Falling prices in Sydney.. Really??

MC1 is right. There were similar fears in the 90's where property boomed and there was fear of an IO reset. Governments leaned on the banks and loans were re-financed out to 30 years again.

Governments / banks / regulators don't want a property collapse either, popular though that theme seems to be on this forum. They will step in if it worsens from here. APRA was looking for an orderly and slow correction in prices and what they got was much sharper.

RBA likely to back-stop the banks with an interest rate cut or two this year making refinancing easier and to stem any distressed selling.

 

How is a 50 basis rate cut (margin pressure?) going to stem distressed sale as a result of IO2PI rollover which resulted in repayment rise by 30/40%?

To stem the distressed selling,

• Banks have to blindly extend IO loans without fresh assessments, or
• APRA has to reverse all the responsible credit measures taken in last few years to go back to 'any one with a pulse can get a loan model'
  

Any this wont suffice.

 

Thats what makes Sydney and Melbourne so attractive to investors is they know that the government will step in to protect the 2 major markets.
Anyone with property in all the other markets just has to suck it up.
And how do they deal with a market that may become oversupplied with houses and apartments at the same time.
An old empty house in Sydney will burn through your savings if you cannot find tenants, and onto the "For Sale" market it goes.

 

I don't know anything about these areas but as a general comment, you need to look at the prices properties in the area have sold for, not what they are listed for. I can list my house for $2 million but if nobody is willing to pay that then it's not the real value.

Edit: Just looked up Campbelltown and many of the sold properties have "contact agent" instead of the sold price - that's a pretty good hint that prices are falling.

 

I am not saying that lower interest rates will stimulate new buyers (though it may do). But it will slow down distressed selling. This is because the main expense of property owners is interest, and lower interest rates can turn negative cash flow properties in to positive cash flow properties. At the margin at least, it means many reluctant sellers can hold on and ride out the downturn.

I actually see today's environment much like around the year 2000. Over priced and volatile stock markets vs relatively less over valued property markets. You will remember that in 2000 after the stock market crashed, funds flowed into the relative safe haven of real estate.

 

I have to disagree. There was never any fear of IO resets in the 90's - because there were never any IO restrictions in the 90's. In fact, that was quite literally THE Golden Era of evergreen 30 year IO products such as NIVA, ZIP, Portfolio, Veridian etc.....

This isn't correct either - because there was never an IO issue and never a refinance issue. Rates were also falling aggressively throughout the 90's . Affordability and borrowing capacity went through the roof. The RBA cash rate fell from 17.5% in January 1990 to 4.75% by July 1994 - WOW! - before increasing to 7.5% by Dec 1994. The cash rate stayed there or thereabouts for @ 18 months before a steady reduction to 5% by July 1997.... and then a modest reduction to 4.75% by Dec 1998, before finishing at 5% in Dec 1999. So other than an 18 month period of increases , rates were in aggressive decline from 17.5% to 5% over the decade. This was also the decade that non bank lenders and Lenders Mortgage Insurance changed the lending landscape. Competition from non banks ( At Aussie- we'll save you) slashed the profit margins banks were making on loans, and LMI allowed for 90% LVR loans for the first time- with 10% non gen savings - and later 95% loans with non gen savings. This decade was boom time for borrowers, and there were no issues at all with getting as much money as you wanted and on IO terms for as long as you wanted. Prices were surging. Equity was everywhere ( CBA built a national ad campaign around it - Equity Mate) . Borrowing capacity was growing with every rate reduction so equity could be harvested. Higher LVR's were available so even more equity could be harvested.... IO was plentiful. How could there possibly have been any refinancing problems?

But setting all of that aside- the here and now is what really matters. And right now, lenders are under incredible scrutiny from the regulators and as a result of the Royal Commission , to apply more rigorous affordability tests than ever before - not less . And to justify their lending decisions more thoroughly than ever before ...... not less - and the Royal Commission hasnt even announced its recommendations yet. Are we really being asked to accept that Govt will simply lean on the regulators (in an election year mind you, and right after a Royal Commission) and they'll suddenly agree to reverse their prudential guidelines and allow the banks to turn the taps on again?

Its a brave call. It's possible of course- but it's a brave call. I suspect it's unlikely.

I think we are more likely to see rate cuts in 2019 and perhaps some modest softening of servicing calculators - maybe. I called 2019 rate reductions 2 years ago, as the APRA stuff first started to bite. I think it's still a very reasonable chance of happening . The modest APRA easing.... who knows? But I think a modest reduction of the assessment rate to say 6% for example, for 24-36 months would be warranted, to act as a cushion to assist the P&I migration.

This is an incorrect premise, I'm afraid. APRA doesnt care about house prices. Their concern is the safety of retail deposits and banking stability. That's it. They didnt take prudential action because of house prices being too high , in the hope of correcting them. They took action because they were concerned about more than 50% of loans being IO ( with no hope of the debt ever being paid off) within a banking system that's ultra reliant on wholesale and securitised debt markets, and because debt to income ratios had reached scary levels. a 50/50 P&I v IO loan mix places Australia's banking system at extreme risk in the event of global funding markets closing shop like they did after the GFC. The orderly correction they seek is to a healthier P&I v IO ratio and a healthier DTI ratio so that Australia's lenders can still refinance and issue new RMBS if there is a credit crunch globally. That's it. Our banks ( and Canada's banks) were really the only teo banking sectors that had little to no trouble refinancing RMBS after the GFC, as other nations banks fell victim to credit issues and required bail outs by their Govt's. House prices in some parts of SYD and MEL are just collateral damage in the effort to get Australia back to that "safer" position. If the banks went under it would be a far bigger problem. I think at the higher levels of the regulators, they understand this very well, and were always prepared to accept that the band aid wouldnt come off without some pain along the way.

But yes, the effects of SYD and MEL price slides are starting to impact the economy. car sales are falling. sentiment is down. It's causing some consternation and the media is getting doomy and gloomy ........ But I don't think our regulators will throw the baby out with the bathwater . The baby in this case being Australia's banking system being stabilised and made more "GFC safe". The job isnt done yet. Sure, excellent progress has been made, and some people say its gone too far - but I dont think anyone should underestimate how important it is to have a healthy and GFC safe banking sector . I think it's more important than some relatively modest economic pain.

 

I do agree with this. It provides a cushion to better facilitate the P&I migration. This is why I suggested over 2 years ago that the RBA would have a conundrum by late 2018/early 2019 and would likely have to reduce rates in 2019 to accommodate the APRA goal of mass P&I migration and to protect against accelerating rates of mortgage delinquency. I said it was a 30% chance. a few months ago I revised that to 40%. Today I think it's closer to 50% ... trending towards 60%

 

Sydney real-estate at current valuations a relative safe haven? Really?
On what basis?
What was Sydney's P2I back in 1999/2000 and what it is now?
What was Sydney's TotalDebt2I back in 1999/2000 and what it is now?

2000 was at the very starting end of global credit expansion cycle,
2019 we are probably at the tail end,
IRs are at all time low,
P2I is at all time high,
D2I is at all time high,
Global Yield curve are on the rise,
leverage expansion is not an endless pit.

 

Thanks Euro73,

Refinancing is exactly what happened in the 1990s. Now, perhaps you could argue that it was more fixed to variable interest rather than an IO re-set (fine), but the new wave of competition and deregulation lead to an influx of refinancing. The banks also tried to re-pivot their balance sheets into residential real estate at the time in a flight to safety (commercial real estate at the time was getting hit).

The point, Euro73, is not the section about IO, it is about its response to the threat of mass defaults. And in this sense, there is a corollary.

 

Loans never being paid back, more affordable for FHB, so many cliches.
IO loans are a tool for tax minimisation particularly for those in the plus 40%+ bracket
Yes there are the loans for the young purchases for owner occ that was very tight on servicing that shouldn't have been on IO, but if you see the statistics (as I have from one of the big 4) the % of these loans are quite low

You need to remember, that the banks hold a lot of power in Australia. Not only with everyday Australians but Government also.

Apra, make no mistake are uneasy with how this is playing out as it is not what they expected.
Banks are holding off until the findings of the RC, the RC will need to be very careful on how they approach this. The banks can bring Australia to it's knees and it is currently happening. House prices and car sales are just the beginning. Retail figures are well behind and will be reflected shortly and employment details are skewed.

If they get this wrong, a couple of rate cuts will not even be noticed with the carnage that will come. And yes, rates will be going down and not up.

Question, were loan defaults and mortgage stress so high that Apra needed to come swinging with a baseball bat. Or was it another case of the small % of bleeding hearts that cried for housing affordability which twisted the arm a little. Yes there were other reasons also, but I have no sympathy for those that say they cant afford to buy.

There is a place for everyone, make sacrifices, move out a little further, or rent like thousands before you have done.

This will be a reap what you sew scenario mark my words.

The intelligence is truly being showed in the media and social media at the moment. A lot of people saying that the young people will finally be able to afford a house and its great that property prices are declining.
Fact is, they are not intelligent enough to realise that with the carnage that will come along with all of this, they wouldn't be able to afford if prices fell 50%, due to the impact being so severe.

Food for thought!

 

No, real estate is expensive. But stock markets are really over bought. I said relative safe-haven, rather than an absolute safe-haven (which would be cash).

The question for this forum right now IMHO is: in an "everything bubble", when you have to deploy funds somewhere because cash is losing value, is investing in Sydney real estate really that crazy? I don't think so, and residential real estate is generally considered a defensive asset (with risk introduced by leverage).

Over to you.

 

There is no such thing as no stake in game, even if one is in cash, one is invested.
Cash/deposit may not be inflation proof but it doesn't mean one has to jump on an asset like Sydney RE which has just come off the boil and is deflating fast and risk loose more.

Based on any valuation metric like rental yield, supply side, P2I, D2I, stagnant income in brave new gig world,
risk-reward wise Sydney RE just doesn't add up for next 2/3 years unless one is able to pick up a desperate forced sale deal.

 

Not sure I agree. I've switched to mostly cash, at 3.1% p.a while Sydney RE lost 4% in the last quarter alone. Unless it's a PPOR and you don't care about money, there's no financial logic to buying in Sydney or Melb any time soon IMO.

 

Thanks Berten,

I think yours is a reasonable decision, and smart people can have an honest disagreement about these sorts of things. We are both speculating about the future of prices, and we are evaluating trade-offs often without a perfect choice.

I would remark however: you can easily get a low risk 4%+ in Sydney, which is pretty good against a 3.1% alternative in cash.

I would also add that it can depend at what stage in life you are. For those with large portfolios already and in less of a rush, now may not be the time to add to it. For those with zero property to their names and with the aspiration to buy multiple properties, now would be a reasonable accumulation point to get started.

 

Hi John,
You do make a valuable point,
Agree with the rent returns. Vis a vis parking money as Cash
But the concern is about the Loss in Asset value (for Syd-Mel properties) over the next 2-3 years. However, your point is well taken and this image would sum it up nicely:

 

Sorry, I don't follow?

In the last 3 months alone Sydney is -4% and nobody is expecting a reversal soon. That would be before accounting for transaction and holding costs. Hold cash and buy later, compound gains as oppose to losses paying interest on a crashing asset. The losses and iliquidity could easily set ya back a decade jumping into Syd right now, anything but low risk IMO.

To be fair, I think we're coming from opposite strategic viewpoints. I've primarily focused on trying to weight toward the right asset class at the right time to make money via capital gains.

 

Low risk 4%+ in Sydney
The favourites at Wentworth Park on Wednsday night?

 

Generally I think this is a good point. Although I think it may be a bit too broad.

Sydney is a city undergoing mass transformation. I'm not sure of any other developed major city that has a new railway system being built, a redo of its biggest highway & a new airport being built...all at the same time. Its literally a construction site of public infrastructure.

On a day to day basis, I see the WestConnex construction ramping up. The light rail project (nearly done) is at my work doorstep. The Sydney metro is being built and there's cranes all over Central Station and across the west. Beyond that, theres the airport construction itself, the metro build of like 10+ new stations across Sydney, some ~50km of tunnelling through the city. Its all a massive pipeline too. The new metro will get extended and have new routes that will be built in the 2020s, the new airport will need a rail system that connects to the existing ones. These aren't really small scale projects too, they're massive and directly impact land prices.

Infrastructure investment creates lots of micro opportunities as it involves land uplift. Its presented massive opportunity for open minded, clever and courageous investors.

E.g. if you could buy a well located plot in East Rhodes today, you would likely double your money quickly & possibly triple your money inside ten years for selective assets. If you bought in bayside west at the very peak of the boom, you would double your money today. Thats with a 10-15% decline in asset values.

Read some of the experienced Sydney guys investing (100% gain in 4 months thread) in this stuff and you can find real life practical stories of very clever investing.

Given what's happening to the city, its actually not very hard and there's opportunities galore.

You just need to know where to look & have the courage to execute. As a general lesson I've learned as an investor, blind negativity & close minded thinking = closing doors to great opportunities. Sydney is an opportunity playground at the moment, especially while the sheep are a bit afraid.

Macro investing in Sydney is risky for the short run. If you want to pick the city and throw the dart, Sydney isn't the right place to look. Micro investing though, it's a playground for savvy investors.

 

I didn't claim refinancing didn't occur in the 90's. Of course it did; refinancing happens every day. The 90's werent special in that regard, though. I claimed that there was no fear of people being unable to refinance IO loans in the 90's

There was no threat of mass defaults. Why?
The RBA cash rate fell quickly during the decade and even during its worst 18 month period never got above 7.5%, after starting at 17.5% in 1990. It was below 7.5% for the majority of the decade meaning ;
Borrowing capacity was up significantly year on year for most of that decade
Equity was up significantly year on year for most of that decade
LVR's had expanded from 80% to 90% and then 90% non gen and then 95% non gen.
Lender policies were becoming more aggressive/expansionary right throughout that decade
Lo Doc and No Doc were available
30 year evergreen IO LOC products like ZIP ( Zero Interest Plus ) , NIVA ( Nil Interest Visa Access), Veridian etc were readily available ...
My point is - almost anyone who could fog a mirror could get their hands on $$$$ so there I dont see where delinquency fears could have come from during that period. It was like Disneyland for borrowers back then, having endured 80% maximum LVR's from only a handful of lenders, no choice/competition, 3.5 x DTI ratios ( yep, you read that right - I said 3.5x income was what you were capped at until the late 80's /early 90's) and rates in the teens previously... Anyone unable to refinance during the 90's while rates were much lower, LVR's much higher and DTI ratios expanding aggressively must have been a little thick or must have had a job loss - but even then a 1 day ABN and 70% no doc could have easily saved the majority of them given the massive equity gains that had happened year on year

I'm afraid I just don't see the situation then as being remotely similar to the situation today... the 90's was the most expansive decade of borrowing power and credit availability and lending policy ever. This decade is the tightest since the deregulation of the 80's.

Im not anti Sydney. I like Sydney real estate - a whole lot. I like it so much that I own a PPOR in West Pennant Hills, and INV properties in Castle Hill, Elanora Heights, Bungarribee and 2 x Merrylands . I would recommend that anyone who needs to buy a PPOR in Sydney should go ahead and start looking because if its a 20 -30 year home , who cares? But I would also tell them not to expect much growth for a good long while.... because I understand borrowing capacity better than the average bear, and it appears I understand APRA's objectives differently to you ..... and I think most of Sydney is in for a long spell of blah unless APRA reverses gear pretty damn hard ... much like most of Melbourne is...... so Id also tell investors to hold their fire for a little while longer because there's likely another 5-10% in it for them if they arent playing the 20-30 year game. So I guess we can agree to disagree on some stuff , but I stand by my view that today is nothing like the 90's. It's just not . It's really chalk and cheese.

 

The other thing is, if govt were to try and undo and revive the market, by the time they move and then the full effects are felt, it wont do anyone in dire straights any good at all.....

Anyway, it wont happen, they have little ability to make drastic changes in the positive.