Glenn Stephen's comments this week

[BV]

I can afford to live in the inner west, I am just borrowing to my maximum if I want to live in a house. I do not need to move further out. An inner west townhouse/apartment is easily affordable.

SYDB

As interest rates increase the amount you'll be able to borrow will reduce.
So if you can borrow $500K today, this figure will be going down as interest rates increase and what's affordable today might not be affordable tomorrow so I hope you can make up th difference with your savings.

Ofcourse other people will be in the same situation and this should put some pressure on prices but with so little stock on the market I doubt that prices will go down at all. Not in inner west anyway because prices have not gone up a lot as they did in Darwin, Melbourne etc to justify a correction.

cheers

 

[SYDB]

SYDB

As interest rates increase the amount you'll be able to borrow will reduce.
So if you can borrow $500K today, this figure will be going down as interest rates increase and what's affordable today might not be affordable tomorrow so I hope you can make up th difference with your savings.

Ofcourse other people will be in the same situation and this should put some pressure on prices but with so little stock on the market I doubt that prices will go down at all. Not in inner west anyway because prices have not gone up a lot as they did in Darwin, Melbourne etc to justify a correction.

cheers

So the costs of borrowing can continue to increase without impacting prices? Until what point? That just doesnt make sense to me - but Im happy to hear a rational explanation of this theory.

 

[knightm]

SYDB

As interest rates increase the amount you'll be able to borrow will reduce.
So if you can borrow $500K today, this figure will be going down as interest rates increase and what's affordable today might not be affordable tomorrow so I hope you can make up th difference with your savings.

Ofcourse other people will be in the same situation and this should put some pressure on prices but with so little stock on the market I doubt that prices will go down at all. Not in inner west anyway because prices have not gone up a lot as they did in Darwin, Melbourne etc to justify a correction.

cheers

Absolutely agree there hasn't been years of out of control growth in Sydney (in fact 03-09 very flat) so its as good a time as any to buy (well apart from last year) As many have mentioned buy well within your limits as rates are likely to go up a bit but waiting for a price reduction in the inner west of Sydney is looodicrus.

For what its worth I understand your reaction to the attitude of others but also their attitude. I did 9 years of commuting to Syd CBD about 3 hours a day whilst renting and investing. Finally saw the light got a job out in the burbs rode pushy 20 mins to work then a transfer out of Sydney now LOVING life down the coast walk to work building a house etc, but it all took time and lots of sacrifice that most of my friends weren't willing to make and they are still contemplating pricey units in the burbs and wondering how to raise kids in em. Clarify what it is you actually want out of a piece of real estate and then its easier to know what and when to buy.

 

[knightm]

So the costs of borrowing can continue to increase without impacting prices? Until what point? That just doesnt make sense to me - but Im happy to hear a rational explanation of this theory.

It will but because most residential real estate is actually owned by people/families with little or no debt (like all the oldies in their homes for the last 50 yrs etc) the effect isnt as dramatic as you think. Last time interest rates peaked it hurt a lot of people and stunted growth in many areas but it was only kellyville (almost every family is a brand new home big mortgage no equity kind of suburb) and surrounds that saw the big price reductions and lots of mortgagee sales in any one street.

Rising rates does take buyers out of the market but it also takes sellers off as many decide to sit and wait for better times. Rents also go up as there are few investers buying for the rental market. Rising rents underpin prices.

 

[alexlee]

Rising rates don't affect all property owners equally. First home buyers who usually have the highest LVRs and mortgage to income ratios would be impacted the most, because they're also the most stretched. The longer you've owned a property, the less you're affected as time increases your wages and property values go up. When you pay off your mortgage, of course, mortgage rates are irrelevant.

So if the market is dominated by first home buyers, interest rate increases have a bigger impact but can be mitigated, for example, by wage rises. Buyers who are trading up, selling their existing properties to buy more expensive properties, will be impacted, but with a lower mortgage to income ratio (since they're using the proceeds of a sale to fund the new property) the impact is smaller.

Investors in Oz tend to be one IP people. 40s, 50s couple pays off their house and starts looking to invest. So they refinance their house and buy an IP. With most of a paid off PPOR behind them, they're pretty resilient.

What's the effect of mortgage rates going up to 7%? 8%? 9%? I have no idea. At some point, rate rises beget expectations of further rises, and people pull back (we saw some of that when there was a rush to fix rates in the 8s). But if the rate rises start hurting businesses, etc and affects economic growth, the RBA will also stop raising rates. The RBA doesn't target property specifically.

Where is that point? Different for each submarket. Depends on how much first home buyers dominate, how the economy does and what happens to wages. There's certainly no 'interest rates hit x%, the market falls y%' rule.

 

[alexlee]

Last time interest rates peaked it hurt a lot of people and stunted growth in many areas but it was only kellyville (almost every family is a brand new home big mortgage no equity kind of suburb)

Makes sense. Rate rises hit fhbs who are stretched the most.

Say you bought a place 10 years ago with a mortgage 4 times your salary (say a salary of 50k 10 years ago, and a mortgage of 200k). 10 years later today, your salary might be 80k, and you've paid off say 80k of the mortgage over the years.

So your salary is 80k, while your mortgage is 120k. Rate rises aren't going to hurt you as much as the person on 80k today who just bought a place with a mortgage of 320k.

 

[HandyAndy888]

Back to your old tricks Alexlee with back-to-back posts...I can see your 10,000th post coming up in a week or two...

Don't stop, love your input...

 

[alexlee]

Back to your old tricks Alexlee with back-to-back posts...I can see your 10,000th post coming up in a week or two...

Don't stop, love your input...

So sue me for knowing how to type........

 

[BV]

So the costs of borrowing can continue to increase without impacting prices? Until what point?.

SYDB

IMO prices will continue to increase until there are no more buyers
(because interest rates are too high or prices are too high or both).

In this instance I think we've essentially run out of stock so prices will keep moving because of this but one day prices will be considered too high so buyers will hold off buying and will rent for a few years.

The few years will pass, rents would have gone up considerably, property prices would have been stagnant or had a small 5% correction and guess what? History repeats itself.
The new cycle starts renters are sick of paying off someone else's mortgage, they've got some savings, they have the ability to borrow due to several payrises, so they get on the bandwagon and prices are moving upwards again.

Meanwhile buyers like yourself who stayed out during the last cycle will be dissapointed that prices didn't come down to the level they'd like them to be but they'll have 2 options: they'll either have to pay the new higher prices or to keep on renting.

Therefore, my suggestion to someone like yourseld would be to get in now and buy a smaller property in the area you want to live so that at least you are in the market and can use this place as a stepping stone for your next one. That's how most people have done it in the past and it works.
I know you gen Y's want the best and you want it now but not many people can afford to buy their dream home straight away.

Finally, We all know that interest rates will go higher so you'll feel some pain but this pain won't kill you because you'll have a small mortgage and interest rates don't have much more to move anyway(IMO).
However property prices will creep up higher so it will be harder to buy the same property later. That's what I believe anyway.
Good luck.

 

[Graemsay]

Why not rent SYDB?

Forget your distaste of paying off someone's mortgage, and look at the figures.

KeithJ mentioned 4.5% yields on rental properties, and I've heard of them being lower. That makes it far cheaper than meeting the interest payments on a mortgage, let alone making inroads into the principle.

The other question is what do you think that the future direction of house prices will be? There seem to be two opinions:

• The general view on Somersoft is that prices will continue to rise at above the rate of inflation and wages. (Typically at 7 to 10% per annum, versus 3 to 4% for wages.) If that's correct then buying sooner rather than later will mean you get more for your money as affordability will continually deteriorate over the long run.
• The other view is that over the long term affordability will track wages. At present property is (relatively) expensive, but at some point in the future it be (relatively) cheaper. In which case you might benefit by holding off.

What you believe will determine your investment strategy. If the former then buy now. If the latter, wait.

 

[BayView]

I think that was Harrison Ford in one of the Raiders of the Lost Ark movies.

Sean Connery also says similar in the movie The Untouchables about someone who he shoots after he went for him with a knife or something (that movie had Kevin Kostner in it)

In Raiders, Harrison Ford had a whip, but then pulled out a gun when the guy pulled out a sword on him.

In the Untouchables, Sean Connery said "Typical wops; always take a knife to a gun fight".

On the subject of what Glenn Stephens said, I reckon he's doing the right thing - it's like the parent warning the child about impending danger and to avoid it.

Should you buy while the market is like it is? Probably not; especially if you are needing to borrow 90% or more...

There are two schools of thought on it -
a) ride the wave and get some quick cap gain before the inevitable slowdown when the rates rise and kill it,
b) wait until it all slows down and then jump in, but how long do you wait, will the prices indeed go backwards (I don't believe they will - they'll maybe drop back to current levels).

I don't subscribe to the comments that it's only the rich who can play the game, and it's only the rich who do well out of times like these.

These are the thoughts of people who are not rich, and probably never will be. They see themselves as the people on the outside and not able to participate. Wrong.

The way it is done is by starting on the first step at the bottom, with a small property that will be easy to manage and pay off.

Then you go up to the next step with another small one - maybe slightly bigger - and so on.

After a number of years you are in a position to play the rich peoples' game.

There are a good number of (newer) investors who have this mentality that an IP is this you-beaut brand new 3x2 with DLUG and ensuites etc and costs over $500k, or even just something around $500k, in a major cap city and around the corner from where they live.

Maybe - if you are up that level without risking everything - but how many here are? It doesn't need to be.

 

[HandyAndy888]

So sue me for knowing how to type........

And you do so much of it...

 

[jingo]

Back to your old tricks Alexlee with back-to-back posts...I can see your 10,000th post coming up in a week or two...

Don't stop, love your input...

You said it in your last line, HandyAndy888. Someone of Alexlee's experience, expertise and intelligence is definetely a highly valued resource on this forum! There was a time when Alexlee stopped posting. Let's hope that doesn't happen again!

Regards Jason.

 

[Piston Broke]

I know it's NEVER a good idea to try and time the market, but maybe proceeding with caution is best given the RBA Governor's comments. Maybe even holding off.

I think it's a great idea!
The RBA has never achieved the charter it was given of controlling inflation, avoiding financial crisis and financial stability for anyone except the four "pillars".

Or maybe it's just a matter of weighing up his comments with those of others to come to one's own conclusion, I guess no one really knows where the market is headed.

The reserve system as we know was first implemented in France by a dude called John Law ~1719. Who was criminal btw.
In his own words, the "system" (Banque Royal) required absolute gov power to be implemented and to make work.
And what happened? A bubble within 2 years.
When things slowed down, he printed more money, and gave more credit (nowadays it's called stimulus) and created the illusion that everything was going great and investments (mainly his) would go up forever.
When people starting doubting the value of paper money, the gov made it "legal tender" and made it law that taxes could only be paid with paper money. When more doubts arose, the gov made it illegal for any person to have more than "500 livres in metal coin" and gave authority to search peoples houses.
The bubble burst within a few years, but mainly for the investors and taxpayers.
That's the system Glenn Stephens represents.

If you think he's there to act and speak for your own good, then good luck with that.

http://www.somersoft.com/forums/showthread.php?p=655024#post655024

 

[Deltaberry]

So the costs of borrowing can continue to increase without impacting prices? Until what point? That just doesnt make sense to me - but Im happy to hear a rational explanation of this theory.

There could be a multitude of reasons.... I don't even know where to start explaining it to you. Here's one of many reasons why prices can continue to go up (noting there are probably in excess of 1,000 reasons I can come up with without pausing if I sat here typing all day).

If interest rates go up then holding all else equal, your borrowing power decreases. But it's pretty bold to assume that, in the event of rising interest rates, all else will be equal post-rise. If your salary goes up to offset the rise in borrowing costs, then your borrowing power has remained the same. If your disposable income goes up by more than this level, your borrowing power will go up despite your borrowing costs going up.

Another reason could be prices go up as a response to quasi-globalisation. What if this city still appears cheap to investors and migrants coming abroad? And they continue to drive up prices because, forget about borrowing costs for a second, the 'land' appears undervalued and they're finding a place to park their 'cash'.

Look. No one will ever provide you with a satisfactory explanation because you've come in here with a particular mindset, and you're looking for people to validate your mindset. As the barefoot investor says, tread your own path. Perhaps you're right - prices will crash and we'll all be finished. But in the event you're wrong, 10 years later the same money you hold now will struggle to buy even a flat in Werribee.

 

[SYDB]

Look. No one will ever provide you with a satisfactory explanation because you've come in here with a particular mindset, and you're looking for people to validate your mindset. As the barefoot investor says, tread your own path. Perhaps you're right - prices will crash and we'll all be finished. But in the event you're wrong, 10 years later the same money you hold now will struggle to buy even a flat in Werribee.

It seems like you're the one who has a fixed mindset (that property always goes up!) - I just asked a question.

Maybe I'll be able to buy the whole block in Werribee - don't laugh, crashes have happened in numerous other countries which had similar underlying "strength" to what we have here.

Not saying it will happen, but jeez, everything you have said can be so easily countered. PI's do tend to be somewhat dogmatic about the continued success of their investments - I don't blame them - it's a long way back (maybe impossible) if a crash comes.

It's some bricks and rubble - there are some polished turds selling at premium prices. When the music stops I'll gladly take your polished turd off you at its true intrinsic price, not a manic price driven by greed, media and perpetuated falsehoods!

Thanks god the RBA Governor has his keen eye on things.

Good Luck

SYDB

 

[BV]

Thanks god the RBA Governor has his keen eye on things.

Don't count on it, he stuffed up the economy last time around when he drove interest rates through the roof at a time when even blind Freddy could see the dark clouds coming.

I wonder if he's going to make the same mistake again in an environment where the banks are sucking dry both individuals and commercial customers....

I have little faith in him and the RBA board. IMO they're good at boosting up bank profits and increasing the price of bank stocks, which makes me wonder if they're biased.

I think Kevin should have fired all of them and started fresh with genuine independend members who are not working for any other organisation.
http://www.rba.gov.au/about-rba/boards/rba-board.html#members

 

[WinstonWolfe]

Remind me again why we have had amongst the highest rates in the world.

If higher rates represent a higher reward for risk, why is Australia considered such a high risk for foreign capital, that we need to pay a higher reward?

 

[Sunfish]

Remind me again why we have had amongst the highest rates in the world.

If higher rates represent a higher reward for risk, why is Australia considered such a high risk for foreign capital, that we need to pay a higher reward?

Because we have a chronic high current account deficit and Aussies, individually, are even more indebted than the Yanks. They don't trust us!

I still shake my head how Xtrata "stole" Mt Isa Mines for so little. (< $1.20, I think) Just the odd percentage of what we blow in the pokies invested in good listed companies would force raiders to pay fair price, at least.

 

[WinstonWolfe]

I still shake my head how Xtrata "stole" Mt Isa Mines for so little. (< $1.20, I think) Just the odd percentage of what we blow in the pokies invested in good listed companies would force raiders to pay fair price, at least.

Xstrata are prks imho....and the way our polies deal with foreign investors shows Australia still has an inferiority complex. You can excuse the private sector for trying to turn a fast buck, but not those (public service) who think they deserve a turn protecting Australia's long term interest.

edit: I should have clarified I meant Xstrata managment are prks.....who are dictated to by Glencore.