APRA to remove interest-only benchmark for residential mortgage lending

Discussion in 'Investment Strategy' started by Madura Perera, 17th Jan, 2019.

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  1. Madura Perera

    Madura Perera New Member

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    Is this a panic button to save the Australian property bust?
     

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  2. The Y-man

    The Y-man Moderator Staff Member

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  3. MTR

    MTR Material Girl Premium Member

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    Its too late, the damage has been done.
     
  4. euro73

    euro73 Well-Known Member Business Member

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    It changes nothing, unfortunately. IO quotas aren't assessment rates. In fact, making longer IO terms available will only hurt future capacity while ever we have mandatory minimum 7% assessment rates calculated over remaining P&I term. ie If you suddenly offer 10 years IO instead of 5, servicing has to work over 20 years PI instead of 25 years P&I.

    Here's when to get excited; if assessment rates are reduced dramatically from 7% P&I to something quite a bit less. Or if the assessment rate stays the same but the requirement to service remaining terms at P&I is removed. Or if salaries explode - although that will likely drive inflation, which will very likely drive RBA increases, which will cancel out any impact

    Likelihood of any of these things happening is probably about as close to zero as one can get without completely ruling them out. There's always a chance, I suppose :) It's just such a very very very very tiny chance that people should just accept the game has changed and debt needs to be paid down if you want to build and hold a portfolio.
     
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  5. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    @euro73
    What do you think are the chances of a lost decade of gains in Sydney/Melbourne aka peak prices not recover till 2027?
    I seem to think its quite likely given the fast changing trend in income growth and jobs impact due to ever increasing productivity gains due to semi/full automation on back of our already stretched P2I valuations.
     
    Last edited: 17th Jan, 2019
  6. Lacrim

    Lacrim Well-Known Member

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    Do we really need multiple threads and responses on this - same views, opinions etc?
     
  7. euro73

    euro73 Well-Known Member Business Member

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    Its how forums work :) Its how conversation works as well. Things are discussed over and over.
    If everyone remembered the details of every conversation or blog the first time around, the world would run out of conversation and forums like these would run out of content , pretty damn quickly :)
     
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  8. Lacrim

    Lacrim Well-Known Member

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    OK let me set up another thread on this topic and see if I get any bites.
     
  9. euro73

    euro73 Well-Known Member Business Member

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    Its really difficult to know. Lets consider some facts though, as they inform what is possible and what is not possible.

    Firstly - APRA has said that it wants DTI ratio's at @7 x income, give or take. We also know that SYD median prices were tracking at somewhere around 10.3 or 10.4 x median income and that MEL median prices were tracking at somewhere @ 9.4 or 9.5 x median income

    So if we were to use that data alone, we could conclude that both SYD and MEL prices had surpassed current lending maximums by something in the vicinity of 40-50%

    So what would be required, time wise, to close that 40-50% gap? How long is a piece of string? If for example, 100% of borrowers switch to P&I tomorrow and start paying down debt , this would have the effect of reducing DTI positions over time.... but how much time? Well, we know that by looking at amortisation modeling that 10 years of minimum monthly P&I repayments results in @ 20% of the debt being paid down in most scenario's . So if we also saw wage growth of @ 20-30% over that same 10 year period, you could make the argument that those two outcomes would close the 40-50% gap between 7 x income and 10 x income. But there are also price corrections underway, and they can also influence or accelerate things. If SYD or MEL correct 30% for example, then the amount of time it might require for the 40-50 "gap" to be closed - especially when so many borrowers are being migrated to P&I - may be a little shorter than 10 years. There's also wage growth... what if it starts accelerating? That could also shorten the 10 year timeframe....

    So what do I think? I think its certainly mathematically possible that we could see 10 years of pretty much zero growth in SYD and MEL. But 10 years is a very long time. The GFC was basically 10 years ago, give or take. A lot can change. Will 7% P&I assessment rates still be in play for the next 10 years, or at least most of that period? Will wage growth improve? How far will SYD and MEL prices slide? We would need to know the answer to these questions to make a reasonable guess at things.... but I think it's pretty reasonable to argue that if sensitised assessment rates stay, and if we continue to see low wage growth, yes we will likely see a prolonged period without growth in both our biggest cities. The maths are the maths. If the key ingredients ( servicing and wages) change in a big way- the duration of things may be shorter

    The only thing I feel really confident of is that previous growth cycles can't repeat in SYD or MEL under this credit environment, and that holding costs are a seriously underappreciated and underestimated problem. But 2019 should finally wake people from that particular slumber. PC members know about the P&I cliff. Joe and Joanne public - not so much. 2019 will bring it front and centre for hundreds of thousands of people. It's why I believe the decade ahead is the decade to deleverage/pay down debt. Even if the SYD and MEL markets outperform what appears mathematically possible ( or impossible) using today's lender calculators, due to some softening or relaxation of current settings - can they really double ? Can they grow 50% even? Ask yourself only one question - where's the borrowing power going to come from to deliver that sort of growth, under these policy settings? DTI's are already 40-50% above medians. We'd pretty much need a complete reversal of APRA policies along with pretty healthy wage growth and pretty healthy rental inflation , and no rate rises - for that to even be mathematically possible, because as we all know by now, it was the policy of "actuals" that created the necessary borrowing capacity for the growth of the last 25-30 years. Every RBA cut equated to a pay rise under those policies- so even when you didnt have any wage inflation going on, all that was required for more borrowing power while "actuals" were in play was a rate cut . But as we have discovered, with any form of "sensitised" assessment in play, that borrowing power has been completely disrupted - so I would argue that previous cycles simply cant be duplicated under those conditions.

    That doesnt mean " do not buy". It means "buy something that can run P&I" In the end, owning properties that can operate under P&I and pay themselves off is the smartest and safest play. It's not fast. It's no sexy. Its not going to put you in any danger though, either. It's just safe, effective and suitable for the situation . It means that whether prices rise or fall, you are setting yourself up for a comfy retirement . I buy properties that will produce future income streams, not one off profits. So do my clients. We like growth but we dont rely on it. We can survive - in fact we can prosper without it. So I dont think its smart to buy properties speculatively any more, hoping for one off lump sums from growth. Not today. And even if you can defy the lender calc gravity and somehow kick a big growth goal, what good is the growth anyway, if you cant harvest/access it, or worse yet, if you cant hold it under P&I conditions? You end up having to put the cue in the rack or having to sell - meaning you have to start over, meaning you have to kick another goal after another goal after another goal in order to have any chance of achieve a large enough cumulative lump sum to retire on comfortably- and given how few people managed it over 25-30 years of super expansive credit - I think the chances for people to do better in the post APRA era are slim at best

    FHB's are really the great hope, so to speak. Affordability is certainly improving for them - but prices are still very expensive even after correcting as they have - but DTI's of @7x income just place a hard ceiling/limit on how much lifting FHB's can do- and the same applies to the next generation of investors as well. The purchasing power of both segments ( FHB and INV) just cant match that of the pre APRA generations..... Just one more reason to focus on properties that can run P&I and setting about paying them off - because expecting to make large growth while holding IO endlessly just seems extremely unlikely to work out for people.... and that's probably being kind. :)
     
    Last edited: 18th Jan, 2019
  10. wilso8948

    wilso8948 Well-Known Member

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    Curious is that based off national median income? or income specific to that city?
     
  11. euro73

    euro73 Well-Known Member Business Member

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    My guess would be that the data they use when making those statistical claims is localised, not national.
     
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  12. euro73

    euro73 Well-Known Member Business Member

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    APRA has released a statement today.

    APRA defends credit curbs, acknowledges ‘trade-offs’

    1. Many here have argued that APRA's intervention is temporary.
    2. Many here still believe that APRA's intervention is about targeting resi real estate prices

    I have argued repeatedly since 2015 that neither of those things are accurate ( yes, we all agree that both the IO speed limits and quota's were temporary - but the prudential guidelines relating to assessment rates and lending standards are not) , and that APRA's concern is actually all about protecting Australia's banking system and retail deposits , and that they arent targeting house prices.

    The last paragraph of the article should put the matter to rest

    The APRA chairman concluded: “Importantly, while the temporary lending benchmarks are being removed, the changes we have made to lift lending standards are designed to be permanent, continuing to support the resilience of the banking system and, ultimately, the protection of bank deposits.”

    I still think there's some scope for them to modestly relax the assessment rates in 2019 or 2020.... maybe . But it seems that anyone hoping for these things to be reversed is going to be disappointed
     
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