Sydney - the coming correction 2018-2022

Yes, I understand that and it is not relevant to the question I asked in this thread.

Yes but I am confused about the impact and so I asked a question to clarify. It's not clear to me what the impact of individual investors saving a buffer will have on real estate. There is competition to buy houses so if one investor decides to save some cash then maybe a competitor will buy that property. Isn't the same amount going into property investment? I don't understand how some people saving some cash will impact property prices.

Let's look at the trillion dollars that people saved in the past and the impact on the economy in the past. Did people saving that money impact real estate prices? My understanding is that it didn't.

I am just trying to understand how it all works.

 

I'll show you a simple example to make it clear

1st investor: $10K cash
2nd investor: $100K cash
3rd investor: $300K cash

when 1st decides to build a larger cash buffer, nothing happens, as he/she couldn't buy anyway

when 3rd decides to build a larger buffer, nothing happens, as he/she could buy before the regulations and after, and the buffer is large enough.

for 2nd investor, it's tricky... he/she wanted to buy another IP... but now as he/she needs to build a larger buffer for existing properties, that purchase is delayed... or cancelled. So as a result, the total demand is reduced.

 

in other words...
you're saving money to buy X Box. You've just saved enough and go to the shop... and now you realise that games for X Box are not for free, and you need money to buy them, so basically you can't play and you need to save more. As a result, Microsoft gets less revenue - you can't say someone else will buy

 

Ok, I get it! Thank you for persisting.

I think that model might work where there is a limited buyer pool for properties. However, is there a limited buyer pool for properties in Sydney, Melbourne and Brisbane?

Remember the cash is held wealthy people without debt or students/new residents/potential FHBs.

I would suggest for investor 2, who saves cash instead of buying, that another person can step in and make the purchase. If we look at who holds the cash then it could be a wealthy person or a first home buyer who has been waiting to buy but did not get the opportunity.

Compare 2 scenarios:

In scenario 1, investor 2 and a first home buyer compete to buy a property. Investor 2 has more resources and the FHB misses out. There are many stories of this in the Sydney boom printed in the paper or on tv. FHBs complaining they could not buy because an investor outbid them.

In scenario 2, investor 2 decides not to buy the house but instead decides to save. The FHB steps in and buys the house because they finally have the opportunity!

Either way, the house sells and prices are not impacted by much in scenario 2. Maybe a couple of thousand of dollars at most.

Scenario 2 only works where there is competition to buy houses, like in Melbourne or Sydney. That is why Sydney and Melbourne are booming.

It does not work in Perth where there is little competition. Prices have collapsed in Perth due to a lack of competition. Prices in Perth did not collapse because investors decided to save a cash buffer.

 

Sure, I understand that. But what if there is only 1 X Box and now 3 people want it? I decide not to buy it now and someone else snaps it up. I miss out.

Here is how this relates to real estate. On 21 May 2013, number 3 Gatton Way Embleton, WA 6062 had the first home open. The property had been on the market for 3 days. Over 150 people inspected the property and 18 offers were presented. 18 people wanted to buy the property but it could only be sold to one buyer. This is competition in action. I decided not to buy the property but 18 other people decided to buy the property. 17 people missed out.

3 Gatton Way, Embleton, WA 6062 - Property Details

As long as there is competition, there is always another buyer.

 

that doesn't make sense. The price depends on demand and supply. More bidders, higher sold price, higher 'clearance rate' (that's not about auction clearance rate which is crap)

e.g. when supply to demand ratio is reduced from 1:2, to 1:1, it basically means that no competition. 'Building up cash buffer' = 'reduced competition' = 'lower RE price'

 

This has already started to happen with people still on IO.

Great comments BTW @sash

 

yes, there is another buyer, but price will be lower. It's like stock market - if less people want to buy stock, the price is lower

 

That makes sense. What I am suggesting is that a limited number of investors deciding to build up a cash buffer will not reduce the demand ratio from 1:2, to 1:1. More like it will reduce the demand ratio from 1:20 to 1:19. This will not significantly impact prices.

 

Ta...wow...you are first mortage broker who conveyed this for I/O....without naming names did those people have to sell?

The guys I use has commented the OTP are crazy he has one client who bought in Darling Harbour ..a unit for $2.3m...vals came back at 1.57m!

 

it depends

in reality, avg property doen't have too many real bidders. If there are three bidders, and their maximum bids were 545K, 570K, 590K, then if 2nd or 3rd is not coming in, the property will be sold at 550K, ~5% lower than it could be sold when 2nd or 3rd comes.

 

Nope but they wanted to refinance for better rate and some cash out and due to harsher style servicing calc (ING) they could no longer service, previously not a problem. We ordered vals via Adelaide Bank (just serviced with them) and of course vals have come back way short of original purchase prices so either have to val shop (likely to get same result) or they cant get the money they need and remain captive with ING who can not assist.

This will become more and more common where people cant refinance for better deals/achieve goals as time goes on. @Redom is "on the money" that people may need to deleverage portfolios as a result. Will get more and more interesting when IO loans come of the boil in the next few years. We may see an oversupply in some areas.

Good-times for those well prepared and positioned to acquire assets, not so for the over-leveraged and under buffered.

Ouch!

 

Yes, that is true. It depends how many potential buyers for a particular property.

I was a potential buyer for 3 Gatton Way. However, I exited the market on that property because there was too much competition. Me exiting the market made no difference to the end price. The sale price was $100,000 above my maximum price.

For my next purchase there was only one other buyer so I thought I could get a cheap deal. But the other buyer bid higher than I wanted to pay and I had to increase my bid. Sure, it wasn't much but even competition from one other buyer can push up the price.

Think about how many investors are actually at risk who might need to save a cash buffer.

Some investors have no more borrowing capacity and have been forced out of the market by APRA. That group can save a cash buffer without impacting the market.

Some investors already have a cash buffer so they don't need to save a buffer. They neither have to exit the market or save a cash buffer. This group will not impact the market.

Some investors are not planning to save a cash buffer. This group are still in the market.

Then there are upsizers, downsizers, first home buyers and others who are still in the market.

Finally, there are a small group of investors who choose to exit the market at this point to focus on building up a cash buffer. I am suggesting that given the scale of the market, this small number of people exiting the market will not have a noticeable impact on prices.

The other side of this is thinking about what happens to the cash buffer. Most people will deposit the cash into a bank account (that's where my cash buffer is). Banks can use the funds in deposit accounts to back a loan to another buyer. This actually makes more credit available to house buyers, which should push up prices.

So, it is possible that a small number of people exiting the market will not significantly impact prices but will actually make more credit available to the market. The additional credit could easily compensate for the small number of investors exiting the market.

Anyway, it seems to me that a small number of investors exiting the market will not really have a noticeable impact on prices, if any.

 

1) what happens when N existing investors sell their properties due to some new laws and put their money on saving account?

2) what happens when N existing investors decide not to buy more properties due to some new laws and leave their money on saving account?

do you really think that

Banks can use the funds in deposit accounts to back a loan to another buyer. This actually makes more credit available to house buyers, which should push up prices.



if that's true, then opposite actions should push prices down, but that's nonsense. Think about it...

 

Got an email a short while ago from one of the western sydney agencies I have a mailing list sub for.

THIS WEEKS PRICE REDUCTIONS

Tide has turned and its not up up up, plenty of discounting now in place. My sydney former ppor is probably down 100k in val since peak

 

The impact on the market will depend on the size of N vs current market demand. You know that. If N = 1 and demand is 1,000 then the impact will be low. If N is 1,000 and demand is 1,000 then the impact will be high.

The impact on the market will depend on the size of N vs current buyers trying to enter the market. You know that. If N = 1 and number of buyers is 1,000 then the impact will be low. If N is 1,000 and number of buyers is 1,000 then the impact will be high.

Are you disputing that ADIs use deposits to back new loans? This is my understanding. Where do you think the deposits come from?

Also, have you not read over and over that the housing boom was fueled by cheap credit? So, more credit available should push prices up then. Restrict the supply of credit a prices fall. This is what happened in the GFC.

This depends on only a small number deciding not to buy and bank their cash instead, which is what I believe will happen. If it is a large number then prices may be impacted.

Think about it.

 

Ok, @AlexV_Sydney. Forget that I said that more available credit pushes up house prices and tightening of credit pushes down prices. Those comments are gone.

Recall that I originally outlined some options for people reverting to P&I from IO.

This is really about the options for individual investors to manage their own financial risk. It is not a comment on the market but you decided to post about the market anyway.

I have responded to this and it would be interesting to know your thoughts on this line of thinking. I have removed my "nonsense" from the post so we can focus on the real issue: will a small number of investors choosing to save instead of buy made a noticeable impact on prices? I say no and here is my reasoning:

I was a potential buyer for 3 Gatton Way. However, I exited the market on that property because there was too much competition. Me exiting the market made no difference to the end price. The sale price was $100,000 above my maximum price.

For my next purchase there was only one other buyer so I thought I could get a cheap deal. But the other buyer bid higher than I wanted to pay and I had to increase my bid. Sure, it wasn't much but even competition from one other buyer can push up the price.

Think about how many investors are actually at risk who might need to save a cash buffer. The number is very small compared to the number of buyers in the market. Think about it:

- Some investors have no more borrowing capacity and have been forced out of the market by APRA. That group can save a cash buffer without impacting the market.

- Some investors already have a cash buffer so they don't need to save a buffer. They neither have to exit the market or save a cash buffer. This group will not impact the market.

- Some investors are not planning to save a cash buffer. This group are still in the market.

- Then there are upsizers, downsizers, first home buyers and others who are still in the market.

- Finally, there are a small group of investors who choose to exit the market at this point (not sell, but choose not to buy) to focus on building up a cash buffer.

I am suggesting that given the scale of the market, this small number of people exiting the market will not have a noticeable impact on prices.

Anyway, it seems to me that a small number of investors exiting the market will not really have a noticeable impact on prices, if any.​

 

this is not reasoning. Replace your "small" to "large", nothing changes, same explanation

so why do you really think the group is small?
we had 40% IO loans! (including investors and home owners). HOs need a buffer as well, and many of them wanted to be investor. FHBs who think to take IO loan and pay IO indefinitely now think twice and build a buffer to cover future P&I. Etc...

 

10 birds sitting on a fence.
Hunter shoots one. How many are left ?
None... the remaining flew away and will not be returning anytime soon.

Fear is a strong emotion....much stronger than greed....The Bull climbs the stairs and the bear jumps out the window.

It will be swift, brutal and fearsome.

 

LOL......Great post.

Markets and human behavior haven't changed in centuries.