ANZ says Australia's housing slowdown is almost over with prices set to rise again

More to that I would imagine, otherwise half the apartment market in Bris, Perth, Darwin, parts of Melb around the country would have been to asked to reduce loan amounts by now. Other party could have had crossed commercial or margin loans in the mix...

 

Yup

 

You said 2K per month. Thats 24K per annum. Do they do math differently in NY?

You must be carrying relatively modest levels of debt across the 4 properties if repayments are only increasing 6K per annum ($500 per month) per loan when they revert to P&I . That would suggest the repayments were originally somewhere @ 12K per annum for each loan, which would further suggest total debt is somewhere @ 1-1.2 Million across 4 properties, or thereabouts

That's neither a large portfolio nor a large amount of debt, by resi property portfolio standards at least , yet its costing you an extra 24K per annum to hold onto. As I already said - If you can afford to hold without any issues that's great. I can too. But its going to become a real challenge for many.

Either way, even using 6K per property as the average annual increase, it still doesnt equate to "its not costing investors anything to hold for the next cycle" as you had suggested.....

So you may well be correct in suggesting that those who find even 250-300K of debt , and the 6K increase that will bring with it as it reverts to P&I - too much to handle, ought to get out, and fast.

 

Ive been in banking a long time.... have never seen an example of this happening. I dont know anyone who has ever seen an example of this happening. Not saying it cant happen , but it is so rare it is not worth debating. Very very very ( I said very ) unlikely a bank just decided out of the blue to revalue him and ask him to pay a lump sum to reduce the LVR based on the lower valuation. I havent ever seen that happen. Something else is at play here. Whats more likely is that the guy wasnt making payments , or he was cross collateralised with something else he sold for a loss or discharged , or something along those lines...

 

Find it hard to borrow due to APRA.....and if the asset values decline in near term it will also be due to APRA action for me.....IMO

 

Euro, this discussion has moved away from your initial statement, all I was trying to point out, that while many investors may have to move to PI loans, thus greatly reducing their capacity for future borrowing, also a small correction in the property market of say 10% would result in reduced equity and further reducing investor future capacity to borrow large sums on money for property investing. Often referred to as a death spiral or negative feedback loop.

Of coarse, this has not been the case for the last 6-8 years, dependent on market and location, where property values have risen 10%p.a allowing investors to tape into this instant equity and borrow against it, but nothing ever moves in a straight line.

I have several friends that work within the 4 pillars of society/banks and service only clients with $10+ portfolios and they reporting that clients that where able to secure large loans 2 years ago and being turned away today as their debt to equity ratio is deemed to high. Yes, they are ******, they want to write loans.

Also, what hasn't been mentioned in regards to changes of the last year that might effect investors is the old property tax, it Victoria, property tax last year increased significantly for investors and it will only be at the end of the financial year, that many are advised by their accountant they have to cough up much more than they have had to do in the past

 

I don't know what you are in disagreement about I'm just saying loans don't get called in like you have suggested....

On the point of reduced capacity - we are in agreement. It's well documented that I have been ahead of the curve about the fact that all roads lead to reduced borrowing capacity being entrenched for years and years to come - and it's why I have long advocated cash flow and debt reduction being so important as a core ingredient for any portfolio which is either immature or still in the accumulation phase.

I started writing about these things well before anyone here else wanted to know about it. Many brokers here - who knew how to write loans but didnt know how servicing calculators really worked- argued with me. They told me I was wrong. They told me servicing hadn't been affected that much. Many supposedly sophisticated investors - who only ever knew generous servicing calculators, improving borrowing capacity, unlimited IO availability - argued with me. They told me I was wrong. They told me this was temporary and that cash flow investments were a waste of time and money and would actually curtail portfolios rather than assist them- if you can believe that. Time has proven them all very wrong, and slowly but most certainly very very surely the denial and resistance has moved to acceptance. The penny seems to be dropping.

Whether its land taxes going up, P&I repayments coming your way, borrowing capacity ceilings being reached , the inability to refinance or extend IO terms... debt reduction is the way to start getting past the hurdles. Unless you win lotto, or inherit money, or secure a large pay rise.... otherwise...people just have to start migrating loans to P&I and paying them down. Eventually things will start reaching a point where borrowing capacity gets restored.

This is why I said ANZ was being optimistic in its assessment that prices were set to rise again... that would require that borrowing capacity starts to expand again, and that's just not happening any time soon. They may be right about cheaper markets , where borrowing ceilings haven't been reached yet, but they are unlikely to be right for many years about half the market - Sydney and Melbourne - where ceilings have been reached.

 

If you pay, they are happy, it is one of the main reasons putting up with tenants and managers tied to property is put up with....for me, well, that, and some other advantages.

They may call on you if they know your in trouble and could lose them money, anyway, it is not margin lending, and that is the end of it really, anything may be possible, but calling in loans for resi is not the norm.

 

Do you think APRA will change the rules? Say if these new rules cause a credit crunch, impacting on economic growth. Do you think APRA will change the rule? Property market is like a golden goose, government probably wants to starve it. But they won't want to kill it. So maybe the rule will be loosened if there is a credit crunch?

 

Problem is its the high levels of debt associated with housing that has been the reason why we have had interest rates at emergency levels for the last few years.
And it hasn't worked .
Moderate inflation is good for the economy.
Your debt gets smaller each year, and with inflation you earn more money.
Could you imagine going to hospital with a condition and after 2 years and you were still no closer on finding out how to treat the symptoms
We survived the 90s when property got overheated.
Life will go on .

 

Credit crunch means no credit for you to borrow ARPA change rules or not doesn't matter, no one will lend, banks don't want to lend one another, investors don't want to buy mortgage-backed security bonds, you go to the banks and ask for a 500K loan, they said sorry cant lend you that much mortgage securities bond market close for now cant lend, wait until it loosen up

at this stage, the government has to step in and creates some sort of liquidity and if they cant ignite the credit engine a lot of people will be out of a job and the spiral begins

that the basis of the credit crunch but hopefully we don't get there

 

This question implies that the property market is being killed off by APRA. Its a false premise...

Also, I think you are using the term "credit crunch" incorrectly... a credit crunch is when banks cannot get wholesale funding from securitisation markets because those markets consider the underlying assets - the bonds...( RMBS) to be low quality and high risk. APRA are trying to avoid one, not trigger one

My views on what may or may not happen , first require people to understand what is happening right now, and why its happening ... Far too many people still believe APRA is targeting house prices. They are not. They need to get this notion out of their heads. There are genuinely good reasons why these regulatory changes have been introduced.

Why the IO quotas?

APRA is seeking to remove systemic risk from the banking system. Across the industry, the banks got to a point where 53% of all lending was IO, and that is well above the 30-35% that has been the "norm" since deregulation started in the 80's.. and the same 30-35% that wholesale investors considered safe enough during the GFC and the following credit crunch, to continue funding Australian RMBS - even when they stopped funding everyone elses RMBS. In plain terms, APRA are forcing the banks to rebalance their P&I v IO back to safe, normal levels, because at the levels they were at, they represented a genuine risk which had the potential to cause a credit crisis here if wholesale markets stopped refinancing their 90 day and 180 day RMBS... ie their wholesale funding. In other words, if there was some event around the world that caused securitisation markets to close again, just like they did after the GFC - APRA knows that Australian banks would have a much much much tougher time rolling their debt over when 53% of it is IO. That would push up funding costs by 150-200bpts at least- maybe more.... triggering a massive housing crash here. And that could bring everything down. The whole economy. And that is why they introduced the 10% speed limit and followed up with the 30% IO quota. And its also why these changes aint getting reversed any time soon. They are de-risking the structure of Australian lenders RMBS - which is by far the largest source of funding we have. Nothing more. Nothing less. They are doing it really well. Gently. Softly. Deliberately.

How long will it last ?

If every loan was set up 5 years IO, it would take at least 5 years to get back to a 30% level under this new regime. We are @ 1 year in to that 5 year period. It was introduced on July 1,2017 . But not every loan was 5 years IO...many were 10 years IO as well.... so I think its reasonable to expect the 30% quota will be around for at least 4 more years, and possibly a couple of years beyond that.

Will we see the 30% IO quota lifted at some point? Quite possibly... but I would expect it to be replaced by a 35 or 40% quota. I dont see any way the regulators will allow an environment where it can get back to 53% of total volume... which is the reason they intervened in the first place. So yes, the 30% quota may go, but there is likely to always be a quota, moving forward. They have been comfortable with levels of 35% before, and that level has survived a GFC/credit crunch so that may be the figure they settle on... who knows? It seems a reasonable bet, right? All we know for sure is that Australia's extremely heavily reliance on wholesale debt , raised via RMBS through securitisation markets - means the regulators cannot allow 53% of loans to be sitting at IO, never being repaid. It's a systemic risk thats just far too great for them to allow.

Why the servicing calc changes?

APRA , in concert with ASIC is also targeting debt to income ratio's and responsible lending .... via servicing calculator changes. There are two main changes. the assessment of existing debt and the assessment of living expenses. These are now almost 3 years old and have really started biting.

Will we see assessment rates and living expenses "softened"? I doubt it. APRAs chairman has indicated several times that while he is quite satisfied with the assessment rate changes and doesnt believe any further regulatory intervention is required there, he is less satisfied with the work done so far on living expenses/HEMs, and would like to see more work done there. he has also stated that he thinks DIR's are still a little too high. His comments, and the likely Royal Commission outcomes, would seem to point to further tightening of that area on a servicing calc...

When you look at it piece by piece, its hard to see any significant improvement to borrowing capacity coming from the reversal of any of these policies - not any time soon anyway. Its hard to see any roll back, easing or softening...not anytime soon anyway in spite of what the mental giant ScoMo said a few weeks back.

They just have to hold the line for a few years. Even if it means some people go belly up. They have to get the whole system GFC proof again.... because if they dont, then its not a few overleveraged investors getting into trouble, its the whole joint. Everything. The whole economy.

And because they have to hold the line , its likely there will be increasing numbers of mortgage delinquencies as "sophisticated" ( cough cough) investors who weren't "sophisticated" enough to realise that 3.5% yields dont pay for 4.5% P&I repayments in the post APRA era ( the ones on here who get into trouble can never say I didnt warn them over and over and over again) start sinking ... which is why I'm calling 30% chance of an RBA rate cut in 2019 . Delinquencies have to be managed very closely. They affect the banks cost of funds if they get off the hook.... another potential credit crunch firestarter.

What am I doing? What are my clients doing? What do I think every investor should be considering at the very least?

How you deal with the new rules is to understand them, understand how they affect a servicing calculator and what you can do to recalibrate to deal with them... which is why, over and over and over again, I say - cash flow. debt reduction. cash flow. debt reduction. cash flow. debt reduction.

 

DIR=debt to income ratio?

 

Martin North said he expects lending to continue to get tighter this year which will continue to put downward pressure on prices. Is that true?

 

Insightful post. Much appreciated.

 

Yep

 

That's not what I said.

I said that our shortfall currently is $2000 in total over the 4 properties eg $500per property per month.

To put it more bluntly, if you cant handle $500 increase in interest rates.......then you have no business investing in property.

I think that some of the issues in Australia is that salesmen swindle naïve investors when rates are low and that they don't take notice it costs you 5% to get in and out of selling the property just a few years later.

My original point is that the majority of sensible investors wont be selling because property increases will be flat over the next 2-4 years......because what the heck are they going to do with their cash.....you have to put it somewhere etc and selling out to realize the equity in cash is just dumb as then what.


(.... to answer your question our LVR is 59% with outstanding mortgage of $1.8m, annual expenses including capital repairs of $36kpa and rental income of $102k (after agents fees.

So not a high LVR but reasonable and comparable to most investors.

Normally LVR would be a little bit higher as we should have purchased our 5th property this year however because of the changes by the Aust govt for expats to LTCG we refuse to buy additional IP's in Australia and instead invest about $10kpm which would normally go towards the next deposit into USA equities instead).

 

Why not equities? If someone has multiple properties, its not a bad idea to take some profit off the table

 

If you check out investment flow data, money from China has dropped significantly last year. So not sure where ANZ get its data from

 

Thought so, ta. Wouldn't have made sense otherwise but do not like to assume too much.