Where do you see Sydney market in 12 months?

I am not sure if all of APRA's handcuffs are direct result of Basel requirements, or they are in addition to Basel. If it is in addition then when market tanks APRA may be able to loosen their grip on investors. But I don't think anyone knows that.

 

This whole finance tightening thing is normal and expected. When it loosens up in the future.. I can imagine the rush of pent up buyers wanting to get in/get more. Its gonna happen. Just a matter of time.

Hence the boom will start again. More fortunes will be made. A new supply of sheep who never decide to invest will lose yet again in another cycle.

Business as usual. The motivated and focused get richer. The rest keep losing out. An endless cycle.

 

Basel III is on the financial statements, Basel IV to come (further tightening global). I doubt APRA will change their grip anytime soon.

 

They are seeking several things

1. A rebalancing of the P&I v IO held by lenders. I imagine they want it closer to 65/35 or 70/30 ... it's a balance that was GFC /credit crisis proof previously

2. A much lower Debt to Income ratio. They havent prescribed one, but they have jawboned 6 or 7 x income at every public announcement/speech , and especially since 2017. I'm sure they have been more direct with lenders behind closed doors, and its what has led to the much stricter assessment we have seen throughout 2018

3. Stricter and more realistic assessment of household expenses. Inter-related to Point 2. Any broker will tell you that banks are auditing bank accounts and monitoring what you spend on coffee, lunches, etc... its VERY strict out there now.

There isnt just ONE lever at work here. There are several. It's quite conceivable that you can pass a servicing calculator and still be declined for IO money, for example - just because the bank is at it's quota at the time you applied. It's also quite conceivable you can secure extensions to IO if your application reaches a lender at the right time - when they have capacity in their IO quota - although thats unlikely to the experience of most .

Even if they removed the IO quota , the servicing calcs - which are designed to deliver a DIR of 6 or 7 x income as a general rule - will put the kabosh on things

Foe Sydney ( and melbourne) prices to start climbing again APRA would need to remove or reduce the sensitised assessment rates , and increase the IO quotas AND increase the unofficial DIR of 6-7x income. Thats the only realistic way for things to "loosen"

The other possibilities are massive wage inflation and for people to use that extra income to pay off a lot of debt.The problem with that is that wage inflation would lead to real inflation, driving rates up, and canceling out any impact on servicing calcs.... so that theory is a dead end. You are really relying on the regulatory policies mentioned above to be lowered or removed in order for Sydney ( and Melbourne) to fire up. . Given APRA's ( and ASIC's ) repeated comments about these policies being here to stay, and Australia's debt to income ratio being way higher than they would like - it would appear that is a very low chance of happening

So I suspect that anyone who believes this will go away and the good times will return, may be disappointed for a good many years yet. Of course one day this will pass. If nothing else, the normal and natural amortisation of debt under P&I repayment terms will eventually lower DIR's to a point where borrowing capacity starts being restored...but that could take 10+ years if wage growth remains this weak. ie 2% ish

You have to remember that Sydney and Melbourne's median price is more around 50% higher than APRA's preferred DIR allows. FIFTY PERCENT. So whats going to close that gap to allow people to start borrowing more rather than requiring them to borrow less? Before you form an answer consider this; even if everyone switched to P&I tomorrow and made minimum monthly's, their debt would only come off by 21% over 120 months ( 10 years) Unless they make extra repayments, or unless there is also some healthy wage growth or some price reductions, the 21% reduction in debt will not get DIR's down by 50% to where APRA wants them - not even in 10 years.

It needs to be more than just P&I repayments . WE need wages to chug along as well... Lets assume this 2%(ish) wage growth of the last several years continues. The way I look at it, between 2% compounding wage growth per annum and P&I repayments, even if prices stay relatively stable it's still going to taker the best part of @ 10 years or so before we start seeing a median DIR /price equation somewhere around that 6 or 7 income that APRA wants . And that doesnt provide for any EXTRA borrowing capacity. It just gets things back to a neutral position. So it could be several years after that before capacity actually improves. So 10 years is probably about as optimistic as one can be under the current credit regime and wage environment. Now thats Sydney (and Melbourne) of course . But in other locations, where DIR's are much lower and medians are much lower- thats where growth can occur - mathematically at least . Doesnt mean it willl... just means it can.

We have already seen strong growth in many regionals in the past 12-18 months . That's no coincidence. Many cashed up buyers who dont need to borrow ( tree changers/retirees) and young families who can purchase there and stay well under 6 or 7 x income... these are good examples of money moving to where things are more affordable, and its why I think of all Australia's cities, Adelaide and Perth have a better than reasonable chance of attracting more money as well in coming years, as more and more borrowers stop resisting whats going on and come to accept that their borrowing capacity is forever reduced. Bottom line...people will be forced to buy in locations they can afford- or not buy at all.

But even then, as any reader of these forums ought to know by now getting the money to buy is only half the battle. The other half of the battle comes 5 years later when P&I is required. In my view, there's no point buying vanilla yielding properties in cheaper locations just because you can get the loan to service. You have to be able to hold it for 10+ years at least to see the next credit cycle start up again... which means holding it under P&I conditions for at least 5 years. Thats a long time to hold when your rents and wages are showing 2% inflation and your repayments are 50% higher This is why cash cows are so important. vanilla yields just arent going to cut it in this credit environment anymore unless you have a lot of spare cash to throw at them when the repayments increase 50% under P&I

With regard to Sydney ( and Melbourne ) - this is why I just dont see how the growth is going to come for at least a decade while we are operating under this credit environment... and it's why I think people are better served putting their money into properties that allow them to pay down debt and survive P&I ie cash cows

 

Wrong. I have paid both more and less for a property than the bank was willing to lend.

It has always been what people are prepared to pay. Near peaks, there are a lot of loan rejections based on low bank valuations. Some buyers stump up the extra cash and buy anyway. The price is what the buyer is prepared to pay, not what the bank is willing to lend.

So much nonsense on the forum lately. Lucky there are still a handful of actual property investors around to tell it like it is.

 

I find your post a little nit pickey to be honest.

People have had their ability to borrow cut on a macro level. Sure the upper middle will figure a way around serviceability issues, but the vast majority of people just lost a lot of spending capacity. For example, a mate of mine just spent over 2mil on a joint in Melbourne. He has a high income but couldn’t get the cash (think 300+). His dad is rich AF so he covered it. That’s a 1% scenario, it’s not going to save the market or keep it moving.

So to reverse your comment. The price might be what someone is willing to pay. But the budget for buyers is set by their ability to get cash.

This is literally the core of the property bubble in the USA and Ireland a decade ago. People were willing to pay whatever, until we ran into liquidity issues. Then it all fell apart.

The order is.
1. How much do I want to spend?
2. How much will the bank give me?
3. Will the bank give me enough cash?
A) if yes - buy house
B) if no - cut budget

I think we have entered and area where there is a lot more of B than A going to happen.

 

I don't really disagree with any of that but it's not really relevant to the point that was claimed. It's pretty simple.

Property is only worth what banks are willing to lend.

True or false?

 

Better would be.

Property value is defined by the availability of money.

So in monarco, bank loans mean nothing. In Australia, it’s much more important

 

Hmm. There is plenty of money available in Perth. Yet property values are at the 10 year low. Your definition fails the reality test

 

I see the "Price" as what the vendor is willing to accept, not what the potential purchaser is willing to pay.

 

Its both

 

This is true and was going to be my next point.

Setting value takes a willing seller and a willing buyer. If they reach an agreement on price, that is market value, what the property is worth.

Market value is not "what a bank is willing to lend" and never has been

 

Not meaning to be pedantic but a lot of purchasers pay "Overs" to secure a property; especially emotional PPOR buyers.

 

It's true. People pay what we think is above market value. But is it really?

If a willing seller and a willing buyer make a successful transaction at a set price point then that price point is market value for that property at that time. It doesn't matter what we think or what the bank thinks. That literally is the definition of market value.

Valuers of real property adopt the definition used by the International Valuation Standards Council:

... the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.

Business valuers in Australia typically define market value as:

the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length.
​

Market valuation for tax purposes

Following up on an earlier point:

There is a difference between "price" and "market value".

Price is what a seller wants. Market value is what they get.

A bloke 2 doors down set the price of his property at $400k. It was on the market for 6 months then withdrawn. $400k was the price of the property, not the value of the property. The value was lower than that but the seller was not prepared to drop the price to meet the market.

 

The economy in Perth is cooked compared to the boom time. Lower wages, higher unemployment. High underemployment, so I think Perth fits my example well.

Less money in market = lower prices

 

Lower wages, maybe. Is the average wage really that much lower than Sydney?

"Lower wages, higher unemployment. High underemployment" maybe compared to the boom times but what about compared to Sydney? The Sydney median house price is double Perth. Is the average wage in Sydney double that of Perth? Is unemployment in Sydney half that of Perth? I don't think so.

Perhaps people are saving deposits and holding off buying until prices reach a point where they think they should buy. So, there may be much money available but not enough people willing to spend it.

You need both money available and people willing to spend that money. If you don't have people willing to spend the money then all the money in the world will make no difference. What I am seeing in Perth is that people are not willing to spend there money on property at this stage in the cycle. So you could say the value of property is what people are willing to spend.

In any case your definition of property value is way off if it has anything to do with market value, which is what I thought was being discussed.

property value is

... the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.

 

Average Full Time Ordinary Time Earnings Q2 2018
New South Wales $83,517
Western Australia $90,496

Average Salary Australia

The average wage in Western Australia is higher than New South Wales.

The Sydney median house price is more than double the Perth median house price.

This does not add up.

 

Property may well only be worth what people will pay/can borrow/willing to spend.

I wonder if a connection. On $91,000 a year some loan calculators suggest a loan in low $400,000 range add 20% deposit and you have about $500,000 which is around the median house price in Perth.
I have often wondered how people in Sydney can buy a house or even pay the rent.

 

Dual incomes?

 

Dual incomes from Coles or Bunnings might be $110k if you are really being generous.