Correction over?

Perhaps I'm misinterpreting this comment @euro73 - but I don't think this is true.

A median price of x7+ is a little difficult to get our heads around, it can blow the modelling given thats where borrowing capacities tap out. But its supported by:
- 30% of properties being un-mortgaged.
- Another 30% at very low LVR's.

Interestingly the IMF's modelling for years (even before the boom!) used to come up with a similar result - that prices were significantly overvalued. A large part of this was based on Sydney prices being elevated vs acceptable DTI's across the world/our lending assessments. RBA's spent a fair bit of time on this, role of financial system BEYOND capacities (offsets, lvr's, etc etc) explaining why ' borrowing fundamentals' deviate from price values.

I.e. people borrow far less than the purchase price in aggregate. I.e there's a reason why prices have been well above x7 for a long time. The reason why prices are bigger than x7 is not solely because borrowing capacities offered more than this in the past and don't offer the same scope now. It's far bigger & more complicated than that. Borrowing power is only one factor in credit, not the whole story.

I'm next to certain that Sydney house prices will begin rise again well before this applies because of the above reasons (otherwise the correction isn't barely half way done and were in for a serious disaster).

 

Maybe I'm not appropriately qualified in the finer nuances of economics, but I do have multiple masters and PHD's in connecting dots So help me understand whats so complicated about these dots that I am not seeing...

Low rates
Low unemployment
booming infrastructure spending
massive migration intakes
credit curtailed....

But it's not credit that's causing this?

 

Agree with all of that - I didn't say anything to the contrary.

I'm debunking your comment that borrowing power capped below 7x income means prices need to fall to this level. If I read that correctly, your suggesting that prices need to fall another ~15-20% if you believe that holds (not quite sure with the P2I ratio is, but its no where near 7).

 

No, Not saying that at all... always helps to read what I wrote first

I use the DTI of 7 to demonstrate that there is a technical mathematical gap of @ 50% between what prices peaked at pre APRA and what today's calcs would allow prices to peak at if we were starting from a nil position. I've made the argument many times that what I think will likely happen is that

1. price corrections will take care of @20%.....maybe even 25% of that 50% gap. That will take @ 3-4 years from go to woah... ie 2017-2020/21
2. the mass migration to P&I will take care of @ 20% of that 50% gap, but only for @ 70% of borrowers , as 30% will stay IO. And it will take 10 years from the time a borrower migrates to P&I using min monthly's to reduce their loan by @ 20% ... so if the first of those borrowers started migrating in 2015/16 and the last start migrating in 2019/20 that means we would be waiting until at least 2025/26 for many of those borrowers to have paid down 20% of their debt through P&I amortisation, with many not reaching that point until years later.... potentially as far out as 2029/30.
3. wage inflation will take care of the other 10% or thereabouts of the 50% gap. And that will take 6 or 7 years as well if wages stay as flat as they have been...

Roll that into a ball and what comes out is this; the cap of 7x income remains the impediment to any recovery, as well as the ongoing catalyst for further (modest) declines. Unless there are a massive number of underdone borrowers out there who suddenly take action and leverage to their maximums, we would otherwise require some healthy wage inflation or assessment rate relaxation , or both These are the same things I say over and over and over. But I have never suggested on any post anywhere that we will see the 50% gap between peak pre APRA borrowing capacity and peak post APRA borrowing capacity filled solely by price corrections... that's very unlikely. Although UBS and others would have us believe otherwise...

 

Interesting - thanks for clarifying. I think thats a reasonable, sensible and well explained viewpoint.

You're basically suggesting that from here, the P2I ratio will revert to the D2I caps that banks have, at roughly 7x. But that most of this won't happen via price falls anymore (as this transition has largely played out), but the mechanism for which this flows through realistically is time. Time allows for incomes to catch up, stock of debt to fall & the P2I to revert to the D2I.

I don't think this will happen, at least, not to the degree you suggest it so. Mainly because I dont think prices equilibrium point is as simple as that.

The main complexity is that I don't think you've accounted for the equity/cash side of a purchasing transaction. Buying property is funded either via cash/equity or debt. You've looked at the debt side and based a price limitation on it alone. But RBA data shows that 1/3 of properties are un-mortgaged. Of the homes that are mortgaged, the average LVR in Sydney is still ~70%. Extrapolating that out, it allows for a P2I well above a D2I. I.e. if borrowers can borrow 7x, but are providing 30% deposits in aggregate, the total P2I can reasonably be 10x+ (which is prices can run away past incomes too.

Also, that viewpoint assumes that the market is closed to those borne by the limits of our debt funding market. Aussie property, is largely a closed market to Aussies buyers, but not completely (institutions & foreigners do participate). Overall though, I do think thats a reasonably accurate summary of the next period for Sydney housing - previous cycles indicate long periods of stability.

Nonetheless, agree that all of this is semantics and that the general trend and direction of what your saying is likely to play out (but not for long enough for P2I to get anywhere near D2I). Interestingly joyce has also come out saying reducing the assessment rate may be a good idea as an alternative to rate cuts.
RBA weighs alternatives to a cut

 

A 5% increase in borrowing capacity is better than nothing, but it's not enough to prop the market up IMHO. I reckon we need a 10/15% increase minimum.

Enough to halt the freefall but not enough to send the market back to the stratosphere. And it's a much better lever than reducing the cash rate.

 

I would suggest the overwhelming majority of low LVR, low debt/no debt mortgages are that way because of age..ie they have paid them off over time... I would further suggest that the overwhelming majority did not start out as low LVR or unencumbered . ie 1/3 % of the population wasnt so cashed up they didn't need a mortgage... . But I couldnt say for sure... its just a view I hold. But because of that view, my view further follows that most those low LVR unencumbered home owners are probably inactive participants closer to retirement than re-entering the property market. I think the majority of them probably havent been participants for a good while and are extremely unlikely to be participants ever again... So I just dont think that argument - which many people use to try and imply there is lots of spare capacity out there just waiting to jump in and arrest the correction or even lead a recovery - has all that much merit to it...that's all.

Now, we can argue that they will pass those properties down to their kids , and thiose kids will replace them as participants - but that doesnt really hold water either. For starters, now we are in an equity discussion... and we all know by now ( or should know by now) that all the equity in the world wont help Jimmy and Jen - who may have 2 kids and 2 car loans and 10 or 15 or 20K in C/C limits and maybe even some HELP debt, extract 80% on Mum and Dad's $1.5 or 2 Million PPOR handmedown... and even if they can get past that hurdle, they will be borrowing with a 7 x cap and will have to deal with P&I at some point .... so their ability to participate using inherited or handed down equity aint what it used to be,....

And lets get really real.....Mum and Dad in 2019 arent routinely handing their SYD or MEL PPOR down anymore ...they are more likely to be selling it, taking a handsome CGT free lump sum, maybe popping up to 600K of it into super as an additional payment above the concessional and non concessional limits, and tree changing or sea changing and enjoying their money in retirement thank you very much ... keeping up the lifestyle they have become used to. Long gone are the days when they'll sit around all day doing without.... so anyone hoping all that massive volumes of wealth transference will happen and come to the rescue... well they are reaching I'd suggest .


I also think there's an serious overestimation of foreign and institutional participation being able to arrest the decline or start the recovery ... Being a specialist in the affordable housing arena where generous floor space uplift and tax credits are available to institutionals - I can speak with a reasonable amount of authority when I say that the uptake has been modest at best . Traction has been disappointing, if you will.... In simpler terms, State and Federal Govts have largely failed to attract large scale institutional investment even when offering 30% more floor space yield per site and NRAS credits - its why you and I were able to buy NRAS and get a look in... because the institutionals didnt pile in. Again, I cant say for sure, but I would suspect the volumes have not increased now those incentives arent there ... so I wouldnt be holding out hope that they will arrest the decline or start a recovery anytime soon...

And cashed up foreign buyers ... well, Chinese nationals are all but done for the time being, between the inability to extract money from China and the inability to borrow onshore here. Unless someone comes in to replace the Chinese, I say the potential for foreign money to arrest the decline is also being grossly overestimated.

 

I never mentioned anything about a recovery and the factors required for it. I think your all probably spot on about this, nothing really big to see for a while (although rate cuts may change the story a bit). Price to income ratios are well above 7 already, no recovery is required to keep it that way!

I’m only commenting on a fallacy that price to income ratios need to match debt to income ratios over time in an equilibrium price setting as euros mentioned his views on. I can see the logic for this - it does make sense, but there’s a few complicating factors that explains why it doesn’t hold here locally and in some other markets around the world.

It certainly isn’t that simple in Australia, there’s been various efforts by people much smarter than myself/euro trying to explain and investigate why this has been the case for a long time. The main reasons are the deposits borrowers add,the set up of our financial system and that we are a capital importing country.

Realistically over the very long run, one could argue that the two measures should continue to deviate away as we become wealthier and wealthier and there’s scope for additional deposits to be had for scarcer land.

Re foreign money, we do a loan a week where someone brings money in from international sources. A lot of FHB, migrants, etc. Capital isn’t closed market and there’s a lot of international and institutional capital moving around. This is part of the reason why you can’t match the primary funding market restrictions (debt to income ratios from banks) as the sole factor in equilibrium valuations.