Headwinds for the housing markets especially Sydney/Melbourne

This is already happening.

 

maybe, but it doesn't take many to change the sentiment as shown by Sydney.
Must say a bit surprised at the rapidity and extent of price falls in some of the Sydney areas.
Was expecting 15% by end of 2020/21 but looks like many areas are in a hurry to reach that target and some more.

 

The median house price in Sydney ($1.1 million) is about twelve or thirteen times median household income ($90K), or about twice what the DIR would allow.

If incomes grow at around 3% a year, they'd be roughly double in 25 years, which would support a similar median to what we have now. That'd suggest looking for the next boom is the wrong strategy...

 

You are confusing correlation with causation. The price falls in Sydney are correlated with record high prices, APRA changes to borrowing, interest rate increases, at-risk borrowers, roll-over to P&I.

Which of these caused the price falls?

Maybe at-risk borrowers have nothing to do with the prices falls and the markets would have corrected just because they overshot. I have seen a market correct for no other reason than prices got too high.

 

Price falls because sellers (who sell) are forced/willing to take lower then what was being offered before for comparable properties.
These sellers don't accept lower price out of some moral duty, they do it because they are not getting any better offers and they fear they might not get a better offer if they wait, some simply can't wait.
To me, these are at-risk sellers either due to SellersFOMO or inability to sustain.

 

That's one theory. In reality people who sell did not necessarily buy recently. Consider someone in Sydney who sells after the market drops 15% from peak but bought before 2012. They are still making huge profits! Selling at a discount is very different to selling at a loss.

It's interesting because peak IO debt was issued in 2015. If some of those have to sell in 2019, how much will the market need to drop from peak for those investors to actually lose money?

 

for many investors it would be just profit on paper...
eg. bought 500K with 400K loan, refinanced to 800K with 1M market price, released 400K spent somewhere - lux cars, holidays, new investments at peak time, etc (market never falls, why not if retirement is not too close?), then after 15% drop the property is 850K with 800K loan. ==> forced sale (for some or for many), CGT, RE fees, etc, factual loss..... but on paper and retrospectively - yes, that was a good project...

do you think there are no such investors? I know some...

 

It is true that some did this. Enough to crash the market? Time will tell.

I didn't say there are no such investors. I know there are.

My problem is that if you listen to certain people on this forum: everyone has maxed out their borrowing capacity, they are all over-leveraged, they all have negative equity, no one will be able to afford to roll over to P&I, and no one has a buffer. We both know that's not true, so when I see claims I know are not true, of course I am going to counter them.

 

There are different people on this forum - others tell that properties always move up in long term, there is always a way to make money for smart people, property cycles, etc. - mix of hopes & past experience, pretending a one can calculate or know the future, and we know it's not true as well, but you like such posts as they correlate with your expectations

Look at that thread with time capsule and price predictions. Most people here can't analyse the present, their forecast for YoY growth often is 10%-15% more than factual growth. My forecast was very close to the reality. Not because I was lucky but because my view was not biased. I don't care if market will grow or fall, for me it is just numbers.

And it's not about if market would crash. Crash for many is fine as long as it can recover, so a one can get bargain and make a profit. The problem is that the market can be flat after correction for very long time without recovery. However we'll always have a group of investors who invests to save rather than to benefit from the growth, so investments won't be dead... but it would be much less popular IMO

 

In your example, the investor will most likely still make money. At least they got the money to buy lux car and went to lux holiday. It is not lost money but rather spent money. If they used all or part of the equity fund ($400k) to buy another IP even at peak and that property also declines 20%, I do not think it is large enough to wipe out their invested equity completely.

 

Irrespective of being in profit or not, the sellers who have sold at a price lower then what was being offered have contributed to the price fall and thus consequently changing the sentiments.

We are not discussing if these sellers made profit or not, we are discussing price falls and how a small percentage of willing sellers is enough to change the sentiments.

 

It's just math - correct me if I'm wrong

Event 1. Bought 500k property with 400k IO loan and 100k deposit
Event 2. Refinanced to 800k IO loan with 1M market price
Event 3. Used the released 400k to buy 2M property at peak (IO)
Event 4. Both properties corrected by 20%

Results: assets worth 800k + 1600k = 2.4M

Loans: 800k + 1600k = 2.4M

Event 5. P&I cliff, forced sales

Considering entry/exit costs, lost deposit (100k), balance of negative and positive gearing, and maintainance costs, it is a loss

Now imagine if a correction is more than 20%

So it's important not when a property was bought but what an investor did after the purchase. If they refinanced recently to buy more, original price and purchase date are irrelevant

 

Ok, if they bought a 2mil IP at peak of Sydney late last year, then no word I can say. It is not investing anymore. It's gambling. And it is not a typical scenarios imo. The total amount of debt (2.4mil with IO) cannot be achieved by an average family post APRA.

 

They could buy just before APRA implementation and that was achievable for many investors, and prices were still at peak or near peak. (We have the stats with number of investors with multiple properties)

At that time that wasn't gambling, that was 'smart strategy' to use all investor potential as much as possible with moderate risk (LVR 80%). Investors with >90% LVR is a different story ))

 

I didn't think we were talking about willing sellers. I thought we were talking about at-risk investors based on your previous comment.

 

Instead of picking on semantics look at the bigger point, it does not take many willing sellers to sell at lower price and change the market sentiment.

Property being a high cost transaction profit booking (as in shares) is highly unlikely to be the prime reason for price declines and changed sentiments which I thought you were implying.

At-risk to me is any investor who is willing to sell for less(Seller FOMO or inability to sustain) doesn't mean just at loss.

 

I agree there are different people on this forum. There are property investors and another group who I will call 'single issue posters'. The single issue posters are not property investors but have some other agenda such as:

- property investing is damaging to renters and all property investment should stop
- property investors are greedy and corrupt and killing the economy
- there is too much debt, the property market is in a bubble and its going to crash
- Australia is on the brink of an impending depression bigger than the great depression

The value of this forum depends on information posted being factual and accurate and posters making genuine contributions. This doesn't always happen when 'single issue posters' gang up on a property investor. A member can completely misrepresent topic and generate a flurry of "likes" from the 'single issue poster' brigade. You may recall a discussion we had earlier about 'Net household debt'. One member decided that 'Net household debt' includes real estate and claimed that I was misrepresenting the 'Net household debt' graph. That post generated a flurry of "likes" even though it is factually incorrect.

Mum and dad investors have Australia teetering on the edge of a housing crash, report warns

Mum and dad investors have Australia teetering on the edge of a housing crash, report warns

Whereas, I posted completely factual posts, backed up by research, that were completely ignored:

Mum and dad investors have Australia teetering on the edge of a housing crash, report warns

Mum and dad investors have Australia teetering on the edge of a housing crash, report warns

I don't particularly care whether I am "liked" or not "liked". I will continue to make factual posts because the truth is important to me and I believe that information on this forum that is not factual should be countered.

Personally, I like to post about a range of topics, including helping people figure out if a certain property has subdivision potential or not. It is interesting to note the single issue posters make no contribution to the forum other than posting about their single issue. They are loud, aggressive and bully property investors. I feel this is wrong because property investors should be able to express their views on a property investment forum without being bullied. Because I take on the bullies, people have created the perception of me that I am overly optimistic about property. I don't think that it true. I try to make posts that are factual and based on actual research. I provide references to back up my claims. That is something the single issue posters rarely do.

It's interesting that you think my bias is that properties always move up. If you read a subset of my posts I can see why you would think that. In reality, I have posted a number of times that some properties in Perth are worth less than 12 years ago, that properties in my area have dropped by 35% from peak (with examples), that the Sydney market didn't really move much from 2003 to 2013. I post those things and more and still get accused of being overly optimistic about property.

I am very bad at predicting the future too. Apparently I am biased that property is always increasing yet I called the peak in Sydney and Melbourne to be 2016, with prices softening into 2017. What happened after that? I called it completely wrong and yet still get accused of being "bullish". It's interesting that people have these biases in their perceptions of other posters when they are not based on the facts.

Calling all prophets - Where will the market be in...?

My track record is being overly pessimistic about property prices in the short term. I do believe the major cities will see price increases in the future but it's not some pie in the sky mixture of hopes & past experience. Have a look at the numbers.

"While Australia's current annual population growth of 1.4 percent may seem modest, this adds almost 340,000 to our population each year, which is one new Darwin every 20 weeks or a new Tasmania every 18 months.

Sydney is growing much faster than this, averaging 1.8 percent per annum for the past five years. It will add almost two million to its population by 2037, which is the equivalent of adding a new Perth into Sydney."​

In 20 Years The Average House Price In Sydney And Melbourne Could Exceed $6 Million

Based on adding two million to the Sydney population by 2037, I can't see how property prices can't increase. This is not "hopes and dreams", it's simple maths. I note in the article that the author predicts the average house price in Sydney will be $6 million by 2037. Personally I think that is nonsense.

Many are saying the property market will crash. I post that the markets will correct and I am accused of being overly optimistic.

In any case, we have had some interesting and productive discussions and I hope we can continue to do so.

 

That is true. Discounting by willing sellers and forced sellers both contribute to falling prices and a change to market sentiment. I also think that very high prices also contribute to a change in market sentiment.

What I was trying to say is thatI have seen a market turn because prices reached a point that they no longer made sense. Buyers walked away and prices crashed.

It is true that these sellers drive prices down.

 

I had that impression after our discussion about correction/booms when you said that after each price correction we will have a boom

My view was that's not a rule or law... and there is a possibility that
1)the price "never" grows after correction phase, or
2)at least it is flat for very long time comparable to significant part of investor's life.
or
3) correction phase may not be short, it can last years killing many unprepared investors

It happened in other countries and it can happen here in certain scenarios which are now more likely.

Btw, I was very optimistic saying almost year ago that Sydney would have -3.5% YoY drop. It is already -5.4%, but I think 1-3% difference is acceptable as we can't know the future (some forum members claimed I was negative) - still better than major banks' analysts and other economists