What will stop this downturn?

Yes but the playing field is changing IO loans out the window, that will change all your numbers

But I was talking the norm in Oz 3-4% yields

 

IO loans aren't out the window at all. There's a 30% quota, so 30% of loans can still be be IO. Thats still a pretty healthy amount of IO lending available.

Sure, IO is dearer than P&I these days and you cant generally hold IO forever because of the quotas and the way servicing calcs treat IO loans, but to say IO lending is out the window isnt right.

What's more accurate is to say that IO can longer be used as a model to buy and then hold for years in the hope of harvesting equity to go again...well, it just doesn't cut it any more . 1- because even if you get the growth ( which you probably wont when everyone is under borrowing and cash flow pressures) the ability to borrow against it is constrained and 2 - because holding costs jump 50% + after 5 years when the P&I migration comes along. So if that approach ( buy and hold and harvest ) is what we are referring to as "the norm" , then yes, it's precisely what I a have been warning against for years. I've been all about cash flow and debt reduction since before Adam was a boy . Since before APRA grew some teeth. It's the only sensible way to safely buy and hold resi properties for most investors under this credit regime.

Bottom line is really very simple for thise wishing to invest in resi real estate - they should be purchasing in the knowledge that P&I is likely to be knocking on their door within 5 years , and they should be adding assets with yields that can deal with that, rather than trying for speculative/growth focused assets with low yields, that cannot deal with P&I. Unless they have the spare cash flow to pay the difference, of course.... then they can really do whatever they wish without having to worry about how to carry P&I repayments down the road... but that is far from "the norm" .

 

What will stop the downturn;
1. changes in Chinese Govt policy that are currently restricting their citizens ( mainly millionaires) from getting money out of their country to invest here.
2. Australian government reducing barriers for overseas investors.

It was these investors in the first place that were most responsible for the booms in Sydney and Melbourne.

 

Came here to say this. I don't think Chinese are the complete picture but i do believe that foreign money make this a bit different to the previous Sydney slump

 

Yeah, you can see it in the areas that were popular with Chinese money now being the some of the hardest hit.

 

Yes Epping NSW has been hit very hard with price decline.

 

Yep the chinese buy em hard and sell em just as hard. Its just a numbers game to them. Pump and dump!

 

What downturn, only have two properties and both on the rise.

 

The downturn ends when excess supply dries up in the face of inexorable population increase. The first sign will be that rents start to increase, probably towards the end of 2019. Sydney absorbs supply increases quite confidently.

So the end of the downturn will arise due to either or both: a) property shortages (watch rents); or b) relaxation of lending standards / reduction in interest rates.

 

Without a relaxation of lending standards, a drop in the cash rate alone will have minimal impact on the property market IMO. Mortgage rates are already super low and it's hard to imagine somebody who is contemplating buying but considers current rates to be a barrier. Everybody is still getting assessed at 7+% on application regardless of what the current rate is and that, along with other tightened serviceability criteria, is the barrier for most people.