interest – in the belief that housing is a sure-fire long-term investment," added the analyst. "History shows that it isn't."

The comments could encourage some investors to compare term deposits in search of safer long-term options. Brian White, joint chairman of real estate specialist Ray White, recently told the AAP that he believes Australia now has a two-speed property market whereby demand remains strong in Melbourne and Sydney but is faltering everywhere else.

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