Is It Time to be Cautious?

With some banks Westpac, NAB, Macquarie now raising interest rates on certain products.... I expect the rest may follow is it time to be cautious? If tightening of lending criteria slowly continues will this change the game in 2017?

Thoughts?

MTR

 

We've been increasing our cash buffers which were already generous , fixing more loans and reducing some debt in non essential areas of our portfolio . We're in a very strong position overall for market movements. Just a normal part of risk assessment and preparedness.

 

Will you consider selling down anything????

Sydney auction clearance still very strong

 

Yes, we've decided to sell our parramatta development as of a few days ago. We did a risk/benefit analysis and long story short there were more pluses on the side to sell than to keep both, so selling 1 then will redeploy money in more sites around other states . Some of the sydney markets are strongest they have ever been so we want to capitalise on this unique time.

 

I wouldn't be overstretching finances on anything purely to hold at the moment, speculating on a market increase (unless there are already clear signs of significant movement). The market will always have opportunities to make money somewhere though. No need to be too cautious if you choose well and can cover costs while holding. As ever, it's just about having sufficient buffer to ride it out if needed. I'm on my fourth purchase this year, but 2 were higher net yield with good growth fundamentals long term. 1 was in a rising market and should be easy to sell if needed. I'm now looking at a commercial and a development block. I also have 1 regional on the market (replacing high yield with even higher yield) and taking profits out on some ips that have had their run for the foreseeable future.

 

Personally am paying down debt, not touching offsets and taking a wait and see approach.

Sometimes for a lack of better things to do, we just continue investing. Good thing we have a 7 month old at home focusing on him while waiting for a doom n gloom moment!

Am keen on what other people are doing.

 

It's always time to be cautious IMO. BUT not to the point of paralysis.

I'm also aware of a number of people (I get calls from them in our buyers agency) who have been so cautious that they never buy anything, or buy 2-3 years into a solid boom and have to pay $100K's more than they would have of they'd acted sooner.

IRs long term average is around 7% so anything less than this or just over is fine by me. (remembering my first PPOR loan some 33 years ago was 13.25%)

 

I'm still looking for more deals however I'm looking at fixing a portion of my loans, we're at all time lows, the 1 and 10 year bond yields have increased recently, I'm thinking we might be slowly grinding out of this low interest rate period.

 

Agree, but operative word being slowly.

 

I think there's a very real risk of a correction due to oversupply.

Australia has been in a bubble for several years and unfortunately, within a very short timeframe bubbles tend to attract a lot of inexperienced investors who buy without a plan or any genuine ability to afford their poorly chosen assets. These bandwagon jumpers tend to pay too much for new developments that are not terribly desirable properties. I'm talking crappy apartments, city fringe developments (often in semi-rural towns an hour or more from cities), that sort of thing. These places are usually the target of speculators who can only afford to speculate in the first place due to lax lending.

Saw this idea a family member did up a few days ago... if you look at the site allhomes it lists sales for the past four weeks, which means you can get some idea of activity in different suburbs and see if supply seems to be outpacing demand. e.g. if you look in South Brisbane there are 165 listed, only 14 sales in 4 weeks. New Farm, Toowong - both about 130 listed, fewer than 20 sales. They are flooded with apartments. Newish developments are just as bad - e.g. out near Ipswich, where those very nice new suburbs have gone in just out past Forest Lake - Deebing Heights, 48 listings, 2 sales... Springfield Lakes 185 listings, 29 sales.

I've seen this trend before and it didn't end well, because all the inexperienced investors in those places were forced to sell up, and few people wanted to buy them as the market bounced back. A crash will probably be uneven, and those sorts of places will bear the brunt. So - buy carefully. Don't overdo debt. Look for quality. Even if there's no correction, you probably can't go wrong with that logic.

 

I do agree with some of your points, not all. I think it's a general statement to say Australia is in a bubble when I've personally seen some areas still heating up.

The issue is also whelther the people can service their loan and to settle to complete OTP deals. All good and all to place a 5% deposit today and think you'll be good once the project is completed in a year's time but if the val doesn't stake up, how can you make the difference. I was lucky that in 2015, I had an OTP townhouse come back at contract price.

 

One of my IPs is fixed and all my other loans are variable. The fixed loan term has another 18 months to run.

I'm considering doing another cashout from my Sydney-based PPOR approx May next year ( last one was only a few months ago for investment ). Intent is for future investment plans. Will take a cautious approach depending on how the market in Sydney and rates go.

Sitting at a fairly healthy LVR across my PPOR and IPs and have a sizeable buffer in place.

 

There are several internationally recognised indicia of bubbles - price-to-income ratio, debt ratios etc. Australia meets all of them, easily. The main measure is the median multiple, which I've heard my demographer wife go on about many times. It's typically used as it relates median household incomes to median house prices i.e. what people pay compared to what people can afford. Australia's is right now amongst the highest in the world. The mean of the median multiple tends to be around 2-4 throughout the OECD on a long running trend. Ours is about 7 for the country, much higher in Sydney and Melbourne. After a bubble, prices tend to correct back to that long-running mean, the long term trend closely determined by fundamentals. I'm not saying everywhere is Australia is in a bubble but the bulk of the market certainly is. John Fraser was right when he called this unequicoval.

I agree the issue of whether people can service their loans is highly relevant. However the market has been recently flooded with investment. At one stage investors were up to 55% of new purchases. For the past five years, we've been around 50% - historically this is extremely high (just two decades ago it was about 15%, and even ten years ago was still only about 20%). So many investors have bought very recently, when prices were high (which is what happens in a bubble). We've seen a huge uptick in foreign investment too - up to 50% of off the plan apartments are foreign owned according to AFR. In addition demographically speaking those over 50 make up a disproportionately high share of Australian investors, so many of this group are close to retirement and may not be able to afford to hold in a downturn as a result. Finally, most of this country's investors are negatively geared, meaning they often depend entirely on profit - on making capital gains - to offset their losses (often in the order of tens of thousands a year).

If people can service loans, again that's certainly relevant. But for at least 5 years this market has equally been driven up by investment demand - so a good half of price growth hasn't been tied to fundamentals, but market sentiment. In a bubble, prices depart fundamentals for that reason; it's the very reason bubbles occur. Prices previously tied to incomes, rents, actual physical supply and population demand are instead driven largely by investment demand and speculation. And this brings me to why bubbles always burst. Demand as an investment and demand as a home will always be tethered - and while one can go up a good way without the other budging (or in Australia's case, while the other is sinking - noting population growth and income growth are at two decade lows, and rental yields at record lows) you always reach a point where one becomes a drag on the other. We're at that point. First home buyers and new investors are struggling to afford in, or even to obtain finance.

Bubbles represent a market where the investment led portion of growth comes from the lure of flipping assets for profit. When that profit dries up, unlike buyers who purchase to live in a property, and even unlike investors who purchase quality properties supported by solid rental growth, a lot of investors (especially the inexperienced and over-leveraged recent investors) sell up. That's what drives prices down in a bubble. Right now we've got an overpriced market, with emerging oversupply, which is nonetheless unaffordable, rates are rising, banks are tightening lending, wages aren't growing, population growth has close to halved - this market running out of upward momentum.

This market is almost identical to what I saw in Ireland in 2006 - especially with oversupply. As investors who bought those properties fail to make a profit, they will sell, and we're already seeing stock just building up.

This doesn't have to spell disaster but it should be a sign for caution. I think investors ought to be aiming for high quality properties and should be thinking carefully about whether they're relying on capital growth to make ends meet. I doubt that represents many on this forum - most of whom are probably well placed for a downturn. All I'm saying is invest carefully, with a real plan - because many other people haven't and if they go under, we'll see a correction.

 

@wombat777 great insights into risk mitigation. A bit off-topic (actually... no it isn't, considering the theme of this thread!) but what do you consider to be a 'healthy' portfolio LVR?

I.e. is a portfolio at 80/20 LVR got enough equity 'fat' in that 20% to be seen as safer during a rough economic patch that we (may or may not be) entering in to? What about 85/15? Or is that getting a bit risky? To me, a healthy porfolio LVR should average out to 80/20+ (Ideally even 75/25), to ensure there's enough equity there to cop a few hits in rough times.

 

Something to watch out for in relation to certain regions that are 'hyped' on here because current price is below last peak, or such and such has had growth so this place always follows. Fine if the region has its own strong fundamentals and OO demand but when investors are piling in and paying too much due to FOMO it's worth taking that as a red flag.

 

I'm currently at around 71/29 averaged across the portfolio. I'd prefer not to go above 80/20 averaged LVR.

 

The banks tried this previously 1 or 2 years ago and after that RBA lowered the cash rate even more. The real indication of whether to be cautious is going to be when RBA starts to raise the cash rate which I do not see happening anytime soon.

 

I agree. I think despite seeing Ireland crash, a collapse is also 'overhyped' in a way. People say it will be all doom and gloom but not all investors lose out, not all people lose jobs, relatively few people foreclose etc. I mean, downturns are downturns, not the apocalypse. At least on a forum like this one. If you're a good investor, and you've bought carefully and buy carefully, you're probably going to be fine.

In Ireland the crash was pretty uneven - those recent developments no one wanted lost most or all of their value, but good houses in quality suburbs really didn't drop much and then bounced back rapidly. By 2010 just a couple of years into the crash rents were rising sharply, 5% or more a year, because all that crappy fringe and apartment stock was never wanted so it kind of 'cancelled out' much of the oversupply, if that makes sense. A lot was also bulldozed. Even though there's still abandoned homes galore, demand for actual quality family homes is now extremely high and rents are tight and prices are rising 15% or more a year in some parts.

Don't buy tiny apartments, don't buy houses in places where few want to live.

On allhomes again, look at Caboolture - this area is a good example of what I saw in Ireland's downturn. People posting "owner invites all offers" and so on. There are 390 odd places listed and only a tiny handful sold in four weeks. For investors and developers it would have been cheap, but no one wants to live there.

 

Agree, there are plenty of areas in Australia where even a slight dip in prices would trigger those waiting on the sidelines coming in to buy. Basically you just need to make sure your portfolio can hold it's own, and/or you have a buffer no matter what the market's doing.

 

I don't disagree with your general assumptions about population growth, price to income ratios and unit supply in some locations. I think that tighter lending conditions rather than loose credit availability is a positive for longer term market stability.
Can you describe which markets you are specifically describing?
Population growth has recently slowed but it has been at historically elevated levels for much of the past decade.