Property cycles and the merits

Actually its not that silly at all. Historically that is what has happened.

@euro73 I agree you have some very solid logic, and I can only offer congratulations for the spectacular portfolio numbers - I am not critical of your strategy, or even your position on this. I can see as you say some policy and lending issues are different now than they have been in the past, and I am not here to win an argument but continue to learn and keep myself involved in the conversation (it keeps me sharper). So I am listening, and considering everything you have said.

My point was I heard people say things are different last time. Also getting good results with your portfolio is great but doesn't nullify every other strategy. For my part I considered NRAS when it was introduced but I was skeptical that the gov would honour its commitment - having been very nearly stung by the solar tariff scheme changes I was convinced they would renig. I was wrong and that is my fault. I probably could have benefited from a few of those.

My view is that in a global economy ever awash with funds looking for a return, if homes have tenants to rent them and our geopolitical stability continues then funds will find a way in. You might be right about the slower and longer part, this last Sydney cycle was 12 yrs from previous peak not 7, and that might continue. The 90yr+ graphs I have seen show a total return in the range of 11%. I personally don't believe the changes you describe are structural enough to change that. If we go through a period of lower growth due to less debt, then rents will rise, even if the govy blocked international funds my belief is that SMS funds will take up some slack as the retirees go looking for cash flow to buy weekly groceries with.

 

Sorry to harp on the same point. US experience - it wasn't just those with poor credit defaulting, but also others who saw house prices falling far below the price they bought at the peak of the market....and saw no value in serving their loans taken out when the house was worth more. Said another way, if an investor is over leveraged and bought at the peak of the market and then experienced the value of their IP drop by 20%, how many would sell and how many would hold on.....and again, based on US experience, it doesn't take much for it to snow ball.

The concern isn't for those who are sitting on good cash flow and investment strategies.

The concern is about those who got in over the heads......and there isn't a short term bright horizon for them.

 

Someone on here will be able to explain the legal basis why, but as I understand it is far easier (or at least consequences less severe) to walk away from a house with negative equity in the US - i.e. A strategic default

 

I think it's the fact that defaults on mortgages in Australia are not allowed i.e. debts obtained via mortgage are carried through bankruptcy. Someone please correct me...

Having said that, his point still stands. Nobody really knows what a 5%, 10% or 15% fall in prices could trigger? Maybe a 7% fall would be sufficient to trigger a "collapse"? Who knows

@euro73, great posts mate. Very rational approach to thinking about the housing market. I think the other parties we need to include are foreigners, SMSF, and potentially any other entrants who are not going to be crippled by recent changes to Australian credit.

 

Euro .

There is one fatal flaw in your argument . You say there ' s no more money coming from the banks .

That's wrong .

The banks are being told to limit the growth to 10 % ..... APRA just don't want it growing at 30-40 or what ever .

10 % growth over 7 years gives over 210 % growth .

Given that the last Sydney cycle took around 12 years from peak to peak , with that sort of growth you'd have a stronger cycle than what we've just seen in Sydney .......

If we assume that Sydney and Melbourne are close to peak and won't have much growth , what could happen in Brisbane , Adelaide and maybe even Hobart if that 10 % increase for Australia as a whole goes to work in three relatively small markets ..

I know it's not necessarily that simplistic . For example , as properties are sold in Melb/ Sydney are sold , the new loan is likely to be larger than the loan the previous owner had .

Bottom line is that the amount of loans can increase , and at a rate greater than what is necessary to maintain a NORMAL CYCLE .

Cliff

 

The 10% cap is on a bank's total loan portfolio increase, so it does not necessarily imply that this will only be achieved by increasing the amount it lends to each new customer. A bank can still achieve a 10% total loan portfolio increase by lending less money to each new customer but will need more new customers to compensate for it. As such, the 10% cap should not be interpreted as an indicative growth rate of individual loans.

 

My point is that euro is implying that there will be no growth . I'm pointing out that there is the capacity for growth that would exceed what has occurred in the last Sydney cycle .

Doesn't mean it will happen , but the whole thrust of euros argument ( frequently repeated ) is that there is no capacity for growth . That is just wrong .

Cliff

 

@euro73 I love your genuine passion for your product!

However, don't you think investors will simply move to cheaper cities over the next 7-10 years? If the availability of credit is the major restrictive force going forward, doesn't logic suggest the majority of investors will simply borrow less $$$ (since they have less deposit)...which means cheaper cities will start to grow e.g. Adelaide?

 

Household Expenditure Measure - essentially a formula for lenders to determine how much you can borrow based on your living expenses.

 

Makes sense
Also, Money may be getting harder to source but there are many ways to source money even if investors are at their limit, Just have to look outside the square.

MTR

 

That's demand and supply question mostly. We have seen the economic integration and last decade. The only thing to count on since then is expansion of credit supply at large.

As far as I agree with Euro on his logic side,I agree with SC the driver would be different from time to time. Does gold always go down when dollar is up, it seems logical but it isn't always that way in reality. logic isn't the only thing and I think drilling into detailed policy response is futile, they react differently every time as well. When the moffo that "every family owns a house of their own is a part of American Dream/Aussie Dream" is thrown in the political campaign, we no longer in a free market economy. Interventionist takes over.

My problem with the cycle argument is most seem to take it as cause not the result. Yes, Brisbane should have been on the rise, but maybe the driver for growth hasn't been there yet. It's the reasoning behind the cycle theories I find it hard to convince. Once people jump on the wagon, it becomes a self-fulfilling thing, so I think cycle is the carrier not the predictor.

 

I think you've entirely missed the point of his argument - that growth in the future will not be the same as growth in the past.
The main reason for this is the change in the availability of credit and therefore the ability of individuals to meet the prices currently being demanded.

He never said that growth will not happen. He said that growth will be slower and be different.

This is a reasonable stance to take given the unique fiscal position we are currently in; the recent changes in lending circumstances; and importantly, the markets negative response in relation to those regulatory changes.

 

No one can predict the future..... % of growth/property moving forward.

Tightening of finance also occurred around 2008?, where lo doc/no docs were abolished pretty much overnight. Investors were cut at the knees.

During this time the of majority investors I know were using these products including myself. This event did not stop or slow down the property cycles or reduce growth whatsoever.

Anyone using lo doc/no doc just declared an income and MB processed, anyone could source a loan, as long as you had equity investors just continued buying.
By the way lo docs are now back, however there are tighter conditions associated with these products.

For me I see APRA as minor compared to abolishment of no doc/low doc ..... Long time investors who used these products will understand exactly what I am talking about.


MTR

 

That's true, no one can predict %s. Then again, I don't think anyone here is trying to do that at all.

What is being argued is whether or not future property cycles will resemble or behave similar to previous property cycles.

The position being argued is that they won't resemble them - not that future growth won't occur, but that future growth will not resemble past growth.

The reason for this is the regulatory changes that APRA has implemented. Whether or not you see them as minor or major is irrelevant - the market has responded negatively with increasingly lower auction clearance rates.
The next reason is the assumption that the current fiscal conditions will not persist into the future. Previous discussion has centered on central bankers raising interest rates and therefore affecting mortgages and borrowing capacity. But as we have recently seen, the major banks themselves are not too shy about raising their rates independent of the RBA. My guess is that they'll continue to do so.
There are probably other reasons that I'm unfamiliar with.

All of this points to an environment where loans are smaller and harder to come by.

 

I know exactly what we are arguing... and I will come back to the fact and this is certain......that no one can know or predict the future.
APRA is APRA, but so what, there will always be hurdles when it comes to investing, same as what I mentioned abolishment of low doc/no doc, much bigger than APRA.

Here is another prediction.....If you refer back to posts on SS and you will find so many comments regarding similar topic/property cycles. Those stating "we will never ever achieve same property growth in Australia as was achieved by baby boomers".... really

Guess what?? check out the stats in Syd recently, properties doubled, not everywhere but many areas and more

Same happened in Melb, certain pockets and Perth.

Anyway, I digress, back to topic

This is why I find this a fruitless exercise because its like trying to predict the weather in 9 months time, we just don't know. Listening to what may, could, would happen makes little sense. I much prefer to focus on what is happening now, this way its keeping it real and probably makes more sense.

MTR

 

Don't think so . Very simplistically I pointed out that the capacity for growth in lending capacity ( under the new guidelines ) that is still available , is greater than the growth in property prices that has occured in the current Sydney boom .

It is 10 %

If someone was able to consistently make 10 % on an ongoing basis , they would be very happy .

That's assuming the current guidelines don't get changed

Cliff

 

But 2008 also saw the expansion of SMSF and their availability to invest in property, as well as a strong Chinese economy.

Baby boomers are going to want to start accessing and living off their super in increasing numbers in the near future......and the Chinese economy needs time to absorb its excess capacity before it resumes the growth we have seen in recent years.

The drivers for continued growth at the same rate have changed.

That, combined a tightening in financial regulations, makes this a different cycle going forward.

 

2008 GFC hit, most cycles crashed, except Melb which boomed.

We can today still invest using SMSF? at least I believe so.

Recent cycles were also different from previous cycles because there were different drivers so what?? ie Sydney boom started in Syds west not inner city.
This was about affordability

Melb, East boomed, rather than inner city.
This was about buying in particular school precincts by CHinese investors

Perth, FHB jumped in so properties under $500K boomed.

My points is drivers may change but boom cycles will still continue and regardless no one will be able to predict today where it starts, why it starts, time frame or anticipated growth.

All we know is a market will rise when there is more demand than supply. That's it basically

MTR

 

'The concern is about those who got in over the heads......and there isn't a short term bright horizon for them.
Last edited: Today at 8:18 AM'
What Oz in Tex said.

Agreed, and what's more, those who are already overcommitted Are already so, they are just waiting for a little breeze, for the 'house of cards' to play a different game. The usual ones are, lack of buffer. Sad but true.

 

My point is the blow to the property in 2008 was softened by changes to SMSF. And my question now is ......what is the softening agent this time round.