Market falls hurt margin lenders

One in every 100 Australians has borrowed money to invest in shares, with the total borrowed now exceeding $10 billion – more than double the amount three years ago. The margin lending industry accounts for about 3 per cent of Australian households' debt, according to Reserve Bank figures, with the average loan now $88,916.

At the same time, world equity markets have fallen sharply and unless they stage a comeback, these investments could unravel. Economists believe that leveraged investments' high returns of the late 1990s are unlikely to come back over the next 10 years. AMP Global Investors economist Shane Oliver says the best that the Australian sharemarket can return over the next decade will be 8.5 per cent, which “isn't much compared with borrowing costs”. The typical margin loan interest rate is 7 per cent. However, Macquarie Bank's head of margin lending, Scott Young, says that this rate is not yet high enough to erode returns. A margin loan will produce returns as long as there's potential for capital gains in the market, he said.

Australian investors have shown a greater appetite for margin loans than elsewhere in the world. Margin loan debt is down in the US and few UK brokers offer margin loans. In Australia, investors have a total credit limit of $16.2 billion, with $21 billion worth of share and managed funds put up as security. This does not include investors who have used equity in their homes to borrow.