Property cycles and the merits

True, Perth also dropped because FHB pulled out of the market and then there were changes/reduction to FHB subsidy which did not help.

Initially it was FHB that drove this market 30%

 

Makes sense to deleverage prior to a bust cycle, but not everyone gets this because they continue to accumulate and ignore risks, but this is called investing 101... forget APRA, interest rates are rising

 

Thinking about this while sitting down at the water front .... Here's my simplistic
Overview.

Cycles have been occurring for a long time .

I experienced my first in the late 60's and what I've read is that they have been occurring prior to that .

The GFC was driven in part by the creation of various financial instruments which weren't really based in reality . The APRA changes have been put in place to ensure that the banks have backing based in a sense of reality , rather than based in a paper trail .

I think this shifts the ball park back to what ( hopefully ) was the situation as prior to the lead up to the GFC .

We had cycles prior to the GFC , so once the playing field has been adjusted ( ie the banks are being forced to be conservative ) I see no reason why cycles won't continue .

Cliff

 

Umm....equity (cash) reduces the need to borrow as much, so it is not useless.
Not EVERYONE needs to borrow money....or as much as some people do

 

You need to measure peak to peak or trough to trough to be consistent. If current trend holds true its peak to peak late 03 to late 15

 

Equity is not cash. Equity is turned into cash if you sell. Otherwise equity is just collateral against which you are borrowing. Equity is useless (if wanting to use it to purchase more property) unless you have the borrowing capacity to service any loan you wish to take out against it.

 

^^^ This. Equity is only cash when you sell. Otherwise put simply it's able to be used as a Loan Extension to fund more deposits IF you can qualify. At the end of the day an Equity Loan just makes your mortgage bigger and still has to be paid back sometime in the future. But that's the game.

 

Yes i know this....

The point of my original post was referring to using the untapped equity once the property was sold, which is then cash to be used for a subsequent purchase and not needing a big new loan.

I thought that was clear, obviously not

 

@Natedog, so how is selling a property for cash and then buying another one with the same proceeds going to drive prices higher? Can you show me a property cycle (anywhere in the world) where prices rose without an increase in aggregate borrowing?

 

depends on how much equity you have.

 

What do you mean?

 

you have enough capital to totally fund it if necessary ie development/build

 

Hey Hobo,

Aggregate borrowing is an average....of course it will increase as time goes on just as average incomes increase with time also.

My original point is that not "everyone" is impacted equally by the tighter lending criteria and that prices can and will increase regardless.

If you sell and you are cashed up, your reliance on credit for your next purchase can be greatly decreased.

 

What do you mean 'capital'? If the development is being funded using equity you still have to borrow against it and be approved for the loan. I don't get what you are saying?

 

I can't see anywhere in this thread that euro73 (or anyone else) had suggested otherwise, he just said growth and cycles shouldn't be expected to repeat in the same size as when credit conditions were easier.

 

not if you have enough equity/capital not using the banks

in effect you are the bank if necessary, not ideal, but is an option for those with funds, equity, cash

 

My rebuttle was targeted at euro saying equity was useless, that's what I was not agreeing with.
Equity converted to cash (by selling) is definitely not useless

 

You are not explaining yourself thoroughly enough to be understood or simply don't understand how equity works.

Explain to me in detail how you use equity to fund a development without borrowing any money/without using the banks.

If you have cash then it's a different story and not what was being discussed.

 

To your two points.

1. Equity , as others have pointed out, has no cash value whatsoever unless you sell or have sufficient capacity to access it. - or , as you have pointed out, unless you sell.

2. Most people borrow. very few pay cash for property. The amounts arent relevant. Everyone can borrow less today than yesterday. Thats a fact.

If you choose to sell, that's great- its one way to access equity- but it doesn't expand your footprint very much unless you reinvest the profits in a dearer/superior property and take on debt again , and after paying CGT and selling costs, you don't even get full use of all the equity. It also does nothing to improve your borrowing capacity, unless you sell and reinvest at a lower price point. However, if you deleverage, you can access the equity without selling, avoid CGT and selling costs, expand your footprint by an extra property, all while retaining the rental income from the dwelling. This aids borrowing capacity and this is how portfolio's can be grown without having to sell.

A culture change is required for all borrowers - but investors especially. Some will recognise it and embrace it. Others will resist, adamant old methodologies, so successful in the past, will continue to work. They will present flawed arguments about cycles and swings and round -abouts and all kinds of voodoo... And who can blame them? That's only to be expected. After all - most investors don't have the first clue how mortgages actually get funded. They cant tell you a RMBS from a LRBA or securitisation from balance sheet, or a swap rate from a LIBOR, or a BASEL from an APRA or an ASIC, or a HEM from a HPI. The money has just always been "gettable" for the most part, each time they needed it. Now that's not a criticism, just a statement of fact. But change is afoot and it wont apologise to those who choose to ignore or resist it.

Of course, if APRA relaxes its assessment rules and ASIC elaxes its focus on HEM /responsible lending ... all bets are off.

 

I understand what equity is and what cash is.

I have explained an option I may use if necessary, it means I have the funds in form of equity and cash. I own it not the bank.
I don't understand what you don't get about this.