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

Now your getting it.

http://www.aei.org/publication/the-...th-accumulation-the-fed-needs-a-bubble-watch/

And that's in only 12 months and with Bailouts.

 

I just wanted to say that three thirds of all loan holders have about $80B-$85B total cash buffer. That is very low proportion of reported $1T cash. So, yes, there is overlap between people with cash and people with loans, but considering that overlap is small we may think those groups of people are different.

Box E Offset Account Balances and Housing Credit | Statement on Monetary Policy – August 2015 | RBA

Above link also supports my view - in 2015 total offset account balances = $90B. Plus $120B in redraw.

I think that $1T cash mostly belongs to renters (potential FHBs) and rich people.

 

And Small Businesses

 

And retirees too I reckon because they are more likely to hold cash even though the return is lousy.

I also wouldn't discount property investors holding cash outside of offset accounts. I know I have used high interest savings accounts when parking money ready for my next project. Loans on fixed rates can't generally be offset and there are a lot of fixed loans around right now with the noise about interest rates going up.

 

those with fixed loans and high interest saving accounts are probably already in that RBA's Mortgage Repayment Buffer report, so their buffer is not large for most investors. I think they can easily match saving accounts to mortgage accounts, even when a saving account belongs to another family member (spouse / child). For parents / de-facto relationships it is harder to match... For example, you can have a loan and open saving account for parent's name (considering it's your money). In this case RBA may think you don't have a buffer because you used some tax optimisation strategies.

Another issue is that a person can buy shares instead of creating saving/offset account. So in fact they still have a buffer (they can sell the shares within a minute if they need), but it's invisible for RBA.

 

The other interesting thing is how the ABS measures ‘over-indebted’. Did you read that?

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

In 2015-16, based on the ratio of debt to either income or assets, around three-in-ten households (29%) were classified as ‘over-indebted’.

Around one-in-four households with debt (27%) fit the definition of over-indebtedness as they had liabilities equal to 3 or more years of disposable income.
​

So someone with a disposable income of $100,000 is considered 'over-indebted' if their liabilities equal $300,000 or more? That seems like a very low level of leverage to me.

That said, it depends on their assets I guess. If they have assets worth $1,000,000 and liabilities equal $300,000, then it would not seem they are 'over-indebted'. However, if their assets are worth $200,000 and liabilities equal $300,000 then they does appear 'over-indebted'.

The other measure is actually debt to asset ratio.

the debt-to-asset ratio definition of over-indebtedness with debt 75% or greater than the value their assets​

I do understand that one but it only affects a small group of households (4%) at this stage. Falling asset values will increase this group.

What surprised me is the low overall average debt.

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

That seems quite low to me.

 

So does over $1 trillion in cash savings. Just sayin'

 

Good Point , but who actually owns the savings , the people with really large debts or the oldies that have paid of their house and just putting their spare money into a savings account, or the stay at home "millennials" kids that are still living with mum and dad.
I doubt that many younger people with large mortgages have much in the way of savings.

 

Lots of people have a share of the trillion. I have some, my parents have some, my siblings have some. In reality, most people have some of it.

Yes, there is a group of people with large debts and basically no savings. They are a concern of course. Is that group large enough to throw the Australian economy into the longest, deepest depression it has ever seen? It seems unlikely. Time will tell.

 

Japan had lots of savings and high savings rate before they went into their crash and 2 decades plus of deflation/rececession no? Just a thought...

But yeah RBA can still do negative rates and more/unlimited debt plus other expansionary monetary policies can still be used to pull us out of a recession.

 

Japan has very high levels of business debt matched with very high levels of savings .
I think it sources all of its debt internally , so it is not influenced to by currency fluctuations .
Unlike Australia that has massive amounts of household debt and which is sourced from overseas.
As far as the RBA is concerned they "are walking around a forest with lots of bears and an empty gun, all the ammo has already been used to little effect.
As long as the country can dodge "the bears" all will be good.

 

There was 2 articles today regarding mortgages, one in the Australian Business section and one in the AFR, both almost seamed to say the opposing views.
Feel free to correct me , as I dont have a copy anymore of the AFR , but they seemed to say that 30% of total Australian mortgage value will be coming up for conversion from IO to P&I over the next 2-3 years and of these, about 220,000 mortgages had no real savings.

 

Given IO terms are 5 years and APRA have been doing their thing for almost 2, 3 years sounds about right.

220,000 with no buffer is a terrifying thought

 

I am planning to buy my first investment property.

Hearing all the news, about the interest hike, investors' P&I conversion, Royal Commission will make it harder for people to get a loan, etc.

Does it all suggest that the property market will decline? What is the worst property correction/decline in Melb historically?

Should I invest now or wait little bit later? Any insights will be much appreciated.

 

I think this is the AFR article:

RBA flags dangers of $480b in interest-only loan resets over the next four years

now, if investors are able to refi or to extend the IO term, what will RBA, APRA, ASIC, and other government bodies, and lending institutions do?

 

Before the crash, was there a boom in the economy? Australia may have had booms in Sydney and Melbourne property but there has not been an Australia wide economic boom for a long time. The stockmarket has been steady for over 10 years and most capital cities have not boomed in that time. The Sydney and Melbourne booms are not even record breaking if you look at the data.

I thought economies usually went boom -> crash, not 10+ years mediocre growth -> biggest crash in history. Just a thought

 

If the data is correct, 30% of loan holders with no real savings is definitely a risk.

 

According to Nigel Stapledon, who did a PhD in Australian House Prices, the biggest drops in Melbourne (cumulative in real terms) were:

1974–79 –19%
1989–92 –19%

However, these occurred quite a while ago so we can't rely on these to occur again.

Another consideration is the drop after the largest boom of 141% which occurred from 1997–2008. In 2008–09 the market declined -3% (cumulative in real terms) followed by the current boom from 2012–17 of +35%.

I don't know what to make of all of this except to say that it does not seem to be a particularly good time to buy in Melbourne at this point in the cycle.

This paper, which is were I have sourced the data, is worth a read:

https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf

 

And it s not all low incomes/small loans, i was chatting with my cpa last week and he was very surprised by my level of expenses/saving as most of his high income clients save very little (big Manson/Merc for the wife, expensive private schools for the kiddies (his exemples)).Some are going to be hit hard.

 

well Perth did go mining boom few years back then crash(though this cycle has been ongoing and no surprise) and caused the 2 speed economy we have.

And boom-> crash should have happened in 2008GFC but world-wide central banks stepped in and this has resulted in recovery of assets prices(which one could argue is a boom of sorts) but GDP growth and wage growth hasn't been strong as artificial monetary stimulus seems to result mostly in boosting asset prices rather than productivity in the economy.

so economy wise, we will probably just be going sideways for a while yet. Property market wise, sure looks to me like Sydney/Melb have had a good "boom", and very possibly could go into the crash part.

@marmot : yes Japan's debt is mostly domestically sourced, much of it sold to the BOJ and some to local funds. Their financial/debt market will be less destabilised by any external shocks in currency/etc.. so to speak. around half of our banks debt is sourced from overseas so it does look like we will be more vunerable to external shocks such as rising interest rates. though I am not sure that is happening yet as our 10year yields are now below USA's, but it doesnt seem like our currency or economy has had any negative effects yet!