Easy credit to blame for high house prices-the Australian.

I think AHPRA can definitely stop you building wealth point blank.... if you are a medical practitioner....

 

It wouldn't matter how willing people were to take on debt if they could not get a loan. Ditto FOMO is useless with out the ability to get a loan/ save up. Rate of savings has not kept up with the growth of real estate though.

 

True. Conversely if you have plenty of credit but not people to take on the credit then there is also not a boom. Look at Perth for example.

 

The big credit restrictions elsewhere tended to be around reduced LVR's. I remember being in London and Dublin after the GFC and all the high street banks had max LTV's ( LVR's to us) of 50-70%

Basically, their servicing calculators never got as far off the hook as ours did , so thats not where the pullback came. They had issues we didnt have- access to funding. So lower LVR's is what happened . They were only lending to people with large deposits.

Keep in mind that our servicing calcs got to a point where they were WAY out there compared to just about everywhere else.... To put it in perspective; debt to income ratios peaked at 6 or 7 x income in the more aggressive lending cultures of the world, pre GFC. We peaked at 15+ x income here if you used the right lenders in the right order. Those are the figures APRA's chairman referenced several times in mid - late 2017 when he talked about 2018 being the year where more work around borrowing capacity and household living costs in particular, would occur, because he was concerned our debt to income ratios were still uncomfortably high even after the assessment rates had ( by then) been bedded in for a good 2 years .


And sure enough, thats what has happened. HEM's progressively replaced HPI. Then HEM's progressively tightened. And now HEM's will tighten further following the Royal Commission, it would appear.

The end result is that we are basically at 7 or 8 x income now at most lenders, and while I suspect APRA's chairman would like that figure to be at 5 or 6 x income ( he has implied that more than once ) he is probably fairly satisfied with things now.

So again, here is another thread, 3 years after the debates about APRA and ASIC and assessment rates and HEM's began on these forums, where there is still some commentary from some members which seeks to deny the role credit plays in driving Australias property markets .

I personally think its as obvious as obvious can be.

#itstheborrowingcapacitystupid!

 

Are you looking at borrowing/debt to income ratios as the ratio to net income or nominal income?

e.g. nominal: someone on a salary of $80 000, about the Sydney median, can borrow approx $560-640k? net: someone on a salary of $80 000 has about $61 000 after tax and can hence borrow $420-480k, if they are living with their parents and eating ramen noodles 3 times a day.


Also, a big reason for the higher peak in the ratio is lower interest rates, I'm assuming cost of money didn't go as low as 3.5% for retail borrowers overseas just before the GFC?

 

Did London or Dublin relax the lvr's at a later date, say 2012-2013. Because looking at the article Graeme posted its showing many countries have had excellent growth over the past few years. If overseas countries could only borrow about 6-7 times their income then how have these countries grown so much?

I understand australia had very relaxed lending standards which has been a huge contributor to growth, but if these countries are also growing then how are they doing it if they could only borrow half what we could?

 

No, it was post GFC that the LVR's were cut back. Securitisation markets had normalised by 2012/13 so LVR's would have started expanding back to 80 and 90% by then I assume.

remember most other nations suffered massive corrections. So while the growth has been strong in recent years, in many cases alot of it is just recovering the losses from the post GFC era .

In any event, here in Australia we are facing - for the first time in @ 30 years (since deregulation) .... a period of re-regulation. That's just how its going to be for a while. The Royal Commission will pile on some pain around living costs I would assume. So no one should expect a sudden break out of borrowing capacity to kick markets off again, any time soon. Only less expensive markets have any real prospects for the next few years, I would think.


The next decade is still going to see debt reduction rather than speculation, well rewarded

 

I inquired about a unit in Como and the agent said it’s better to buy in Perth now and avoid the east because they’re going into downturns whilst Perth is going into recovery after a decade long slump. I used to think that’s how it would play out but now I think that if Sydney and Melbourne tank then Perth will tank twice as hard for another decade. If rates go up and credit continues to tighten what reason will Perth have to start booming again? Do people expect prices there to go boom just because.

 

I don't know anyone who thinks Perth is going into a boom. There is nothing to drive a boom. However, it does seem the property market is stabilising. We may be headed into a slow growth phase. Better than going backwards.

 

Wow, so effectively the borrowing capacity of an average buyer/investor could/has drop by 30+% from its peak?

Borrowing capacity being THE most important sauce for continued price rise,
Imagine what it could do to Sydney/Melbourne prices where debt to income ratio is most stretched?

 

Borrowing capacity tightening will effect all markets, but markets like Sydney/Melbourne which are stretched as it is, will get impacted most, things could go really ugly for high leveraged IO investors with increasing CG as exit strategy.

 

how's the rental yield in Perth?

 

Still low but we have just had our first rental increase in almost 5 years.

Perth house rents on the rise in positive sign for local market: Domain Group report

That said, it depends on the product and location. @Westminster recently put a new product on the market for rent in Highgate and had multiple applications for each property.

 

You might be suprised how much borrowing capacity is left by buyers completely untapped.

ABS published HOUSEHOLD DEBT AND OVER-INDEBTEDNESS IN AUSTRALIA

In that report, there is the comment:

The wealthiest 20% of households were more likely to hold debt ($292,000 on average)​

The wealthiest 20% of households should have a much higher borrowing capacity than that. I don't know what the max borrowing capacity of the top 20% of households but it looks like a lot of unused borrowing capacity to me.

6523.0 - Household Income and Wealth, Australia, 2015-16

I don't really see borrowing capacity as the issue but I don't see Sydney and Melbourne continuing to rise. They are reaching or have reached a price ceiling for now.

A boom is really driven by 2 factors:

1. capacity to take on additional credit (borrowing capacity)
2. willingness to take on additional credit

In Perth, the market has been declining for years. The issue is not borrowing capacity, it is willingness to take on additional credit. Most people I know in the last 5 years have been looking to purchase residential property in Perth. However, they have all been holding off while prices fall. They have started buying in the last 12 months and from memory only two are still looking for places. All the others have bought.

I can see the same thing happening in Sydney and later in Melbourne. Many will not buy while prices are so high and will wait for prices to ease before buying.

 

With borrowing capacity 'willingness to buy' is choice,
Without borrowing capacity, well... you cannot buy even if your are willing.

 

That REA is full of ****. Decade long slump is not true - it's been about 5yrs. If you had bought 10yrs ago and sold 5 years ago the world slump would not be in your vocabulary.
However Perth does tend to be counter cyclical quite often to Melb/Sydney. There have been points in history where Perth's median is higher than Melbourne.
There is no need for Perth to start booming again, it just needs to start growing.

It surprises me everytime someone says "Perth yields suck". It's generally a Perth person and it's a statement about how they suck when compared to what they had. From a national perspective people shouldn't take that statement as a "Perth yields suck and are even lower than your state yields". Perth yields when compared to most capital cities are better and that's considering the less than stellar market.



The above data is from CoreLogic and is 3mths old but it does show a good high level comparison. Yields of 4-5% are possible in Perth which is very favourable when comparing to other states.

 

True but there is no real evidence that borrow capcity is maxed out across Australia. What do you make of this?

The wealthiest 20% of households were more likely to hold debt ($292,000 on average)​

The wealthiest 20% of households with an average $292,000 debt seems extraordinarily low to me. I had more debt than that as a low income earner!

 

How much debt do you think someone who has bought in last two yrs in Sydney/Melbourne is holding?
Averages doesn't mean much when it come to a market were a small percentage can make a difference and change the sentiment.

 

Plenty of markets outside Sydney/Melbourne. With regard to Sydney and Melbourne, I posted this a couple of posts above:

I don't see Sydney and Melbourne continuing to rise. They are reaching or have reached a price ceiling for now.
​

How much borrowing capacity do people in Sydney and Melbourne have, who have cash savings and no debt? It doesn't matter if they refuse to buy at what they see as the top of the market.

 

@50% is widely accepted as the post APRA reduction to investors maximum potential borrowing capacity

Its why cheaper cities ( Perth and Adelaide) and regionals will see money flows heading their way over time. It comes down to affordability. And its why the east Coast/big city/metro only growth argument that far too many PC members are still holding onto, doesnt hold water any longer.

In very simple terms, when buyers ( O/Occ or investor or foreign) in dearer cities are excluded from buying there as easily or as frequently, you'll see price acceleration taper off. I give you Sydney as exhibit A. Its already seen droves of investors sidelined, and clearance rates and prices are reflecting that. The froth is now long gone. Melbourne is following. Its because larger loan sizes are required to buy in those cities and they just arent as easy to qualify for, now.

But investors will still want to invest, so they will start looking elsewhere eventually when price and ego and snobbery gives way to mathematical fundamentals. Brisbane is the obvious choice for many , but its been flooded and continues to be flooded with apartments and is soon to be flooded with dual occ and house land in surrounding regional areas... so it hasnt performed as many PC "cycle bulls" have predicted, and I worry if it will... it should have kicked on by now. It really should have. I own several properties there so I am hopeful like others are .... but I suspect I will not see spectacular results there.

When you get down the brass tacks of how borrowing capacity and price growth are related, and as more and more PC members and members of the general public come to understand just how significant the lending changes are to their future borrowing capacity , the potential of regionals, Perth and Adelaide becomes very clear.

Put plainly, debt to income levels and house prices in those locations are well below those of the East Coast cities. So they are the markets with the most potential under this credit environment , because they are the only places where the broader population has the ability to borrow much more money and drive prices up market wide ...

Now that doesnt mean they will take off..Im just saying they are the markets with the greatest mathematical potential to take off...



#itstheborrowingcapacitystupid.