What will stop the BOOM in Sydney and Melbourne

I wouldn't quite say that.
However, I am a big proponent of buying in predominantly OO areas. I've learnt this the hard way with RE in investor areas and what happens when the timing is off...

 

IO Loans are our subprime...

 

Heidelberg Heights and Heidelberg West still going crazy!

2 recent sales:

1. 17 Lawson Parade, Heidelberg Heights
Condition: eek!
Price: $931,000
Lot size: 677m2
$/sqm: $1,375.

Incredible!

2. 531 Waterdale Road, Heidelberg West
Condition: Unknown but not looking good from the outside.
Price: $820,000
Lot size: 592m2
$/sqm: $1,385.

Even more incredible!

$1,385 per square metre in Heidelberg West is mind blowing.

17 Lawson Parade, Heidelberg Heights, Vic 3081 - Property Details

531 Waterdale Road, Heidelberg West, Vic 3081 - Property Details

 

Oh well, in Syd SW, people were paying 1500/sq for land quite a while ago, not sure what they are paying now.

 

That is a lot. Was that for better suburbs or slums? Heidelberg West is pretty bad. Some pockets are some of the worst in Melbourne. There are better pockets but overall it had a very bad rep. With houses selling for close to a million now, I guess this will change?

171 Southern Road, Heidelberg West, Vic 3081 - Property Details

 

thinking inner city Melb may be looking better

 

Probably cheaper!

 

Let them go nuts in the burbs, what goes up must come down

 

@Perthguy Syd SW lot of people look down on it like Western Sydney, but I do not mind it or the West now, when I was a kid you could not pay me to be seen there or say that ☺

 

Please... Not a NINJA loan amongst them. Not a non recourse loan amongst them. So no junk bonds. That's not to say we cant have a correction, or that there isnt too much I/O lending on the banks books for APRA's liking. Those things may well be true, but seeing as not a single Australian RMBS has ever defaulted , and people cant just walk away here without consequence, and all lending above 80% is underwritten by LMI, and Australian banks dont have CDO's upon CDO's underwriting their junk filled RMBS - comparing any Australian resi mortgage product - even no docs, to subprime is just not a reasonable argument....

 

Sounds like our financial system is stronger. However in the case of a big crash from a recession for example, would the insurers unwriting the LMI be solvent or have enough to reinsurance to cover the loans they have underwritten? Is there any strict regulation in the LMI insurance industry?

Does anyone have any idea?

Its one thing to say banks doing 90% 95% lends are covered by LMI, but it's another thing to ensure those insurers providing LMI are able to cover big claims themselves. Don't think there is any stress testing for insurers?

 

i was at the waterdale rd auction.
that pocket was bad. the neighbour was eyeballing ppl there and look to be on drugs ice or something. though lots of new townhouse builds.

i am starting to notice a lot of asians buying up in HW. chatting to a few prior to auction. one of them was from balwyn coming to buy an IP. 4-5 asian bidders and was won by a group of 3. to think back than these places could be bought for 400k a couple of years ago and now it is 820K is insane.

 

It was not a one on one comparison, Hence the term OUR subprime...as IO loans has the potential to put our financial Institutions at risk.

What happens when IO Loans borrowing costs are reset higher(happening already) or those with interest only mortgages are forced to repay the principal as well(very likely), which can increase IO Investors monthly repayments by 30/40%?
Refinance/Draw equity would not be easy anymore given the tightening and the IO Investor feel they can no longer service their loans?
Negative feedback loop? Distressed sale?

In last couple of years IO loans have increased from 30 per cent of all mortgage credit to 42 per cent.
50% of Westpacs mortgage book is IO, CBA has 40% and Anz has 37% IO Loans.
Are our big four banks as strong as we would like to think?

Just curious what happens when LMI insurers go under?


Cheap & easy Credit fuels a bubble and scarce(and costly) credit eventually deflates it.

 

This may happen to some investors who have overleveraged. However, it would have to be a significant percentage. Other investors like me are prepared for when our IO flips to P&I. Remember it is at a defined time so we have years to plan ahead.

The other side of the equation is that Australians are sitting on the highest level of household savings in history: over $1 trillion. Some of this cash is property investors like me who have squirreled away surplus funds into offset accounts for the impending financial apocalypse. Except, because we have saved so much cash, there won't be a financial apocalypse.

Australians sitting on mountains of cash as wealth outpaces debt

In some cases yes. In most cases it's unlikely. Many investors have cash buffers. They will all be fine.

Yes they are. $1 trillion pays a lot of interest. Years and years of interest in fact.

The government bails them out? I don't know. It's such an unlikely scenario that I really don't think anyone has contemplated this seriously. It would take massive defaults to send LMI insurers under. I seriously doubt there will be massive defaults because that $1 trillion is going to get a lot of people through what happens next.

 

In last 4/5 years we have had a stagnant salary and rising mortgage debt (due to price rise and FOMO mentality),
As households become more indebted by taking mortgages (and hence debt payments) up at a rate faster than household income, savings decline as a result.



From 2008 quite a chunk of these saving have been due to falling IR and not due to rise in income, Now with IR on upward trajectory expect these savings to decline further.

High savings of prudent investors(like you for eg.).. wont bail out.... high leveraged IO investors with no income growth to support monthly payment rise of 30/40%.

It doesn't require a big percentage of defaults to rattle the high leveraged house of cards.

 

$1 trillion in cash savings won't bail out everyone but it will bail out a lot of us.

It won't require a big percentage of defaults to rattle the high leveraged house of cards but it will require a big percentage of defaults to bring it down. And this is really what we are talking about, it's it? Some big catastrophe that will bring down this high leveraged house of cards. It is not as likely as LF Economics and MacroBusiness claim.

If you read a bit more widely, you will find out that LF Economics and MacroBusiness are politically biased and politically motivated. For everything they tell you there is a lot they are not telling you. They also twist the stats to suit their agenda. They have some interesting info and I read them too. But then I put what they are presenting into the wider context of information available and give it the weight it deserves.

In other news, Philip Soos of LF Economics has claimed that the Australian Property Market has been in a bubble since 1996. Seriously!

 

In an absolute worst case, you may be right. I certainly don't disagree that there's a strong argument for deleveraging - I'm THE guy who's been championing that argument for the past 4-5 years, just quietly

But consider that only 3 or 4% of investors hold more than 3 or 4 investment properties, and many of those would be well below 80% LVR .....so you have to distinguish between the probability of a modest correction and the probability of a full on GFC type credit crunch .

In my view, I agree there is serious risk of default for those relatively recent investors who have immature portfolios purchased in recent years, where the yields are still quite weak because they just haven't owned the stock long enough for rental inflation to have matured yet, and who are therefore relying on low I/O rates to keep their heads above water. Of course when those borrowers I/O terms expire and they find it difficult or impossible to extend them or refinance elsewhere , and they are forced to migrate to P&I , I worry that many may have some serious problems servicing their debts. It's why I have long (and often) banged on about the virtues of debt reduction - especially for these "at risk" investors, and even more especially for newer "at risk" investors also still carrying large amounts of PPOR debt. For these types of "at risk" investors, getting some defensive, debt reducing cash cows into their portfolio is ( in my view at least) not only smart - its essential.

Even now, as the LVR's fall daily - one bank after another, and I/O lending gets tougher daily - one bank after another - those with some remaining borrowing capacity should be pulling their fingers out rather than procrastinating, and using that capacity while they can, before LVR's for I/O lending fall to 70% across the board and they cant qualify for a loan. They should be getting some form of cash cow into their portfolio.

But also keep in mind that "at risk " investors represent only a relatively small percentage of all I/O borrowers. There are many earlier generation investors whose portfolio's are by now, generating mature enough yields to comfortably service their debts even if forced to migrate to P&I. Sure, they may not want to live with P&I, because they consider it an inefficient and less tax effective structure , but the point is they are able to live with P&I should it be required. And for this reason, I think any talk that large amounts of I/O lending reverting to P&I will be a trigger for mass defaults, which in turn leads to RMBS defaults , which in turn leads to Australia's own little credit crisis, are probably overblown.

Add to this, the fact we cant hand back keys and just walk away here without recourse, and its very difficult to see how we can arrive at anything approaching a subprime type of mess.

Mass defaults on OTP apartment settlements would appear to me to be a greater risk of triggering any form of Australian credit crisis... If it went so bad with apartment settlement crashes that our banks had to write off billions in developer loans as losses, its possible they would suffer large credit ratings downgrades. It's therefore possible they couldnt refinance their RMBS in securitisation markets, causing a credit crunch here..... but that's a very very looooong bow to draw.

#decadetodeleverage

 

Also might be worth having a look at Perth and Darwin where the crash has already happened. Big Time. Lots of people there are Underwater by 100k+ and still go to work, live, go out and just get on with it.

Some are struggling...no doubt about that,
But for the majority, even with a big drop life still seems to go on.

 

Adding to the above is the change in politics when it comes to the debt narrative. It seems like both parties are willing to borrow and spend on infrastructure and other major projects to stimulate the economy.
One other major political change has been in regards to super not being a sacred cow anymore. We have a cumulative 2 trillion dollars in assets in Super and who knows what they can come up with in order to maintain the current status co

 

It's interesting about super.

Superannuation assets in aggregate were $2,199 billion ($2.2 trillion rounded) at the end of the December 2016 quarter (1)​

I know quite of lot of the super funds gets invested in the ASX. That makes me wonder why the ASX has been so flat for around 10 years? It also makes me wonder where the money will be invested in the future and what impact it will have?

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(1) Super statistics - ASFA

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