i've seen enough - time for thoughts.

[Aaron Sice]

i've had it with the current lending environment - i certainly don't understand it.

my cynical predictions - don't, for a second, think any or all of the following scenarios ARE NOT possible.

1) govt bank guarantee being lifted 31 Mar 2010. 12m "job loss" repayment holidays will end soon after. foreclosure / receivership rates will increase as banks attempt to put more cash/equity back into their coffers. the criteria for repossession will get stricter knowing that rising interest costs will put more pressure on repayments and therefore default rates are likely to rise. after a repossession, a home can be put back to market and the engineered demand will guarantee profit from the sale.

2) the lending environment certainly backs this up. no new development (new OO homes still okay - for now) lending in a period of increasing demand this means that existing stock values WILL increase. this is definitely a board-wide decision, which presents as evidence of a subtle collusion or my favourite, collusion "by default" after the other banks studied why another bank would stop lending and realised how this could work in their favour, too. Dr Phil Lowe, Ast Gov of the RBA has also warned of the issue.

3) more and more recently we've seen govt's covenanting large tracts of land to develop, or zoning them up to a point of ridiculous (Midland WA, Ipswich QLD etc) and now i see the NSW govt is looking to BUY private land with the look to redevelop it. if lenders aren't lending to Joe & Jane Schmoe to develop, then i feel this is predatory action by the NSW govt - being to mandate the acquisition of private land and reap the profit of developing it. Don't think it won't come to a state near you - i'm looking at you Karratha, Port Hedland, Brisbane, Mandurah, Vic Transit Cities.

4) as of today, still no one know the true extent of how much our big 4 were exposed to the downturn and the true nature of the losses they have sustained. i feel the big4 banks are now manipulating the market now they have a large (85%+) hold on the AUS mortgage market - directly and indirectly (US top 2 banks have ~20%) - means they can now do as they please and the govt has NO power to stop them.

5) any reform proposed to regulate banks further will "add cost" to the process and said "cost" through rate hikes will be "passed on" to the consumer, which will cause backlash, and the reform will be dropped because politicians are about votes now, not actually doing the RIGHT thing for the long term benefits.

so here we are - any new construction underway is held to ransom by the unions, and the country is now, offfcially, at the mercy of the banks because no new construction is funded.

big thumbs up to Goldman Sachs for the insights they provided for CBA to complete the task of generating equity to solve their liquidity crisis.

6) how to get out? the only way is for the govt to print all the money they need to pay for their own services / infrastructure without utilising private funding. that's right, govts borrow money just like you and i do to fund public infrastructure, when the govt itself regulates the money supply.

remember, don't, for a second, think any or all of the previous scenarios ARE NOT possible.

 

[josko]

Hi BlueCard,

"aren't possible." Sorry I can't help myself.

I take it you haven't had a successful outcome?

I hear and know your frustration, believe me.

Regards JO

 

[Aaron Sice]

no my finance isn't the issue - it's the system going to hell in a handbasket.

i was taught from a very young age to read between the lines and i've always been close to spot on with my thoughts - this is just some of them.

for discussion.

"isn't" edited...

 

[Ausprop]

there is some weird stuff going on. anyone heard anything about entities wanting to set up a new bank here and the govt holding back their licence? why would they do that?

the behaviour of the banks thru the GFC was deplorable and yet mandated by the govt. Scary times. how can the nation possibly cope with such high immigration and industry if we don't develop anything? the RBA hit it on the head... supply constraints and rising house prices. we are having an engineered housing boom

 

[Aaron Sice]

absolutely engineered.

i DO NOT want to be left holding the bag on this one.

 

[HiEquity]

Hi BC

What was the problem again? Banks withholding new housing supply to prop up the value of their loan books are perfectly aligned with the interests of us buy and hold property investors. It keeps values and rents up - I don't see a problem for the likes of us?

In any case, for some time now banks have been raising funds without the use of the govt guarantee so taking it away won't change much. I can't see a wave of foreclosure happening either - the banks have had heaps of opportunities for that during the GFC and it seems they have learnt that aggressive foreclosure provides no real benefits to themselves.

Interest rates are rising because the economy is growing, jobs are being created, hours are being increased and people are earning more again. Not sure that is a recipe for lots of foreclosures?

The relaxed lending environment of the noughties was an aberration. We are now back to business as usual in terms of LVRs, serviceability and investor skin in the game. And values have held up, if not kept growing...

From my POV, it all looks good...?

 

[Intrinsic_Value]

i've had it with the current lending environment - i certainly don't understand it.

my cynical predictions - don't, for a second, think any or all of the following scenarios ARE NOT possible.

1) govt bank guarantee being lifted 31 Mar 2010. 12m "job loss" repayment holidays will end soon after. foreclosure / receivership rates will increase as banks attempt to put more cash/equity back into their coffers. the criteria for repossession will get stricter knowing that rising interest costs will put more pressure on repayments and therefore default rates are likely to rise. after a repossession, a home can be put back to market and the engineered demand will guarantee profit from the sale.

2) the lending environment certainly backs this up. no new development (new OO homes still okay - for now) lending in a period of increasing demand this means that existing stock values WILL increase. this is definitely a board-wide decision, which presents as evidence of a subtle collusion or my favourite, collusion "by default" after the other banks studied why another bank would stop lending and realised how this could work in their favour, too. Dr Phil Lowe, Ast Gov of the RBA has also warned of the issue.

3) more and more recently we've seen govt's covenanting large tracts of land to develop, or zoning them up to a point of ridiculous (Midland WA, Ipswich QLD etc) and now i see the NSW govt is looking to BUY private land with the look to redevelop it. if lenders aren't lending to Joe & Jane Schmoe to develop, then i feel this is predatory action by the NSW govt - being to mandate the acquisition of private land and reap the profit of developing it. Don't think it won't come to a state near you - i'm looking at you Karratha, Port Hedland, Brisbane, Mandurah, Vic Transit Cities.

4) as of today, still no one know the true extent of how much our big 4 were exposed to the downturn and the true nature of the losses they have sustained. i feel the big4 banks are now manipulating the market now they have a large (85%+) hold on the AUS mortgage market - directly and indirectly (US top 2 banks have ~20%) - means they can now do as they please and the govt has NO power to stop them.

5) any reform proposed to regulate banks further will "add cost" to the process and said "cost" through rate hikes will be "passed on" to the consumer, which will cause backlash, and the reform will be dropped because politicians are about votes now, not actually doing the RIGHT thing for the long term benefits.

so here we are - any new construction underway is held to ransom by the unions, and the country is now, offfcially, at the mercy of the banks because no new construction is funded.

big thumbs up to Goldman Sachs for the insights they provided for CBA to complete the task of generating equity to solve their liquidity crisis.

6) how to get out? the only way is for the govt to print all the money they need to pay for their own services / infrastructure without utilising private funding. that's right, govts borrow money just like you and i do to fund public infrastructure, when the govt itself regulates the money supply.

remember, don't, for a second, think any or all of the previous scenarios ARE NOT possible.

Firstly let me state bluecard i believe you are truely a 'nice guy'. I havent forgotten the pyschological assistance you gave me when the sh**t hit the fan in 2008/2009 and i was just about the only guy on this forum suggesting that for those with a long term view buying as everone else was running to the hills was an opportunity of a lifetime (and this was shown correct in the 'upwards correction we had to have, and has effectively made me independely wealthy from now on).

I will post addtional commenatry to your comments.

 

[HiEquity]

and has effectively made me independely wealthy from now on

Congratulations IV. Remember to celebrate! An achievement worth celebrating if ever I heard one...

Well done.

 

[Intrinsic_Value]

QUOTE]i've had it with the current lending environment - i certainly don't understand it[/QUOTE].

Firstly with this comment could you be comparing things due to my favourite saying: near term data bias. The last 8 odd years since 2001, has been a lending anonomy (spelling?). This had NOT been a usual lending environment. Bank margins are returning to some form of normalicy (and should actually increase further from here). Risk vs return for the last 8 odd years has not been in equilibrium, we are starting to see adjustments back to equilibrium.

1) govt bank guarantee being lifted 31 Mar 2010. 12m "job loss" repayment holidays will end soon after. foreclosure / receivership rates will increase as banks attempt to put more cash/equity back into their coffers. the criteria for repossession will get stricter knowing that rising interest costs will put more pressure on repayments and therefore default rates are likely to rise. after a repossession, a home can be put back to market and the engineered demand will guarantee profit from the sale

.

As i see it we are actually returning to a more normal lending environment. The last 5 years odd as actually abnormal, especially in regards to such things as LVR ratios, lending margins etc. The result of such adjustments is the removal of 'weak players'. But the remaining strong players actually benefit from such a scenario. Both as lenders and borrowers.

2) the lending environment certainly backs this up. no new development (new OO homes still okay - for now) lending in a period of increasing demand this means that existing stock values WILL increase. this is definitely a board-wide decision, which presents as evidence of a subtle collusion or my favourite, collusion "by default" after the other banks studied why another bank would stop lending and realised how this could work in their favour, too. Dr Phil Lowe, Ast Gov of the RBA has also warned of the issue.

Again refer to my point above. One interesting thing i am seeing is those companies involved in contract services and listed on the ASX. Compare for example STS against WOR. This is a potential example of weaker players against stronger players (but not necessary an indication of future share price performance or future returns, future performance depends on so many factors)

3) more and more recently we've seen govt's covenanting large tracts of land to develop, or zoning them up to a point of ridiculous (Midland WA, Ipswich QLD etc) and now i see the NSW govt is looking to BUY private land with the look to redevelop it. if lenders aren't lending to Joe & Jane Schmoe to develop, then i feel this is predatory action by the NSW govt - being to mandate the acquisition of private land and reap the profit of developing it. Don't think it won't come to a state near you - i'm looking at you Karratha, Port Hedland, Brisbane, Mandurah, Vic Transit Cities.

4) as of today, still no one know the true extent of how much our big 4 were exposed to the downturn and the true nature of the losses they have sustained. i feel the big4 banks are now manipulating the market now they have a large (85%+) hold on the AUS mortgage market - directly and indirectly (US top 2 banks have ~20%) - means they can now do as they please and the govt has NO power to stop them.

Remember last year when i was talking about game theory and the oligopolistic situation of our big 4 lenders. It was exactly i why i was saying that for any serious investor, the margin of safety was huge for anyone looking at buying bank shares in 2008/early 2009.
Returns for me are about risk vs return. I do not speculate i invest, looking for not only RETURN OF MY INVESTMENT, but also RETURN ON MY INVESTMENT.
At the end of the day i am greedy, i want both. When i cant get it i sit on the sidelines. But i dont use momentum style investing to justify my investments.

5) any reform proposed to regulate banks further will "add cost" to the process and said "cost" through rate hikes will be "passed on" to the consumer, which will cause backlash, and the reform will be dropped because politicians are about votes now, not actually doing the RIGHT thing for the long term benefits.

Yes you are sooo soooo spot on with this comment. Alot of people dont realise just how spot on you are. This is a public site so i have to be very careful of speaking. But right now i can say that the big 4 are looking away from future 'mass lending' at substandard returns to future areas that provide a future ROE and ROIC that provide better returns. I cannot comment further.
The net result of this will be higher interest rates.

so here we are - any new construction underway is held to ransom by the unions, and the country is now, offfcially, at the mercy of the banks because no new construction is funded.

Like any 'business' it will depend on expected return on invested capital. The banks are not the 'problem'. They are merely the facilitaors of lending. You have identified unions, and local councils, i would add state levies to that problem.
But as an individual investor, this is NOT my problem. As an individual i cant change the system, i just look to profit from it.

big thumbs up to Goldman Sachs for the insights they provided for CBA to complete the task of generating equity to solve their liquidity crisis.

Where do you think some of my strategic information comes from???? I can tell you now its not from commonwealth bank securities

6) how to get out? the only way is for the govt to print all the money they need to pay for their own services / infrastructure without utilising private funding. that's right, govts borrow money just like you and i do to fund public infrastructure, when the govt itself regulates the money supply.

In my opinon the way to get out is to control ones debt situation while the going is good for australia. I am in the process now of deleveraging. Why now and not earlier? because i can now receive the prices i want. Debt is all about risk vs return. In the last couple of years i was COMPENSATED for taking on debt, now i am deleveraging. My operational timing might be out, but not my strategic planning. (ie i cant time the market but i can time the cycle)
Never do what the masses are doing, you can never get rich by doing what everyone else is doing.
Its so easy, yet so few people do it.

 

[lizzie]

3) more and more recently we've seen govt's covenanting large tracts of land to develop, or zoning them up to a point of ridiculous (Midland WA, Ipswich QLD etc) and now i see the NSW govt is looking to BUY private land with the look to redevelop it. if lenders aren't lending to Joe & Jane Schmoe to develop, then i feel this is predatory action by the NSW govt - being to mandate the acquisition of private land and reap the profit of developing it. Don't think it won't come to a state near you - i'm looking at you Karratha, Port Hedland, Brisbane, Mandurah, Vic Transit Cities.

in the hunter alone there have been two large housing developments approved by state and local government (over 2,000 new dwelling each) only to be take to court by the "anti-development crowd" and haven't approval removed ... even the government is having a hard time of it.

although, their current method of wacking in new multi-multi-unit housing department blocks in the middle of residental areas (without having to comply with local government regs) is rightfully causing an uproar.

 

[Psyk]

Very interesting...

Can I get a quick summary on how this will effect the average person?

It sounds like the banks are colluding together to fill their profit baskets after the years of 'easy' money, which as a by-product will raise interest rates for the average investor?

How is the govt. involved?

Very interested...

 

[Nathan]

Hmmm...

Inflation due to undersupply is the key to the next boom.

I see so much potential still out there (in my areas). Not for my numbers, however for affordable housing for people to live as PPOR etc.

I think we will se a rebuild of some of these cheaper areas like 2770 etc...

 

[Amadio]

I am in the process now of deleveraging.

When I see "deleveraging" I think that someone is reducing their debt and keeping the asset - but it sounds as if you are actually selling? Is this correct?

 

[Intrinsic_Value]

When I see "deleveraging" I think that someone is reducing their debt and keeping the asset - but it sounds as if you are actually selling? Is this correct?

Yes this is correct, waiting for cash flow is too slow, unless your assets are generating significant cash flow above the cost of interest (and for property and shares this is almost impossible at the moment, cash flow positive yes, massively cash flow positive, no (unless you are nathon)

I started 2007 with no debt, by late last year the debt had gone up to just under $3million on a mixture of shares and property
Hopefully one property that i bought in 2007 will have sold tomorrow (bought for $320K in 2007 selling price $500k).
I have started triming back on the share portfolio as well.

The net result should be debt of around $2 million.

If the melbourne property market continues to go wild i will sell one more property at +10-15% of the one being sold, which will leave me with three properties and a share portfolio.
If i sell the second property i will be content to pretty much sit on my hands regardless of the market.

In other words i dont try to time the market, but i do try to time my debt situation. The attractiveness of debt is directly proportional to the opportunistic return that i can extract from the investment asset.

In my opinion a buy and hold strategy is a very intelligent strategy. But a buy and hold strategy with large quantities of debt is NOT.

Of course the downside of this are the realised CGT that i will have to pay. But this is just a cost of doing business.

Ifi the planned sale comes through i will then organise to have the remaining properties revalued and a LOC at 80% applied against them. The bank has already given me the OK for this. This will increase available funding to me if i see any opportunities.
If the second property is sold at +10-15% i will repeat this strategy again.

So far return on equity employed for investments (approx numbers)
2007 equity: $800k
2010 equity: $2,250k

Return on equity in 2.3 odd years: 180%
Cashflow throughout the period has been positive and has not been included in the return for simplicity.
Return is before tax on CGT

 

[Dazz]

I will organise to have the remaining properties revalued and a LOC at 80% applied against them. The bank has already given me the OK for this.

Hmmm, my experience in this funding market would suggest what you assume will happen might take a tad more work than you are suggesting here.


I've also seen Banks, plenty of them, be extremely reluctant to put in writing final and fixed unconditional finance approval. For them to get to this stage before they have the title deeds in their hot little hands and have a fully signed off recent valuation is beyond reasonableness. I'd like to explore exactly what you mean by "OK".


Have a listen to the retarded responses from TF, he speaks exactly like a credit squirrel....and he would never give the OK without seeing vals.


What I have seen also is the Banks twisting the Valuers arms to produce val figures that are ridiculously low, such that 80% of that low figure is really only 65-70% of the real value anyway.


Let me know what it feels like to pay all of that CGT. I reckon it would hurt far more than just the glib "cost of business". IMHO, if that's your business, you've got one hell of a big leaky hole in your boat.

 

[Amadio]

Return on equity in 2.3 odd years: 180%

That's very impressive. Good for you.

 

[Intrinsic_Value]

Hmmm, my experience in this funding market would suggest what you assume will happen might take a tad more work than you are suggesting here.

It depends on individual circumstances and your personal relationship with your lenders.

I've also seen Banks, plenty of them, be extremely reluctant to put in writing final and fixed unconditional finance approval. For them to get to this stage before they have the title deeds in their hot little hands and have a fully signed off recent valuation is beyond reasonableness. I'd like to explore exactly what you mean by "OK".

Yes i understand your thought process here. Nevermind what someone is saying at the end of the day its the 'written contract' that matters.
But consider:
1) i am disposing, not acquiring. If i dispose of a property and i have another in the building, then the market price for the other becomes my disposal price. Not much for the valuer to dwell on here (especially as my disposal price is not artificially increased).
2) i am dealing with residential not commercial properties and at 80% LVR's. I have never requrested and never will an LVR about 80%, this is my own personal maximum risk tolerance.
3) the funds from disposal of the property will be used to pay down loans, i am not 'extracting' that money.
4) Never underestatimate relationships. I dont deal with a 'retail' bank manager.

Have a listen to the retarded responses from TF, he speaks exactly like a credit squirrel....and he would never give the OK without seeing vals.

Yes i always give TF's responses due consideration. I might not agree with them, but he is a responsible poster and he sees things from the other side. Again look at the commentary i made during the GFC, many of the isses TF was raising i was in agreement with as a RISK factor for australian borrowers.

What I have seen also is the Banks twisting the Valuers arms to produce val figures that are ridiculously low, such that 80% of that low figure is really only 65-70% of the real value anyway.

Again depends on personal circumstances and the type of assets in question.
For most residential property this is not a problem, especially at requested LVR ratios of 80%.

Let me know what it feels like to pay all of that CGT. I reckon it would hurt far more than just the glib "cost of business". IMHO, if that's your business, you've got one hell of a big leaky hole in your boat.

Not really Dazz. If you have owned your own businesses before you pay tax under a corporate structure of 30%, this is also a 'cost of doing business'.
Do you call that a leaky boat????

Your thought process is similar to the various investment vehicles set up by Macquarie (their satalite funds, such as Map, Macquarie radio, AAD etc) BnB, GPT, centro etc etc.
Why did these blow up???????? (for the intial holders at least, overall i have made very good profit by comming in later)
The intial thought process was correct, but they had structural risks that were not accounted for.

It i have to pay some CGT to reduce the STRUCTUAL risk of my investments because of DEBT, then so be it. At least i am selling on my OWN TERMS and under favourable market conditions.
Being a forced seller is one of the quickest way to wealth destruction.
Just ask those that had margin loans in the share market.

 

[Intrinsic_Value]

That's very impressive. Good for you.

Thanks, i wont be able to keep up that sought of rate of return. But it does highlight an imporant point in my opinion. That ROE was only possible because i was in a financial position to take advantage of asset pricing inefficency.

This is exactly the reason why i dont want to be fully geared at all times.
The future is always uncertain, if one is fully invested, then not only is it more difficult to take opportunistic purchases, but also your existing assets in play can become a liability.

This is why i focus so heavily on underlying intrinsic value, both in the stock market and property market.

 

[Dazz]

It depends on individual circumstances and your personal relationship with your lenders.

How so ?? I am unaware of any lending institution in the country that allows any of it's customers to have a "personal relationship" with any of it's decision makers - the dreaded credit squirrels. They are squirrelled away in some dark room, completely removed from all external contact.

I've asked to speak to them directly, repeatedly, over the past 15 years and never once been allowed to sit down with any credit decision maker.

You're telling me you have, in the past 3 years since engaging Lenders to invest in property, not only been given access to the decision makers but been allowed to form a personal relationship with them ?? I find this amazing. You must be an extra-ordinary individual that has slipped through the usual Banking systems if that is truly the case.

Perhaps you are getting confused with the Bank managers, private banking consultants, personal relationship managers and a myriad of other banking personal who are merely paper shufflers and "credit submission package get readiers" who have not a jot of authority when it comes to a credit decision.

i am dealing with residential not commercial properties

I assumed you were discussing residential security, and I too was discussing residential security. What has commercial got to with the discussion. The OP was talking residential, we all are.

For most residential property this is not a problem, especially at requested LVR ratios of 80%.

My comments regarding the problems I recently encountered were specifically targeting Lenders offering 80% LVR's secured against residential security. If you have found it not to be a problem, then well done, but it departs vastly from my recent experiences in this Lending environment. I might have to run my mortgage broker off and come and have a chat with your personal credit contacts.

 

[HiEquity]

2007 equity: $800k
2010 equity: $2,250k

Hi IV

Thanks for posting real numbers - it makes all the difference. I am interested in your version of being "independently wealthy" though. Are you single? As a single person I might (just) be comfortable giving up the J.O.B. on $2m+ equity but as a family man (which I am) I don't think that would be halfway to financial independence...

Of course it's different for everyone but it's nice to throw numbers around on the risk / reward proposition...