Did APRA work??

Datto, your thinking Oprah ??? she does not have to work

 

There is a definite decline in prices in SW Sydney houses and no need to rush to beat others anymore, it was crazy as prior & no doubt would have continued on and maybe out of control completely if left alone.

 

I think APRA's much needed changes have had some effect. Some investors are certainly pushed more or so due to servicing but other then that our group has been really busy. I have been seeing more and more first home buyers get into the market but also I have noticed a big jump in PPOR enquires.

 

She works harder then any on in know!!!

 

That month a lot fell over straight away. But there was already a high number of fall overs prior, lots of people putting contracts down in a rush before they had finance sorted. Straight after that our fall overs due to finance were and remain multiples lower than previously. This month to the APRA month would be near 10 times less.
For us, the next month would have been the first month that our new contracts didn't grow exponentially compared to the previous month, but our settlements stayed on trend.

 

I am not convinced. I think 99% of the time an agent's reason for contracts falling through is "finance".

I guess it is a safer bet then the inconvenient truth of "buyer pulled out because their B&P report found a collapsing roof on the main and 2nd bedroom. Oh yeah there are also termites."

 

Quite likely...its old

 

The reduction in capacity exceeds the price drops we are seeing... you are looking at 30-40% reduced capacity on average, for those already carrying debt. So you will see investors having to go to less expensive markets such as Brisbane, where a short bull run will occur...like is being seen now. Hobart as well.... Possibly Adelaide and then finally, Perth.... simply because they are where investor shoppers can afford to shop. And then , unless significant debt is reduced, many of those investors will be sidelined from any further investment for up to a decade. Probably more like 7-8 years, but possibly a decade.That's just the simple reality of the new servicing calculators and HEM's.How long it takes will be determined more by wage growth and rental inflation than anything else... Somewhere between 7-10 years is the likely result though

But new participants - such as First Home Buyers and investors with remaining capacity will still be reasonably good drivers of things and FHB will actually see afffordability improve a touch as investors are increasingly sidelined and the speed of growth slows.... but it's not a magic bullet. Those groups will still need to generate deposits - which takes time- and they will also see their borrowing capacity limits reached far sooner than would have previously been the case.. so they arent going to just waltz in and pick up all of the slack left by the investors who are now sidelined... and even if they could, they will not be able to repeat purchase as frequently as previous generations... but they will do enough to keep things moving along- albeit at a slower pace.

So all roads lead to, slower, lower growth... traditional Australian mum and dad methodologies related to property investment will require a rethink. Assumptions of 7 year rules or any other hocus pocus like buy and hold and wait for the big pot of gold, or any other rubbish arguments built on statistics that have been skewed by a once in a lifetime credit era that is now ending , will be shown to be anomolies... and just cant be relied upon to generate the same results for the next era of investors. When you take up to 40% of capacity away from a segment (investors) who are responsible for over 50% of the borrowing in a market ... that's just what will happen.

But for APRA and ASIC...they want all roads to lead to a much more robust banking system, able to deal with a 2nd credit crisis; meaning more P&I and less I/O . More long term funding for RMBS. Less 90 and 180 day terms. More strenuous assessment of real spending patterns etc etc etc..... and until the rebalancing of hundreds and hundreds of billions worth of loan books is achieved, and the regulators feel comfortable that the majority of debt is at P&I, being paid down, and new loans are being more thoroughly scrutinised for affordability based on real world living costs rather than antiquated poverty indexes, they wont consider loosening any of these changes any time soon.... the return of "actuals" or a lowering of HEM's, or reducing capital requirements per $$$ lent are standards/policies that arent going to be reversed. This is the new order of things...

 

Extremely well analyzed macro environment and succinctly put given the complexity of the issue.

Individuals should takeaway the relevant points from your assessment and tailor their investments accordingly to the micro environments of their choice.

Rocky times ahead for the economy as property market is one of the major if not the major drivers currently. The participants in property markets who rely on investment side of the things might feel the sting a lot more.

 

This is why I believe opportunities like NRAS were /are so valuable...if for no other reason than the debt reduction they can facilitate, by reinvesting the surpluses -which are significant when you consider the low rental yield environment we are entering and which will only worsen as so much stock comes online throughout 16,17 and 18. Even one or two cheap and cheerful NRAS added to an otherwise CG focused portfolio will prove very valuable in combating the post regulation lending environment, getting you ahead of the curve - provided the dividends are reinvested as debt reduction of course.

One day, in the distant future, big growth cycles will return because in time, income inflation and rental inflation will create capacity again... but until then, I want to continue to expand my footprint and to do that I need to be able to keep borrowing. And to do that in this new lending environment, in the absence of a windfall or big increases to income, I need to reduce non tax effective debt. And to do that without selling, meaning my footprint can expand rather than contract , I need to manufacture more cash flow within a portfolio... rent rises are not going to do it...

 

Yep definitely! It gave me the push I needed to get out of my comfort zone and find a better paying job.

 

No changes personally, yet... I always put down a 20% deposit anyway, so I haven't felt a change.

 

The borrowing capacity changes are to do with how the bank assesses current debt, so assessing on principle abs interest at a loaded rate vs the servicing of old being interest only repayments at the actual repayment amount. None of my loans are over 80pc either.

 

Great thread.

I'm about to write a piece on my blog/site about a documentary I just watched on a qantas flight back from Auckland. Highly disturbing, the doco is called 'From Russia With Cash'. It was shot in late 2015 London, and it pre-empts the thoughts I'm about to write below. It is a must watch, and is available for free on YouTube (about 50 minutes long)...

...In my mind, the future problem that Australian - and indeed global 'desireable' - property markets will be facing are not to do with honest, mortgage-taking folk who buy houses (either conservatively, or by over-extending themselves if talking pre-APRA). Whilst I dont deny that when masses of mortgage-taking buyers all overpaying/overextending can lead to horrible outcomes, the focus should be on what the higher-end cash-buyers are doing and how they are effectively distorting markets in a trickle-down way.

Lets be honest, if you are buying a million dollar+ house in Australia, in CASH, you are very likely to be a foreign buyer. I cant imagine there being huge swathes of local cash-buyers in this bracket.

There are two types of foreign cash-buyers. 1) Those with cash derived from 'honest' means, who are looking to park it somewhere safe, and western countries' residential property markets fits the bill. 2) Foreign cash buyers who sourced their cash from illegal/criminal means. These buyers are similarly looking to hide their cash under a clean rug, effectively laundering/cleaning their cash through residential property.

It frustrates me when I then hear people say 'oh, but those buyers in the $5million market dont affecy those honest, mortgage-based buyers in the $500K markets'. That virw could not be further from the truth.

Just as forgery of $5,000 Gucci handbags trickles all the way down to pricing and profit of a $20 no-frills Kmart handbag; so too does dirty money in prestige property trickle through to first home mortgage buyers in the housibg market. Furious bidding-up of property in the $5mill market causes $3mill properties to edge intp the $4mill market. Then $2mill ones into the $3mill bracket. This carries on (albeit diluted as it goes) through to a $500k property suddenly going up to $700K.

Dirty-money-laundering is a serious issue. APRA will help sensible everyday people not to do stupid things, but who is helping to stop dodgy dollars entering our markets?

 

There is changes, and you will hit them if you keep buying a couple a year unless your able to get 10% + return and you have the cash, but even then at some point they wont like the rent being too big a % of your income.

 

@C-mac I watched that doco on a flight too and although I thought it was interesting.....it was pretty loose. As a buyer attempting to park dirty money, 'Boris' was too obvious and even cringeworthy at times. The premise behind it though is certainly very true and exposed the ethics of some of the agents.....but nothing will change in that regard.....the world is full of dirty money. Tracing it can be near impossible. You would not be openly discussing where you got that dirty money from with a REA that's for sure!

 

That would be the role of yet another government agency - AUSTRAC.

 

My strategy is different, as cash savings are not used as the 20% deposit, rather, equity is used. All properties are cash flow positive, which makes the banks happy, me happy and the ATO very happy

 

It doesn't make much difference even if the properties are cash flow positive, for serviceability the banks calculate the interest rate at 7.5% and getting over 10% yield wont help either. as the banks don't count any yields over 8% to calculate serviceability. Whether you use cash saving or equity is not going to alter your net assets and serviceability. I have found the only way to access equity is to sell which means investing in more risky assets such as the share market and get lower yields.

 

Unless you have an excellent broker and appropriate ownership structure in line with a strategy of avoiding hitting the brick wall with the banks