Sydney's housing bubble deflates as loans revisit GFC declines

What are your thoughts on the matter? I don't have an attachment to the outcome here.

 

which is one of the reasons that it's unsustainable. There will definitely be policy change somewhere along the line in the not too distant future.

 

Given that #ReducedLeverage is needed to #DeRiskTheSystem,
#ReducedBuyingPower is here to stay,
Salary/income is not rising in a hurry,
500bn of #IO2PI headwind,

Something gotta give....it can become real nasty for overleveraged with limited ability to support increased repayment, It doesn't take many to dent the overall sentiments

 

What I interpret is that for people on IO loan, when they are forced to switch to P&I their repayment will be higher than the equivalent loan that was P&I right from the beginning, because of the shorter remaining loan term. Is that correct? If that is the case, is it applicable for all IO loans? I am sure some investors who cannot afford the switch will find a way to extend their IO period. Otherwise we would be seeing a flood of investor properties on the market now.

 

I think a lot of people are hoping that once the RC into the banks is finished , it will be back to "Business as Usual"
And it also takes about 12-18 months for many to chew through all their savings before they take the drastic action of offloading property.
When you look at the GFC , although it had very little effects in Australia it took well over a year till many properties were being sold off by the banks.

 

With the GFC I don't even think many people really offloaded properties except for their holiday homes.

 

Wage inflation in Australia is sitting at just below 2%. Assuming rents track incomes, and we're looking for yields to triple, you'd have to wait nearly sixty years for them to "become attractive" as @TheSackedWiggle puts it.

There's an article in the Fairfax press today about housing affordability.

The most affordable suburbs for first-home buyers

It states that given a median house price of $1.15 million in Sydney, a household income of $232K and a 20% deposit would be needed to avoid mortgage stress at an interest rate of 6.5%.

Note that the journalist has screwed up because the $230K should be net, not gross, income. That puts the necessary earnings between about $330K and $380K depending on how it's split between a couple.

Given that median income is around $60K for all workers (the article says it ranges from $54K for someone in their late twenties to $70K for someone in their late thirties), again you need this to approximately triple for a couple to afford an average house. Which I've already estimated as taking sixty years at current inflation rates.

I keep on reading posts saying that prices in Sydney won't fall by 40% or 50%. I think that the figures suggest you could be looking at a drop (in real terms) of around 60% or more if things go wrong.

 

Some can hold off selling. Most will wait in the hope that prices and rent will only go up. Then, if they do not, they will try and keep holding and the bank will default them if they can not afford the loan.
I'm seeing a fairly high proportion on investor properties on the market. Have done for the last twelve months. Others piling in. It takes hours to research though.

 

They can hope all they like. Global bank regulators are looking to tighten lending everywhere. Australia will continue to see tightening credit.

 

IO loans always have an end date. The likelihood of being able to refinance is not good. It was never supposed to be a permanent arrangement.

 

True and I've always found them a rort (though enjoyed getting by on IO for a 6 month break from work). And they were overdone in the last boom, for sure.
But employment is going gangbusters and mining, while not crazy like before, seems to be getting a second wind.
What does it matter if we go through a period of no/low growth? Prices, rents, wages? I'm not worried; I don't want to buy more now anyway. I love the low interest rates.
There is a lull/correction in the market and it will continue but it won't be major. Not yet. I have no problem with posters genuinely stating their concerns about 40% drops etc because that's what they genuinely think and they consistently back it. Same with yields that may #NeverGoUp.
My point is, give credit where it's due i.e. to people with the best credit scores.

 

No one is being thrown out - the entire premise underscoring your argument is flawed. Credit scores are indicators of credit worthiness / risk - they are not indicators of borrowing capacity . Credit scores may affect the price you pay, but at this stage at least, they won’t get you a higher debt to income ratio

 

Although I’m a real estate market bear at the moment - I doubt we will see broad drops near 60%. That maths only works if people have to sell - which is unlikely.

More probable is a 10-20% drop followed by a few years of flat markets.

Having said that - it’s always the unknown that pops the bubble or screws the economy completely. The economy always looks fine until it’s not. If we get a rise in unemployment caused by something we don’t know yet it might get messy.

I basically view the Australian workforce as millions of pokers players, and there is a really large amount who are close to all-in on the flop. They better hope they don’t find anything nasty on the turn or the river or we might all suffer.

 

To what end? Longer IO terms , lower living costs , lower assessment rates ....? How does this help APRA achieve its stated objective of more P&I, less IO and lower DIRs ?

 

This line of argument is endlessly put forward. What's more relevant IMO is the ratio between income and (say) first quartile price. You can buy the median price house later.

 

When I meet non QLDers, or those who have not spent alot of time there, I'm very surprised at how little knowledge they've had about the GFC and its influence on the goldcoast and Brisbane. I've seen many posts that refer to Australia as not being affected.

I can understand a lot of lessons and chatter on the forum are based upon Sydney, and a lesser degree Melbourne, but I think those who've invested in Brisbane (or Gold Coast) in the last year or two are in for a terrible shock if the wheels fall off, especially tourism and projects.

 

I think IO loans have a place for owner occupiers in financial stress where there is a reasonable belief that circumstances will change and the loan can be paid off. For most investors it can encourage unsustainable debt which is unfortunate. I think ready supply of IO inflates prices via QE essentially (it increases the money supply). I'm not sure I would go as far as to call it a rort but I take your point.
My analysis of the employment stats show that we are seeing fewer hours per person, fewer full time jobs and greater underemployment. There's nothing particularly reassuring to my mind about the employment market or mining more broadly. My recent reading on mining suggest that the second wind is exaggerated but I was reading someone else's analysis.
We've been in a period of no/ to low growth for everything except asset prices (houses) buoyed by cheap credit due to low interest rates. It's fine until the interest rates via the US Fed go up and capital flows to the US likely forcing the RBA to rise too.
If that happens (and I think it will) expect a correction sooner rather than later.
You can have the best credit score in the world but responsible lending means seeing how much is spent and how much someone can pay while attending to all their basic needs. That means encouraging healthy deposits and looking at loan to income ratios. Without that people end up in trouble sooner or later. Arguably the financial sector is in pain too. I notice lenders are laying off staff for "efficiencies" recently. Not a good sign.

 

Maybe, maybe not. At this stage, most of us are fixed P&I or still IO. I'd love to know the stats now. How many are actually fixed at or belw 4.5%? Australians used to prefer variable but not sure now.

 

I don't know yet but you can bet your cotton socks that something will change. I mean, even in your answers above you've indicated that there's wriggle room on several fronts.

 

Around 80 per cent variable/ 20 per cent fixed according to stats I looked at a few days ago.