Pre-2015 investors and post-2015 - PC

Theres a lot of upside to the current environment compared to the past too and some contextualisation from a finance lens to the 'doom'.

These changes are very much relatively minor and don't really mean the worlds ending for investors.

Rates are at an all time low.

In terms of servicing capacity, there was a recent 'explosion' in borrowing power when the cash rate fell significantly from 4 to 2%.

That, combined with some clever finance structuring meant that borrowing power for investors was literally a non-issue. I talked about how it worked in 'How to grow multi-million dollar portfolios on average income' posts. Recapping: reducing the cash rate from 4 to 2 meant that many many properties where now cash flow positive (on a 80% of rent - interest payments calculation). Some lenders credit policy meant that purchasing these properties in fact helped expand your borrowing power rather than hinder. That means investors could borrow $2mill at a 6% yield and expand their borrowing power to another $3mill for example. A continual growth cycle (albeit with lender limits, etc).

It mean that servicing wasn't an issue for a short little while.

Now its back as an issue for investors to work around. It was because credit policy didn't really adjust to changes in interest rates and banks were happy to accept lower levels of credit quality for profit.

So what we have now is the CASH FLOW benefit of lower rates, but a partial reversal of the BORROWING POWER benefit of lower rates.

 

Yep, Yes and yeah. A lot harder back then to get funding, harder to find deals outside of where you lived because you were basically relying on the local rag to see what is available, property management was just a sideline to the agents real business of selling property, very hard to find historic sales information so you didn't know if you were paying too much. Much Much Much harder time and you know what...

There were still property booms, bubbles and busts. Just like now.

if someone can't make it in the current environment with easy lending and all the information at their finger tips they should just get out of the game.

 

I'm going to take a contrary view on the GFC.

The GFC was an interesting period but I wouldn't say it was worse at that time. Certainly if you were applying for lo doc loans, the impact was huge (they virtually disappeared), but even then this was only a very small portion of the market.

What really made things difficult during the GFC was lousy monetary policy pushing rates up to 9% - 10%. Essentially this made it very difficult for people to borrow money at all. When rates dropped (as much as 5% in 6 months) it became very easy to borrow money which led to a boom which peaked in 2010.

There were some mainstream policy changes, notably the restriction of lo doc loans, removal no doc loans, removal of 100% loans and lenders becoming far more conservative on 95% LVR. It also led to the introduction of NCCP which restricted those acting outside of prudent lending standards.

The changes of the GFC really only had a significant impact on those acting at the fringes of the lending market. To those who were already applying good practice, the net affect was mostly once of compliance and paperwork. Higher interest rates made life difficult, but this is a transient thing and the bank policies weren't making life that difficult. When rates dropped, a boom in lending ensued.

The affects we're seeing today are much more far reaching. Lower rates aren't going to make peoples investing easier, in fact it's probably the opposite. Bank policies will continue to be adjusted but overall they're far more conservative and there's no end in sight for this regardless of where rates or the economy goes.

For most people, the challenges of the GFC where one of a market cycle. The challenges we're seeing today are outside of market cycles.

Redom has made an excellent point that low rates are helpful during this period. Try imagine where we'd be right now if we combined todays policy with the high rates of the GFC. What really does worry me is what will occur when rates go up, even to only 7% (which was once the long term standard). Todays policies almost ensure that rates need to stay low so the economy can keep moving.

 

I bought my first property in 2009, and I always think, say I was in that position 3-5 years earlier, I feel like I would be in a much better position now.

But that would have been impossible.

 

I understand the argument - credit has loosened and tightened before . But with all due respect the nature of the credit tightening has changed. We are talking about totally different things.

Any previous instances of credit tightening were only ever very temporary and the tightening was never deliberate, and it was certainly never regulators who drove it. This time it's being motivated over concerns of systemic risk in the banking sector. Except for maybe 12 -18 months after the GFC when non banks and 2nd tier lenders rolled back lending for a while because they couldn't find investors for their RMBS, and the AOFM had to become a cornerstone investor and the Govt lent their AAA status to banks and guaranteed deposits, there's really been no period in lending since deregulation where Govt has been involved at all. RBA increases and decreases are not Govt or regulatory interventions designed to address banking risk, so they cant be considered to be the same kind of thing as APRA or ASIC's intervention now.

So borrowing capacity tightening, when it did occur, was only ever really a consequence of rate rises... and rate rises were by and large a blunt instrument to contain inflation or stimulate growth, but certainly never an instrument designed to ration or reduce credit and reduce systemic risk to the banking sector.

Nor can an argument be made that borrowing capacity tightening was a result of lower incomes or a slowing economy, because until the last couple of years the Australian economy and Australians living standards and wages have enjoyed uninterrupted growth for 3 decades.

So really, aside from a very small number of instances in the past 35 years where rates rose a little before falling again, circumstances leading to reduced borrowing capacity have rarely existed. And where they have existed, they have been very short lived. No - overwhelmingly, undeniably, unambiguously, rates have been falling since deregulation, incomes have been increasing ,and credit availability and borrowing capacity have both expanded almost exponentially . Both the circumstances and the levers being pulled in 2015 are significantly different .

Interest rates were higher then and have never been this low.

Property prices were lower then and have never been this high

The proportion of income used to service a mortgage today is higher than it was then

Debt levels today are far far far far higher than they were then

Single Income households were more common then and the number of dependents was larger.
Double income families with fewer dependents are more common now.

In other words, almost everything is now inverted....

Add to that the fact that all debt is now being assessed at 2-3% above the actual rate you are paying by all banks, and 30K of income per $1Million in debt has been taken from you, and add to that the increases to HEM's to take a bias against higher income earners , and you can see that previous credit tightening was a very different beast.

Ultimately what it comes down to is this - this is a deliberate and calculated intervention designed to force more of us to pay off debt, whether we have realised it yet or not, and whether we like it or not . The month on month, year on year lending growth has been capped at 10% by regulators to make sure that as new investors take up that allocation , older investors will be forced out of I/O and into P&I more and more in the coming years.... and the end game for them is Australias banks de-risking themselves and recapitalising themselves to buffer against future economic shocks.

I agree this will all eventually pass, of course it will - but the key here is time. It took 30+ years for this to grow to where it is today...and it isnt going to undo itself in 30 months.... So I must reinforce what Redom is saying.. and other brokers here have been saying; Unless you can manufacture significantly more income - one way or another you are going to need to ( or posibly be forced to) deleverage or wait ( quite some time) to recover your pre APRA capacity. And that is going to mean that the next few years will be less 'exciting" for growth than the past few years...

But if you are taking a 10, 15 year view.... I would imagine by then a lot of people will have achieved a significant amount of debt reduction, and like all things - history will eventually repeat and there's nothing surer than the fact we are going to have another credit boom in that 10-15 year period

 

Well given that your average cycle takes around 10-12 years , that sound normal to me .

As someone who times their buys to maximise short / medium term gain , does sell off properties , pay CGT , pay down debt to increase serviceability , rather than having an ever increasing pie and ever increasing debt , I wonder whether that approach might work ...

It's working so far for me , though to make it work highly effectively , you'd need to be following the cycle around Australia , buying and selling in different places , different times , on several occasions .

People keep on taking about manufacturing growth. We've done two successful subdivisions in Sydney ( unlikely to do one again ) , but the easiest and most efficient money we've made is by getting our timing right , and doing nothing else . Developing is time consuming and usually uses more money than people realise . Sitting back and holding properties while they go sideways is inefficient . Buying just prior to booms and watching things go up while you do nothing is incredibly satisfying . I've enjoyed Sydney in the last two years , just the same as I did , Logan , rocky and Hobart in the last cycle .

I do have a higher income , but even now we still haven't maxed out our borrowing capacity and we've never come close in the past

Would be interesting to see the results of some modelling using that approach , but it's worked for me

Cliff

 

Go regional

Still plenty of well placed properties in decent towns of 10000 Plus from $100000 - $150000 where equity can be manufactured

Buy some of these. Sell them after a little bit and buy properties outright in the big cities

 

I think it's amazing that your children have been able to buy into the market from such a young age. Did they get their 'start up' funding from you, or was it a mix of parents, + own income, or were they entirely self-funded? Also, have they been able to continue to live at home before they bought into the market, and for minimal/no expense, so that they could accumulate some funds to get them going?

The only reason I ask is that I want to be able to get my own child into the market as early as she can, and am hoping to learn from the experiences and attitudes of experienced investors, just how much help I should be willing to give her. I'm worried that, if I expect her to do it entirely on her own, she'll never be able to get enough $$$ behind her to get her foot in. On the other hand, I don't like the idea of a 'free ride', either.

 

Exactly. We all have the tendency of thinking that older generations had it easier. I was one of those who first started paying off an investment mortgage when interest rates were 18%. It wasn't fun. It was a sacrifice. I was, in hindsight, just a kid ....but I worked hard and long hours to met my commitments. I wasn't able to do what my generation of friends where doing in their late teens/early 20s. I couldn't party as often. I couldn't buy the latest trend in fashion....whatever.

At the end of the day, it is now and was it then.........figuring out your priorities.

 

Hey @Redom,
In the new post-APRA environment - roughly how much income from PAYG would one need to build, say a 20 property portfolio valued at $6 million ($300K/average property) with an LVR of 80% (debt of $4.8 million)?
Edit: With 6% yield across the portfolio


Cheers,

Taku

 

Could do it on median wage if you had a good broker

 

Median wage - are we talking around $70K?
Surely it has to be higher than this otherwise we all wouldn't be kicking up such a big stink about the new restrictions?

 

Good question - I'm interested too. I'm not sure I believe @D.T.
We may need to set a yield though - if so, how about we pretend no property has under 6%?

 

The rental yield policy isn't something to get concerned about.

There's not many properties that exceed 6% rental yield at the time of purchase. Values also tend to increase as fast as, or faster than rental yields. When you submit the application, you simply adjust the values on the existing properties to their current value. In most cases you'll find the rental yield remains under 6%.

Occasionally you might find something with an exceptionally good yield. Odds are a 7% yield being reduced to a 6% yield in the lenders calculations aren't going to make a significant difference in the overall serviceability.

Also keep in mind that only a couple of lenders have this policy.

I don't think I've ever seen a loan application declined due to these adjustments.

 

With a 70k income it would take a lot of time, very careful property selection, lots of development, multiple entities, and most likely remaining single and living with mum your whole life.
Right now is different than 6 months ago no matter how amazing your broker is.

 

Not sure how the property magazines are going to publish the feel good stories now on people with an average income achieving excellent property purchases!

 

People can still do amazing things, it's just going to require more thought than simple buy and hold. It will require the ability to create capital to reduce debt that in turn increases cash flow, for eg, splitting and selling one or two to reduce debt on the others.
Buy and hold is going to be more difficult b/c there will be no change to the level of debt, which means every purchase is a real drain on your resources.

 

No you couldnt, unless the properties were yielding 9-10% pre tax.

 

Whether it's 20 properties or 5 properties, if you want a $6million portfolio, the short answer is @ 375K + with rental income yielding 5% on all the properties.- ie 300K

That would be for a single person, no credit cards, no other liabilities, no children, and borrowing 5.4 Million ( 90%) and all debt assessed at 7.4%

Could have made the same loan amount work with 130K + salary and 300K rent, just a few months ago.

Stunned by the different figures? Yep - thats the difference "actuals" and the new HEM's make.


Longer answer- you could get it done with less income using NAB and Pepper for some of the purchases.... but for the purposes of keeping it simple and demonstrating how it would work at all lenders except NAB and Pepper - the figures noted above are accurate.