Sydney property market on edge of collapse

[WebBoard]

From: Louie Langov


After the ridiculous prices people have been paying for property, it was obvious that vacancy rates would increase, due to easy lending and low rates. Get real, how sustainable is $600 rent a week in paddington! People move out, rents decline and I'm just waiting for the foolish to sell me their houses. This situation is so similar to the tech wreck its not funny. Whether its shares or property, you make money when you buy , not sell!

 

[Rolf Latham]

Reply: 1
From: Rolf Latham


Hi all

There has been a lowering of rates in recent times, although there is some mild upward pressure on rates at the moment.

The statistical link between rates and prices is in an indirect and weak one.

One eminent Sydney Property Statistician will tell you that: historically, there is actually a slightly inverse correlation between interest rates and rates of capital growth: ie higher rates = higher rates of growth - odd but provable.

The implication is that rates are primarily responsible for increases in property prices.
There is a paradigm shift going on in our society - current (middle term ~ 3 year average) price growth will be sustained.

One:
Technology has increased access to information thereby increasing the actual market base of investors - thereby creating more demand.

Two:
Basic Financial literacy is greater than it was 10 years ago , AND will increase further.

Three:
Ageing Society, changes in demographics, realting to point two above, most people in their 40s and 50s know they need to look after themselves because no-one else will. This attitude filters down to the next generation also, since if curretn trends continue, our number of retired people vs rest of the population will almost double over the next 40 years.

Four:
Superannuation assets growth. Super based assets invested have almost tripled in the last eight years. These Managed and Super Funds Moneys find their way into direct property investments in one way or another, thereby again increasing demand.

Five:
Recent figures show Mums and Dads are getting out of direct share ownership, into managed funds and direct property. Not surprisng since most of the increase in direct share ownership have been one off freebies from demutualisations or floats.

Six:
Easy lending ? The reality is that most lenders will not lend you more than you would effectively pay in rent. And as all you multiple IP owners out there will know, when assesing rental income they generally allow ~ 25 % of the actual rental income to be used as repayments.

You would have to be a poor risk manager to get into trouble with that sort of conservative approach. Having said that, ALL investment needs to be far more risk managed. This is even more important in property than in other areas. Why - because the leverage in property can be 5 times higher than against other financial products, even though property is much less volatile.

Ta



Rolf

 

[GoAnna!]

Reply: 1.1
From: GoAnna !


Hi Rolf

You said "The implication is that rates are primarily responsible for increases in property prices."

I would have thought that the relationship between property prices and interest rates is that during high inflation period the govt puts the breaks on by increasing interest rates. Therefore increasing housing prices (as part of overall inflation) drive the rates up.


GoAnna !
Why not go out on a limb, that's where all the fruit is. (Mark Twain)

 

[adaran01]

Reply: 1.2
From: Adam Randall


Hello
Just tying in points 1 and 3 (also want to make mention of point 6)with personal experience. I work in the I.T industry, historically this field is full of cashed up young people, with 24 hour access to a world of information. I can assure you out of about 12 I work with on a day to day basis, the closest they come to forward planning is working out how they are going to score on a friday night, let alone planning their financial future (just like generations before mine). Just because the tools for financial freedom are more readily available than in the past does mot mean people are going to use them.
Not to sure if I am reading point 6 correctly, I have 3 rentals, and the bank takes into account 80% of the rent from my properties, maybe Im reading it in reverse, or maybe you mean 25% of your total income cannot be used for purchasing property.
PS I thought there was a mild pressure on rates being pushed down again.
regards Adam

 

[Rolf Latham]

Reply: 1.2.1
From: Rolf Latham


Hi Adam

Good to see some different opinions - more please !!! The more discussion the more information is shared.

Would not argue about the use of the information that is available for some groups of the community. There will always be those that will not have the time to use the tools they have.

Increasingly these people will be serviced by a growing army of financial advisors.

Partially at least, one's life is determined by the decisions you do or don't take, perhaps even about priorities - I see it all the time with my clients. Sad people that have innocently toiled for someone else and in the process having ignored their own financial future. Suddenly they hit 45 or 50 and its wake up time, they will be dependent or partially dependent on a government that has less and less to give.

More and more of today's generation will be carrying an extra burden. That of providing for their own future AND that of their ageing parents.

There is a huge difference though about the generation before yours and mine. Quite simply the information was not available to your average person. It was also socially acceptable to be financially complacent, as it was to be a smoker.

Great you have 3 rentals !! I suppose its hard for your then to see your coworkers squander their opportunities.

On the 25 % of rental income issue. You are correct. Some lenders will even take 100 % of your rental income toward serviceability calculations.

Some of the older Debt to Service based Models are that they will take 75- 80 % of your rental income AND allow up to 40 % of that 80 % to be used to service debt. Then they will add a 10-15 % margin to the interest rate, and generally calculate serviceability in P&I rather than I/O, all the while ignoring tax benefits (if any)

In the end on the most conservative models
you are licky to get 25 % of the rental income to be allowed to service debt.

Even on the more modern cashflow based methods where some will allow 80 % of gross rental, they still assess with up to a 37 % rate margin and on P&I not on I/O, so the net effect is a diluted allowance of around
the 50 % mark, some models will go to about the 66 % mark depending on your tax position. My point was simply that you should not run into twouble purely based on "easy lending".

The way I see it variable rates are unlikely to be cut any further. Short term fixed rates have gone up by 25 points in the last couple of weeks. The 5 year rate has increased by 5 to 75 points in the last 2 months. RBA has taken us off the US merry go round at least for the moment. This is not advice ), just a punt, all need to make their own call.

Ta

Rolf

 

[Rolf Latham]

Reply: 1.1.1
From: Rolf Latham


Hi GoAnna

Im no economist !!

McFarlane would be pretty upset if you said to his face that he is a stooge of government.

The RBA is supposed to be an independent body toying with fiscal policy.

The last time the brakes were put on (late 80s)(anchor thrown overboard more likely) the gov of the day still had strong influence over the RBA, supposedly not so anymore.

I think its a chicken or the egg this one since its the fast growth in the economy that brings inflation.

In any case my point was that statistically it can be shown that HIGH rates = higher prices growth. What causes that I have no clue !

Ta

Rolf

 

[GoAnna!]

Reply: 1.1.1.1
From: GoAnna !


Oooops I meant RBA puts breaks on not govt! Whatever was i thinking ??

GoAnna !
Why not go out on a limb, that's where all the fruit is. (Mark Twain)

 

[adaran01]

Reply: 1.2.1.1
From: Adam Randall


Hi Rolf
Isn't it funny how the RBA takes us off the merry go round when interest rates are dropping, yet the second interest rates go up in the U.S Australia follows like the little lapdog we are (not mentioning US commitment on east Timor or missile defense systems), Im pretty sure their were burn marks on the letter from the bank last time they told me my interest rates were going up, yet when they went down I think my letter went via Afghanistan.
I suppose I should learn a bit more about money markets, some of the things you mention (5 - 75 basis points etc) have gone straight over my head.
I have recently refinanced, and was quoted over 10K in break costs, I settle this new loan on Tuesday, and that figure has dropped to 6K, maybe this has to do with what you are talking about, as I was told this figure is based on daily fluctuations in money markets (this is over a 20 day period).
Regards Adam

 

[WebBoard]

Reply: 1.2.1.1.1
From: Glenn M


Adam,


Basis points are money market lingo used to describe %'s.

Say for instance, a 25 basis points increase/decrease in rates equals one quarter of a percent or 0.25% increase.

Similarly 75 basis points equates to three quarters of a percent or 0.75%.

Hence each 0.01% of an increase/decrease equals 1 basis point.

Both tradition and ease of reference have contributed to the use of the term 'basis point'.

Hope this helps.


GlennM.

 

[Rolf Latham]

Reply: 1.2.1.1.2
From: Rolf Latham


Hi Adam

Gee ya gotta watch the jingo lingo dont ya

Sorry about the industry speak.

Simply 1 point = 1/100 of a a full percent

so 25 points .25 %, and .75 points = .75 %.

Yes there is a disparity in terms of rates going up or going down.

The reason your break costs have come down is that you are on a fixed rate product. the 10 k cost is partially the difference between your loan when you fixed and the same product you could buy today. Because fixed rates have gone up since you had your quote the difference between them is smaller so therefore less break cost.

Why are you refinancing and paying reak costs. There may be a simpler and cheaper way ?

ta
ROlf
Rolf

 

[adaran01]

Reply: 1.2.1.1.2.1
From: Adam Randall


Hi Rolf
Thanks for explaining those terms (you to Glenn)
The reason I am refinancing is the loan product I wanted a couple of years ago was refused to me (by several banks) because I was an investor. Now this loan is readily available to investors as well as homeowners.
(all in 1 LOC 1 account 55 days credit card, auto pay feature etc).
I have got the new loan at 4.99% for 6 months, then it reverts to .5% below vairiable after 6 months.
Then compare 4.99% to 7.75% (what I am currently paying) over 6 months on a 400000K loan the saving is greater than my break costs, so I am already ahead at the 6 month mark (assuming interest rates stay still).
I also got the following from my new bank.
4.99% for 6 months
No account keeping fees on any account.
No application fee
All valuations were free
All future valuations will be free.
After 6 months I will revert to the proffesional package at no charge.
Maximum repayment 40000 P/A (more than i could ever pay off anyway)
I want this setup because It will streamline and simplify all my finances, I (will)have $50000 LOC, and once I have built up a bit more equity I would like to work on a 2-300000 LOC this way I can offer cash for my future properties, this I really think will be a big bargaining tool over people who have to wait on finance, especially on properties that have had finance fall through a couple of times.

 

[WebBoard]

Sydney Interest rates/Fix it. Honeymoon or ??

Reply: 1.2.1.1.2.1.1
From: Gee Cee Cee


But if rates moved a couple of percent the honeymoon would soon be over.

Rates in my eyes (may be wrong ) are upward

What will the lock in rate be for 3yrs or 5yrs once all the honeymoon ends.


Gee Cee

Depends on your 3-5 yr + GOALS.

I like to be set at knowing such in relation to % rates. (Set cashflows etc)

Any views on whether to lock or not. I have expressed such previously.

 

[Rolf Latham]

Reply: 1.2.1.1.2.1.2
From: Rolf Latham


Nice deal

Remember though you have sold you rate protection to achieve it. If rates remain steady youll win, if they dont then youll probably break even )

Some take this sort of thing to the extreme
I HAD nomadic clients that used to refinance once a year usually with another lender


Rolf