Panic Setting in Sydney

Discussion in 'Property Market Economics' started by sash, 13th Mar, 2017.

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  1. timetoact

    timetoact Well-Known Member

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    Agree, Sydney's run is over for now.
    But population, geographic constraints, wealth and liveability will always create demand over the long term.
     
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  2. sash

    sash Well-Known Member

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    That is absolutely correct..and agree...over the long term...it has good potential
     
  3. euro73

    euro73 Well-Known Member Business Member

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    1. The first mistake in this argument is that you believe this is about house prices. The regulations are not about house prices. They are about banks being overweight in I/O volumes. APRA is seeking to reduce the amount of I/O lenders hold, because they rely on securitised markets to buy and refinance that debt. But even if they are eased, they will not be eased enough to allow for the widespread return to servicing calculators using "actuals" and Henderson Poverty Index living expenses.... so debt to income ratios are going to remain permanently reduced compared to pre regulation, even if they expand from current levels.

    2. The second mistake is that while total number of buyers may well increase, total number of properties each buyer is able to accumulate is fewer because total debt each buyer can hold is less, and the number each buyer can actually hold long term is even fewer again as they will have to do so using P&I after 5 years rather than the usual 10 years or more that pre regulation investors were able to use to buy the time required to allow for "cycles" to evolve...

    I am not suggesting there will be no growth. I accept that population growth/migration places a floor under prices to a point, and even places upward pressure on prices in theory. But what I am suggesting is that growth will be slower than previous cycles because every borrower can borrow less and hold less debt than they could previously.... in order for any investor starting out today to be able to hold larger numbers of either dollars or properties, debt reduction , or at the very least the ability to hold P&I , will need to be part of any strategy. And that requires better than 4 or 5% yields. It requires properties that generate good 5,6,7,8 or even 10K CF+ results after tax.

    What all of the arguments here are failing to accept is that fundamental, core servicing criteria have changed. Supply and demand arguments are flawed... it is no longer about anything other than the supply and demand for debt. The 30% quota means less I/O debt will be available, which makes debt servicing 25% more expensive right away ( when viewed as P&I )

    I could have the last cup of coffee in the land (supply) and 20 million coffee addicts may want it ( demand). If I paid $5 for it your arguments suggest that just because 21 million want it tomorrow, I can sell it for $6, and the next buyer can sell it to another buyer for $7 when 22 million want it, and so on... Thats a reasonable argument if everyone can borrow 6 today, 7 next year, 8 the year after etc... and that is largely what's underpinned the Australian resi market since deregulation in the late 80's. Almost 30 years of increasing credit demand has been met with increased credit supply. But what happens if suddenly no one can get more than $5 from their bank? And they cant get $6 for another 5 years. And they cant get $7 for another 5 years after that, etc etc..... Extreme example, but you get my point I hope... do you see how previous growth cycles cant be repeated in similar timeframes, and how debt reduction holds great value in that sort of circumstance?

    My position is that this is a decade to deleverage. Not a century. A decade. Longer term, as P&I repayments amortise loans down and wages slowly inflate, borrowing power will eventually start to be restored... but its a long way off . Borrowing power is a little like an elastic band. It has been stretched and stretched and stretched in only one direction for almost 30 years but has now reached its limits. When that occurs, the only way to create elasticity is to reduce the stress on the elastic band... imagine you had one stretched between your left and right hands. You would need to bring those two hands closer together in order to start restoring elasticity. This is more usually called deleveraging :)

    Now, as the majority of borrowers are forced onto P&I one way or another in the coming years, deleveraging will start to evolve naturally... but it will take years for any meaning principal reductions to occur and for elasticity to start being restored. I am saying that if you are smart you will accelerate that process by making extra repayments using surplus cash flow from cash cows... so that when enough elasticity is restored market wide, and the next boom comes, you will be deleveraged and well positioned to take maximum advantage.
     
    Last edited: 16th Nov, 2017
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  4. Xavier

    Xavier Well-Known Member

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    Disagree... the thing about these regulatios are that the politicians and bank both LOVE them

    Banks make heaps more money from higher rates... why would they stop the gravy train

    Politicians are seem to be doing something about housing affordability AND banks.

    Banks are on the nose... eg CBA and nAB scandal and whenever they make this much profit they have to bear higher political risk.

    Eg royal commission might go ahead.

    Additionally Basel IV and much OS pressure to regulate banks.

    Unfortunately property investors get SQUEEZED.

    So why the hell would politicians want to lose votes and banks not make heaps more money????

    This is just the start until something changes dramatically with house prices.
     
  5. euro73

    euro73 Well-Known Member Business Member

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    So you're arguing that if Sydney or Melbourne correct significantly, APRA will relax the 30% I/O quota, the 10% I/O speed limit, the use of HEM's and the use of sensitised assessment rates, causing even higher levels of I/O lending ? They will ignore the enormous risk this poses to a heavily securitisation dependent banking sector, currently carrying @ 1.4 Trillion in exposure? They will ignore the threat this poses to retail deposits? They will in other words, resign Australia's banking system to the possibility of a bailout one day down the track in the event that our banks cant secure new funding from securitisation markets or refinance any of the existing debt?

    Screen Shot 2017-11-16 at 7.27.40 pm.png



    http://www.securitisation.com.au/Li...al Mortgage-Backed Securities, March 2015.pdf


    hey listen.. I own a lot of resi property and I will only see it shoot up in value of that occurs. But importantly, I also own a lot of surplus cash flow producing property and am deleveraging as I accumulate... I wonder.... do you ( and others) have that Plan B?
     
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  6. Xavier

    Xavier Well-Known Member

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    No way in hell are APRA going to relax anytime soon. even with Sydney declining 20% +
     
  7. euro73

    euro73 Well-Known Member Business Member

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    I agree completely... the much bigger game is banking stability. APRA's end goal isnt short term house price corrections ( if they happen)
     
  8. Xavier

    Xavier Well-Known Member

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    Pretty much every international financial organisation has warned Australia about the systemic risk of house mortgages being 60% of financial loans - highest in world by a long way.

    APRA has been forewarned and will not change their mandate until these ratios materially change.
     
  9. MWI

    MWI Well-Known Member

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    So it makes me think, if the housing and construction industry really slows down how will the economy grow? What metrics do we use, that most is now flowing from smoke or gambling tax, booming financial sector mainly,....OR I suppose those infrastructure projects, but will they suffice and for how long?
    I agree tightening was required.... to what level the interference or economy will decide and I suppose no one has a crystal ball to that?
     
  10. Xavier

    Xavier Well-Known Member

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    If housing and construction pull back sharply it will probably cause a recession in NSW.
     
  11. Illusivedreams

    Illusivedreams Well-Known Member

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    Australia wide recession.

    Almost 1 in 10 job over 1 million employees .
     

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  12. timetoact

    timetoact Well-Known Member

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    I respect your opinion and there is no doubt you have solid reasoning behind it. I am challenging my own thoughts/plans based on your posts. So thanks :)
    In addition, planning to aggressively reduce debt is a prudent strategy at this stage of the cycle regardless of what happens.

    Reading your reply brings another problem to mind. If investors have no funds to invest over the long term, then construction of new dwellings is going to dry up very quickly. Which will in turn leads to higher rent (yield) and continued pressure on values as population increases.

    Lack of supply is going to put pressure on government who will in turn look at ways of encouraging investors back to the market.

    I guess I don't subscribe to the fact that the cycles are only driven by how much small property investors can borrow. There are bigger drivers behind the cycles. If it was only small investors access to funds driving the cycles then the corrections would be much larger when they run out of serviceability. IMO.

    To be clear, I believe the Sydney property boom is done for now. But in 7-10 years time if values have gone sideways another run will be due and the lending environment will have changed in some way.
     
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  13. timetoact

    timetoact Well-Known Member

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    Maybe not soon.
    But at some stage the regulations will change. (hey they might even get tighter)
    Or the market will find a way around them.

    As I said before what is to stop the CBA (and all others) opening a new mortgage lending company with a blank loan book to fill with I/O loans?
    Won't happen in the next few years, but if APRA don't loosen the strings and the market is gagging for more funds, someone will find a way to supply it.
     
  14. propernewb

    propernewb Well-Known Member

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    When is Basel IV expected to arrive?
    Do we have any actual data on the proportion of loans that are i/o or is it all speculation?
     
  15. euro73

    euro73 Well-Known Member Business Member

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    It would still sit under their banking licence ( they are an ADI ) and it would count towards aggregate I/O volumes.

    The market has plenty of funds. There is no shortage of funding, provided you can qualify for it. The Australian resi mortgage market is so awash with I/O debt that the banking regulator believes it is severely overweight. So this isnt a question of a shortage of funds.. this is a question of debt to income ratios reaching levels well beyond 15 - 20 x earnings and far too much of it not being amortised/paid down.

    Investors may well be gagging for pre APRA policies to be reinstated so they can leverage up to the eyeballs with minimal deposits and never pay a dollar of debt down, but the regulator wont be allowing it.

    I agree that at some point these regulations may ease. But they will not ease greatly enough to see a return to previous borrowing capacity.
     
  16. euro73

    euro73 Well-Known Member Business Member

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    2018, although I suspect it will be 2019.

    In 2015 APRA stated that industry wide I/O volumes had reached 53% before their intervention. When the 30% quota took effect in July this year they said I/O volumes were still 46% industry wide.

    Remember, individual bank data was not released. Only industry averages were released. We know that some banks were underweight, which means some banks must have been well over the 53% average.

    Remember the 30% quota only applies to new business written after July1 ,2017. So its very likely that many lenders would be meeting that target for new business but still be well overweight across their back book... it will take several years for their back books to roll off and it will therefore take several years for total I/O lending to reduce to 30% - if thats what APRA's end game is - and I suspect it is. So it could be at least 5-8 years for that cycle to be completed, as there would be a lot of 10 year I/O that only commenced in the year or two before APRA stepped in. We know from APRA's data that 2012-2015 is when I/O volumes exploded...So its conceivable that if much of that was written on 10 year I/O terms, it could be 2022 -2025 before it rolls to P&I , and APRA feels that the 30% I/O v 70% P&I balance across ALL ( not just new) lending has been restored...

    This all assumes that APRA is seeking a 30% I/O v 70% P&I balance across all lending... if they arent after that, then perhaps there's some chance we may see I/O lending get easier in a shorter period of time. But it seems likely that is their end game. The RBA ( who I'm sure are "steering" APRA at least a little bit, more likely a lot ) are extremely worried about levels of household debt. We all know that. We also know they want the cash rate up, but I suspect they are saying that publicly while their real game is to use APRA to engineer the same outcomes whilst also shoring up the banks against future global shocks and fattening up their margins on less volumes.....

    Its smart. well engineered. well executed. clever. Achieves the same or similar outcomes as cash rate increases without damaging the whole economy while keeping the banks safe from themselves and profitable. But I could be completely wrong of course....
     
    Last edited: 17th Nov, 2017
  17. timetoact

    timetoact Well-Known Member

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    Can you explain this further.
    Does Aussie Home Loans I/O loan book count towards CBA's limit?
     
  18. euro73

    euro73 Well-Known Member Business Member

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    Aussie gets its funds from CBA. If you have a recent Aussie mortgage, open it...see who the mortgagee is.

    Older Aussie loans used to be funded by PUMA (Macquarie) and ORIGIN ( ANZ...now Columbus Capital)

    So yes, loans that are written with the Aussie brand are still CBA funds.

    See, Aussie isnt a non bank just so you understand. They are called a non bank by people who have a simple level of mortgage knowledge. What they really are is a mortgage manager/white label lender. They dont originate their own product. They use their brand on someone elses product on a wholesale level rather than a retail level and manage all the back end themselves - call centres, statements, internet banking etc...

    Flip one of their credit cards over - who is the card issuer? Used to be ANZ...dont know if it still is... I dont have any Aussie products so cant say for sure...

    Insurer? CGU

    Same for Virgin - when they first launched many years ago it was all Westpac product. I dont know who funds them now....

    Wizard..before the GFC. It was all GE Money.

    These are not real non banks. their funding sits on someone else's books.

    Firstmac is a real non bank. Pepper is a real non bank lender. Liberty is a real non bank lender. These lenders manufacture and originate their own products , using RMBS
     
    Last edited: 17th Nov, 2017
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  19. propernewb

    propernewb Well-Known Member

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    Thanks euro73.
    Is there any data on the distribution of i/o loans in terms of interest only period? I.e. what proportion are 1, 2, 3 yr i/o terms etc.

    The only way i see this shaping into a crash/panic is if i/o loans move to p &i and holding costs become excessive. But that wont be an issue if incomes end up rising, which is what governments worldwide are doing their best to improve.
     
  20. euro73

    euro73 Well-Known Member Business Member

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    There may be data like that, although I havent ever seen it. I suspect APRA is probably privy to it though.


    Investors with strong surplus salary have nothing to fear except the displeasure of being forced to P&I at some point. It wont break them. It will just **** them off :)

    Investors with mature portfolios generating strong yields have nothing to fear except the displeasure of being forced to P&I at some point. It wont break them. It will just **** them off :)

    This means high income earners and longer term pre APRA investors only have first world problems to deal with... hardly sleepless night stuff.

    For just about everyone else... especially those carrying large PPOR mortgages and several I/O loans - or those seeking to accumulate several INV properties and replicate pre APRA investors successes - the P&I cliff represents risk. Very high risk for some - especially those with sizeable PPOR mortgages, no real prospect of wage growth and who havent owned the INV properties for long enough for rents to mature. Less risk for others who havent extended themselves too far..

    So this is a tale of two era's. For Pre APRA investors , success came from investing in an era of generous servicing calcs and generous I/O terms and the growth flowed from that.

    For post APRA investors ( and I mean genuine, new, post APRA investors - not investors who started in the 90's and noughties but are still investing now ) , success will need to be achieved differently. You just cant ignore that with the regulators driving a recalibration of banks mortgage books , cash flow and debt reduction /debt amortisation becomes king .

    Those in the "at risk" categories ( newer investors ) who choose to ignore the facts run the risk of either running out of borrowing capacity or in a worst case scenario also running out of holding power...
     
    Last edited: 17th Nov, 2017
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