The IO property cliff disaster? Fact or fiction

Discussion in 'Property Market Economics' started by Sackie, 1st Feb, 2020.

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  1. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    I agree. There are not enough investors who can’t refinance for it to be an issue that’s felt in the market.
    Even people in their 50’s can refi INV to 30 years with a good exit strategy.
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    But is it a non-issue because the rate drops and easing up in serviceability?

    That would be like saying a police terrorist investigation didn't work because there was no terrorist incident.
     
  3. TMNT

    TMNT Well-Known Member

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    If someone told me in 25 yrs time i was going to get $100million,
    Id be over the moon!!
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Hey, guess what.

    In 25 years you will get $100million
     
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  5. euro73

    euro73 Well-Known Member Business Member

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    only because of improved servicing calcs that are a result of drastic , unprecedented rate cuts from the RBA. Had the rate cuts not come , the number of investors dealing with challenges refinancing would have been much larger .
     
  6. euro73

    euro73 Well-Known Member Business Member

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    property market wasn’t regulated . Bank lending was .
     
  7. Blueskies

    Blueskies Well-Known Member

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    Spot on, it is obviously a bit of a tightrope they have to walk, can't let lending get too risky but neither can they let the property market tank, at some point that also starts to destabilise the banking sector.

    I take some comfort in the knowledge that given our nation's property obsession the government and regulatory bodies act as defacto underwriters.
     
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  8. Sackie

    Sackie Well-Known Member

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    So would I. But I don't think the cash cows in Resi will yield you 100 million.

    Jokes aside, I'd much prefer 15mil in 10 years to 100 mil in 25.
     
  9. Rocky

    Rocky Active Member

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    Absolutely, they can’t let it fail, it would be like Trump letting the US Stockmarket fail
     
  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Objectively, the portfolio investor servicing is only marginally better than when APRA tossed the rock anchor, late in the piece ( in my view)

    Different for sole property owners, where on the surface, borrow caps have increased by 20 % for the same notional income to expense mix.

    Hems for most lenders have gone up by a lot though.

    ta
    rolf
     
  11. kierank

    kierank Well-Known Member

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    Exactly.

    That’s is why I thought we would never all fall over the cliff ...
     
  12. Brisbane04

    Brisbane04 Well-Known Member

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    Bank valuation wasn’t my concern when considering refinancing my pain came from the new servicing calculators.
     
  13. albanga

    albanga Well-Known Member

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    Even without any changes. I’ll again throw the same question to you, how many of your clients would have been effected?

    We all know the figures of percentage of home ownership and I don’t think anyone is arguing that owner occupiers or even those with a single investment property were in any danger

    So that leaves us with really only those with 2+ properties which is say around 3% of the population.

    Of that 3% how many could not extend IO terms, refinance, afford P&I repayments because they were cash flow positive, had huge saving buffers, could happily sell one of their 5 properties without pressure?
    Surely we could all agree it would be well over 2% right???
    So what are we now left with? The slightest number of investors spread across the country put into a position that requires forced selling over different IO expiration periods.

    It just cannot see how anyone believes this could cause a dip in the house market?
    I couldn’t care less about what revert rates are, we can all agree if your stuck then your stuck and you need to sell but the revert rate is not the debate. The debate is how many people have the issue they need to sell.

    And @Terry_w the servicing changes and rate drop was just the cherry on top as to why this is a none issue. It’s probably taken the 3% and brought it down to 1%.
     
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  14. Brisbane04

    Brisbane04 Well-Known Member

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    Cheers for that Jess I’m in my early 50’s and was wondering whether my age could impact refinancing to I/O
     
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  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    They all would have been efffected in some way. But are you asking how many would have had to sell because they couldn't handle the PI repayments? Probably none I would think
     
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  16. Trainee

    Trainee Well-Known Member

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    More importantly were the forced sales so high that the market couldnt absorb it? People are forced to sell all the time for different reasons.
     
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  17. Redom

    Redom Mortgage Broker Business Plus Member

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    Disaster is a loaded word.

    I think some of the bears went really strong on this, and some of the bulls thought it was a load of baloney.

    IMO, most commentary has misunderstood the issue and looked it at it in a 'micro' sense - i.e. at the individual investor level. At a micro level, IMO, it never really amounted to much of an issue. For all talk about the sky falling in, the realistic truth is the vast majority who serviced a loan at a particularly point in time with a certain income/expense threshold - would be able to extend or recast their IO at similar funding rates. This is because there's been a change in funding mix, with much of this lending shifting to the shadow sector. Macquarie/NAB/etc don't do this anymore, but a whole new set of lenders do! Yes rates are higher than mainstream groups, but given the big drop of in interest rates over 5 years, they're still largely comparable/cheaper than the original origination rate. Given the rate drop offs, borrowing power is similar/greater with these group of lenders than it was with mainstream actuals when these loans were origination. For those that didn't want IO anymore, they were rewarded with big discounts on rates compared to origination rates too, which cushioned any P&I impact too.

    At a macro level however, there was an issue & it did impact the market. Unpacking it all:

    - Was it a problem? IMO, certainly yes. In a few posts I noted a few different ways of how regulators could actually address the problem. Fast forward a few years, the most powerful of suggested potential pathways have actually been taken (rate cuts & assessment rate cuts). This pretty much meant that the issue was controlled and the impact was largely managed. As noted then, Aussie financial market regulators have a pretty solid track record here and IMO done pretty well here too.

    - How large was the problem? Very. We had 20% of all mortgages in Australia migrate from IO to P&I in the space of 24 months. I still find the pace and scale of adjustment massive. If you actually extrapolate the stock size of debt and the repayment change, that's some seriously large numbers in increased forced repayments!

    - Did it have an impact on property prices? IMO yes. Sydney and Melbourne didn't go through the biggest contraction in 30 years during employment economic boom periods for just the 2015 APRA servicing restrictions. In fact, there was a 20% price rise between the 2015 APRA actions and the 2017 interest only changes. While it's harder for seasoned property investors who require borrowing power leniency to buy 3,4,5,6+ properties, interest only changes impacted all existing debt-holders (price), and thereby had a much larger tangible impact on the market than borrowing power (new lending only).

    Is it still an issue? As noted in May (and refuted by some), the macro impact of this is over. Again, at an individual level, yes. Some may be caught up. This is standard and will ALWAYS happen. Realistically with rates this low, it's unlikely to have much of a liquidity trap for any well managed investor. At a macro market level, no, not at all. The % of all loans being interest only will barely adjust from here, probably likely to increase as investors come into the market in 2020.

    IMO, what I've learned out of learning from some of the pro investors here over a decade or so, is you have to adjust to the information on hand. Information and data changes. Its why cycles occur. While this was an issue in 2017, 2018...its not an issue today.
     
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  18. kierank

    kierank Well-Known Member

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    I am 63, going 64 this year.

    We refinanced $1M last year. Security and Income came into the bank’s calculations.

    I don’t believe age can into it as the bank offered a 25 year term, with 5 years I/O.

    That was my experience.
     
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  19. Illusivedreams

    Illusivedreams Well-Known Member

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    Had APRA not introduce Macro prudential control things would be different.

    But ..........

    They did.
     
  20. euro73

    euro73 Well-Known Member Business Member

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    That's a nonsense argument.
     

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