Property cycles and the merits

Coming in late on this one.

Euro, I think you have some good points, for me they are the reason this boom is ending but do not indicate a structural change that will last forever. Rules will changes, regulations will be relaxed and there will be another catalyst that will bring about the next leg up, whenever that may be.

At some point, property will seem cheap again and people will start piling in and the banks will be doing everything they can to provided them with the credit they need to do so.

No one back in 03-04 would have guessed that the catalyst for the next boom would be a cash rate ~2%. No one.

Similarly no one today can pick what will cause the next one, but it'll happen. Especially in a place like Sydney.

Markets find a way to provide the demand for funding, it'll happen one way or another.

 

No ones disagreeing... and no one said forever. I have suggested it will be slower and lower for a while, not dead; and deleveraging during that phase is a clever way to get ahead of the curve in anticpation of the next credit cycle, which will take much longer to come along next time. I have even said cheaper markets will see a short term kick from this before petering out...

The fact remains - every single argument presented against me continually fails to acknowledge the importance of credit, and relies on old data. The arguments always assume credit availability. I'm saying - if credit goes away, every other driver is irrelevant. Just like equity has now been shown to be of little value to an investor without borrowing power, so to is location, undersupply, population growth and any other traditional driver to property prices when credit is removed. Now thats an extreme example I know , because I dont' contend that credit will evaporate completely , but its absolutely delusional to believe that 30% of capacity being removed from the market wont slow things down for all. And there will continue to be less of it available - especially to those carrying debt already- for many years . APRA doesnt appear ready to relax the servicing buffers in a hurry... Nor does ASIC appear willing to relax the responsible lending/HEM changes.

This is ultimately though, a debate about how important credit is in property cycles. Its value has never really been appreciated before now, and while I say its very important, others seem to believe it is less important. Perhaps I'm wrong . Perhaps others are wrong. So let's see if the cycles of the past can be replicated with less credit expansion, in the coming few years, and then we will know... But I work with servicing calculators all day long and probably deal with more scenarios for sophisticated investors than just about anyone here, and I say not. Others disagree. Only time will tell.

In the meantime, I'm deleveraging anyway, as planned, so I'm covered either way...

 

What price point/areas do you think cheaper markets will see a short term increase?

 

I agree that credit is very important in property cycles. Without credit there is no boom. However, earlier you were arguing that housing prices are driven by easy credit. Whereas, from what I have seen, greed and fear drive property prices up and credit expands as a result of that (not a cause). I agree though, no credit, no boom.

I also disagree on your timing. You argued earlier that a delay in the cycle is 10 years. But I see 10 years as a normal cycle. Maybe I am missing something?

 

Fear is an emotion, greed is a desire. Credit is the cause that feeds your emotions and desires.

 

I don't agree. People are greedy whether there is credit or not. Think about what happens in a property cycle. Prices are flat for some time and then they start to rise. As they start to rise, greed kicks in and people see they can make some easy money by buying in a rising market and selling before the peak. This drives prices up. The higher prices go, the more people are willing to pay as greed kicks in. Then others jump in because they don't want to miss out (fear of missing out). Prices rise higher. Credit expansion is a result of this and always fuels a boom. But I don't think credit drives greed and fear.

 

But if credit isn't easy, greed cannot be fueled......that is, if you cannot access credit if you cannot prove you have the ability to pay for it........speculation and greed is taken out of the mix.

That is the recent US experience.

In the US, You need to prove your credit is of good standing. You need to prove your income here and now is sufficient to cover your liabilities......without including potential rental income for at least a couple of years.

And no, I can't claim part-time wages or self-employed or business wages without proving a track record of at least a couple of years. And no - a loan of 105% of purchase price is never going to fly.

Either have equity in your home or come up with a decent down payment......or noone is going to listen or play ball......unless you are willing to play with hard money lenders who tend to charge you about 3 times to going/market interest rate.

That is the new reality coming to Australian based investors.......once it accepts global lending practices.

 

I would say it is more of a case of if it accepts global lending practices. Credit was tightened up during GFC and relaxed some time after it because it because easier for lenders to source funds. More recently, due to APRA changes, credit has been tightened again (as it should have been). Once things calm down again, I expect credit will be relaxed again. There are no indications at this stage that I won't be. FWIW, I won't be relying on it. My investment strategy doesn't depend on booms or easy credit. I just think that is the reality of how Australian banking and regulation works. Whether this is a good thing is another topic.

 

I'm thinking about it a little differently on a larger scale. If I was to give you (for free)an endless amount of credit(which is the cause) for the rest of your life, it would be fare to assume you wouldn't invest in property as you no longer require the need to make money.
Your emotions and desires have been filled because you have endless amounts of it. Now what happens if I take all the credit away completely? Your fear and greed return.
But if the cause(credit) isn't available, how do you feed your emotions and desires?

 

That's an interesting prospect but it doesn't explain why Perth has been dropping in price for more than 12 months. Credit did not dry up during this time so if credit is the cause that feeds emotions and desires, and the credit remained available, what happened to prices?

There were not enough buyers prepared to pay the prices that properties were being listed at. Because of an economic downturn in Western Australia, people became fearful of the future (uncertainty) and lost confidence. Fear of the future (by buyers) overrode the greed of sellers (who want the highest price they can get). At the end of a property cycle, fear of missing out is replaced by fear of the future and people stop buying or buy at lower prices. This drives prices down, which is what is happening in Perth now. For most of that time the credit was there for the taking but people just didn't spend the amount of money on properties that was required to keep prices going up. That's where the credit drives greed model falls down.

 

It would appear everyone is running to the outer suburbs of Brisbane...

 

Cliff

 

from another thread:

 

Recent past, Perth experienced faster growth than other cities because of the mining boom.

And now ........ crisis in confidence is also about mining.

Post-boom WA not all bad news... if you drink coffee

 

I'm in Perth and I am a Perth investor, so I know the real reason why property prices have fallen. My point is that if property prices are driven by credit availability and the credit was there for the taking, why did prices fall? Credit expansion is the product of a boom not the cause of a boom.

 

Perthguy .......are you suggesting mining has nothing to do with why Perth is being hit hard than other cities.

 

Perthguy

An article that talks about the combined affects of increased new supply hitting the market at the same time as a decline in population growth.

Perth is headed for a prolonged slump: Simon Pressley

 

Not at all. Of course the mining downturn is affecting Perth prices. It's a lack of confidence that is driving the market down. This is what I said in a previous post:

"There were not enough buyers prepared to pay the prices that properties were being listed at. Because of an economic downturn in Western Australia, people became fearful of the future (uncertainty) and lost confidence."

The economic downturn is based around a downturn in mining activity. Some of the this is due to falling commodity prices and some is due to mining transitioning from construction to production, which requires less people. Hence many FIFO workers have left Perth and returned to Sydney and Melbourne. At the same time this happened, Perth prices have slumped and Sydney and Melbourne have boomed. Of course the Sydney and Melbourne booms are not solely down the mining employees returning but they do form some of the reason for the booms.

True but that is part of the picture. I am an investor ready to buy. I have not been affected by the mining boom and I have access to credit. I am not buying now. Because I am a Perth investor, I talk to other Perth investors. No one is buying now. None of the investors I know have been affected by the downturn in mining and all have been positioning themselves to buy. I would say the primary reason is that we, as a group of investors, have lost confidence in the property market. All of the people I talk to believe prices will continue dropping for 12-18 months. No one is prepared to buy while prices are dropping, myself included. It's like self fulfilling prophecy. People believe the market will drop, they stop buying, so it drops.

 

Credit is not only a product of the boom, it is the boom enabler.

You are right that emotions and other causes can drive the desire, but the credit needs to be available to do so if the action of buying is to translate into higher prices being paid in aggregate.

 

I think this is useful, and in the end (my interpretation) all of @euro73 's point is that is is all about credit. I agree that credit is expansionary, and I agree that changes in credit policy will impact the supply demand curve and prices. I see credit as intimately linked with the property markets, and the cycle, but not the sole driver of a cycle. The world has lots of capital looking for a return so my view is that credit for housing in Australia will continue to be seen as fairly low risk and not disappear anytime soon. SMSF funds and foreign money are also the new sources of capital that we are yet to see how big the inroads into property markets they will make. Having watched a couple of cycles now I see banks tighten and loosen their lending policies, and the gov bring in and out policies that impact the banks. I think this will continue. I don't think the banks can afford NOT to lend money as they need the return. If the big 4 continue to pucker the purse then I see an opportunity for other lenders backed by foreign capital to enter the oz homeloan market. Anyone want to lend me a few hundred billion? I am happy to set up the next Aussie/Wizard