The popularity of margin loans has fallen substantially as investors looked for alternatives after taking a battering from the global credit crunch and falling stock markets, central bank figures show.
Slumping share prices also meant that margin loans outstanding are, on average, more highly geared than before the onset of the meltdown on financial markets that began in the second half of 2007.
Prosperity Advisers director of financial services Gavin Fernando said clients were still reluctant to go back into margin lending.
“There is not a lot of appetite for new margin loans, particularly for those clients who don’t have advice,” Mr Fernando said.
“You mention margin lending to a new client these days and you get a bit of a quizzical look.”
A margin loan is one where money is borrowed to invest, usually in shares.
The investor receives a “margin call” when the value of the shares falls below a certain percentage of the total amount borrowed.
To reduce the loan size, investors either top up the loan with additional funds or sell some of the shares to repay the money.
The Reserve Bank of Australia (RBA) figures show the total amount of margin loans in the market slumped to a near four-year low of $18.7 billion in the March quarter.
The number of margin loans accounts fell by 12,000 to 189,000 in the March quarter, the lowest level since the pre-credit crunch days of the June quarter of 2007.
A financial analyst at Canstar Cannex, Frank Lopez, says recent signs of recovery on global equity markets will tempt investors to return.
“The minute stock markets start going up, people start getting dollar signs in their eyes again, it’s human nature,” Mr Lopez said from Brisbane.
“Stock markets have stabilised now, which has probably given borrowers a certain level of confidence that they won’t actually lose their savings.”
The All Ordinaries index is up 30 per cent since reaching a low of 3111 points in March this year.
And last week the broad market indicator broke above 4000 points for the first time since November.
Mr Lopez said the rise, if sustained, would support a rebound in margin lending.
“I would suggest that for the margin lending industry probably the worst is over,” Mr Lopez said.
Mr Fernando said clients who were keen to get back into equity markets at current prices were more likely do so through additional contributions to superannuation, rather than via margin loans.
The average number of margin calls per day per 1000 clients fell from 9.95 in the December quarter – the highest level recorded since records began in 1999 – to 4.77 in the March quarter.
Mr Lopez said the fall in margin calls reflected investors being more prepared for falls in the value of their shareholdings.
“They have to be ready to respond to margin calls quickly, whereas if we went back just over a year ago it would have all been quite unexpected and maybe a new experience for many of them,” Mr Lopez said.