The Australian market has meaningfully lagged its major northern hemisphere counterparts over the past five years. The massive quantitative easing of global central banks pushed investors further out the risk curve in search of better yields and equities markets have been beneficiaries.

The US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England all embraced a two-pronged strategy--aggressively reducing interest rates and making significant purchases of government bonds and in some cases residential mortgage-backed securities from banks and financial institutions.

Australia's Reserve Bank did not embrace the latter and so does not have bulging balance sheet issues to deal with.

The re-liquefying of the financial system in the post-GFC period created a massive pool of cash within the banking system, the size of the pool in direct proportion to the size of the problem created by the GFC. Borrowers took full advantage of the availability and the historically low price of credit.

It was the intention of the central banks to create an attractive option, so increased borrowing activity would drive increased economic activity, albeit leveraged. The credit pool was also created to provide struggling banks with the capacity to increase lending and so support and grow earnings in the traditional way, not speculating.

With interest rates and bond yields suppressed, investors sought alternative higher-yielding investments. Prices of risk assets, including equities and property, increased as the pool of liquidity was accessed or cash reserves drawn down.

While the Australian economy was in transition from the deflating resources investment boom, economic metrics struggled. GDP growth sagged, unemployment rose, particularly in the resource states of Western Australia and Queensland.

East coast residential construction fed by low interest rates and abundant liquidity gained traction and increasing momentum. International buyers, mainly from China, added to demand. Investors gravitated towards residential property as their risk asset of choice.

While the stock market was not ignored, it paled in comparison with gains achieved in the residential property market, as macroeconomic signposts failed to attract buyers to equities.

Margin loans, which are also a form of negative gearing, peaked at $41.5 billion in December 2007, the pre-GFC market crest. They halved by June 2010 to $20.7 billion and halved again by December 2016 to $10.6 billion and have not recovered, with loans outstanding at June 2017 of $11.7 billion. Investors turned to another form of negative gearing, residential property.

Investor housing loans totalled $290 billion in December 2007, representing 32 per cent of Australian total housing loans of $918 billion. Owner-occupied loans were $628 billion and 68 per cent of the total. By August 2017 investor loans had doubled to $582 billion and 34 per cent of the $1.7 trillion total.

Investor loans reached a peak of 39 per cent of all housing loans in June 2015. Investor loans have increased by almost $200 billion since January 2012. Subsequently, macro-prudential measures introduced by the financial regulator APRA have increased interest rates on investor and interest-only loans and capped lending to investors.

I wonder what authorities would have done if say 50 per cent of investor housing loans over the past five years ($100 billion) were channelled into margin loans, probably sending the S&P/ASX 200 through 7,000?

These are interest-only investor loans, buying assets in most cases already partially geared, arguably riskier than housing loans. Would they have introduced macro-prudential measures to bring on a meaningful market correction?

Self-managed superannuation funds (SMSFs) have increased their exposure to residential property over the past five years but represent an estimated 4.5 per cent of total investor housing loans in Australia.

According to the Australian Taxation Office, SMSF residential investments increased from $16 billion in June 2012 to $26.7 billion at December 2016. Commercial property investment increased from $53.3 billion in June 2012 to $74.4 billion at December 2016.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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