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Property cycles and the merits

Discussion in 'General Property Chat' started by dabear, 7th Nov, 2015.

  1. dabear

    dabear Member

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    Coming back from the home expo in Sydney, property cycle has been a popular point to start a pitch.

    Every time it's being mentioned,and it's followed by statements like "Sydney at the top of the cycle" and "Brisbane at the bottom", I see people nod their head as if it's given. If it's then being "reasoned" for affordability, population growth, overseas money and a range of economic data all come to the scene.

    All these points can't be proven or disproven. To me, it appeals to instinct more than rationality. The regional economies in Australia are indeed diversified, but to imply markets operate complete out of synchronization, they have to be rather isolated of each other, don't they?

    From many invested in Brisbane because of the "property cycle" talk, people support it argue affordability is good, people against it say the mining weakness is still there.

    I personally don't invest based on cycles, and I think a lot of cycle talk actually means timing. What do you think about property cycle narrative and its merits?
     
  2. euro73

    euro73 Well-Known Member Business Member

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    Cycles of old are unreliable barometers of the future. All previous cycles occurred during credit expansion. Future cycles will have to evolve under credit constraint. The only "cycle" that should be relied upon now is debt recycling... eventually those who deleverage will create the capacity to expand again....

    It doesnt matter how many ridiculous and flawed arguments get put up by these people - the banks are not lending as much, or as easily. And without ready credit, markets dont accelerate. There will be further funding pressures across the next year or two and postcode restrictions are also starting now. HEM increases are piling on, and when I/O loans start reverting to P&I , there will be another adjustment to borrowing capacity.

    Actual "rate to borrower" affordability may get cheaper if the RBA cuts rates, but forget any improvements to borrowing capacity for several years at least... so forget past cycles being anything but old data from old models, created under old rules.

    New thinkers understand that debt reduction and cash flow need to be the new focus.

    If Brisbane is so hot, why has it barely moved pre APRA, during the lowest rates in history and with far lower purchase prices than Sydney.... and why will it now go kaboom , post APRA, with far less capacity in the markets and rates on the up from bank funding increases?

    Dont get me wrong- I think Brisbane ( and Melbourne and maybe even Adelaide and Perth) will see a short surge from Sydney investors looking for the next best thing where they can actually qualify for a loan, but they will still hit servicing walls soon enough and it will be short lived surge... call it a "Mini Me Cycle " if you wish ;) But a 3 year cycle like these guys are predicting- methinks not

    the fundamental issue is very very simple- First Home Buyers are entering the market requiring ver y large non deductible loan sizes, compared to 20 years , 10 years ago. Older investors are purchasing less because their capacity is curtailed. The new generation of buyers ( to drive the market along) has to come from below, and many of them will have to choose between PPOR or INV, because calculators in the new post APRA world will not allow them to do both, or in a best case scenario they may be able to do both, but not as quickly. So worst case there will be far fewer buyers in the next few years, and in the very best case, there will be as many buyers but the speed at which they can purchase and and then re-purchase will be slowed. The changes to servicing calcs, LVR's and HEM's have ensured this. No if's. No but's. It will play out and become the new cycle over the coming years... It has already started. It's happening right now.

    Gotta deleverage.
     
    Last edited: 7th Nov, 2015
  3. See Change

    See Change Timing Lord Premium Member

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    .The cycle giveth and the cycle taketh away .

    I believe in the cycle , all hail to the cycle .

    There are logical reasons why it happens . The people who take the most advantage of it are those who don't need to be told about it at a property expo ( though I think they 're ok in terms of their timing at the moment , though I'd be worried about what they're selling k

    To ignore it is foolish . We picked up well positioned places in Brisbane in late 2013 and are close to the end of a buying spree of cheapies.

    We've also been buying , what we think are good buys in some where which is not being raised on the radar yet .

    Cliff
     
    Last edited: 7th Nov, 2015
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  4. bob shovel

    bob shovel Well-Known Member

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    Everything happens in cycles, watch the check out lines at woolies! Boom and bust numbers :p
     
  5. Bastiat

    Bastiat Member

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    Isn't there a real estate group that promotes a property cycle of different areas in Australia.

    Might give a clue to who and why this is useful for.
     
  6. sash

    sash Well-Known Member

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    Ahmen to blue pills....errr Cycles...

    Agree 100% cycles giveth and then taketh....be aware of mad men buying at the end of cycles. ;)

     
  7. MTR

    MTR Well-Known Member Premium Member

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    All I can say with certainty is that it is far easier to make money in a rising market than a flat or falling market, if you call this getting the timing right then that is what it is.

    You don't necessarily have to jump into a rising market at the beginning, however you certainly don't want to be jumping in close to the peak. For those who jumped into Perth, Syd, Melb over the last 3 years you got the timing right and made money, just had to throw a dart.

    Sydney is at the top of the cycle, bust cycles will start in a area/s and move, bit like a disease. This is clearly what is happening in Syds west suburbs now, not so just 3 months ago.
    There is far more stock coming to the markets. Boom/bust markets are all about supply and demand, more stock, less buyers, investors have been cut at the knees APRA.

    Sure there are strategies where you can add value to property to make money regardless of the cycle but it wont be as easy or as full proof IMO as jumping into a rising market.

    MTR:)
     
  8. sash

    sash Well-Known Member

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    Sure is......a lot of people are unaware and do not believe this can happen...but you are absolutely right...it is unwinding very quickly..and not just in prices but in some areas the rents are also headed down.

    This is the canary in the mine....

     
  9. bob shovel

    bob shovel Well-Known Member

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    They help get the price highest though, they are good value. What they buy may not represent value though
     
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  10. MTR

    MTR Well-Known Member Premium Member

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    They either do not want to believe it and worse keep buying at peak. Its a killer, I know at least 3 from SS that went bust this way, lost the lot.

    Can also be lack of experience, they only know one cycle - boom cycle, too green to understand how it works and think they can continue to make money and the gravy train will never end.

    Some also delude themselves in thinking that even if the market tanks it will only go sideways and no falls. We just check out what happened in the last boom/bust cycles in our own city to find out that bust cycles means it can be as much as 20%+ drop in value.

    If LVR at 95% this is quite scary and exposure in one State means when the market tanks your debt could be greater than the value of your portfolio.

    Yep, "the cycle giveth and the cycle taketh", just make sure you taketh before you giveth back.

    MTR:)
     
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  11. Scott No Mates

    Scott No Mates Well-Known Member

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    I'm a cyclist. I have to be wary of cars. ;)

    There is less correlation between each capital city's cycle or is it that they are closer to being in sync with each other?

    How is this cycle correlating to the asx?
     
  12. sash

    sash Well-Known Member

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    Yep...without naming them....can you please elaborate what happened to them.

    I remember one gentlemen who retired last Sydney cycle....he expected his properties to stop growing and rents to grow slowly. Unfortunately..for him..he underestimated the impact on Sydney and being at least 7 years from accessing his super (he had a decent amount there)...he had to go back to work.

    Couple of factors he did not anticipate:

    1. His properties dropped on average 15-30%. So his 60-80% gains sometimes became 30-65% gains

    2. Rents did not move up as much due to supply for the first 3 years

    3. He underestimated the need for serious buffers because things happen to properties.
     
  13. See Change

    See Change Timing Lord Premium Member

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    Personally I don't know anyone on somersoft who went bankrupt except for SN , but he was " a guru " who starts believing his own hype too much .

    There have been others who have announced with great fan fare that they were " retiring " but I can think of a couple who's definition or retirement was different to most people's .

    Cliff
     
  14. sash

    sash Well-Known Member

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    Actually I can't recall anyone who went bankrupt...I don't know who SN is.

    But I agree the retiring ..but you are right...retirement can have many meanings.

    Hear you about a few who retired...but staying retired was another question.

    There was a lady called Brenda who I believe was into dogs retired...after selling her holdings in Ipswich. I think she still was...she was of those who I believe replaced her income. Now that is retirement with no compromises.

    In my view it is easier to replace your income when you earn say 50-60k ..than someone on 200k/pa.

    Seech...will be be replacing your income?? :D
     
  15. See Change

    See Change Timing Lord Premium Member

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    You'll see multiple pictures of the " property cycle " from different companies .

    Herron Todd White have one they update every so often , and IMHO it's probably the most accurate . Having said that I think regular reading of the forum is as good , though sometimes it's the places that no one is talking about that are the places to be going to , to get ahead of the herd. But if your buying with the pchat herd you'll be ahead of the vast major of people .

    Cliff
     
  16. Tyrell

    Tyrell Member

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    Thats where I want to be , just dont know where that is :p
     
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  17. Biz

    Biz Well-Known Member

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    @euro73 I have seen you mention about the "deleveraging" a few times due to apra. Not everyone is effected by the tighter lending policy though. The reality is that the vast majority of investors only own 1 maybe 2 properties. These guys are not effected like the serial investors you find here but they are the ones driving the market. Mum and dad Joe average on a combined income of 100k can still go out and get 1.5mil hoc without too much drama, that is where you need to look for what the outcome will be.
     
  18. euro73

    euro73 Well-Known Member Business Member

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    Im sorry Biz. Not with a PPOR debt they wont . No chance of getting half that amount in fact.

    But let's test your theory...

    1 Couple.
    2 Dependent children.
    5K C/Card Limit.
    Male 50K income.
    Female 50K income.
    No personal loans, no HELP debt.

    Existing PPOR debt of 300K -

    Step 1 - we pull 200K of equity out, to fund 20% + stamp duty on 2 x 400K INV purchases. This changes the loan from 300K to 500K. I have assessed the 300K at "actuals" of 4.2% P&I and the 200K extra at "actuals" of 4.2% Interest Only on the NAB servicing calc.......

    New debt requested - 640K to buy the 2 x 400K properties at 80% LVR - remember the funds to complete is coming from the 200K equity pull above, which Im assessing at 4.2% I/O to give your theory every chance.

    rent used. $20,800 each. $400 per week each

    Capacity to get 640K = fails. see attached . ( long way short of 1.5 Million, you'd agree? )

    Now I would argue that most "Joe average " types will have larger C/Card limits than 5K. Most will have personal or car loans which I have not included here. So please do believe me when I tell you - the majority will be affected, and I remain convinced that deleveraging is the only way past these constraints. Removing as much ineffective debt as possible and replacing it with more effective debt that the bank calcs can use neg gearing, depreciation and addbacks against - will be crucial.

    The only people who will escape this are those with no debt, those who secure a windfall or those who receive an inheritence. ie Small percentage of people. Sorry mate, you need to accept the servicing calcs have changed MASSIVELY and even if you havent been caught by them yet, it's only a matter of time before you and the majority will be caught by them...

    I think there are some people here who are still in denial about what the assessment rate changes and more recently the HEM changes, mean for capacity moving forward. Happy to be proven wrong, but when you cant readily get 640K investment debt for a 100K couple with 2 kids and a 300K P&I mortgage, 5K card limit and no other debt, are you sure you dont want to reconsider whether the game has changed???
     

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    Last edited: 7th Nov, 2015
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  19. LibGS

    LibGS Well-Known Member

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    They are just over the initial NRAS income limit. At 98k they could rent and save 20%.
     
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  20. C-mac

    C-mac Well-Known Member

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    Hey does anyone know where I can get each month's Herron Todd White 'Property Clock' picture, in one neat sequence?

    In various threads on Pchat, posters will post the occasional gif or jpeg of just one month of the HTW property clock picture, but I want say the last 6 or 12 consecutive months' worth. Tried Googling it, but to no avail.

    Can anyone please hook me up? PM me if you have a link or something!
    Thank you!

    C-MAC
     
  21. euro73

    euro73 Well-Known Member Business Member

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    Ha... good work GS. But isnt NRAS only for dole bludging, single parent, disability pensioner, community/social housing tenants????? :)

    So let's increase their income to 60K each to remove the irony from the conversation.... the extra 10K each would be sufficient to help them to just scrape over the line for 2 x 400K INV properties, but they'd run out of capacity immediately thereafter. And even at 60K each, if their C/Card limit was 10 or 15K, and they had any form of personal loan or HELP debt - fail. At 65 or 70K each, they wouldnt get far past 2 properties.... until they see large pay rises or reduce debt.

    Point remains - it would be a mistake for forum members to believe cycles of the past will be repeated. The changes to DSR's and HEM's are massive. They have never existed before. The assessment rate /DSR impact represents 25-30K of lost income per $1million in debt. And that's NET, not GROSS. The HEM changes represent $1000 -$1500 more per month being applied to some borrowers as "household expenditure" which means 12K per annum -18K in some cases... but its at least a few thousand for most "average Joe's". Add those together and you are looking at well in excess of 30K of "expenses" and up to 40K in "expenses" being auto deducted by the post APRA servicing calc changes.

    So unless "actuals" return or "HEM's" are reduced, or unless the average Joe's of Australia see massive pay rises and rental increases to compensate for that 30K -40K+ of lost income , forget the rubbish people are peddling about cycles. The cycles will eventually return, but not before a long cycle of debt reduction occurs, or not before you or I or any average Joe starts earning 30K - 40K more than they do today. Given an Median Australian income is @ 77K , a 30K salary increase represents a nearly 40% increase... How long will that take, would you think??? In an economy where wages are stagnating? http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0/

    7, 8,9, 10 years? Lets say it takes 7 years for example, for salary and rents to increase by 30-40K. Great... but all that will mean is that even if rates and assessment rates stay exactly where they are today , anyone with $1Million in debt will take 7 years just to recover sufficient income to get back to their pre - Apra borrowing capacity.

    And that right there is why deleveraging is important, Biz. If during that same 7, 8, 9 years you can pay down a few hundred K of debt, you'll be unbelievably well placed for when the majority of people eventually get some capacity again in 7 ,8, 9 years , creating some momentum for the market - those who are deleveraged will be best placed to do better.

    Remember that every statistic people use to create "cycle" models, comes from a 20+ year period where rates have consistently fallen , assessment rates have consistently fallen too, incomes have consistently risen and dual income families have become the norm. In addition, the era corresponded with servicing calcs getting more aggressive and LVR's expanding from 80, to 90, to 95% and I/O terms could be extended and extended. In other words, the cycles were created by an expansionary credit environment.

    Now, LVR's are being restricted, rates are at bottom ( or close to) , assessment rates have a floor ( that isnt going anywhere soon) HEM's have been significantly increased, incomes are flat, and credit is being constrained. Interest Only debt is being re-priced and extensions will become harder to find. These are very very very different credit circumstances to the ones where the "cycles" established themselves.

    So unless we are going to become a polygamous nation where triple or quadruple income households become the norm, or unless some genius finds a way to convince RMBS investors or mortgage insurers or banks to fund 110% LVR's , or unless APRA can be convinced to let banks reintroduce the use of "actuals" , can someone here please show me where the borrowing capacity is going to come from for the past cycles to be replicated .... please.... anyone???








    crickets........
     
    Last edited: 7th Nov, 2015