New strategies post APRA

I think there's a few myths and misunderstandings through some of the commentary above, that seem worth clarifying. Not necessarily the conclusions:

- "Pre APRA" - this doesn't relate to a 30 year period and the changes they made are not generational massive structural shifts in lending. This misunderstands the changes they made, the history of their intervention & what they actually did & why it came about.

So why did APRA intervene (and for investors):

- The single biggest reason was that interest rates fell...dramatically. This led to an investment demand boost (natural) that occurred worldwide. See here:




- APRA have always had a 'textbook' for lending standards (called APG 223). This textbook for years DID NOT update instantly for interest rates FALLING below their 2013ish level. It was written in the context of higher interest rates. You know how books are remade with new editions? Well APRA remade their textbook after a 18 months or so of really low interest rates.

- The old 'textbook' wasn't clear enough about how debt needed to be treated, banks abused this for a little while and investors could recycle their borrowing power relatively indefinitely. Low interest rates made this possible as it lit borrowing power calculators up! APRA/Regulators wanted risk taking, so they just looked the other way for a little while as investment construction helped boost the economy.

- They fixed it in may 2015. It wasn't hard to tell what they'd do. I'd simply communicated what I'd do if I were in charge of APRA, and it was followed almost to the tee with a bit more done over time.

- In saying that, its highly unlikely the current 'textbook' is going to be loosened up. I agree with that. That would be unusual and unlikely, especially from the regulator. Its not prudent for them to do this publicly.

- But history has shown that banks pushed guidelines this before and the regulator didn't really care much. Market participants will do what they want to and will push the boundaries. Why? Because lenders are in the business of making money. They make money when they lend. Early evidence suggests that this is ALREADY happening. Lenders are waiving living rent free expenses, applying friendly variable income treatment, etc. These are marginal changes, but its a clear push of APG 223 already. Simply, APRA not going to care about this right now, their attitude and profile is to care when it matters systemically. They have no need too and are not like ASIC (policeman who target breaches).

- In short, the preceding BOOM was created by falling rates (and worldwide rates falling too). APRA's delayed intervention just meant a SHORT period where investors could recycle their borrowing power over and over again by manipulating low interest rates & high yields combination (positive cash flow). They tweak policies regularly and their 2013 tweaks weren't overly dramatic. They were just fixing what low interest rates created (fuel to servicing calc that shouldn't have been as strong). When rates go back up, servicing calc will weaken dramatically too.

- Now...lenders also manage risk. They certainly DON'T want to lend to over leveraged investors by assessing interest only debts at actual repayments (thats just stupid now). HEM won't change either.

- That doesn't mean lending flows can't increase over time. Lending is certainly cyclical. There's plenty of scope for this over time. It is unlikely this will be allocated to highly leveraged investors who can't pass servicing when debt environments normalise though.

- I'm also unsure where massive growth in lending will come from - I think @euro73 is right about that. If you look at the above chart, there's literally very very little room to bring this down further. Growth will likely need to come from real factors (wages, population, etc), rather than nominal factors (debt repayment changes).

- There are a lot of downside factors to servicing too. The biggest one is rates increasing. When this happens, then servicing calculators will be hit hard too. A 1.5% change in the cash rate to a 'neutral' setting will lead to big negative change to servicing calcs too. You'll see lenders push APG 223 more and more in this environment. You could even go back to 'actual repayments' - it won't make that much of a difference if interest rates are at 6%!

 

@Ian87 We had the lowest rates in Australian dollar history and the availability of credit was once off rare occasion. The whole APRA event was largely reverse the borrowing capacity back to the level 6 or 7 years ago. Building a good portfolio will just take more time like the good old days 6 or 7 years prior. You have 2 good properties. Selling would mean huge lost in expenses and cg tax. Rent your principle home if have to. Be patient, save up and wait for your next opportunity to strike.

 

One thing I might add I think the cheap credit plays a relatively minor role to the Sydney and Melbourne boom . Yes it might have added 10 -20% to the over all price(Which now is taking back by regulations), the key drivers where Sydney and Melbourne's economy, immigration and supply failed to meet the demand.
If cheap credit was the key player, other cities would have done ok too, but clearly that was not the case. Perth and Darwin and gone backwards, Canberra, Adelaide and Brisbane has done almost nothing for the last 10 years.
The key take away is don't get side tracked by the whole Royal commission or APRA. It might make things a little harder for now, but the main thing is "It's the economy, Stupid"

 

@euro73 I have already conceeded to your response about APRA.
Thank you @Redom for clarifying. And as stated, lending is cyclical.

@euro73 you've completely missed my argument, which I have clarified twice already:

If you see 'property investing' as buy-and-hold. That's speculation. Not investing.

Even with 'positive geared property'. If you are an average PayG, with 2 slightly positive geared properties. What good is it. As above, you will eventually cap out. You said it yourself, most people only have 2 properties and in 30 years few reach financial independence.

You NEED to get some sort of lump sum to pay it down. Where does it come from? Buying 4 properties, selling 2 to pay down the other 2? Sure. But can you buy 4 when you can't borrow?

If you can find good development deals, build 4, sell 3. There's a way forward.
If you can do a grid-variance. Turn a 3 bedroom into 4, and flip for profit. There's a way forward.
If you can get a good business going, you can sell/smash down debt. There's a way forward.
If you can do NMD deals, vendor finance, JV's, there's a way forward.
If you can get into HIGH yield positive geared properties. 10% net+. There's a way forward.
If you adapt and learn to make money when markets going up/down/or side-ways. There's a way forward.
If you buy 2 slightly positive geared properties. Add no value. Cap out. Eventually get to $100k in 30 years when that $100k is only really $30k in today's money. Well... good luck.

There's a lot of free flowing money out there. It isn't going to come your way if you can only buy-and-hold. What's the short term exit strategy? Why would people lend you money? How will they take their cut?

30 years is a long time to stay on-track. Refinance for wedding, PPOR. Kids. Loose job. Divorce. The quicker you can pay off your loan to free yourself up, the less risk you won't hit your target.

 

..… Thanks..... This just confirmehow can property investing as a buy and hold proposition be attractive in the short term???

One way forward is to become an active investor where you can add value, buying and selling to increase capital and cash flow.

Yep, take control be an active investor not passive, wont work too well in current environment

 

Amen.
Passive investing. It's like passive gym.

Smoke and mirrors.
Not all advice is equal.

Person earns high PayG income.
Purchases $3M portfolio, at 90% LVR.
Caps out.
Starts a business offering to show how YOU can have a $3M portfolio.
They didn't make their money from real-estate. They made it from YOU.

 

You are correct about that. Historically, booms have not been supported by falling interest rates.

It's a common but understandable misconception that rising interest rates have a negative impact on housing prices. That this is wrong is easily demonstrated in the following graph, adapted from the Australian Bureau of Statistics' (ABS) Sydney house price data and RBA cash rate targets:

The graph shows that virtually every series of rate rises (1991, 2000, 2006-07 and 2009-10) was accompanied by house price growth in Sydney, and that when house prices fell (1998-99, 2001, 2003-2005, 2008-2009) interest rates were steady or also falling. Although there's been no rise in interest rates for over 10 months and they're still at historically low levels, the recent softness in many housing markets sees interest rates getting the blame, despite a total lack of any correlation.
​

How do interest rates really affect the housing market? - Australian Property Investor

Maybe this time really is different and if interest rates increase then house prices will decrease.

 

@NHG what is this said business you started concurrently to still working Payg? Or did i read that wrong? Assuming some sort of property advisory or development company.

"Me:
24 months ago - saving 40% of PayG.
Now - savings 70% of PayG (which is $50k more than before)
AND - saving 100% of BUSINESS income which is = to my PayG and will be 1.5x more by June 2019."

 

You need to set your sights a bit higher, once you have them you can :

- sell them the property that get them there (for a small fee).
- organise their finance and structures/legals with a reputable related mob.
- organise the tenancy and maintence.

While always telling them to steer clear of those one-stop shop providers.

 

I have what would be considered a high PayG income, and a business which earns just as much.
It's real-estate related.
What it is? Irrelevant to the discussion above. This isn't my market.

What is relevant:
I was on a high income and saving well before and during the Sydney boom.
I was fortunate to make 70%+ growth. Positive geared $40k+ at one-point.
I capped out just like everyone else I started with.
The ones who haven't vanished, have moved from passive to active investment.
Most have moved into business.

The reason I'm vocal about it, I'm hoping if at least one young person listens, that's one less 60 year old disappointed in their passive 'investments'.

 

I honestly have no qualms with this.
It's a service.
It wasn't meant as a jab. It was to encourage looking at the numbers.

Not everyone has the time, or willing to put the effort to invest actively.
A lot of these guys are REALLY knowledgeable. Many are/were even mentors.
Their real-estate/professional advice is actually really good.
Their business advice is even better. That's the $$$ machine that lets one buy-and-hold all them properties.

That was the OPs question. What strategies does one use post-APRA?
My response: What came first. The large portfolio, or the business.

 

I know an old migrant couple came out late 50 early 60s. Blue collar very hard workers Probably brought the 3 houses in the late 60s
They live in one. The other 2 are duplexes so dual income properties. I assume the "rent" paid both off. They have been living off the rental income of those 2 duplexes for years. All up those houses even in Perth at the moment are worth over 2 million dollars

So that method works.

 

depends what you buy, everything is not equal.... Do this in the sticks and results wont be the same.

 

That was 50 years ago...
FIFTY. That's more than half a lifetime.

2 Million? Even if all 3 were rented at 5% ROI, that's $100k. Mgt fees,council fees, insurance, renos (crap houses don't rent at market rates) usually 40%. Let's say $70k being generous. Then pay tax.

So 50 years they are on what, $50k passive income?

Yes the method does work...
FIFTY years. Man, I'll be 82.

If I stop investing today, I'll do that in 15 years. 9 years left. 41. I like that better.

 

They are old Migrants they still have broken English. 20 years ago they could have sold one and started developing blocks and selling units and be very very wealthy today. Me I would have sold years ago and brought shares,

However it worked for them. They acquired 3 houses in there life time and have income off 2 to live on. This was there method to sustain themselves in old age

Warren buffet buys and holds shares very long term. Buy shares in a company. Put script in lower draw of filing cabinet. No need to look at it for 10 years is one of the things he says to do. He is a lot richer than many day traders and those that sell there day trading methods.

Everyone is different. If you have the money to get a loan to buy a (pick a number) $700k property. And it can pay for itself in 20 years. That is not a bad nest egg, Maybe not how you would do it but not wrong for them. It is also achievable for many. However ymmv

 

Warren Buffet has a business and is an active share trader (he is actively researching).

Harry Triguboff was also an immigrant that came in 1947.

I'm not diminishing your examples efforts. It's great. As a guy who speaks English and has resources available (PropertyChat). Don't you wana do better?

 

50 years. Gud-damn.

Age pension is $684.10/person/fortnight in a couple.
So $684.10 * 2 * 26 = $35,573.20

So all of that hustle for an extra $15-20k/yr.

And they are living in one of their properties, so it's probably not even that.

This is literally the point I'm trying to prove about passive investing.

 

Interesting reading in this thread. I agree with your points about buy and hold resi being speculative. 50:50 whether you get CG or drop/stagnation.... About the same odds as starting a business and having it not go under within 5 years.

Its all very well to say "lol just start a business and become a millionaire", but this is just as speculative as hoping for a boom that you bought into to continue. I am sure you will answer "not if you know what you're doing"... However, I would answer that "you can't possibly know that you know what you're doing when you have not done it before". Thus, you are speculating on your own unproven business accumen. Many do this and are served a rude awakening, and would have been better off with pocketing what savings they can into a passive approach.

 

Great post as always @Redom!

How do you see these lenders tweaks playing out overtime?

I know some of the recent changes include:
- Taking 100% of OT for some key service jobs
- Assessment of bonuses at 80% with some lenders

So do you believe they will continue to target increasing the serviceability of income? I think we can all agree the new living expenses are here to stay.