What will stop the BOOM in Sydney and Melbourne

I am calling Melb will cool in mid 2018 we are already seeing signs of this, impact from APRA continual tightening of the screws.
This may also be the year that will determine what sort of impacts the car manufacturing closures would have on the market. I think it we will ot see a crash but it will flatten.....

 

I think premium suburbs have been flattening in melbourne for the last few years. (likes of glen Waverley, doncasters, Balwyn and the rest of the higher end suburbs) this not suprising at all.

For me, it is always the newer suburbs that will emerge in melbourne (that will boom) 2015 - Ringwoods, Preston, Maidstones 2016/17 - Reservoirs, Heidelberg Wests, Point Cooks, Tarneits etc. 2018 - ???

(Been on the ground in newer suburbs for auctions (and one suburb is seriously booming talking about 40-50K rises in weeks, 4-5 bidders in auctions and massive crowds, chatting to ppl - actually helped buy a few IPs through private sale and auction). and I won this auction on behalf of someone this week ( it wasn't easy)

 

Well done, where if you can share

 

Melb now following Syd???

The playing field has changed. First drop in price in Melb since Feb 2016.

Its not how much it dropped, but the fact that it has... this may impact on market sentiment. Is more supply coming to market... me thinks YES

Australia's housing market on track to cool in 2018 as prices fall in capital cities

 

No surprises here... investors have half the borrowing capacity they used to, and FHB have to save massive deposits to get in ( to the 2 main markets anyway) ... its just like any budget for any purchase. If you have $10 to spend rather than $20 to spend you cant go shopping in the $15 aisle or the $20 aisle any more. Its taken a couple of years to flow through..but everyone is experiencing the reduced borrowing capacity now in one way or another...not just investors carrying a lot of IO debt. Even FHB's with no other debt are still seeing capacity reduced due to the significant HEM increases. Everywhere, debt to income ratio's are down.

My expectation is that affordability will start to drive decision making. I expect you'll start to see a migration of investment money to larger regionals and smaller capitals throughout 2018 and into 2019, simply because those products sit in the $5 aisle or $10 aisle rather than the $15 aisle or higher. They yield better and they are where people can afford to buy. Sure, there will be resistance by those still in denial about the reality of APRA... but in the end they will come to accept that yield and affordability will win the day. In NSW at least, I also expect a migration of FHB's priced out of Sydney to start going to regionals - driven by the more generous stamp duty concessions to 850K ... ( already seeing this actually- see below) and of course the ongoing migration of retirees/sea changers as well....

We always knew to expect Newcastle and Wollongong to get a ripple effect from Sydney, but that's old news now. Thats not what I mean by regionals. Like Sydney, those areas are peaking. What I mean is that we are now seeing areas a little further out , up to 3,4,5 hours from Sydney, start to do well. Places such as Port Macquarie, which starting taking off 12-18 months ago, land prices have surged there and I can tell you that the NRAS 1 bedders I sold and settled there just over a year ago have gone from 250-260K to 330K. I know because one was just re-sold. That's @25-30% in a year..... and now we are seeing Orange and Bathurst and Mudgee doing the same. Its modest (dollar wise) by Sydney or Melbourne standards of course , but land prices have jumped 25%-30% in the last year or so... and more importantly they are also seeing strong rental yields.

Here's an example. The dual occ's I sell in Orange and Bathurst were getting $620 combined in early 2017. The most recent settlements are achieving $650 per week... At 550K purchase price, and valuing at well over 600K on completion - these ( and places like Port Macquarie ) are the sorts of areas where I see sustainable strength - simply because they are affordable ..... and it doesnt hurt that they generate 7-8K CF+ when depreciation ( on two dwelling - the house and the granny flat) is factored in.... and it also doesnt hurt that you could hold several of these before touching the NSW land tax thresholds.

I think Goulburn will start to come on as well.... especially as the airport at Badgerys starts to take shape and as the Menangle land releases accelerate the urban sprawl in Goulbuns direction.... Its a longer term play though. Probably several years from starting to really kick.

I also think affordability has every chance of providing Perth and Adelaide with some momentum. Perth is especially interesting... really , really interesting in my view...... the latest Housing Affordability Report has some super interesting data. Tenants are only spending 17.4% of their incomes for rent . Home Owners are only spending 22.4% of their income to pay the mortgage..... 42 suburbs showed increased sales activity and prices last quarter. Its been years since that's happened..... Tells me Perth has bottomed and I think there's a chance Perth may be about ripe for investment in 2018.... might take a while yet to kick, but its another example of where affordability will attract money. People may well poo poo regionals or smaller cities like Perth, but Ive laid out numbers that dont lie. People may even prefer the rollercoaster of the sharemarket, or ETF's or LIC's? or even Crypto.... That's all well and good until the next "event" and those people are crying into their Weetbix

Housing affordability surges in WA

 

Its this simple, if you can not source loans you can not buy, more volume comes on the market.

This is where and what you purchased may make the difference here. I got caught with my pants down in 2007 when I was building land and house packages, went from no supply and turned quickly to oversupply. Not scaremongering coming from my own personal experience. Not saying this market is going to crash, but it will soften and same cookie cutter product very hard to sell if you have to sell that is

Perth - let me tell what I think over the next 6 months. It has bottomed IMHO, but its still price sensitive and of course rents have dropped back around 25%.....
I am still waiting and watching this market, being on the ground makes a massive difference, the psyche is a huge one

 

All the more reason to be looking at something that isnt cookie cutter, such as dual occ or NRAS... where there are 2 dwellings and 2 incomes, or strong tax advantages... because of the benefits to cash flow and ultimately to borrowing power ( by reinvesting for debt reduction) these sorts of properties will increasingly be sought by investors who have limited purchasing power, are seeing limit/slower growth ( because everyone else has limited purchasing power too) and finally realise that they need better yields to sustain a portfolio than they have previously needed.

rents are slowly rebounding now though... but yes it will take time. My position is, its less expensive than it used to be so its now very affordable place to invest. It's bottomed and rents will start coming up slowly... so its an ideal time to start considering Perth ( or other regionals I mentioned in my previous post) , especially if you can buy there with excellent cash flow

This is what I have been saying for the past few years as the APRA stuff took effect. People are catching on finally, now

Anyway....to the broader theme of the thread, its pretty clear the Sydney and Melbourne booms have been winding down due to one simple fact - borrowing power being reduced everywhere for everyone. Thats going to lead to less expensive markets and better yields becoming more sought after

 

Writing was on the wall with regards to markets softening

Do investors still believe Brissy next boom? Still
the old chestnut need to be able to service debt in current environment??? I have a theory when investors are accessing equity we know sonething is moving, until then its watch and wait

 

Thats a pre APRA indicator. Cant access equity if you havent got any borrowing power. as you said yourself, if you cant source loans you cant buy. This is the system now . Ignoring debt reduction means growth cant be harvested without selling. Its better to create equity through debt reduction.

 

Wow, tough gig at the moment, change strategy or perish.

MTR

 

Well, change strategy or put the cue in the rack....

 

What's going to happen with growth properties?

If an investor is holding a property that yields 2% or 3% in the hope of outsize capital gains, it's going to get very, very uncomfortable if the price flatlines or drops for a few years.

I could see a few being offloaded, particularly in inner Sydney and Melbourne, and that could exacerbate any downturn.

 

Cycles, no need to panic we have been here before and survived

we are now going from boom to bust/correction.
What does this mean, property on the nose, from sellers to buyers market

Downturns can go on for 7+ years, I think it wont be that bad, but all guess work, who knows.... I need my blanky

 

Eventually borrowing capacity will start to be restored, but the key will be holding long enough for that to occur. I would agree there is risk for those with low yield and no Plan B

Think of it like an elastic band. It has effectively been allowed to expand/stretch almost without any interruption for the best part of 30 years. Deregulation and ever falling cash rates along with expanding wages and the use of pre APRA servicing calc policies such as "actuals" all combined to fuel enormous elasticity, which is what allowed for the rapid expansion in peoples borrowing power, which in turn provided the funds to drive the growth "cycles" far too many here still believe will repeat... Unfortunately they just aren't comprehending that the "cycles" they came up on have been disrupted because the ingredients used to bake them have been changed ... its frustrating to see the comprehensive changes that are now in place being dismissed as a cyclical hiccup. They are not part of a cycle...they are cycle changing.... If they stay in place for the next several years (which appears likely) or beyond, they represent a seizmic shift in the way the whole resi property model will work in Australia, moving forward.

Every previous cycle, elasticity existed. If it didnt, how did prices rise? How did borrowing capacity increase in order for prices to rise? Post APRA 1 and 2, the elastic band simply has no room to stretch further... all those policies /ingredients that created all past cycles have either peaked or have been reversed/curtailed now. All of them. There's nothing left to stretch that elastic band, other than a reversal of these changes.

So imagine you are holding a piece of elastic band between your two hands... and knowing that its stretched as far as it can; how do you create elasticity again? You'll need to either grow longer arms or start to move your hands closer together... in other words you have to start to deleverage. That's where cash cows come in...

The good news is that APRA's forced migration of large numbers of IO loans to P&I means that deleveraging is now slowly getting underway... slowly yes, but surely ..... so elasticity will eventually start to return... its simply a matter of when.... Given that P&I loans dont tend to start eating into the debt until 9 or 10 years in, and you dont see real inroads until years 12,13, and 14 , I think thats a reasonable time frame to use as a baseline. And this is why I advocate buying a cash cow or two for any portfolio and using the surpluses they produce to reduce debt more aggressively...so you can shorten the time it takes to eat into the debt, shorten the time it takes for your borrowing power (elasticity) to start being restored, or at the very least you can improve your chances of holding....

 

I'm renting at present, so effectively shorting the property market, which means the bigger the drop the better for me.

There's a tendency for someone's investment position to colour their predictions, so that might explain my bearish tendencies.

I agree with @euro73 (in fact, I'm liking his posts a lot these days) that prices have risen strongly for a long time. I think that some of this has been driven by cuts to interest rates, primarily in response to the GFC in 2008, but also the Dot.com downturn and 9/11 in 2000 - 2001, and we're starting to see central banks tightening again.

That said, I'm not sure how it'll all play out. The markets tend to do the opposite of what I think.

The rational view (from my perspective) is that the drop off of speculative demand for growth properties, be it from homeowners, investors, or foreign buyers, will lead to a sharp drop in prices.

In reality, the government will come up with a set of incentives to boost the market, and put a floor under prices. Thereby making me look stupid. Again.

 

It really depends ......if you purchased in syd and melb in 2013 you will be a happy chappy you rode this boom cycle... if not sit back and wait time is on your side.... the tyde has turned

Oops is it tide or tyde... ??

 

This is whats happening to most investors post APRA - especially newer ones with less mature portfolio's. They know they need to change their approach. They know borrowing capacity has been significantly reduced. They know they need to improve cash flows so they can A ) reduce debt and B) hedge against rate rises or P&I. They know that they cant get the types of yields they NEED in the places they WANT to buy.

They know all of these things , yet for the time being most continue to pursue a WANT methodology rather than a NEED methodology ... ie they are still purchasing ( or aspiring to purchase) low yielding properties in historically better performing locations ( east coast cities )

They are hoping that they will get the same results the pre APRA generations did.... they are resisting the new credit environment rather than accepting it.

Wants versus Needs. Acceptance versus Resistance.

 

So if the tides are turning for a downturn what is suggested for someone who is seeking for their first investment property. Cash cow or capital growth? It seems cash flow works better for people with an established portfolio, but for someone that's just starting out, i think seeking capital growth will be a better approach starting out. Please explain reasons why or why not that is the case.

 

This
Grow Capital First

 

Graeme

My observation is that I've only seen sharp corrections with turns in the economy and even then , they dont look that bad when you look at the historical figures

You certainly get a small pull back at the peak of the market when you no longer have competition from multiple buyers pushing levels above what everyone expects .

Mid last year , the house opposite us sold at Auction for 2.55 which was about 300k above expectation . If they tried to sell that now they'd get about 2.1 -2.2 which is what similar properties were selling for before that specific Auction.

From my observation those types of pullbacks and peaks don't show up on the annual figures because the figures that are released for 2017 are the average of the year , while the dramatic peaks and troughs are shorter duration and dont tend to impact the annual figures because they're averaged out .

We were actively buying in the GFC and we saw places drop over 20 % in the months after it hit , but if you look at the averages that just doesn't show up . A small pull back only .

Sydney has pulled back from it's peak , but most of that is due to the lack of competitive pressure .

The APRA changes have impacted things and it will be interesting to see how that plays out . The place where that may have a big impact is in new units where people can't get finance and walk away . I think this will be more pronounced when the blocks were marketed to OS buyers where their is less chance of the developer pursuing the buyers for more than their deposit . I've already seen one block in Chatswood where a renter was offered a 20 % discount on the purchase price to buy rather than rent .

The issue with that is will the discounts get better and how long till you see any growth.

Cliff