Debt Bomb: Fears of housing 'fire sale' as interest-only loans roll into principal plus interest

Our IO loans (ending in 2021) say they revert to 30 year P and I. Will this be automatic? If we retire before then, and don’t meet serviceability- could they reduce term.?

 

I don't know of any loans that would revert back to a full term of 30 years but reverting to P&I automatically is the norm. If your IO is 5 years on a 30 year term it's reverted to 25 year P&I.

 

Thanks for a detailed reply, appreciate it.

I am under the impression that APRA has a timeline of 2021/2 and a figure of closer 500bn aka how much and how fast they want to roll #IO2PI, now this is a large figure and a small timeframe which indicates it's urgency. what do they know?
Longer term loans (40 yrs) will put less pressure on IO2PI rollover borrowers and provides slower de-risking, but is this acceptable to APRA given this timeframed urgency? We will have to see.

There are already questions about high house hold debts and about the quality of lending standards which RC is investigating and APRA is enforcing by tighter lending standards.

RBA is obviously pressured from international banks/bond market along with its own fear of losing control of IR lever if there are external shocks of some sort.

I hope RBAs action is preemptive and not out of absolute(timeframed) necessity.

 

Is Brisbane the first big crack in Australia’s house price bubble?

 

Not that it matters what I think but after analysing the numbers a million different ways, I still maintain that paying down loans via P&I and LOR, or even selling down and LOR is a sub optimal retirement strategy.

In fact, it just doesn't make sense.

 

I think it probably a bit late. The markets in Sydney and Melbourne have over shot and will now have a larger correction than if action had been taken sooner.

I don't think it will be a disaster though. Do you think 2003 to 2013 was a disaster in Sydney? Something similar is on the cards although the market may not stay flat for as long as last time.

What will happen?

Some people will hold their properties and keep making payments.
Some people will roll to P&I early to get lower interest rates (I have done this)
Some people will voluntarily sell before it is too late.
Some people will get into trouble. They won't be prepared for higher P&I payments and will not be able to make them.
Of that group:-
- some may refinance to 30 year P&I
- some may refinance to 40 year P&I (this product is available today)
- some will sell after it is too late
- some will be forced to sell

It is the last group that is unknown and interesting. No one knows what will happen in 2020. That's what makes it interesting!

 

No, no and no. First, it was Perth that was the first big crack in the "housing bubble" (otherwise known as a boom).

Second, people have been warning about the Brisbane apartment market for years:

Investors are on tenterhooks as experts debate if we are on the cusp of a painful property market correction or a soft landing, and the Brisbane apartment market could be the canary in the coal mine.​

The Brisbane apartment market is not the canary in the coal mine.

 

Detached houses in parts of Logan, gold goast north, and town houses (eg. pine ridge road Coombabah) will probably show up as bombing in the stats shortly. I wouldn't be surprised if it happens before Brisbane. I'm watching a second 4/2/2 on square flat 850m2 no easement Helensvale house creep down in advertised price, now within 30k of the vendors 2015 buy price. By late 2016 it would have sold at 50k to 70k over. Imho they paid lower end of market value at the time.

 

I'm kinda curious why you think 3% is conservative when you yourself gave an example of Perth not doing anything close to that, for what like last 10 years ? While 3% may be reasonable expectation for Perth or regionals that haven't been overly leveraged it may not be the case for overleveraged markets.

 

We were looking through the Perth property report in the Saturdays paper and if you got 2% growth for the last 10 years ,you would be pretty happy with yourself,most were around 0-1.5%.

 

Because it is a 20 year timeframe. What has Perth done in the past 20 years?

10 years tells us nothing. Sydney 2003 to Sydney 2013. How did the market go?

How about Sydney 1998 to Sydney 2018? Much difference?

20 years in real estate is a completely different story to 10 years.

 

This is true but I was modelling 20 years. How has Perth gone if you look at last 20 years?

 

Ok, do you think after next 10 years, Perth will have 3% growth from 2008-2028 ? I'm saying that's unlikely barring pickup in household income that exceeds 4% from now till 2028.

 

Generally it's been Sydney and then Melbourne and then Brisbane all go up first and then come down first followed by the Adelaide's, Hobart's, etc

But each cycle there is always an exception
For me this time its the fact that Brisbane hasn't boomed . Or maybe it's yet to come

 

Maybe it will, maybe it won't. There are more markets than Perth though. How about Sydney and Melbourne? How are Sydney and Melbourne looking for growth from 2008 to 2028?

 

Our planning was based on Brisbane first but it's not happening yet . I'm fairly confident it will , just comes down to when . If it's not picking up soon , we'll look at selling in Hobart and realising equity there to pay off some Brisbane loans.

Only thing is we really like the Hobart Property ( block of four units ) ....Sniff , Sniff

Cliff

 

Brisbane showed good growth like 3 yrs ago when melb and syd was booming. But it's like its ran out of puff, which surprised me a bit.

Perth would be my go to city as a whole if I was in the market

 

The World’s Biggest Property Addicts Face a Painful Future

 

That's a interesting read ,becoming a millionaire in ten easy steps may not be possibly anymore..
Quote..
Now it’s time for those borrowers to start paying up: About A$360 billion ($266 billion) of those loans revert to interest and principal payments over the next three years, just as global borrowing costs are set increase.

Quote..
“The worst case is where interest rates rise very, very rapidly overseas—and not just the central bank rates or overnight rates, but bond rates,” said Roger Montgomery, founder and chief investment officer of Montgomery Investment Management Pty. “That could be a problem because we know that even prime borrowers, if they have negative equity, that significantly increases the propensity to default.”