Panic Setting in Sydney

Calling @euro73

"Basel 4 will require banks to hold up to five times the amount of capital against investor loans materially dependent on rental income to repay the loan.

This could lead to interest rates for loans to investors with deposits of less than 20 per cent rising 3 percentage points, lifting from the present rate of about 4.5 per cent to 7.5 per cent – even if the Reserve Bank of Australia keeps the cash rate steady."

"...Under the new rules, even investor loans with big deposits of more than 40 per cent of the loan may have interest rates rise 1.5 percentage points, while borrowers with LVRs of 60-80 per cent will be 2 percentage points higher, according to analysis by JPMorgan and Digital Finance Analytics."


Property investors 'materially dependent' on rent face steep rate hike

 

Im predicting between 40-80bpts. I dont think 3 % rate increases are on the cards.

 

Yeah agree. I think the article took a bit of an extremist view... I'm not as interested in the exact numbers as much as the general theme

 

40-80 bpts for I/O would be difficult enough for many to manage... 300 bpts would be a disaster

 

Thanks for the info @lightbulbmoment

Just out of curiosity why do you think Newcastle is immune to a slight correction as many are predicting in Sydney? Is it because of the cheaper buy in price or all of the factors you mentioned in you last post

 

Fixing starting to look the go!

 

Fixing 4-6 months was precisely the go, when you get get 3-4 years at 4% or less. Still looks pretty attractive now, at 4.29 - 4.49 range . Any time money is available under 5% its dirt cheap.

Readers here cant say they haven't been warned over and over again ... I laid out a logical, sensible case for all of this, some time ago Unfortunately, when short term profits are clouding peoples sense of reason, they tend to ignore good advice....

They also cant say they haven't been warned that the next decade will reward deleveraging. Every investor who isnt on a very high income, or who doesnt already have a very mature, high yielding portfolio should very very very seriously consider using some of their remaining equity and borrowing capacity to purchase 1 or 2 cash cows, to reduce debt and further insulate against rate shock or P&I shock.

Basel IV is coming. Capital provisioning is coming . It will lower the banks ROE and require that they increase their rates to recover it. Its not a myth.

Further I/O tightening is also coming. Further cash out restrictions are also coming.

None of these things need be viewed negatively or as doomsday looming - they actually present a great opportunity as they equate to the same thing ... money will get dearer and borrowing capacity will get tighter and growth will get slower.... The great opportunity is that by knowing this and acting on it , you can combat it in advance by deleveraging so that you can manage the change comfortably and position yourself with improved capacity as others who dont plan, hit walls.

 

Agreed. But then why is it that people/investors get burnt when markets change?? I have the answer because they either buy at peak, or assume that property will continue to rise, they have made great gains but fear selling and not everyone can access equity in current climate.

Reminds me of that story the monkey and the bottle

THE STORY OF GREEDY MONKEY

 

Trend unemployment has increased in NSW.
6202.0 - Labour Force, Australia, Feb 2017

"Since February 2016, the largest increases in employment have been in Victoria (up 100,200 persons), followed by South Australia (up 12,700 persons). Over the same period, the largest decreases in employment were in Queensland (down 24,200 persons), Western Australia (down 5,500 persons) and New South Wales (down 5,400 persons)".

 

My view is that they get burnt because they dont have sufficient cash flow to survive changes.

Asset values ( property, shares, whatever) can fluctuate. lets all remember that you only ever realise an actual loss if you have to sell. Im not talking about opportunity cost. Im talk about crystalised losses... where your bank account goes backwards. In the end - you only ever have to sell if you have insufficient cash flow to survive.

This is really all about attitude and culture. In Australia, the property culture works like this; property has by and large had very few fluctuations in the past 3 decades, due largely to ever easier, ever cheaper credit availability. issues like supply and demand matter, but largely its been easy money thats driving things. Because of this, fundamental, sensible investment strategies have been almost completely abandoned over time, and replaced with speculative strategies . This has proven itself to be very profitable and rewarding for most, and culturally, the idea of buying an asset that runs at a significant loss while waiting for it to appreciate has become THE business model utilised by almost all property investors. Thats all fine. Cant crticise that. It worked very well for a very long time, after all.

But consider this. We dont invest in any other asset class this way. Not the share market, certainly. Why? We cant get the same level of leverage, and we cant get it at the same low rates, and we cant get it without the debt being at call. The key difference is CREDIT. Both the ease of access and the leverage/terms available.

So we have two major asset classes where we have completely different attitudes and cultures to how we invest - and those attitues have been shaped exclusively by credit. The result is that share values are determined by earnings/profits - otherwise called P/E ratios , yet we purchase properties with little or no consideration of yields and are purchased exclusively for speculative profits. Again.. all good so far - this is how the credit environment has seen these two asset classes evolve

Whats happening now though, is that we are transitioning from a credit environment that rewarded/encouraged speculation, to a credit environment which does not. It doesnt discourage it per se - its not as though 60% LVR's , at call lending has replaced 90% LVR, 30 year resi lending all of a sudden, but it certainly doesnt encourage it either. There is a deliberate regulatory intervention underway to curb I/O lending and push more and more borrowers across to P&I. Thats a fact. So cash flow/yields - which are fundamental considerations with every other asset class- are now going to have to become fundamental considerations for the property asset class... that's also a fact.

So my strong advice is still this - deploy your available capacity towards cash cows that will provide additional income, which you an then reinvest towards debt reduction/deleveraging. This approach is what will be rewarded in the new credit environment. Speculative strategies will be less rewarded/less encouraged than they have been in the past.

I'm not sure how much writing needs to be on the wall for people to get it...or how many dots need to be on the wall for people to start connecting them... but I guess like all cultural change - and make no mistake this is really at its crux a cultural change - those who embrace it early will prosper. Those who resist and hold out for the old days, will risk being left behind.

 

Because they don't prepare for the market change. There are still posters denying that the Sydney market will correct. Do you think they are preparing for the market to change?

And despite smug rants from some quarters, there are investors who are prepared for higher interest rates and tighter credit. I started this process 2 years ago. I will have everything in place before it happens.

 

I know its very familiar to me, saw this when Perth mining boom was going ballistic for 6-7 years, then came 2007 crash and I saw smart, savvy investors who made millions buying up big OTP apartments by the bucket load in 2006/7 peak and going to mining towns for cash flow....OMG, they lost their heads.... and lost their fortunes. Stopped posting years ago now.

Also what's interesting is this was the time where lo doc/no doc got the chop, we are now experiencing banks tightening policy on lending criteria, critical to watch this one, its a massive game changer. I think making money from property is also about managing risk, protect what gains you have made, there will always another boom cycle another day to make money.

 

I personally have not experienced a market turn but my parents have when we first migrated to Australia in the early 1990's, they purchased a house in Algester Brisbane for $110k, interest rates shot through the roof, limited work opportunities, house was passed in at auction for $80k, repossessed by the bank. That house now is worth about $550k, burnt my parents for life and have never bought since, the only positive was that they only lost the little deposit they had and manged to get out of paying what was owing to bank! Took about 6 years to achieve.

 

kaboom! I called 40-80bpts by end of 2017. There's 25bpts ... only 15-65 bpts to go. ANZ, CBA, WBC... who will move next?

 

ouch

 

This topic has become a circus show.......

As I said before if you want to say Sydney prices are going back to justify the fact you never invested or you recently sold and invested elsewhere and you "hope" it will go backward so you can sleep at night then so be it. No need for an argument, write it as an affirmation and look at it 20 times a day to calm yourself.

For now its going up no matter how many graphs and links are posted here so stick it in your pipe and smoke it.

Will it readjust? yes just like any other market will and no one will ever deny that. But for now here is a link on the demand to munch on:

Sydney's soaring house prices fuelling surge in rental demand

There is no point arguing a fact that is happening right now so I am going to leave it at that.

 

No one is denying it is still booming/peaking. Just that it won't last long and people need to be cautious about entering at this point in the cycle. Especially when the market is this silly and vested interests are trying to keep the flame alive. Not a good sign of things to come.

 

No doubt Sydney has market leading prospects for employment at the moment.
What will happen when the cycle turns? Dunno..but I don't think when the Sydney cycle turns, it will take the rest of the country with it...for the reason being that places like Brisbane and Perth have different cycles to Sydney and Mel.
When the cycle turns for Sydney (eventually it will.. No one knows when and how badly).. Yes it may still have more jobs (in sheer numbers) than Brisbane and Perth combined..but Sydney also has a lot more people (competition) for those jobs-especially the high paying ones. As a recruiter, you would see that I'm sure (by the way, can I send you my resume..I'm a brisbanite after all )
I do agree that I don't think there is panic in Sydney (can't be sure I'm not there).. But looking at clearance rates, sale prices, stock selling times etc all look decent to me.

 

Yeah, currently sydney's price is going up because of the economy is still good, etc. But I would like to call the current market unpredictable, because there are unpredictable human such as the people in rba/apra are taking measure to curb the growth of property market, the mortgage rate is going up worldly and a property market can turn in term of a few months.

 

Agreed...when you have articles like this in the SMH...it shows that more bad news is in the wind...

Confidence in housing collapses to lowest level in 40 years: survey

However....a downturn in property in Sydney and Melbourne will be a boon for places like Brisbane, Perth and Adelaide. It is cycles after all...