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

Also called LTI sometimes. ie Loan to Income Ratio. Either way, its the amount of money one can borrow And APRA wants it to be less than it used to be... about half, in broad terms.... so bye bye property cycles of the past, where debt reduction wasnt particularly important, as most investors stopped accumulating before they run out of puff... . and Hello property cycles of the future, where debt reduction is king because most investors are running out of puff before they are finished accumulating.

 

I totes get the concept, just not your fancy abbreviations Interesting times ahead.

 

If APRA succeed in reducing the amount people can borrow by half, then surely there'd be a similar reduction in property prices?

Domain has an article about increasing gloom in the property market, which includes comments that the RBA might have to cut interest rates. In event of a slowdown, I could see the government going against ARPA trying to reflate it. Politicians seem to be terrified of a slump on their watch.

 

Just because something is expensive or some one cant afford it. Does it necessaruly mean it will drop to a more affordable level?

Or will one have to save up longer to buy it?

Im not sure. I dont think most can be sure.

Affordable properties will be more pleasing as i think people will not want to wait.

 

totes

totes x 2- hence Perth , Adelaide , regionals will likely see money move their way ....

 

I have a different observation based on some madly expensive asia cities. The govts there also tighten the LVR and LTI ratios, even increasing the stamp duties to 2 - 3 times of what it used to be.

Results? They certainly shut out quite a number of potential buyers, but then they attracted the buyers of substance, who had been building their wealth over the years through real estate investment. They just leverage on their capital gains already attained and rental incomes (cashflow positive by now) to borrow more to buy.

The outcome? The rich got richer, the poor, never saved enough for the deposit and keep on renting. Of course the rents eat into their saving power and they are like swimming upstream.

 

What rental returns are they getting there for investors entering those market?
I'm assuming 3-4% rental returns net?

If people can't borrow the same amounts and finance is drastically reduced can Adelaide/perth/regionals still grow in capital growth, do they have the demand? I'm thinking no, maybe a little but would investors buy to receive lower rental % returns and lower chance of growth?

I know you love cashflow and paying down debt and I'm all for it, but I don't think most investors will be going for this strategy.

 

Totes getting into the spirit of abbreviations Lol

 

When you say madly expensive cities, I guess you mean China and HK. In there, the problem is too much population and selling land was the only way local govt can fund itself. I guess slightly different here.

 

Hi Duck,
Yep we know we are a little overweight property (eg about $2m in equity) and underweight equities ($500k) and that's where our left over savings are currently going each month now.

Just ****** off at the ATO/Australian govt with the changes to LTCG for expats otherwise would have been buying our next IP and refuse to consider doing so until changes implemented.

My real issue with buying equities however is that the current PE for US equities is 24:1 which is ridiculous on a historical basis (eg they are way way over priced for the risk you are taking on).

I also feel people are over estimating liquidity in the USA equity market........ its an ominous sign. This said our advantage is we have a long term 10 year horizon so would happily welcome any crash in US equities with the view that we can load up with more and time our exit for sometime after 2025 etc.

Like I said....no point in selling out real estate profits to "capture gains" if you are going to jump into equities "which is just as much risk" if not slightly higher.

 

Only if people stop having babies, we have no more immigration, inflation stops going up, GDP stops increasing (either through indirect inflation OR through productivity increases with technology/robots/software etc).

Does that make sense as to why houses wont go down by half?

Inflation is a relentless *****

 

Hi,

Certainly in my neighbourhood prices haven't slowed down at all. Here's an article from a couple of weeks back now:

Cashed-up downsizers hiking up prices of low-maintenance Sydney properties

The property highlighted in that article is just a block down from my unit development in Darley Street. Happy days. My three were recently valued around the $1.6M to $1.7M mark each but look like continuing to strengthen from there.

Cheers,
Michael

 

Here's my take:

In real terms, Sydney property prices have been in a bear market since it peaked in 2004. There was a slight bounce from 2012-2018 but the correction is back on.

There are two ways a bear market can happen: 1) property prices go down, or 2) more common: prices go sideways, but our dollar goes down, reducing it's real value.

Check out the chart below, which removes the noise of currency devaluation - pricing property in gold.



So, Sydney's correction will complete in the next few years, and we can see at present, the dollar weakening AND prices softening at the same time. This will show as a sharp price reduction.

I agree with ANZ that nominal prices will resume upwards from mid 2019, which suggests a continuing weaker AUD.

Hope this helps,
John

 

Isn't it meaningless to plot the house price in terms of gold without considering the family income in terms of gold over the same period?

 

I actually think it is the best measure out there. One asset can not go up in perpetuity in real terms. All assets are trapped in a valuation corridor, moving from over valued to under valued, and so on. So at the least, we can say that property goes up and down in real terms.

The reason that this (gold) is a better measure than % of income, is because artificially low interest rates distort the repayment profile.

So while overall property prices might be stretched as a % of incomes, monthly interest repayments are at historical averages as a % of incomes. Pricing in real money (gold) clarifies our economic calculation in this sense.

Hope this makes sense.

 

You are saying the price of house has deflated in terms of gold, fair enough,
My question is how has income fared in terms of gold over the same period for an average family? as without that element in picture the chart is meaningless, avg buyers don't get their salary in gold but in continuously devalued dollars.

 

Arrrrr the good old Gold vs Fiat money debate

 

@euro73

Hi mate hope all is well.

I personally have been following the reduction debt mantra since 2013/14, when others I knew were pushing the take on more debt and buy more assets I went in the opposite directions and literally just loaded offsets/paid down debt.
My question for you is how do you think someone in my situation will fare as yes debt levels are low but borrowing capacity has also taken a hit, hence unless pieces get a haircut those with low debt levels will still be sitting on the sidelines due to borrowing constraints?

I guess this touches on your next point, cashflow/increase income? If so do you think we will see more 'smart money' flowing into dividend payers and dual occs?

Genuinely interested in your response as I agree with everything you have posted in this thread/on this topic.

In my humble opinion whilst there are always secondary drivers I.e immigration, international investment, government policies etc etc the main driver for every boom and bust is lending! When the tap turns on - Boom, when the taps turns off - Bust. This time being no different, especially across South eastern states, question is will the tap be turned shut or will there be a little trickle? That will determine how hard we are hit be it a period of sideways movement or a significant drop I.e 20%

 

Yes , I do think we will see people increasingly turn to yield. Certainly for any investor with an average to slightly above average income and with a P&I PPOR mortgage, just to get 1 or 2 INV properties and more importantly - to HOLD them , is now going to require that cash cows be part of the equation. Even moreso for those wanting to purchase and hold more than 1 or 2 INV properties. So whether it's to assist with debt reduction or just to help them survive the P&I cliff - or both - it's difficult to see how average Joe's and Josephine's have any chance of keeping up their repayments when their loans re-set to P&I using vanilla yields.

if you look at a resi property investment portfolio like a small business that you run, the obvious is bleeding. For 30 years the "business" has managed it's single biggest expense ( interest) by paying the minimum possible amount - Interest Only. No quota has ever existed. And even if a bank said your business had to switch to P&I - you could easily refinance to IO somewhere else because your borrowing capacity had improved just about every year for the past 30 years - due to improving wages, dual income households, the introduction ( and acceptance by banks) of FTB A and B, 1970's era living expenses, falling interest rates and the use of "actuals"

But now your business has a problem. All of the above is now kaput! finished. Done. Exhausted. Wages are flat. we don't have polygamy here so triple and quadruple income families aren't coming anytime soon, living expenses have been replaced by more aggresseive HEM's and APRA is exerting evermore pressure on banks to ratchet them up even further, and "actuals" are a distant memory. Oh.... and there's an IO quota now, meaning that at some point,in the coming 5 years, your business is almost certainly going to see its single biggest expense jump by @50% or more.

But the underlying assets within your business are still valuable...it's just that the running costs mean you cant survive . You quite literally cant find the money to make the repayments each month - just to hold onto to the assets .... So, as a business - what would you do?

I know what I would do... especially if I knew years in advance that this was coming my way. I would add income to the business, initially so I could reduce debt as much as possible before the repayment re-set arrives, and later to help manage the situation after it does arrive.

If that meant selling a vanilla or two to buy a cash cow or two , I'd do that. Or if it was possible for me to add a granny flat to a vanilla or two, I'd do that. Or if I could find a cracking commercial deal, I'd do that. Anything to get extra cash flow in to the business, so I could reduce some debt and survive the re-set. And if I was unwilling or unable to do to do that , Id sell. Because the re-set is going to take the decision out of my hands if I cant cover the repayments.

In the past 6,7,8 weeks I have been contacted by multiple PC members who have received notices from their lenders that their loans are about to re-set. To a person, even though they said they knew it was coming and thought they were prepared - the reality of the new repayments sent them into a panic. So yes, I'm absolutely convinced that people will seek out yield more and more as the reality of 50% + repayment increases and disappointing/low levels of capital growth for the next several years, dawns on them...

To the other part of your question... Unless you earn an extra 80-90K per Million of debt owed, there will be a material reduction to your borrowing capacity. That's just how it is - Liberty and Pepper aside.

So no, the injection of cash flow and the reduction of debt will not solve that problem instantly.. but the good news is that it will solve it over time . Dividend Reinvestment doesnt show results for several years . This is no different. But its the only option that offers the prospect of success. The alternative is to sit on vanilla yields waiting for capital growth, and trying to survive PI re-sets. That's no option at all, really - high income earners aside

 

Thanks TheSackedWiggle - I love your alias by the way.

I don't have a chart on income vs gold, but that is a good question. I don't think it's completely meaningless though, just because we tend to look at property prices with a myopia that blinds us to the inflationary effects on other assets. Gold just irons that out, that's all.

Thatcher used to say that the best combination for income growth was higher interest rates, and lower taxes:- higher interest rates leading to capital formation and under consumption (ie credit). I think she was probably right. We have the opposite combination now. My guess is that one of the reasons for low income growth is precisely that interest rates have been too low, and savings have been discouraged.

In any event, for a property forum like this, all I would say is that most central banks are backed into a corner and normalising rates would be difficult without triggering a recession. Sustained low rates is obviously good for us investors. And having some yielding and some growth assets is the best hedge possible.

My original contribution with the gold chart was really just to say that we have over-pricing in many asset classes, and singling out property as the only expensive asset class (as the media tends to do) is not right.