Property cycles and the merits

I don't fundamentally disagree with anything that @euro73 except for the conclusion.

In this environment, paying down debt and deleveraging is a smart strategy in my books. That's what I am doing. Also, setting up an investment strategy that relies on ridiculous amounts of capital growth over the short to medium term is not a smart strategy IMO. I understand that property cycles are driven by credit. They always have been. Each cycle has been different. The latest cycle had the lowest interest rates ever, SMSFs, no low-doc loans, more foreign investors etc. It was not like any other cycle that has been before and the next cycle will not be like the next one.

The only part I actually disagree with is that it will take a long time for the next cycle because of servicing calcs. People adapt. Pre-gfc, low-doc loans were common. During the credit crunch, they were basically done away with. You could have argued at that point that the next boom would not happen for years because there would be no credit to fuel it. But the boom did happen. The credit will come. People will find a way. Whether it is a good idea for them to buy is another question. In a lot of cases it won't be a good idea. That won't stop them.

 

australia isn't that different from the usa. the reality for the average joe is this. you declare bankruptcy and they sell off the little, if any, assets you have.... and you can't borrow or have access to any form of credit for a few years. but the average joe is just making it pay check to pay check anyway. and they will say, so what.

 

Cliff- I'm in total agreement there will be growth. I have said that repeatedly, all along. What I'm not agreeing with is that previous cycles of growth will be replicated. That was ,after all , the original question.

The 10% you keep referring to , refers to lender book growth - not individual borrowing capacity per lender. That's where you are getting it wrong; there wont be less money in the market. But in many cases there will be less money available per borrower in the market. That doesn't mean they cant get "new" money - it means they can likely get less "new" money. In turn, that doesn't mean no growth. It means less growth, happening more slowly.

It's why I see deleveraging as being of such value. It allows me to get ahead of the cycle most others will be constrained by.

I also agree that eventually the credit constraints will pass - either by regulator withdrawal or by the passage of time, as incomes and rents overcompensate for the 30-40% capacity reductions imposed by assessment rate and HEM changes. But that will take years. Potentially a decade, especially if Australia endures a prolonged low wage growth economic period. While we all wait for that, I intend to be as deleveraged as possible to take maximum advantage of that next wave.

 

Thankyou @York

 

rates fell...and so did assessment rates. That is what drove it. Plain and simple.

Had assessment rates been 7.5% for the past 3 years, and had banks been constrained to 10% investor loan book growth, do you really believe Sydney and Melbourne would have performed like they did?

 

if it means getting out of unsustainable debt, you do what you have to do.

i agree with perthguy. this is a diversion from the main point which is to invest wisely and manage your funds wisely. and to pay attention to market forces. that's it.

i really don't want to argue with anyone because we are in essence kind of saying the same thing but coming from slightly different view points and experiences.

i'm old enough to remember 1970s and early 80s high interest rates and stagflation. My first investment was in that environment. Nothing is impossible. Just different.

 

No, most of us get it, lower credit lending will stunt previous growth big time.

 

No I don't believe Sydney and Melbourne would have performed like they did. They performed they way they did because of the economic environment and lending environment, which were unique for the time. Just like the economic environment and lending environment, which were unique last time Sydney boomed.

I remember after the last Sydney boom that people came out predicting that property cycles were over and we would never see another Sydney boom like that. We would never see growth again like that. Normal property cycles were over etc. But Sydney boomed again just like it always did. Back when the last Sydney boom ended, no one could have predicted record low interest rates, no one could have predicted the government allowing SMSFs to invest in residential property and loosening of foreign investment rules. No one saw state governments handing out $10k FHOGs. You can't predict the future. What stupid thing will the government do next that you can't see coming?

 

More than 1. -APRA, interest rate rises, economy, Au$ trending South, market sentiment turning from positive to negative, fears sets in and people sit in their hands

 

Good debate guys, keep it going. Euro vs the world!

Here is a nugget for you, the theory is credit has become harder to obtain (and it has) and that we just concluded a period where credit has been easier to get than it ever was...That is not correct, it was easier pre gfc. I remember back then you could go to Challenger with a letter from your accoutant and they almost gave you a blank cheque in return...Now that was easy! Lo doc ftw, also 105% loans were very common, deposits were for girly men!

 

Yes of course, but it's always about the timing for growth and the numbers with regards to developing.

I have been doing this for quite some time now, I have read many predictions, some from famous economists, they too could not predict the future and seem to always get it wrong. Here we go again.

To assume we don't understand the risks is naive at best

mtr

 

beam me up Scottie.... nothing wrong with healthy debate, but no insults

 

Haha. I did that too. I would just walk into my branch manager and tell him I wanted more money.

Low-doc all the way. Of course that all went pear shaped when my lender sold up and I ended up with Pepper home loans

Refinancing from low-doc loans to full doc loans was painful!

I gotta go now, but quick question, are property cycles driven by greed and fear or easy credit?

I say greed and fear drives property cycles and credit expansion is a result of that, not a driver.

 

The cycle is determined by many different things. To an extent, greed and fear exaggerate the cycle,

 

The seed of it all is greed. Credit is a tool for greed.

 

Greed is the seed to everything .

Easy credit is created by the banks greed for profit ....

Cliff

 

Correct me if I am wrong but the last Sydney boom was 2002/03. The most recent Sydney boom started picking up around 2013. That is a decade. Based on that I wouldn't expect Sydney to really boom until around 2025.

I agree with your strategy to be as deleveraged as possible though. That is where I am headed too.

 

Agreed.

True, but my point was that property cycles are driven by greed and fear. Not this:

Property prices are driven by greed and fear. They are not driven by credit supply first and last. Increased credit supply is a result of prices increasing, not a cause.

Take Perth for example. Prices started dropping over 12 months ago. At that time credit supply was cheap and easy. It is only recently that APRA made changes to make it harder to get loans. So if property prices are driven by credit supply first and last, Perth prices would not have been dropping for over 12 months during a time where credit supply was not restricted.

Perth prices dropped because of a lack of confidence in the economy (fear). Nothing to do with credit supply. The credit was there for the taking all along. It's just that no one wanted to take it. So I would say that credit is more an enabler of property prices, not a driver.

 

This is a fun debate actually. Yay everyone.

Hi @Ozzie in Texas I will have a go. The actual amount of exposure of SMSF capital to residential property market in Oz in 08 was tiny, not enough to prop up the market, even by 2014 it was only 3.7% of smsf total assetts. It is growing year on year (adoption of smsf and exposure to property)but off a small base, historically the biggest smsf property purchase is COMMERCIAL not residential. It will continue, not decrease.

Nevertheless, your point that boomers will want to retire and spend their money is a valid one. The problem is how are they going to eat. Where do they put their capital? In the bank they get less than inflation and they can't afford to buy groceries. Cash in the bank is not seen as a valid safe choice when folks cant get a return on it. That (simplistically) leaves shares and property as avenues to store capital and generate a return.

Here people have (right or wrong) the idea that property is safer than shares, or at least less volatile. This is leading many of them to consider property to actually hold during retirement, for the income.

Let me tell you what is happening for me regularly. I get boomers ring up at point of retirement, or just before, and they ask for positive cashflow property or a minimum yeild set, either 5% or 6% are both common. This means they have decided that 3-4% yeilds in Sydney are no longer attractive and they want a regular weekly return more so than capital growth. They want low maintenance and low costs, and very reliable rent. Location is irrelevant to them except as far as they can understand the risks and consider they they will have a tenant for many years to come. As a result they are not interested in mining towns, but are highly interested in coastal/large regional as long as they can see a future for the area. They are buying with cash, not debt. They want to know they can buy groceries with this rent money. They do not intend to sell the asset to eat, or put large sums of cash in the bank because the return is so bad. Unless the gov wants to ban all smsf purchases, these will continue because they are completely independent of banks.

These people will likely sell these properties, but not until they are in their 80's and 90's and cashing in to pay for the nursing home, others will pass them on to their children (if they sell the family home to pay for the nursing home).

@Biz made a comment about locations and supply and demand changing, but the essence of property not changing, this would be my view generally. The future property cycles (for a little while at least) will be less Sydney centric and more based upon changing supply and demand. But they wont go away imo.

 

...and overseas money. That is softening the blow too.