So which camp was right the doomsayers or the property faithfull?

[hobo-jo]

But is that 'excessive', and if so, why? Lenders normally factor in a 2% IR increase when working out what people can pay back, so there should be room for at least another 1% rise in rates before some people really feel any discomfort. I think the majority though could handle even higher rises than that, and since house prices have risen 12% on average, there may be some room to refinance if necessary. And mortgage holidays are available for those in really dire straits. So how do you determine whether FHBs are borrowing at 'excessive' levels?

From memory in 2009 the report also showed over 50% of FHBs were borrowing with LVRs greater than 90%, with around 30% over 95%.

In my opinion that is excessive. Especially considering the FHOG has been used in some cases to get the deal over the line. The FHOG was a nice bonus when buying, but IMO any FHB that needed it to buy a property was over extending themselves.

What is your definition of excessive?

I would suggest we will see over the next few years whether the lending to FHBs was excesssive or not. No one can know either way for sure until we find out whether they can manage the amount they have taken on.

 

[devo76]

From memory in 2009 the report also showed over 50% of FHBs were borrowing with LVRs greater than 90%, with around 30% over 95%.

In my opinion that is excessive. Especially considering the FHOG has been used in some cases to get the deal over the line. The FHOG was a nice bonus when buying, but IMO any FHB that needed it to buy a property was over extending themselves.

What is your definition of excessive?

I would suggest we will see over the next few years whether the lending to FHBs was excesssive or not. No one can know either way for sure until we find out whether they can manage the amount they have taken on.

I agree that the LVR,s are up there but what i have noticed on the street is a hell of a lot of FHB being knocked back for variose reasons like income,current debt,credit record. This to me says that while LVR,s have remained high. The people being axcepted are more likely to fulfill there requirements ie continue paying there loan. This to me is more important. A low LVR will not mean s#@t if they dont pay the loan off anyway.

 

[RumpledElf]

I would suggest we will see over the next few years whether the lending to FHBs was excesssive or not. No one can know either way for sure until we find out whether they can manage the amount they have taken on.

Yup. Again, too early to call. And as devo said, the very recent loans are screened better but there was a fair stretch they weren't, and that wasn't very long ago in the grand scheme of things.

 

[keithj]

From memory in 2009 the report also showed over 50% of FHBs were borrowing with LVRs greater than 90%, with around 30% over 95%.

In my opinion that is excessive.....

...What is your definition of excessive?

Why is borrowing at 90 or 95% LVR excessive ? I'd define excessive borrowing from a servicability POV, rather than an LVR POV. Excessive borrowing is borrowing more than one can reasonable afford to repay, allowing for IR increases. The banks know this and have lent accordingly.

Encouraging (bribing?) excess FHBs into the market has increased prices in their market. Those extra FHBs are the ones that couldn't get a deposit together, rather than those who couldn't afford to service their loan.

Regardless, the ones who did buy in early 2009 have seen (on average) a 12% gain in their house value... a 95% borrower now has an LVR of 84%.

I would suggest we will see over the next few years whether the lending to FHBs was excessive or not. No one can know either way for sure until we find out whether they can manage the amount they have taken on.

Agree. And the RBA knows it.

We may see lower growth for the bottom quartile, but I expect upgraders (who have been mostly sitting on their hands throughout 2009) to move price in the next 2 quartiles up. ozperp suggested similar above. We've seen compression in prices - the top has fallen, the bottom has risen.... it's a good time to upgrade while there's not much difference.

 

[Shadow]

What is your definition of excessive?

Similar to what Keith said, if the borrower can afford to pay back the loan then I don't think the loan is excessive.

They also have an extra 12% capital growth last year to improve their LVRs.

It will all depend on individual circumstances.

 

[weg]

Similar to what Keith said, if the borrower can afford to pay back the loan then I don't think the loan is excessive.

And this really is the bottom line I think. Very few borrowers are low doc with little income to support their loans.

Any future drops in RE prices or stagflation would be due to reasons other than housing having to correct to be more affordable.

I'm of the opinion however that it's still to early to call how things pan out over the next year or two.

 

[Aaron Sice]

So who is/was right?

The answer should be clear, neither! Instead the large number of faceless and more importantly campless business minded people who were quietly adjusting their investment strategy based on the prevailing information were right. They understood simple economic principals such as cycles start and end and therefore taking advantage of the downside by picking up undervalued assets and now re-adujsting again for the prevailing up cycle.

your credibility just shot up 1000% with me. kudos.

 

[Hoffy]

If they get more expensive there is no yield,

Don't worry about yield - worry about income.

 

[hobo-jo]

Why is borrowing at 90 or 95% LVR excessive ? I'd define excessive borrowing from a servicability POV, rather than an LVR POV.

I think both should be taken into account. If the borrower can't save up a more substantial deposit than 5% of purchase price then they should think twice about taking on a mortgage.

 

[JIT]

I think both should be taken into account. If the borrower can't save up a more substantial deposit than 5% of purchase price then they should think twice about taking on a mortgage.

It's also a function of time.

Eg. If someone can save 5% in a year, then in another year if they continued on this path they could save another 5% (or more).

But if by waiting another year to get into the property market house prices go up by... say 12%, then they're going to start falling behind (your measure of when they're ready to take on a mortgage)...

The smart buyer will get a foothold in the market and then keep saving to reduce the initial principal amount.

I bought my first IP at 97% LVR and maxed out 3 credit cards at 10k to do some maintenance work, to get my foot in the property door.

I kept saving after, and survived to tell the tale!

 

[RumpledElf]

Don't worry about yield - worry about income.

I do. My short term goal is simply 'enough passive income to live off'. We'll be there at the end of this year. This just happens to translate to 20+% gross yeild each on two cheap properties, but you could get the same effect with 1 more expensive property with higher rent on a much lower (positively geared) yield.

BTW you could also apply your statement to people who have goals like "5M portfolio by 2015" or "10 investment properties by 2011" and neglect to mention if they are aiming for negatively or positively geared ... ie profit or loss.

This rental income malarky is confusing my business mentor no end lol

 

[JGM]

"The Property Faithful" were only "right" because of government intervention.

While I'm no bear (as I have my own property portfolio), let's call a spade a spade.

Nobody, could have known that the extent to which our government would intervene over the past year to support/promote residential property prices over the past year:

1. Relaxing Foreign Ownership Laws
2. FHOGB Boost (Plus Extended for 6 months from original date)
3. Changes to Superannuation Laws which made negative gearing more attractive.

A government doesn't take these actions (combined with the RBA's 49 year lows in interest rates) if it believes property prices "dont fall" or the "housing shortage" would support property prices from falling.

I can only ever see the doomsayers being right only when a problem in the economy becomes so big as to overwhelm all government and RBA price support initiatives in the property market (Ala...in the USA).

 

[Graemsay]

The original question was rhetorical, and that it would be more interesting to ask:

1. Why were the property faithful right and the doomsayers wrong?
2. Will prices continue their upwards trajectory?

My best guess is that the economy over the last decade has been driven by cheap money, and that's a large part of what's behind rising property prices around the world.

The GFC was a sudden contraction in credit, and since houses are generally bought on mortgages, it's understandable that prices have dropped in many markets.

Economist wrote a few posts suggesting that the Australian economy had been kept afloat by the carry trade. (Borrowing money in the US, and reinvesting it in Australia at a higher interest rate.) If I'm reading his posts right then that could explain why the country dodged the GFC.

 

[JIT]

The GFC was a sudden contraction in credit, and since houses are generally bought on mortgages, it's understandable that prices have dropped in many markets.

But they didn't, I thought someone quoted 12% growth (not sure which state/city this was)...

I know Melbourne's figures were 17% for houses, 19% for units.

 

[hobo-jo]

But they didn't, I thought someone quote 12% growth (not sure which state/city this was)...
I know Melbourne's figures were 17% for houses, 19% for units.

JIT I think 12% was the national figure from RPData and I assume that's where your other figures are from.

My question: I believe RPData recently changed their methodology for calculating median prices, so are these percentages from a data set where a different methodology was used between the start and finish prices and if so why would you put any confidence in their accuracy?

I bought my first IP at 97% LVR and maxed out 3 credit cards at 10k to do some maintenance work, to get my foot in the property door.
I kept saving after, and survived to tell the tale!

I also bought with a high LVR after saving a 10% deposit in 12 months. There are always exceptions and those that can do it. Do you honestly feel safe with 50% of FHBs doing it though? I'll be blunt. A lot of people I know who have bought property as a FHB have little to no knowledge about finance, I don't trust them to be doing the hard yards and building a buffer shortly after buying with a 5-10% deposit. I see them filling their new homes with furniture interest free from GE and buying big screen TVs.

 

[JIT]

I don't really pay too much attention to median figures to be honest. I've had over 30 percent CG for some of my IPs last year. The overall median price trend is up, that's the main point init?

And why are you so worried about FHBs, I thought it's been established by cleverer people that they only represent a small proportion of the market? Screw them! They must love all that media attention and sympathy!

JIT I think 12% was the national figure from RPData and I assume that's where your other figures are from.

My question: I believe RPData recently changed their methodology for calculating median prices, so are these percentages from a data set where a different methodology was used between the start and finish prices and if so why would you put any confidence in their accuracy?


I also bought with a high LVR after saving a 10% deposit in 12 months. There are always exceptions and those that can do it. Do you honestly feel safe with 50% of FHBs doing it though? I'll be blunt. A lot of people I know who have bought property as a FHB have little to no knowledge about finance, I don't trust them to be doing the hard yards and building a buffer shortly after buying with a 5-10% deposit. I see them filling their new homes with furniture interest free from GE and buying big screen TVs.

 

[hobo-jo]

I don't really pay too much attention to median figures to be honest. I've had over 30 percent CG for some of my IPs last year. The overall median price trend is up, that's the main point init?

And why are you so worried about FHBs, I thought it's been established by cleverer people that they only represent a small proportion of the market? Screw them! They must love all that media attention and sympathy!

Nice gains, what suburbs are they in?

FHBs increased to around 30% of the market during the middle of 2009, but that percentage pulled back towards the end of the year as the FHOG was lowered. I wouldn't really call that a small portion of the market, but I'm not hung up on FHBs, most of the FHB talk has been in reply to other posts.

IMO the real drops (if they come) will be from investors exiting the market in fear of further drops.

 

[Graemsay]

I wasn't clear in my previous post. When I said many markets I meant to say that prices fell in many national markets.

As I said, I still think that the most interesting question is why Australia escaped.

One opinion is that a well timed package of stimuli (the boost, low interest rates, etc.) nipped any fall before it started. That's Steve Keen's argument as to why he's got to take a little hike. But I'm sceptical that government action can have such a big effect if serious problems exist elsewhere in the economy.

I'm wondering if it's more to do with the carry trade that Economist highlighted, fewer bad risks by Australian banks (is there any proof of this?), and the current boom in China fuelling growth in the resources sector.

 

[cloudyday]

I reckon the real downside will be tested during the next 12-24 months after the stimulus. I believe hoards of small businesses were buying up due to the 30-50% tax allowance which ended on December 09. As a small business, we spent big this year, replacing a lot of old inventory, doing our part to help the economy. It will be interesting to see what happens now that the home grants are gone, interest rates are rising and there is no more tax allowances for businesses.

Could the stimulus cause a bigger hangover? For example, many businesses replaced their old inventory/equipment because of the tax allowances, but what happens when consumer demand drops after all these stimulus programs fade away? Average Joe and his business now has brand new equipment, large debts from acquiring those assets and no customers to sell to. What does he do? He ends up firing employees. The employees freak out because they just bought their PPOR homes with the grant. (Just a very pessimistic view)

 

[keithj]

As I said, I still think that the most interesting question is why Australia escaped.

One opinion is that a well timed package of stimuli (the boost, low interest rates, etc.) nipped any fall before it started. That's Steve Keen's argument as to why he's got to take a little hike. But I'm sceptical that government action can have such a big effect if serious problems exist elsewhere in the economy.

Agree. The US & UK & elsewhere also had similar well timed stimulus packages...... didn't work for them though. Our stock market mirrored falls elsewhere, but housing held up & unemployment only increased because of population increase (employment stayed virtually the same).

It's hard to believe that anyone (let alone an economist) would expect a govt to stand by & not take action to stimulate the economy when it looks shaky. The RBA does it every month.

A lot of the D&Gers assume that nothing will change and that their preferred D&G scenario is inevitable. However, the reality is that govt/people adapt to impending bad stuff and the usual outcome is that it's avoided.