What sort of markets do investors want?

[alexlee]

This sort of related to the Eq Finance Mortgage product being discussed in other threads.

The EFM product has been criticised by a few forum members (including myself) because it'll likely lead to people borrowing too much for their PPOR without understanding all the costs involved. I see some parallels with adjustable ARMs in the US (loans with initial low rates that 'adjust' upwards after a few years). Both are products where people may not have thought through (though their own laziness or greed) the potential cost.

Others have commented why we, as investors, would want to discourage people from buying more 'house', since it'll probably increase the price of property and therefore our portfolios?

This is what I hope this thread will discuss. I'm an investor. I own IPs. If the price of properties increase, my portfolio goes up. I can sell to realise bigger gains, remortgage and pull the gains out, whatever.

So why would I be against products that theoretically increase property values? Because as an investor I would prefer a market that is more aligned to the fundamentals and one that goes up steadily. Currently the market is generally unaffordable, but instead of letting the market adjust by creating more stock in cheaper areas or just plain letting the market stagnate or fall, these products will just keep prices dislocated from fundamentals.

You’d think an investor would want bubbles and busts because you could buy in a bust, sell in a bubble to make more money. True, but I personally can’t read busts and bubbles that well. I find bubble and bust situations to be very difficult to invest in, because I always call it too early. If the market was more smooth I would be much more confident in buying and ultimately the more I buy the more money I make.

IMHO, loans that keep pushing the limit (usually introduced when the market is hot or unaffordable) just fuel the bubble. That makes it more difficult for an ordinary investor like me who can’t tip the tops and bottoms. I would rather have a more orderly market.
Alex

 

[grossreal]

hi alex
for me its the opposite.
I like a very volitial market
I make the most from the buy not the sale.
I get the most if the market is at the bottom or fallen or has hit the max and turns.
similar to any stock market chart.
a flat market or slow growing market is ok for steady growth but heart attacks is when you get very high gains but also very high drops.
and thats the market I like.
but thats me

 

[alexlee]

Each to his own. Which is why you find China to be an exciting market while I would prefer a more sedate market. Also explains why I am willing to borrow for residential property while I'm not willing to trade derivatives (even though I probably know more than most, working in a bank alongside traders who do it for a living).

For an average investor who just accumulates and lets time do its work, though, a smooth market is easier to invest in.
Alex

 

[jingo]

Hi Alex,

I have replied to your original thread in two parts.

Part 1 - The effect of the EFM product on the housing market
I wonder whether one loan product would really appeal to a broad enough population base to have the power to influence the direction of the housing market? It may encourage some people to either:

i) Buy into a location they otherwise couldn't obtain finance for.

ii) Buy a larger home.

iii) Or simply break into the market in a cheaper area.

IMHO I believe that the product will only appeal to a small number of people, and I doubt whether the housing market will be significantly affected by it. As I understand from newspaper articles that I have read recently relating to the US, 'B' grade home loans were only taken out by a very small proportion of the population.

Part 2 - Type of Market Preference

I too would find it easier to invest in a steady market. However, I believe at the moment that in Australia there are steady markets, (outer suburban areas) and there are markets that are moving very quickly. (inner city locations and beach side suburbs). I believe its possible to invest in either a steady market or a rising market. (Or a little bit of both if you so desire )

Just my thoughts, and they may or may not be correct!!

 

[alexlee]

i) Buy into a location they otherwise couldn't obtain finance for.
ii) Buy a larger home.
iii) Or simply break into the market in a cheaper area.

IMHO I believe that the product will only appeal to a small number of people, and I doubt whether the housing market will be significantly affected by it.

All 3 points means people will borrow more than they could previously. I don't know how popular this loan will be. Though the media is certainly playing this up as if it will become a popular loan. Putting myself in the shoes of your ordinary battler, I think this loan will look VERY attractive. Interest free loan! This is the same crowd that thinks it's a great idea to rack up credit card debt and buy things on 2 years interest free and then 30% thereafter (I actually read the small print).

As I understand from newspaper articles that I have read recently relating to the US, 'B' grade home loans were only taken out by a very small proportion of the population.

The problem is how many of those subprime loans will default. Some stats show 20-30% of subprime loans will default. You can bet that the peak of the market also coincides with the highest number of subprime loans. You may not need many defaults before the market starts hurting.

It's a bit like looking at the unemployment figures. 10% unemployment implies 90% of the people have jobs. Sounds pretty good, but we know 10% unemployment is painful. The stats mask what happens to the rest of the people. At 10% unemployment, the other 90% are fearful of losing THEIR jobs so they are more stressed and are less willing to spend.

With housing, if your neighboorhood's prices are depressed because of foreclosures and defaults (remember that only a small number of homes in a suburb change hands a year anyway, so even if 5% of the houses in your area default, that's a pretty big % of the total turnover), you're less able to refinance and use the money to consume. Arguably, Americans have financed current world growth by using their home like an ATM. If property prices fall and that consumption slows, it may trigger more economic pain and more defaults.

Not saying it'll happen but it's one scenario. Markets are built on confidence, so if people THINK it's going to get worse, hedge funds will sell, people will stop spending, etc and it WILL get worse.
Alex

 

[alexlee]

Don't underestimate even one foreclosure. e.g. remember that house in St Marys in Sydney that sold for 60% below what the previous (defaulted) owner paid? It was in all the papers a while ago. That's an aberration, of course, but most people who read the paper will think Western Sydney as a whole is in deep crap.

Now, if you're looking to buy in St Marys, even for a PPOR, what will you be thinking? You're thinking you can lowball the owners. You certainly aren't going to think you need to make high bids because you'll think "this area has foreclosures so there will be plenty of sellers". So this one publicised foreclosure has dragged down growth, if not prices, for the whole area.

Banks might think the same thing. So people who own properties in Western Sydney will find it harder to borrow, and valuers will be more conservative.

Multiply that across many areas, and you see how you don't need many foreclosures to hurt the market and economy. Especially in a market where consumption is dependent on house price rises.
Alex

 

[luce.rocks]

I don't hold anything in Sydney yet. I wasn't planning on holding anything in Sydney for a while. The plan was to make money elsewhere (large regional centres, and then on to Brisbane) through reno's, and then, when I had made enough equity and could afford to look at Sydney, to get an IP in Sydney. I was kinda hoping to have a few years to do that, and that Sydney would stay a bit flat for 18 - 24 months. If EFMs are taken up with gusto then my plan will probably need to be rejigged...