This Housing Downturn is Over 2020

a decade ago i had a morgage 500k@ about 8%

Which meant my intrest repayments were $40,000 per annum


Now the same $40,000 is probably cover interest on a $1,200,000 loan

So assuming rates go no where who knows. Things are cheap to hold.

 

Yes that is correct....if you bought 10 years ago..and hold onto a job no worries...but if you bought in the last 4 years..rely on a job...another story...I reckon financial services will take a battering...so will professional services.

The major banks margins are under severe pressure...they are carrying a bloated number of employees....blind freddy can see what is going to happen.

 

This is just what yield is. When you lend to the US Government you know you will get paid back, so the principal risk is low, and the interest rate is low.

If you lent to Zimbabwe, the risk is high and the interest rate is high.

Buying Sydney real estate is considered low risk, and so the yield is low as well.

Contrast that to investing in commercial property (risk of high vacancy) with its high yields, or investing in regional areas (risk of mine closures, vacancy etc). Sydney just doesn't have those risks.

it is possible to over pay for real estate in Sydney - so it is not without risk. There is always valuation risk. But the market even discounts that risk, because time forgives mistakes in Sydney residential real estate in a way that other mistakes are not forgiven. Hope this makes sense.

 

ALL markets go through cycles and that includes Sydney or did we forget the brutal sideways market that went no where for most of 2000's.

Buying Sydney real estate at this point in the cycle is by no means low risk. It's all case by case.

 

I mean it's obvious the Coalition are in 2 minds.

1) Impose restrictions/quarantine & hurt the economy in the short term.
&
2) 'Restricting borders isn't going to work' so lets not "harm the economy" by imposing restrictions & let it rip.
I don't think this idea has been very well thought out, though.

 

Option 1 done quickly an effectively will contain damage down the track.

 

Yes 99% of your previous post makes sense.

But I still insist low yields in itself, is not a measure of risk for Sydney.

If increased rental demand pushed rents higher would that increase or decrease purchase/holding risk?

Let's say a recession plays out and Sydney house prices drop 20%, while relative yields increase due to stable rental demand. Has the market risk now increased, or decreased?

Adelaide has far higher yields than Sydney, but as proven over the last few years is a far less volatile market. Would you consider Adelaide a riskier market?

It's been my experience that price can deviate from earnings and underlying intrinsic value, but will always return to the mean. Low yields in Sydney coupled with volatility do not meet my personal investment risk criteria.

 

Observation suggests that as an area becomes more expensive and more dominated by owner occupiers, rental yield falls and stays down.

 

If you are on IO... not so cheap on P&I...but yes, with rates this low holding should be less of a problem than it may have been a year ago. Use this time to pay down debt and get buffers in place.

#decadetodeleverage

 

Fallacy.

Often risk and yield are correlated. But they are distinct.

For example dot com bubble. Shares hit historic levels of low yields (high PE). You'd say - the lowest risk they'd ever had?

So perhaps pertinent to the Sydney market: one clear area where low yields do not indicate low risk is ... bubbles...

 

It's not a fallacy. The correlation between risk and yield is an economic law.

I think where we are disconnecting, is that the interest rate is not being used as a measure of risk or inter-temporal preferences due to interest rate manipulation. The interest rate is being used by central banks to in fact subvert risk, and to stimulate the economy.

So in the current economy, the central banks are interference with the natural process of yield reflecting risk. When the economy contracts, in a free market, the money supply should contract as well. But with central banks, the opposite happens - economy contracts, but the money supply expands. And this distorts our perception of risk.

So when I say that Sydney is the least risky city, it is still true, but it a comment about relative risks compared to other cities. There is still risk of course.

 

Since economics is just anthropology, ie study of human behaviour, the "laws" are going to be more "rules of thumb". Since humans are not rational, laws are not reliable.

No doubt rate manipulation is one example of the laws not holding. Countless others.

So is that a good definition of a bubble? "A bubble is when yields and risk lose their correlation".

Peril the person who applies your economic law in a bubble

 

Just so we are clear. I haven't been saying that Sydney is cheap so buy in. My point was simply that Sydney is the lowest risk market in Australia.

 

Have you seen what happens to Sydney in a recession?

 

Sash, compared to which city, and over what period of time.

 

Beejesus John.......out of 103 CV cases....Sydney has 55.....Melb/Bris has 15...does that ring a bell?

The NSW govt a looking like a bunch of galahs compared to South Australia where they have implemented mobile drive through test sites....here and Vic...people are standing around each other to test...is that wise?

OK...here is the tip infections were less than 3 about 2 weeks ago...now 55...want is the probability we will have over 300 in a fortnight just in NSW? If that happens it game over mate....we might need Italian/South Korean/Chinese intervention....real estate and business will be on their knees by then...as there will be a lockdown....in a couple of weeks. Lets hope that does not happen.....

 

You may be right eventually, but right now the market has only priced in the interest rate cut, but not the recession. You are talking as though this future price crash has actually happened and I am blind not to have seen it. But it hasn't.

 

We had a 15% drop from late 2017 to early 2019...this ones will be more interesting.....maybe once in a 100 year....even Scomo is flagging this...

 

True, but as soon as credit was relaxed, the market recovered, reaching it's previous highs within 6 months. I hear what you are saying, and of course you could be right (there are headwinds for sure). But I can't see a contraction in credit coming (the opposite in fact), and that is what caused the last downturn you mentioned, not a recession. Anyway, time will tell, and no point arguing over a prediction.

 

If you bought at peak
If you have an insecure job
If you have no buffers /savings
Why are you looking at worst cases?

This is represents a minority

I can also look through my negative glasses.

Just saying i see your point of view but.....