What a soft landing might look like

Discussion in 'Property Market Economics' started by Graeme, 25th Aug, 2018.

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  1. Graeme

    Graeme Well-Known Member

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    I've seen a few comments in the press about the RBA being relaxed over price falls of around 5% in Sydney and Melbourne over the past year. So I wondered what this would be like over a longer period.

    Let's assume prices fall by around 5% and incomes rise by 3% each year from 2017 to 2027.

    Last year the median Sydney house peaked about $1.2 million, and the median household income was around $90,000.

    By 2027, the median Sydney house price would have fallen to about $720K, which was last seen in 2013 according to Homely, whilst household income would have increased to about $120K.

    In terms of the much maligned median multiple of income, houses would have dropped from just over thirteen times to six times. So whilst the nominal value of property would have fallen by 40%, the real fall would be around 55%, which is much more crashy.

    OK, a 40% fall would be painful, but the shift to P&I incomes would cushion some of the impact. If someone bought an average ($1.2 million) house in 2017 with a $200K deposit and a million dollar mortgage, then they'd have repaid about $220K over the decade. The net result would be owing $780K on a $720K, which wouldn't be too painful, especially if prices began to rise at that point.

    This is really just idle speculation on my behalf, but if the RBA and APRA want to reduce debt (and by extension property prices on the Eastern Seaboard), this strikes me as the least destabilising way of achieving this.
     
  2. Rex

    Rex Well-Known Member

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    Ha well if that is their plan, they better not tell anybody, the market would freak out and fall off a cliff. A property losing value faster than you can pay it off every year for 10 years sounds pretty financially crippling to me.
     
  3. Blueskies

    Blueskies Well-Known Member

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    Don't forget about immigration too, what is the predicted population of Sydney in 2027?
     
  4. Barny

    Barny Well-Known Member

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    Migration is important, but least important and impact on prices. Credit/tax policy/cash rates/property supply have far more of an impact they say. Migration comes last at around a 4% affect to house prices.
     
  5. Pete Arendt

    Pete Arendt Well-Known Member

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    I think the question is if "today's" investors would just sit tight with 5% p.a. falls for 10 years, or will they jump ship. Can you imagine not only having negative gearing losses, but also capital loses each year. The idea with NG is you make a loss in return for capital gains, but there would be no capital gains insight.

    The reason why I say "today's" investors is it is becoming clearer most of the smart investors have sold up. The investor's today don't really have a clue. They claim their tenants are paying off their IO only properties etc. Hence, will they really understand they are losing so much money? Property investors appear to be more dumber today that say 5 or 10 years ago - I don't know if that is just complacency, or they really are. How will this poor financial literacy effect the market going forward?
     
    Last edited: 26th Aug, 2018
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  6. sash

    sash Well-Known Member

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    The Homely chart only goes till 2016 at which point Sydney median is 1.125m. It it is now about 1.03m...as of now.

    What we can learn from Australia's median house prices from 1970-2016

    @Graeme I can't see the median down to 750k from peak....let me extrapolate the table for Sydney:

    Sydney 2017 - $1,065,000
    Sydney 2018 - $1,000,000
    Sydney 2019 - $940,000
    Sydney 2020 - $900,000

    At that point it will probably stabilise.

    Is that a large fall...yes...because i went from 575k to 1.125m.

    But the drop from 1.25 to 900 is a 20% drop....but it is still 57% gain. This boom will be very similar to the late 80s booms given the size of increase and the impact of finance on the market in Sydney in particular. Obviously this does not consider labor getting in......
     
  7. Rex

    Rex Well-Known Member

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    I suspect the upper limit of what regulators would find palatable is maybe a 15-20% fall in Syd & Melb over the first couple of years and then flat or very modest price rises for maybe five years thereafter. Anything more could seriously compromise the national economy long term. If half the nation's homeowners and investors start observing a structural decline in house values, and believe their biggest assets will be losing value every year for the foreseeable future, it will destroy consumer confidence and discretional spending.
     
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  8. sash

    sash Well-Known Member

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    Correct...but this would be done by APRA policies...thus removing the need for intervention to prevent foreign investment like NZ and Canada.

    The RBA rates will keep rates on hold and thus business will still keep growing and more money will be put into shares/companies as well as other cities. Perfect land for the government....it will also address the over crowding on Sydney and Melbourne as people look to move to Qld, SA, and WA. Pure genius....
     
  9. Befuddled

    Befuddled Well-Known Member

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    Linear extrapolation is about as useful as t*ts on a bull, especially if it's performed off a small sample size. Unfortunately, that's all that mainstream media does.

    Even the so-called subject matter experts are guilty of doing this. This time last year, I was at an expo where one of the leading Australian economists/property commentators gave a talk suggesting Sydney home prices would rise another ~5-10% in 12months. We all know how accurate that turned out to be. Fast forward to today and the same commentator echoes what everyone else is forecasting (ie: steady falls for another couple of years).

    Often the safest thing for commentators to do is take the recent 3/6/12months of market performance and extrapolate it over the next little period. However that's just protecting one's own reputation. If you're wrong, well that's alright, so was everyone else. It's of little use to investors. How often do economic charts go up or down in a straight line?

    The function of media is to report what has already happened

    The function of an investor is to make educated bets about what will happen
     
    Last edited: 26th Aug, 2018
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  10. sash

    sash Well-Known Member

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    I disagree...you for one was one of the ones who seemed think Sydney would continue up....

    Extrapolation for investors is usefull albeit 50% correction is a bit too much....but we are down 10% and heading towards 20%.

    The fact that you don't use this indicated you have not seen one cycle.....

     
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  11. Befuddled

    Befuddled Well-Known Member

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    Nope. My forecast was flat. Seems I was too optimistic ;)

    Forecasts and Predictions...????

    I've made it no secret that I haven't seen a full cycle.
     
  12. hobartchic

    hobartchic Well-Known Member

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    I read somewhere (I think the AFR) that there's been a 1250% increase in refinance rejections.
     
  13. hobartchic

    hobartchic Well-Known Member

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    I think a sharp fall in some markets and then things normalizing is the most likely, and economically healthy, outcome long term. Chronic stagnation means you get no meaningful recovery.
     
  14. Someguy

    Someguy Well-Known Member

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    Fully offset loan tried to get it back to IO (was IO previously for 2 years, lender said another 3 years would be available) to do this with our bank the application process had to be followed again, despite incomes being same as initial application we were told were not even close to being able to service the loan according to their calculations.
     
  15. sash

    sash Well-Known Member

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    That is what is happening to a lot of people.. .if the phone queues are an indicarion at australia's most unethical bank CBA are an indication... you are no aline

    CBA now doing only 10 years IO. And i suspect i will be 5 years only shortly.

     
  16. ymmf

    ymmf Well-Known Member

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    Home loan refinancing jumps but many find they have to sell up

    In this article it quoted "The impact of interest-only loan restrictions has largely played out, but the effect of restrictions on high debt-to-income customers and more scrutiny on income, expenses and valuations are still to come."

    Would you agree? I thought the effect on IO restriction is yet to peak
     
  17. hobartchic

    hobartchic Well-Known Member

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    No. There's always a lag with these things.
     
  18. marmot

    marmot Well-Known Member

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    It will also be interesting to see if there is a glut of properties coming onto the market before there is a change in CGT, and looking more than likely with a change in federal government .
     
  19. Rex

    Rex Well-Known Member

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    Current CGT rates will almost certainly be grandfathered for existing investments so a mini rush to buy is more likely IMO.
     
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  20. hobartchic

    hobartchic Well-Known Member

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    With a massive increase in people rejected for refinance? How will buyers pile in without finance? Cash buyers, lower price, would be my guess.