How could restricted borrowing change investing approach

[see_change]

I was thinking through the potential impacts on the limiting of the ability to buy multiple properties .

Firstly , there is only a small proportion of investors who buy multiple properties , however my assumption is that somersoft has a much higher percentage of these investors than normal .

At the extremes there would be two different profiles .

At one end you have someone who has high income , lots of equity in reserve , and their investing is for them fairly conservative .

At the other end you have someone on a low / average income who relies on frequent revaluations to draw down equity to buy further properties . Their buffer is reliant on these and they have to watch their money very closely . Obviously after with time their equity builds up as does their income from increasing rent , but they would be relatively rent reliant .

I think we have both of these styles of investors on the forum with many in between .

My assumption is that any changes in serviceability will have a significantly bigger impact on the later group , and probably not much on the first group.

So if you were in the second group and couldn't buy those 12 properties that you know you can afford ?

You could try and find people in the first group to borrow from . Could that be a new opportunity ?

Or you could try and maintain the rate at which your equity increases by chasing the next hot market .

Buying in Sydney when you see the market starting to move , selling as it peaks , then putting that equity in to Brisbane for the next 2-3 years ,selling up and moving on to Perth , where ever you see the next opportunity .

So instead of revaluing and drawing out equity , selling , paying tax and moving on . Will the changes in servicability lead to a more trading approach .

obviously you'd need to run the numbers to see if that actually generates more money after costs are deducted ,

Thoughs ?

Cliff

 

[Jamie M]

Hi Cliff

Good post.

I share the same assumptions.

Those that will be hit hardest are the investors on low/average incomes looking to build a portfolio.

The move to treating other banks debt at an inflated repayment amount will effect these investors greatly. They are going to hit a servicing wall much quicker.

For those on high incomes with a decent amount of equity/cash- the changes will have less of an impact to their ability to borrow.

Cheers

Jamie

 

[Rolf Latham]

Or you could try and maintain the rate at which your equity increases by chasing the next hot market .

Buying in Sydney when you see the market starting to move , selling as it peaks , then putting that equity in to Brisbane for the next 2-3 years ,selling up and moving on to Perth , where ever you see the next opportunity .

So instead of revaluing and drawing out equity , selling , paying tax and moving on . Will the changes in servicability lead to a more trading approach .

Interesting comment, much of this has been going on for at least 15 years here on the quiet , but its not fashionable to confront the dogma of "never sell" that many peops have - often for little logical reason..............



Im seeing a rebalance of portfolios amongst our clients with an aim for 3 main outcomes

1.
Income and diversification.

We are getting close to pulling up stumps on our PAYG or SE active income, and much of our stuff is older style, high maintenance growth stock. We are seeing a deleveraging and then rebalance into more income related property, generally smaller and newer, also with some focus on NRAS, and into equities, SMSF and allocated pensions etc


2.
Increasing the overall portfolio value

Usually but not always to overcome a serviceability issue, flogging low yield stock for higher income potentially lower CG props, but the net end result is planned to be significantly better

3.
Shoot the dogs

Most of us have invested in stuff that didnt exactly perform as we expected.......

ta
rolf

 

[dolby]

me reckons we are in for a big kick in the teeth. someone's gotta slow down this ole bird called the Sydney housing market.

 

[see_change]

me reckons we are in for a big kick in the teeth. someone's gotta slow down this ole bird called the Sydney housing market.

Historically , once Sydney slows or gets unaffordable , other places start moving more .

Cliff

 

[see_change]

For those on high incomes with a decent amount of equity/cash- the changes will have less of an impact to their ability to borrow.

Cheers

Jamie

That's what I'm hoping .

Cliff

 

[Redom]

Great post sea change - very interesting.

Whats happening is a closer linkage between income and debt levels. Prior to changes flowing through, someone on 80k can grow their portfolio well into the millions with some good structuring, yield purchases, etc.

In income/debt terms - with decent yields, thats something like $35 of borrowing for each $1 of salaried income. Of course rental income makes a big part of it too.

With these changes, that ratio is likely to fall big time, especially if all the lenders move to actual repayments and inserting buffers. It'd be somewhere near the vicinity of $10-15 of borrowing for each $1.

Now there's not many in the general population that seek to gear themselves to the hilt that far, but there'd be an impact on all of those that fall in between those two points.

I explain concepts like the 'serviceability' wall to all my new investor clients seeking to grow a very large portfolio. That wall was stretched out very far into the distance with rate cuts and lender policy. Now it looks like it'll no longer on the horizon and just around the corner instead.

Taking the extreme assumption that this tightening continue and ALL lenders apply interest rate buffers on all debts (talked about and the big serviceability risk to investors), i'd see a few consequences:

1. Some that have passed the corner may have already passed their wall and will need to make plans accordingly. Getting I/O extensions may be a nightmare for this group of investors. Will they have prepared the appropriate buffers given many wouldn't have factored this into risk assessments?

This may lead to divestment from some investors.

2. Those looking to leverage - most will be capped to 4-5 properties in this scenario rather than 15+.

This will lead to a slowdown in investment lending/demand from its current highs. Given rates are so low, i'd suspect investor lending growth to moderate to around 5-7% again. This would have an impact on prices. I'm still trying to figure out the segmentation of which markets it'd impact.

In terms of opportunities - may incentivise some to enter the PPOR market (pricing differentials between investment and PPOR loans).

Cheers,
Redom

 

[see_change]

The question I'd ask of the brokers is what percentage of their clients will be affected .

As noted , probably tend to have more aggressive investors here .

How many investors take things to the maximum limit possible .

I'd clients feel that their serviceability is better than the banks allow , will they be inclined to go for lower yi Le , better positioned properties l or will they aim fo higher yield properties to improve their serviceability , or will that decision become a more important factor in deciding where to buy .

We have to remember that most people only buy one or two IP's , so it may not have a major impact on the market .

Cliff

 

[see_change]

In income/debt terms - with decent yields, thats something like $35 of borrowing for each $1 of salaried income. Of course rental income makes a big part of it too.

With these changes, that ratio is likely to fall big time, especially if all the lenders move to actual repayments and inserting buffers. It'd be somewhere near the vicinity of $10-15 of borrowing for each $1

1. Some that have passed the corner may have already passed their wall and will need to make plans accordingly. Getting I/O extensions may be a nightmare for this group of investors. Will they have prepared the appropriate buffers given many wouldn't have factored this into risk assessments?

This may lead to divestment from some investors.

Couple of interestingly comments Redom

I hadn't really though about the inability to get I/O extensions . For some that could be a major factor .

In terms of your rule of thumb borrowing capacity . That's also something I hadn't heard of before .

How would existing equity impact the situation ?

Eg someone on 200k wanting 2 million dollars of loans . How would their existing equity impact it if they say had 3 mill vs 1 mill equity . Obviously income generating equity would come into the equation .

Do you have any rule of thumb calculators ?

Cliff

 

[skater]

1.
Income and diversification.

We are getting close to pulling up stumps on our PAYG or SE active income, and much of our stuff is older style, high maintenance growth stock. We are seeing a deleveraging and then rebalance into more income related property, generally smaller and newer, also with some focus on NRAS, and into equities, SMSF and allocated pensions etc


2.
Increasing the overall portfolio value

Usually but not always to overcome a serviceability issue, flogging low yield stock for higher income potentially lower CG props, but the net end result is planned to be significantly better

3.
Shoot the dogs

Most of us have invested in stuff that didnt exactly perform as we expected.......

You're obviously talking about me!

I've done all three just lately! Although to be fair, I knew the dog was a dog when we went in, and since the market hadn't moved for a long time, and the price was right, the dog was worth buying with the sole intention to shoot it once the market moved enough. So....technically it DID perform as expected.

 

[Peter_Tersteeg]

As Cliff initially suggested, the people with the more established portfolios are more likely to be less affected as they're in stronger cash flow and equity positions. Those who are starting out, more aggressive and with limited resources are going to be more affected.

At this point I don't think it's really going to affect any of my more established clients, outside of what they want to do in the immediate future.

The impact on the less established investors isn't really that great either. I see a lot of people running out of equity and deposits before they run out of affordability.

It will affect some people, but I don't think it's as dramatic as some believe. Given the current low rate environment, people should be factoring in a significant rate rise, so perhaps pulling investors up with high debt levels isn't an entirely bad idea.

 

[Rolf Latham]

Just like other gov changes and imposts to the financial services industry in general over recent years, the little guy can no longer afford qualiy financial advice, and now may possibly may be also sidelined from an equitable participation in the investment markets due to government influence to protect the greater good.

Unintended consequence im sure, and simply collateral damage

I know I come across like a greenie soya cappuchino sipping socialist but I am seeing first hand how Fofa (as an example) has made access to financial planning damn expensive and out of the reach of many that would benefit from it

To a large extent though I do agree with Pete, on the lending and property markets side this too will pass

ta

rolf

 

[WattleIdo]

Fools rush in where angels fear to tread.
Who can resist the opportunity to throw in a proverb?

Surely any changes will affect those more highly leveraged. Income would be a secondary issue.
Live within your means.
Strike while the iron's hot.
Make hay while the sun shines.
I would think that banks have been cautious with your average Joe and Joanne ... at least one of whom would be conservative anyway.
Harder to come up with a 10 or 20 percent deposit the higher the numbers go.

 

[psylink]

Has anything official come out about changes to lending from any institutions ? I know one of the orange coloured guys today decided to stop lending to investors above 80%LVR as a blanket rule.

 

[datto]

In my opinion, this tinkering buy the govt to control lending by investors is only going to increase rents.

In Sydney, there's a heck of alot apartments going up to cater for the growing population. Less investors means less properties available for rent. Rental supply down means rents go up. It"s gonna be a yield yileld yield market.

I'm gonna hold onto my lot and start jacking the rents up. No more Mr Nice Guy.

 

[see_change]

There may be some pain for OTP buyers who were planing on 90% LVR's , and if we have a few defaults that may cause some buying ops in those areas .

At the moment I'm glad we decided to downsize last year.

Cliff

 

[skater]

No more Mr Nice Guy.

Were you ever Mr Nice Guy?

 

[Redom]

There may be some pain for OTP buyers who were planing on 90% LVR's , and if we have a few defaults that may cause some buying ops in those areas .

At the moment I'm glad we decided to downsize last year.

Cliff

Im not so sure of this just yet Cliff - this would mean most banks start restricting LVRs.

APRAs peripherally mentioned that they have the option to go down this route if necessary, but this sort of intervention appears to be a while away. At this stage it is just tinkering and asking individual banks to move in line with their pre-defined prudent standards. Each bank carries different types of exposure, and overexposure on their books. BW i would assume is carrying a significant portion of high LVR loans and hence have cut back in this space. Other lenders have DSR issues and hence are tightening serviceability calculators.

Not sure that LVR issues are a key risk just yet for the majority of lenders.

Nonetheless, should growth continue to run over the next 12-18 months at an unsustainable pace driven by investor credit demand and loosening standards, then yes, we may see some real hard caps imposed and a big impact on the OTP market.

Cheers,
Redom

 

[datto]

Were you ever Mr Nice Guy?

Did you have to ask? It was rhetorical

 

[mcarthur]

Good post and ideas!

...
2. Those looking to leverage - most will be capped to 4-5 properties in this scenario rather than 15+.

Which means investors will stop trying for lots of lower priced properties and move to mid-range where yield is still acceptable but GC prospects are high enough to offset not having lots of smaller CG's.

This will lead to a slowdown in investment lending/demand from its current highs. Given rates are so low, i'd suspect investor lending growth to moderate to around 5-7% again. This would have an impact on prices. I'm still trying to figure out the segmentation of which markets it'd impact.

In terms of opportunities - may incentivise some to enter the PPOR market (pricing differentials between investment and PPOR loans).

Incentivising into PPOR would, I suspect, mainly mean investors upgrading their current PPOR (some investors are certainly sans PPOR, but I suspect a clear majority have one). Upgrading PPOR means their existing house would be put on the market and, given the tradeup is voluntary, wouldn't occur unless the price was reasonable-to-high.
So the result is more mid-priced (guessing) investor-owned-PPORs coming on the market expecting a good sales price. If the mid-end of the market goes off the boil, this may restrict PPOR upgrading too meaning both investment and PPOR upgrade becoming unpalatable. = fast slowdown.

I'm interested to hear what segment of the market you think could be negatively effected the most by the (possible/probable) slowdown in investment lending.