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

@L3ha7
try https://forcedsales.com.au

alternately you can use keywords in realestate.com.au

for eg. go to
Real Estate & Property For Sale in Perth - Greater Region, WA (Page 1) - realestate.com.au

expand more refinements links and type in
'Mortgagee in Possession' in 'Keywords' textbox

 

I posted some data (new mortgages by LVR band) here: Sydney - the coming correction 2018-2022

 

have already posted this before , but as the topic came up again

There were warnings from some professionals in the industry on the forum in 2016 . I was happy to watch and see what happened ( we have a spread sheet with the times our loans go to P&I , earliest is late 2019 , then through to 2025 )

Mid last year we decided we needed to take some preventative action.

In terms of cutting down costs .

Sold two properties that were responsible for around 50 % of our negative cash flow .

We've just signed up to put a Granny Flat in our back yard and we're doing work on our weekender so we can rent it part of the time.

Once we've done those , we're going to subdivide ( and renovate ) a block of four units in Hobart . This means we can sell them individually if we need to or can refinance . Now days it's hard to refinance a block of four .

We can extend the I/O term on some , but happy to leave those at this stage .

Cliff

 

I have done similar. I started planning for this in December 2014.

 

Thanks Alex, some interesting figures in there.

While it looks okay, it is still the aggregate figure of Private debt to GDP that is off concern. Private debt contain both mortgage, credit card and personal loans. However the figure is still of concern as GPD is a measure of our output, debt is still debt. But in saying that and I do not have the figures if the % of private debt is broken down and the break down shows that mortgage debt is less than 70%, it is very concerning, as the other 30% would be at much much higher interest rates, making it harder to pay down

 

Don't you hate it when you've exchanged contracts to purchase and then start reading page after page of property doom

 

It's good to be prudent and prepare for the changes but I think if the major markets start to correct heavily because of this the government will step in and take action or apra will do it themselves.

A simple way to alleviate some of the pain would be to let people coming off IO go onto 30 year P&I instead of hitting them with 25 or 20 year P&I when their IO term ends.

 

I agree. Depending on how many times a person has rolled over their IO, the remaining term could be 15 years. P&I over 15 years may not be possible where over 30 years is possible. In that case it would make more sense to allow the investor to refi to 30 years P&I rather than a forced sale.

 

A good time to ensure your cash flows and cash reserves are healthy.

I'd say there should be some decent buying opportunities ahead in 2019 in Syd and Melb.

 

That's what I am looking and preparing for. Really hope to get a/some bargains in blue chip areas. You can make money in both bull and bear markets.

 

There will be opportunities for those who aren’t burdened by tightening of credit

 

this will be a good solution, soft landing

 

I just came off a loan 10 years of IO for an Ip repayments were $1899 IO 4.34%
Commonwealth bank gave us 3.89% P&I 3 year

My repayments went from $1899 to $2399

This is one of a few loans around $500k


So if the worry is people coming off IO from 5-10 years ago.

Looking at ABS chart the loans average loan size coming off $300,000 to$390,000

So that means PI would be on the remaining 20 yeas of $2100.
That's assuming nothing was paid of the principal in the average loan from day 1.

Is this cliff soooo scary? Its $500 per week. This is based on ABS Sydney average loan size

 

Question - what do we think will happen to markets other than Melb and Syd?

My best guess is Adel / Perth / Bris (where things didn't go bananas) will still hum along at low rates of growth, dampened by the negative sentiment of Melb and Syd declines.

I see a few things going to impact the Melb and Syd markets in 2019-2021

• Already at affordability limits / time for a decline as part of a normal cycle
• Huge drop in foreign purchases (China stopping wealth outflows)
• The IO -> P&I thing
• Tightening credit all round (in particular living expense serviceability calcs)
• X-factor: A potential US debt collapse scenario / high inflation / high interest rates (?)

My guess is 'up to' a 10% decline in Melb metro market over a two year period, followed by a long (3+ year) stagnation for wages and rents to catch up.

 

Exactly. Banking is a very politically sensitive industry. Plus, extending the term of the loan is more profitable for the banks, because it extends the amortisation of the interest. Far more profitable that foreclosing.

One last thing that no one has mentioned: everyone is either a renter or a buyer, and Australia has very healthy demographics. Like squeezing on a balloon, if APRA is pushing people out of home ownership, they are therefore pushing them into the rental market.

My expectation is that the all of the accumulated inflation and the demand will shift from asset prices to consumer prices, and we will see rents shoot up between now and 2022. This will help investor serviceability, and take the sting out of any P&I cliff.

Best,

 

In Previous cycles , that's NOT what happened . AFTER sydney and Melbourne slow , the others go Banana's . Hobart's doing it at the moment . Just waiting for Brisbane - now it's getting the population growth , some funded by people selling in Sydney and Melbourne and others by looking for the next place to invest .

Sydney stopped in 2003 last time , but that was only the start for Brisbane .

Cliff

 

In addition to above, govt has vested interest in property. Stamp duty has been a MAJOR revenue earner for the govt and I doubt they would let it go so easily. They are already feeling the pain

Sydneys-cooling-market-to-cost-nsw-government-6-billion-in-revenue

 

Quite right - governments know how to tax inflation, but they don't know how to tax deflation yet. They want prices to go up.

 

"accumulated inflation and the demand will shift from asset prices to consumer prices, and we will see rents shoot up between now and 2022."
I tend to agree, but following the logic, if consumer prices & rents go up, inflation goes over the 3% RBA threshold, RBA will increase IR's and thus reduce serviceability for investors.
IR increase and P&I cliff = drop in property prices while increase in repayments, but even that is to simple, it will depend on how many investors are on the margins struggling the servicing large amounts of debt.
To me it is the large amount of debt that has been accumulated coupled with the real chances to IR's going back to long term average of 6.5 to 7%.