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

It should get very interesting over 2019 thru 2022 in the Sydney and Melbourne markets...

 

I remember you posting this and thinking oh dear, sounds ominous. I think you were right.

 

I think this is somewhat true when you're talking about regular home-owners, but the number of investors in the market has been very unusually high for 5 years now (at least double historical rates, if not triple) and many of the recent variety have little experience, have bought while principals are high, and on the expectation of making money. I know quite a few who seem to have bought with the idea they could just set, forget and rake in the cash.

If they don't make money, or if they lose money, many of these bandwagon-jumper types will absolutely sell and more importantly, others could stop buying into the market (which means there are fewer people to sell to for a profit). People refusing to buy in, and inexperienced investors getting cleaned up (especially in poor quality, oversupplied assets), is what sinks markets.

Experienced investors with a strategy will get by or will quite often benefit, and home-owners are unlikely to sell unless they have to, but you can see some serious market turbulence just with those inexperienced investors or developers going under. The sorts of people who thought it was a good idea to buy a bunch of OTP one bedders in Melbourne's CBD, or who bought house-and-land packages in Sydney's crowded fringe markets, expecting to get easy-rich are the sorts who've got a big potential problem right now.

For most experienced investors with a good plan in place, not panicking is probably the best course, if you've already offloaded underperforming assets. Being emotionally and psychologically attached is certainly not a good idea. No is the time to be pragmatic.

 

One of the main reasons I only invest in high OO areas.

The other thing imposible to guage is when markets rumble, investors will be affected to varying extents. Those who bought in Sydney/Melb etc 4 years ago good stock compaired to those who bought OTP at the peak will be affected very differently. Its totally possible (and likely) that post market correction 1 group of people will come out unscathed and actually pick up bargains and still love RE investing while another group will be totally disillusioned and feel RE is the evil destroyer of their life.

 

We still got a few more years before it comes to a head perhaps.

 

Nah. It'll all be the lenders fault 'cause they knew this would happen and shouldn't have lent me all that money.

 

But hasn't that already been happening over the last few years , the RBA has even brought interest rates down to record low levels to stimulate consumer spending , and that has turned into a complete failure.
Even Joe Hockey once said , that its Mums and dads going out and spending their money in retail that drives the economy.
Business make good profits and it feeds down the chain.
We were even told that 7 day shopping with unrestricted hours would make retail business even more profitable, as people could go out on weekends and shop, well except the ones that have to work.

 

Some cry at that headline, others with cash/equity might be licking their lips

 

Yep....watch suburbs like trendy suburbs like Bondi...Newtown....Darlo...Potts Point...Mosman...lots of young things are seriously over leveraged...already one bank has black listed Bondi...its about to get interesting....

Other areas are the Hills...SW...

 

Be interesting to visit this space in a years time and see how people feel

 

No need...it will be it will be worse than now...in 2016 I indicated that there would have to be some correction in Sydney...a lot of emoticons got upset...now it is taken as the norm that the market is less than healthy.

This run was the Mother of all Booms to date....I can't see it being the mother of all corrections...but 15% off the median at the peak is a real possibility. Sydney topped at $1m median..so it could come back to 850k..over the next few years.....

 

A counter argument
The areas such as Bondi,Darlinghurst, Potts point and so on are High wealth areas
The areas where population is well educated and is well remunerated..
Their is also generational wealth so families can assist with deposits and be dependent on if times get tough.

In so I counter by saying a young couple in Mount Druitt with a 5% deposit on $700,000 home is most likely in a worse position than a couple in Bondi who had a 10% deposit on $1,200,000 2/3 bedroom apartment

Making assumptions is OK if you made so many we need a balance .

 

My worry is that be have built a real powder keg.

Outside of what is happening now (apra, bank inquest, etc.), one macro economic event and all the people earning 100-300k leveraged to all hell will be in real trouble as bonuses dry up and business slows. The lower income earners will be getting later off faster.

I agree bigger than a 15% drop is unlikely as we stand. But if something else happens outside of the current system - the bleeding could be huge. There is just too much leverage out there.

 

Hi All,

Great thread.

Three things:

1) It is important to note that the banks don't want to own the properties that foreclose. It is easier and more profitable for banks to allow the borrowers to refinance, even if it is at less favourable terms. When credit tightened in the early 90's banks just extended the loan terms back to 30 years so borrowers could make their repayments. This political pressure will kick in again.

2) The correction that is underway is a really healthy thing and the correction has a little way to run yet. Regulators (APRA) are clamping down on credit, rather than in previous cycles where higher interest rates would bring an end to a credit boom. So with interest rates unlikely to rise, it is hard to see a property crash, as if the correction gets too severe APRA will just turn the tap back on.

3) The LVR for the overall property market in Australia is just under 24%. This is not a debt bomb.

My guess is that in the early part of the next decade, there is going to be a significant run up in property prices as APRA loosen, and interest rates are stuck at these low levels. You should be using this time to scoop up good real estate.

Best,
John

 

What? Banks do not need to refinance. If mortgage holders are in debt to the hilt, the banks sell them. Either quietly or they advertise a mortgagee sale. I get emails with these sales listed. It seems to me they do not want to advertise mortgagee sales (and there have not been many officially lately) because it would send a signal to the market. At the moment, with tighter regulation there will be more sales from lenders.

 

Hi Hobartchic,

Thanks for your reply. Yes, banks can and do mortgagee sales of course. But it is a last resort.

Also, if banks were to do this on a larger scale, the PR hit would be very undesirable. This will follow the royal commission scrutiny etc, and I don't think they want any more bad publicity.

Cheers,

 

This makes me think- would people refinance to 40 year loans nowadays?

 

I am not one to try and predict as I have been wrong for the last many years. I thought and sold up and thus missed some incredible growth just prior to the GFC. I believed that as the GFC took hold, govnuts and society would learn, that we had to much leverage in the system.

How wrong I was!

I never considered that instead of learning our lesson and deleveraging we would do the exact opposite and pile on the debt both in Australia and across the world.

I never allowed in my calculations that the RBA would drop and hold interest rates at historical lows. I do know that they have very little room to move on the down side and any move on the upside, increase in IR will have a major impact. With inflation at lows in the 2% range, people can no longer rely on inflation inflating the debt away.

If the formula for calculating inflation is modified and causes an uptick in inflation figures, the RBA will have to move IR's up, bad news, a small increase at low levels has a large % increase in the pocket.

They could drop IR's lower, more people will add more debt into the system, asset prices will increase, but at some point, they have no ammo left, IR's at 0%, bank IR's will not fall below 2.5%.

The low interest rates have meant many people with money have moved their money out of banks and into property, as it is deemed safer, which it is for a store of wealth, until those people release the intrinsic value of the asset property can also go down.

Ie $1M in the bank at 2.0% p.a return looks ****
$1M in property with a gross return of 3.5% looks even better unless
the $1M assets goes down 5% p.a and then the %2.0pa return on term deposit looks good.

The sad thing is, the govnuts have not provided a solution for people to maintain their wealth safely in retirement.

How much money has been borrowed against savings/retirement nest egg in SMSF and gambled it in property?

All in all, Australia can have the most expensive property in the universe, it does't make our society any more safe or more productive and I live in society not perceived wealth.

Ie if all houses in australia are work $10M but only for a % of the population, the rest cannot meet basic survival requirements, food and shelter, can I safely walk down the street with my children to get a coffee and a donut.

 

Hi John, I have no doubt that the figure you have quoted is correct, but you provide your source an how it is distributed across all property. Ie 30% of property is owned outright, 40 % of property have an LVR of 10%, 30% of property has an LVR of 80%. It is the later that I am more interested in.

As for your statement, it is not a debt bomb, I do call that out as c..... We have the second highest private debt to GDP in the world, all around one asset class, that by nature cannot be transferred or moved easily. ie I can sell and move a house in Toorak to Shanghai, but I can sell and move a tech company anywhere in the world.

 

Hi,

Australia's housing market is valued at $6.9trn, and debt is $1.642trn.

Please the article below, which provides the data source, but not quite the breakdown you are looking for. Date of the article is March 2018.

Australia's housing market is now valued at $6.9 trillion