Why is there not a strong expectation that Syd/Melb will mirror Toronto/Vancouver?

Discussion in 'Property Market Economics' started by Rowan, 27th Sep, 2018.

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  1. Rowan

    Rowan Well-Known Member

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    The property stories in Sydney and Melbourne have been extremely similar to the developments that have emerged in the past from the Toronto and Vancouver property market. Because of this, I feel looking at what is happening in Canada gives you a good sense on what can happen to Sydney and Melbourne in 12 months time.

    At this point in time, Toronto and Vancouver have been experiencing growth after flatlining/declining for a year or so. Some reading available here: Toronto Real Estate Market Has Recovered And Home Prices Are Up

    Some points:
    1. Toronto and Vancouver has been through enormous growth comparable to Sydney and Melbourne
    2. They have looked to counter that growth by imposing an improved Foreign Buyers Tax, one that is even more severe then what we have in Sydney/Melbourne
    3. Canadian Regulators also imposed new lending standards that has a big impact on credit
    4. Canada Central Bank has hike rates four times
    5. Property market declined for approximately a year but has regained stability.
    6. Argument is that all the factors that forced a decline was superficial, ultimately supply did not keep up with demand given Toronto's growing population and economy.
    I don't know too much of the finer details about the Canadian property market as information is tough to find as the metrics are tough to compare but would very much like to hear the difference between their market and ours if anyone has an thoughts or know it well?

    But I feel given all the speculation on how our market will look in the future (and frankly there is a lot of BS out there particularly all the doomsday scenarios), looking at the Canadian market and how they are behaving could be a good indicator on what will likely happen in Syd/Melb. Thoughts?
     
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  2. Angel

    Angel Well-Known Member

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    Good points.

    Do we know anything about Interest Only loans in Canada?
     
  3. JohnPropChat

    JohnPropChat Well-Known Member

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    Out of control growth, at least our government is trying to crack down on unsustainable growth. I like cycles as much as the next investor but will be happy with current growth levels than crypto-like growth and busts.
     
  4. Kangabanga

    Kangabanga Well-Known Member

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    They are very rarely used in Canada. For Vancouver and Toronto a lot of the rise was from foreign chinese/hk/asian money.

    And recently commodityx/oil prices are on the rise again so it is expected their economy remains buoyant.

    Our their resi loan book totals around 1.8trillion now but their banks supposedly have capital to sustain a 30% drop in home prices.
     
    Last edited: 27th Sep, 2018
  5. MTR

    MTR Well-Known Member

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    They are going......going....gone in Australia..... banks in Oz reverting to P&I.... this is massive for investors and I expect many will have to offload if they cant service the 40% tack to the interest loan.

    I wont compare Canada to Oz, cos I have no idea, focusing on what I see today.

    Property is currently on the nose in general... why ….. credit squeeze that simple.

    That old chestnut if you cant source a property you cant buy.....more stock comes to market, exactly what we are seeing in Oz today
     
  6. Redom

    Redom Mortgage Broker Business Plus Member

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    I don't think many realistic experts think Sydney will be in decline for an extended period of time (3-5 years+). Most of the major forecasters imagine a peak to trough period of ~10% panning a few years.

    The underlying fundamentals of supply and demand are still relatively strong over the medium term. The economy is in really strong shape, unemployment is non existent, population is booming, & in coming years supply levels will start coming down (cyclical). Pan that scenario out for a few years, you'll have some growth spurts come to light in pockets eventually, especially as the demand/supply imbalance comes back into Sydney pockets. The above factors are also why the relative decline rate isn't that much (~5% this year) and won't be near the 40% doomsday scenarios some mention.

    Property markets are driven partly by in sentiment. Once it feels like its going down, it may appear as though theres no end in sight. Same works in reverse too.
     
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  7. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Keeping it Sydney specific,
    What do you think of (by 2020/21)
    • Current tightened credit?
    • IO2PI rollover affect?
    • Rising international bond yields?
    • Impact of access supply hitting in next two years?
    • Potential Debt to income cap?
    Do you think a decline of 20%(from its peak) by 2020/21 in Sydney is unlikely?
    What would be the green shoots for Sydney? by when?

    We are already at a peak of TotalDebt2Income, loan2Income in terms of Sydney valuations, Don't you think increased leverage has to deleverage before cycle can restart?
     
    Last edited: 27th Sep, 2018
  8. Sackie

    Sackie Well-Known Member

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    My opinion, 2 things.

    1. Easing credit (personally I think it will happen sooner than many think)
    2. Market sentiment to change again

    There are a ton of people (demand) out there who still want to buy and can afford to buy. Good suburbs/stock (supply) are tightly held . But the credit limitations are holding them off for now. Once it eases up and market sentiment starts to shift again... well we all know what's gonna happen then.

    Growth depends on two things: 1. Supply of credit (but not to as great an extent as some believe) and 2. supply/demand of an area.

    #1 will fix itself in time. and #2 will go nuts again.
     
  9. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    "can afford to buy but held by credit limitations"
    not sure I understand this?,
    do you mean they are held by credit limitations because banks thinks they are getting risky for debt they hold? or cash flow risk?

    I think increasing supply of credit is most important fuel for continued boom.
     
  10. Redom

    Redom Mortgage Broker Business Plus Member

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    20% in median results is a bit extreme, peak to trough at about 10-15% seems to be a relatively bearish projection too. I suspect the big falls have already happened and it'll largely move sideways for a few years from now. The economy would need to fold or they'd need to restrict immigration to stop demand to have a 20% drop.

    Not sure I see credit issues as crazy as some commentators make it out to be. Lending standards certainly weren't wildly poor here, a few bits were questionable and usually meant investors who wanted more and more had access to it.

    As an aside, we've been doing some modelled data on IO rollovers specifically to investors from our database, early analysis shows that most that are seriously over leveraged are also seriously buffered. Being buffered removes the need to sell, at least quickly. For homeowners on IO terms, lending standards were generally no where near bad enough for the change to P&I repayments to be more than the buffered repayment calls that banks use anyway.

    Point is, segmentation analysis on both groups doesn't seem to show a situation where there'd be a mass increase in sales, which is almost a pre-requisite for a housing crash (at least when developers aren't out of control and building more than required).

    So if the economy continues to hum, jobs growth continues to perform, its hard to see how there'd be a real crash.
     
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  11. Sackie

    Sackie Well-Known Member

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    Yes sorry was typing in a hurry.

    I agree credit supply is important . But also s/d of an area.
     
  12. mues

    mues Well-Known Member

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    We are near 8% in Sydney now. I would have thought that unless something happens soon, 10-15% in Sydney is possibly the sweet spot.

    I think 10-15 with 2 years flat is probably most likely scenario now.

    I actually worry if we hit 20+ it is more likely to create a run and we might go past 30%

    That’s not good for anyone as it will have broad economic impacts.
     
  13. hammer

    hammer Well-Known Member

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    I would have thought the changeover from IO to PI over the next few years will be dangerous.

    Investors buying IPs is one thing but there were also a lot of FHOB who bought expensive properties using IO because they couldn't afford PI. We're talking loans of 800k+....dunno if there will be enough of these to cause a problem but we shall see.

    I don't think this little chestnut is looming over Vancouver/Toronto.
     
  14. Rowan

    Rowan Well-Known Member

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    Were lending standards for IO loans questionable? I recalled that when I was getting mine that you'd be assessed in the same way as a P&I given that IOs reset not too long after.
     
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  15. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Back in good time expenses taken into calculation were lenient without scrutiny of what was really spent, thus creating a false buffer which didn't exist and leveraging the buying power much further then it should. Also no cap on total Debt2Income.

    Forced Sale as a result of IO2PI rollovers (in current and next two years) will just accelerate the fall further but is not the cause, The primary cause of prices falls in Sydney/melb is reduced buying power. The full Impact of buying power (via credit) getting chopped off by more than 30% is not fully baked in the cake yet.
     
    Last edited: 28th Sep, 2018
  16. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    "Investors who wanted more and more had access to it"
    Isn't that bit crazy?

    Hasn't most of the recent housing corrections (worldwide) a result of credit tightening and not due to rise in unemployment? rise in unemployment was the consequence of the price falls set in due to tightening, rise in unemployment sets in fall in immigration.
     
  17. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    I agree 20+ falls across Australia is never good for the economy given that housing feeds a lot of periphery industry employing a lot people

    But I think we are discounting APRAs effort a bit,
    APRA has been proactive rather reactive in its effort to mitigate the systemic risk. APRA has been very open in their target, instruments, intentions and timeframe and have given ample warning to Investors who are willing to listen understand and mitigate thier leveraged risks.
    Its efforts are highly targeted towards high leverage build-up as against using blunt instruments like IR hikes which effects everyone irrespective of leverage. These efforts leave some room for policy intervention for later if absolutely required.

    So letting a 20% fall in highly leveraged markets like Sydney/melb and very less falls in other markets (if any, or even rise due to their lower leverage) will balance out the impact and wont call for panicked policy interventions.
     
  18. Rowan

    Rowan Well-Known Member

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    Interesting. Theres been argument thrown around that its rare that anyone utilises their full borrowing power anyway but I don't have any data to support of anything. Lets hope the availability of credit isn't impacted too much going forward.
     
  19. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    True for many in yet to be risen markets like Perth , Adelaide, Brissy, but for high leveraged markets less so.
    There is a reason we are hearing 'Willing to buy but held by credit tightening' from syd/melb, Sellers willingness of adjusting to new credit reality take Desperation or 'fear of not getting out', that's were forced sellers will play a role of trigger in next two years.
     
    Last edited: 28th Sep, 2018
  20. hieund85

    hieund85 Well-Known Member

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    When things get bad, I would rather reduce my expenses than sell my IPs for a loss. The HEM calc is enough to cover the basic expense imo.
     
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