WA Properties in Mining Towns

All the best Angel, and you are not allowed to stress, almost there

 

Awesome news Angel. Onwards and upwards

 

I remember being at a seminar about 5 years ago at the height of the mining boom and this Lady was boasting about a house she bought in Port Hedland for 850k and was receiving a 14% yield. I thought to myself at that time how silly it sounded as if it was gonna last forever. She woulda got burned for sure. Sad thing was that it was a SMSF.

 

Not great, but I would have thought that would save her bacon?? or have I got it wrong??

 

Do you mean being a SMSF property? No I don't think so? I mean, imagine you have 400k in super and you borrow 450k to buy a property for 850k and three years later your property is only worth 450k. That's basically all your super gone.

 

got it, I was looking at it from a servicability angle

 

Why worry about mining towns....how about asking the question .....will people on this forum be able to pay interest rates of up to 8% on their portfolio?

Better still what mitigation measures have they implemented to manage a combination of a slow growth rental market and higher interest rates for say 18mths - 2 years....what will you do if a bank does call in your loans??

 

Or principal and interest? Got an alarming email from a brokerage, reading between the lines, many people are struggling with loans switching to P&I.

 

Takes a phone call 2 fix rates.

 

Spot in Kate..a great point...that is a disaster waiting to happen also.

I have asked for 10 or 15 yrs I/O to allow rents to grow....a lot of people have not thought this through. Some banks will allow only 5 yrs and they require proof of serviceability in 5 yrs.....if you have $3m in loans...and interest rates change to P/I......that could add another 1% depending on the term left. 1% on $3m is 30k!

 

Depends which bank.....some require a formal process.....a also depends on cycle of rates...

 

its a huge disaster Sash, especially in the already price depressed regions.

IO loans used to only be offered to sophisticated investors who met certain ASIC requirements (think it was $2.5M in net worth + $300k? in annual income).

 

Sure, even if you can fix rates, but this wont be the major issue, check out realestate.com, there is a glut of rentals, no takers, and a glut of properties on the market which means everything goes into free fall, how low can you go.

 

Yes..I know mining towns it is a disaster. As for I/O it is not a sophisticated product...just that a lot of people focus on making the cash...but don't look at the risks. I consider myself the Village Idiot investor......it even translates to buying property...the more unsophisticated my conversation gets with agents the better my deals get.

Back to you point about IO only loans in mining towns. Lets say Little Johnny bought.....5 properties in Qld Mining town originally for 400k a piece. The prices of these went to 750k each and was returning $1800pw at the peak. They borrowed the lot...so their debt levels are about 1.9m with total value of $3.5m and returning over $460k per in annum rent. So $1.9m would only require about $140k in repayments and other expenses. So they would be positive to the tune of $320k.

A couple of years later....their places are now $250k with a total value of $1.25m with a debt level of $1.9m. That is negative equity. The issue is now ....the rents are only $70k per annum. That is massive shortfall of $70k in cashflow. The banks have risk management systems which pick this up based on location...and then wham...they call in your loans....

This is the danger of mining towns...but can also happen with people buying bluechips in large cities when rates go up as the cash flow is not great!

 

Hey Kate...if you are around ..come along to next meet with your better half.

I am sure I and a few others would love to hear your experiences....hey it could even be a soft launch for your book. Don't worry...we are easy going lot...no real ********s around.

 

Do banks ever call in loans for resi property?

 

They have in some instances... rarely...they last did this on 90s...in droves.

 

Hey sash, yes so true all of it.....

IO + mining towns = pants on fire for sure.
People believed the market would drop, but not as much as it did (70-90% in the bah)

Its my belief (from seeing first hand) that the inflation of prices was caused by loose lending. Now, with prices sitting as low as $120k, locals are finding it a real struggle to get a loan (go figure, wasn't the case at the peak of market)

IO loans were actually more regulated and used to be predominately offered to sophisticated lenders. My understanding is in the last 10-15 years banks have loosened up a lot.

If you were making lots of money doing what you do, and no one was challenging you, its likely that you wouldn't change. Its Human nature. Obviously there are big profits for the banking sector, but when it turns pear shaped there is little structure in place to help the fallen ... let alone change.

In the case of where I live, when a system collides with human fear and emotions, it gets very very dangerous. You can't measure peoples suffering in dollars, so I guess in some peoples eyes its not a problem, but it is, and humanity collectively created this problem, collectively we can change it for the better.

 

This is the best time to buy. Contrarian approach.

 

Ditto!!

Human emotion is always underestimated......exactly what I said about parts of Western Sydney and people launched. The market is driven by human psychology most humans are followers..so when they read Sydney is going ganbusters they all jump in at the sametime and get out about the same time. The smart players get in early and get out early or hold.

Agree about the banks....I would like to see more fines for banks when they don't do the right thing. It is imperartive...unfortunately too many libs are ex bankers or have mates in banks.