Negative equity starts to bite

Discussion in 'Property Market Economics' started by Pete Arendt, 28th Jul, 2018.

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  1. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    not my area of expertise, but comparing USA condo stock with Say Sydney and Melbourne isnt directly comparable.

    American investors are much much less risk averse, and will take a punt on stuff that leaves most Aussies gasping for air. So its not unusual to see a whole commercial development - unleased and boarded up.

    Residential backed mortgage loans in the US were being provided to people that should never have had them due to a number of factors including political, and obviously the stooopidity of some lenders and brokers.

    The Nature of the limited recourse product for resi loans in the US had a large impact on what went on there.

    I suspect our mainstream lending models are signnficantly more robust.

    If you have a limited recourse product and it gets too hard, you simply hand your keys back and the rest of your assets are fine - your credit file is stuffed, but your assets are safe.

    Not the case here, people will do what they need to largely protect what they have.

    ta
    rolf
     
  2. TMNT

    TMNT Well-Known Member

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    Different culture
    Differnt people
    Different tax system
    Different property management systrm
    Different mindset
    Different tenants
    Different council laws

    I could go on for ever.
    You'd be nuts to treat the two markets the same
     
  3. sash

    sash Well-Known Member

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    Spot on these will be common from 2019 to 2022 in Sydney and Melbourne....
     
  4. highlighter

    highlighter Well-Known Member

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    I mean in Ireland we had a lot of 100%ers but damn, and we built a stupid amount of homes we didn't need, but that's just nuts.
     
  5. Perthguy

    Perthguy Well-Known Member

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    Yes, it's true. Cashflow positive in a boom could easily be cashflow negative in a downturn. One of my rentals dropped from $440 per week to $280 per week.

    How about heavily cashflow negative in a boom. What happens in the downturn?

    I guess what I'm really talking about is I'm running a cashflow positive portfolio in Perth during the downtown but this has taken deliberate action on my part. It was a choice to turn my portfolio around from heavily cashflow negative to cashflow positive.
     
  6. Indifference

    Indifference Well-Known Member

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    Every dollar made, is either a dollar created by productivity or a dollar lost by someone else.

    Now track productivity gains against local markets as a quick indicator of sustainable growth. If they aren't in sync, some people are inevitably losing money.....

    I recall endless conversations with people stating "Sydney will continue on its property growth... you don't understand that this market is different".... or something to that effect. Well, the mathematical laws of the universe are sound & it's a shame many can't or won't accept them.....
     
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  7. datto

    datto Well-Known Member

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    From about 2004 to 2013 there was very little growth In Sydney. OK some but not much.

    Some investors crashed and burned while others held on or even bought up bargains ( remember the houso properties being sold off in the Druitt around 2010 ? cheap cheap)

    Investors survived the bleak times. They worked hard and collected rent till the sun shone down again. The $$$ then came rolling in.

    No different to what's happening now. Just got to batten down the hatches, work hard, collect the rent and wait. Might be 5 years or even 10 years but it will happen.
     
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  8. marmot

    marmot Well-Known Member

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    How many loans in 2004(and in dollar terms) were actually IO , compared to P&I , after 9 years of little growth, and comparing a more conservative investor that already had paid all or most of their PPOR off, they would have made significant gains into paying of the principle of their loan on their IP.
    Compare that to someone with multiple properties all IO and then 8+ years of zero(or very low)wage and property growth, they would be under a lot more pressure as the principle of the loan was untouched, add to that extremely low yields , and the possibility that rents would go in the wrong direction for a couple of years. Especially if government made a commitment to add a lot more supply.
    Just comparing yields over the last 30 years adds a lot more risk into the equation.
    Then when you look at total rental losses since the late 70s ,it varied from small losses to small gains right through till about 2003 when the overall losses just got bigger and bigger.
    You reach the point where the total risk has risen significantly, to a point where it can affect an entire market . Where in the past it only really affected individual owners ,if they bought at the peak or at a point when rates started to go upwards.
    In the past you could also deal with it pretty easy as wages were constantly rising .
    No wonder the banks turned around and wanted a RC, as their risk exposure was also going in the wrong direction, as wage growth stalled and something like 40-50% of the dollar value of home loans being written were IO.
     
    Last edited: 30th Jul, 2018
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  9. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Was there forced IO2PI rollover pressure like it is now?
    Was there clampdown on serviceability like it is now?
    There wasn't any hanging (potential) 6/7 x DTI Cap like it is now.

    Of course there are many investors who have the ability to sustain the rise in payment and hold on but its not about those investors.
    Its about at-risk investors and their ability to sustain,
    its not 'would they' but rather 'can they' sustain.
    It doesn't take much and many to change the market sentiment.

    Now some hash tags :),

    read "=>" as "leads to"

    1. #IO2PIRollover => #RepaymentRise => #SellingPressure => #ForcedSelling

    2. #CreditTightening and/or #DTICap => #ReducedBorrowingPower

    3. #ForcedSelling and #ReducedBorrowingPower => #FallingPrice

    4. #FallingPrice => #FallingValuations => #SellerFOMO
     
    Last edited: 30th Jul, 2018
  10. Marg4000

    Marg4000 Well-Known Member

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    Those who stick their necks out run the risk of having their heads chopped off.

    Those with large portfolios on high LVR, IO loans are speculators, not investors. They gamble on house prices and rents continually and steadily rising. Some also believe they have a sound exit plan and will sell at the peak before a downturn.

    And some do succeed, but many don’t. For every person saddled with a virtually worthless property bought at the peak of the mining town boom, there is a happy vendor who made a huge profit.

    In any downturn the most highly leveraged will be most vulnerable and more likely to crash and burn. Those who took a more prudent, long term outlook should fare better.
    Marg
     
  11. Illusivedreams

    Illusivedreams Well-Known Member

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    The question remains.

    As compared to the whole Australia property market .

    How many are purchased at the peak of market?

    How many of total portfolio are IO?

    Ho many were purchased in Sydney/Melbourne at peak of market?



    I see an assumption that is made that every one bought in Peak of Sydney and sat cities and Melbourne at sat-cities and nearby regional.

    I will actually create a post about it. With a Poll so we can see waht the forum is like.
     
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  12. highlighter

    highlighter Well-Known Member

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    I think this will be the case for the majority of investors, but there have absolutely been a lot of recent sorts who are unlikely to hang on.
     
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  13. highlighter

    highlighter Well-Known Member

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    Most. The ratio of investors to owner-occupiers went from about 20% to almost 60% in a decade, and most of that growth happened since 2012. However, I doubt this forum is very representative of the complete noob, recent, in-over-their-heads buyer group. I'd be surprised if the people on this forum aren't on more solid footing than your average investor.
     
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  14. datto

    datto Well-Known Member

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    OK I agree now, a bust is inevitable.

    Every boom has a bust.

    I don't mind a good bust actually. Some investors experience the bust and go for the slide. Not me. When I saw the last bust I just saw an opportunity to get my hands on some cheap property.
     
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  15. Pete Arendt

    Pete Arendt Well-Known Member

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  16. Illusivedreams

    Illusivedreams Well-Known Member

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    This is for loans in 2014.

    This is exactly what I'm saying but people have been investing for years .

    1 year of IO loans may represent almost nothing when looking at loans written over 30 years.

    Every keeps talking about this like the baby boomers that will all retire this year.
     
  17. Pete Arendt

    Pete Arendt Well-Known Member

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    Market prices are set on the fringes. It doesn't matter what the average is.

    For example there are 11.9 billion Telstra shares on issue on the ASX. We don't need someone to sell all 11.9 billion shares for the share price to fall.

    The property market is exactly the same thing. Let's say there is one sale in Sydney this month - 1 sale. And the sale price was down 20%. What did the entire market do?
     
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  18. Kangabanga

    Kangabanga Well-Known Member

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    I like #seller FOMO, we could shorten it to #FOMOS(fear of missing out selling) :)
     
  19. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    RBA wants $480 billion IO loans to reset over the over the next four years, which is around 30% of outstanding loans.
     
  20. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Its sound like #MOMOS, which is a yummy tibetian/Bhutanese dumpling,
    I am hungry now :)