As an investor would you buy in sydney at current valuations?

We have been worried about Cliffs for the last 12/24 months. So far most not all have avoided falling off.

 

Mining town is like Spec shares and Penny stocks.

People that invest in them hope to hit it big high yield large capital gain. . Not your average investor. If you get burnt you scream if you made it big your a investment genius.

Mining stocks are extremely volatile and considered high risk investment.

Not a typical property investment.

 

Worrying about the IO cliff before now was nonsense but it's going to become a big issue i nthe coming years and I'll show you why.

Most IO periods are 5 years. Anyone who bought a median priced Sydney house in June 2014 ($814k) would have seen their house value increase by about $218k until June 2019 when the IO period ended. So at worst they can sell and take a $250k+ cheque depending on how much they started with. Even if they can't afford the PI payments and the bank won't refinance it they've ended out well on top taking into account stamp duty, sale costs and holding/interest costs.

Of course not everyone bought a median house but the same idea applies. If you bought a property on an IO loan in 2014 then at worst you can sell for a solid profit. Those who rolled over in the previous 24 months are all in this position (better off the earlier you rolled over).

But what about those rolling over in 2020? The median house price in June 2015 had jumped to just over $1M. If they sold now they'd probably make a small (~$50k) profit on the sale. Chances are they'd come out about break even after all the costs like stamp duty, etc.

But then it starts to get really ugly. Somebody who purchased mid-2016 (rollover mid 2021) are facing a small loss on their sale. Somebody who purchased mid-2017 is currently sitting on a ~$150k loss before you even consider other out of pocket expenses. To put it simply, unless there are massive price rises over the next couple of years, those who bought IO around the peak in prices are ****ed. If they can't afford the PI repayments, can't refinance (negative equity and tougher financing rules), can't sell without still owing money to the bank what do they do?

We know 40% of loans around 2016-17 were interest only. As far as I can see this is a wall of negative equity that will all roll over at once and I don't see a possible solution to the problem. If I've missed something obvious please let me know but I don't see how, barring 10-15% price growth before 2020-2021, this doesn't cause enormous financial problems.

 

Well for the current flow of sales... owner occupiers, downsizers, divorcees etc all natural flow of market....

As investors however if your Sydney property is down 20% from 2016 then yep it May have a big impact on your next move, refinance etc...

 

Well said...will be interesting.

 

Its quite hilarious. A couple of (I assume but correct me if I'm wrong) zero wealth accumulation folks are essentially 'debating' the merits of wealth creation in Australia with other folks who have created some serious wealth for themselves over the years and continue to do so.

Hilarious would be an understatement.

 

Are you on the IO cliff @Sackie? Is it triggering emotion?

I noticed you are back to your old tricks of posting a link to one Bondi property wth the statement that market is strong due to 1 property sale!

I hope you apply more analytical rigour to your wealth accumulation process than this!

 

95% of that post is false and taken out of context of my opinion. But that's ok.

FYI, IO doesn't bother me mate, my LVR is very low.

 

Why are you trying to hijack this thread with personal rants then?

And it’s always been your MO, from 2016 anyway... look look a bondi beach apartment sold for 1.5mn, market is roaring!

 

More nonsense and out of context comments. No probs. Whatever tickles your pickle.

 

Mate..... the accumulation is mere disney fantasy......

 

What is this “IO cliff” that everyone is harping on about?

Does it have good views?

 

Maybe not now....but if rates get to all time lows say about 2%...and then it gets back to 4-5%...it will get interesting....these rates can't stay with way.

I am loving this...though...with every 1% drop in rates..I am adding about 40-50k to my income! I ain't complaining....the only issue is I pay much more tax......

 

Well said @Woodjda. In general, less worried about IO2P&I issues (now and into 2016). I enjoyed your reasoning - its nice to have well explained, understood and balanced views about it. I could be wrong about the below, but I don't think its much more of an issue that'll impact the macro market (it will for some individuals, but IMO not enough to make a wave).

Overall, I'm less concerned about these than the 2018 big adjustment - which was worrying given the sheer volume of loans being converted in such a short period of time & IMO played a large role in housing conditions then. 20% of all mortgages re-adjusted in 18 or so months...thats a lot of money going to 'savings/principle' that wasn't otherwise (even accounting for offset accounts). I said it around then, Australia had a debt problem that it needed to address. Some solutions mentioned then (IR rate cuts, dropping affordability benchmarks) have since come into play to help cushion the housing market and economic impacts of deleveraging cycles.

I don't think we really have one now in the midst of a re-leveraging cycle (but may be creating one by pushing the envelope too far again that will need deleveraging again in the future).

Re 2016 loans, these were originated under strict lending conditions & rates will likely be materially lower in 2021 than they were in 2016. I.e. while there may indeed be a small repayment increase associated with the change to P&I (albeit at lower rates), these loans were already stress tested under affordability benchmarks that are similar to today. I.e. they should be able to afford the repayment, relatively comfortably too (given stress testing was done at double the interest rate, 7.25%).

In short, if you passed borrowing power for your 2016 loan and your conditions are the same, you'll pass borrowing power now and most likely will in 2021. This should mean you can afford the loan repayment relatively comfortably.

Personally, it wouldn't surprise me at all to see anyone who bought in 2016 even (or in the green) by 2021 too.

 

I’m yet to meet a mortgage broker who doesn’t think the property market will be stronger in a couple of years :)

 

Yes the last 2 weeks clearance rates seem unnaturally inflated, even just as a high level measure. Although for me its about finding the right deal/project/site so no rush right now, have been laying low for a while.

 

To my mid all these factors are arguments for why "the cliff" won't eventuate. The IO cohort from 2013 & 2014 already hit the P&I wall recently, in a lending climate of tighter credit and higher rates than today. As you have said, they were also sitting on more equity than when they purchased. So this group would be most likely to sell en mass if they couldn't stomach the P%I repayments, since they still walk away ahead. And they haven't.

The latecomers who bought in 2015-2017 will avoid selling at all costs since they have little or negative equity. People adapt, eat 2 minute noodles etc. Plus interest rates are super low rates so they're more likely to be able to make the repayments nowadays compared to just a few months ago. Sure there will still be a bit of forced selling, but probably less than what we've already seen.

 

Yes I’m buying but mainly commercial. In Qld land taxes and rates keep going up and the capital growth isn’t really there. The only way to get decent yield is cramming houses with students etc and then the water , insurance and wear tear tend to negate any real yield improvement.

Australian commercial yields around 6-8% on long WALES are still global outliers and a cash on cash of 10% is VERY attractive IMHO.

I am rotating the family portfolio to try and generate $1M pa In passive commercial rents. Half for lifestyle and half can be parlayed into development sites.

I realised I had it the wrong way around the whole time... cashflow is king. Growth is really just the cream

 

Hi @Bris developer , what kind of commerical stuff you seeing value in?

Cheers

 

"Look this 10 bedroom, ocean view property with a pre-stocked penfolds grange cellar sold for 10% above the reserve, market is in full recovery, everyone buy. Ignore all the pesky socialist kids. I'm a real capitalist who has the government subsidise my investment properties with low interest rates and negative gearing."