Will restricted lending limit capital growth in next few years

[House_Keeper]

This is from Bill Zheng latest newsletter:

http://www.ecm7.com/rp//417/Content.clsp?ContentId=710

I found this statement quite interesting:

the sentiment of the financial world has shifted to more prudent and conservative lending and deleverage, regardless of when the current recession is over, lending will not be loose again for at least 3-5 years and possibly longer.

In other words, the main driver of property price increase for the last 10 years, i.e. easy credit, will not be there to push property prices up for at least the next 3-5 years, you will see modest growth with higher yield as a result during this period.

Usually I don't pay that much attention to people "forecasting" the property market with their crystal balls. However, this is coming from a mortgage broker who SHOULD know what is happening in the lending market.

Does anybody has any evidence as to whether lending is now more restricted or any hint as to how long tighter lending might last?

Thanks,

 

[marg4000]

The fewer people who can obtain finance the fewer people in the market for property.
The main driver of the recent boom was the very easy finance. I doubt we will see these conditions again in a very long time.
Marg

 

[Aaron Sice]

mmm - definitely an interesting point - and i believe it will ARTIFICIALLY hold prices down.

just the same when prices were artificially inflated by easy credit, which when retracted caused a slump, if prices are kept artificially low by hard credit, when loosened (sp?) up it will cause a return to strong growth.

i doubt very much-ly-ness that when credit eases it will cause a boom, because credit won't just be "opened up" overnight - or even over a few months. we will just see LVRs increase slowly and criteria loosen slowly (like RHG allowing a "gift" as deposits for FHBs etc) will will allow demand to drive prices the way they're bottled to go - up.

a return to normal growth is all i ask for, and in australia, i don't think it's out of the question. will we get better than normal growth? will it be more than inflation? i hope so, but am certainly not saying it will.

 

[Gremlin]

Does anybody has any evidence as to whether lending is now more restricted or any hint as to how long tighter lending might last?

Thanks,

IMO, the answer to your question comes down to "what is normal?" Is the lending environment of three years ago normal or is it the aberration? Is today normal or the aberration?

FWIW, my view is that in no uncertain terms lending is looser today than it was when I first started investing (and it's looser than I've experienced for most of my career bar the last 8 or 9 years). But obviously tighter than it was two to three years back. My take is that what we're experiencing now is closer to a long run 'normal' than three years ago and there's nothing I've seen to suggest it couldn't harden further for resi closer to what we experienced in the early 90s (although I'm not necessarily expecting it).

Over the long run, I'm personally not banking on it returning to what we've experienced in the last five years. Of course, mine is just one opinion.

 

[lizzie]

personally - the tightening credit will greatly restrict what we planned to do.

our townhouse development is on hold for a couple of years - bank would only finance 70% of build cost (not 30% of finished value) and on commercial terms (ie, an extra 2% above resi) ... we have a 20% deposit, but not 30% - and not happy about paying 8+% interest for merely 4 townhouses.

da is current until 2013 so will wait to see if the lending market improves.

also, means we are much more restricted on what we can buy, even with 20+% deposit we have reached current servicability limits.

darn!

 

[Propertunity]

our townhouse development is on hold for a couple of years - bank would only finance with 30% of build deposit (not 30% of finished value) and on commercial terms (ie, an extra 2% above resit) ... da is current until 2013 so will wait to see if the lending market improves.

While this is not good for you lizzie, or others in this situation, what it does do is restrict supply. And when demand is high (as it is atm in certain areas) and supply is low - that can only mean one thing for prices of existing stock - UP!

 

[Ausprop]

I agree propertunity - I think restricted credit will hamper supply possibly more than demand

 

[evand]

Tight credit might restrict new builds and developments but it doesn't restrict property (ppor & ip) going onto the market. Which is the majority of supply if the definition of 'supply' is property on the market.

So, wont put upward price pressure on existing stock as much as you think, if at all.

While this is not good for you lizzie, or others in this situation, what it does do is restrict supply. And when demand is high (as it is atm in certain areas) and supply is low - that can only mean one thing for prices of existing stock - UP!

 

[Token Funder]

Tighter credit policy, lower cut-off scores in credit scoring models, lower LVRs, No Doc essentially dead, Lo Doc significantly restricted, absence of off-balance sheet funding alternatives keeping capital-based caps on lending capacity all mean less borrowing capacity in aggregate.

Given the last ten years was the exception rather than the norm, you might see improvement in some elements in a year or so but you won't see the recent experience again for a decade.

 

[MichaelW]

Tighter credit policy, lower cut-off scores in credit scoring models, lower LVRs, No Doc essentially dead, Lo Doc significantly restricted, absence of off-balance sheet funding alternatives keeping capital-based caps on lending capacity all mean less borrowing capacity in aggregate.

Given the last ten years was the exception rather than the norm, you might see improvement in some elements in a year or so but you won't see the recent experience again for a decade.

Hi Token Funder, I agree. Which is why I also agree that you'll see this:

This is from Bill Zheng latest newsletter:

http://www.ecm7.com/rp//417/Content.clsp?ContentId=710

In other words, the main driver of property price increase for the last 10 years, i.e. easy credit, will not be there to push property prices up for at least the next 3-5 years, you will see modest growth with higher yield as a result during this period.

i.e. Credit rationing is likely going to drive modest price increases but certainly drive higher rental yields. There will be less access to credit for developers and property is going to become a scarce and valuable commodity. Normally that would push prices up, but the absence of credit will limit capital growth too. But the absence of properties will cause the rents to increase as people bunch up into the available accommodation. More GenY's staying home and more sub-letting of spare beds.

Good for those who own the properties or can access credit. Thankfully I just scraped through for my development on a 70% max LVR commercial lend. I had enough skin in the game even at a $2.5M Gross Realisation that I could get it through. I get the impression not too many developers are putting that much in normally.

Cheers,
Michael

 

[Propertunity]

Given the last ten years was the exception rather than the norm, you might see improvement in some elements in a year or so but you won't see the recent experience again for a decade.

One of the things we learn from history is that we don't learn from history. In this respect, I'm sure your right TF, we will again see loose credit lending come around again......and I for one will welcome its return.

 

[chilliaa]

Tight credit might restrict new builds and developments but it doesn't restrict property (ppor & ip) going onto the market. Which is the majority of supply if the definition of 'supply' is property on the market.

So, wont put upward price pressure on existing stock as much as you think, if at all.

You are only looking at it from a single step viewpoint.

The major problem with the US was excess supply (if i get kicked out of my home who cares, theres stacks of surplus rental properties available).

When push comes to shove, the supply is short, then it WILL act as a big support to downwards pressures on property prices, and WILL act as a big incentive to upwards pressure.

 

[chilliaa]

Tighter credit policy, lower cut-off scores in credit scoring models, lower LVRs, No Doc essentially dead, Lo Doc significantly restricted, absence of off-balance sheet funding alternatives keeping capital-based caps on lending capacity all mean less borrowing capacity in aggregate.

Given the last ten years was the exception rather than the norm, you might see improvement in some elements in a year or so but you won't see the recent experience again for a decade.

Quite agree with you, and hopefully will lead to a more sustainable market.

 

[MichaelW]

Hi Guys,

More coverage out today on the impact of credit rationing to the resi construction market in line with my thoughts above:

Building slump threatens buyers, tenants

THE number of approvals for new apartments and townhouses in NSW has fallen to the lowest level since 1983, prompting fears that the slump in developments will force up rents and house prices.

Mr Morrison said it was inevitable the looming shortage would push up rents.

"The pressure on rents is certain to continue, and that's another reason why we need the stimulus to encourage more housing construction," he said.

The lobby group's chief executive, Tim McKibbin, said a shortage of new apartments meant tenants would be facing longer queues for rental inspections as well as rising rents.

"People will find it increasingly difficult to have that basic human necessity of a roof over their head. There is nothing on our horizon that would lead me to conclude that we are going to have an injection of stock to meet demand," he said.

Simple supply and demand economics. You reduce supply and simultaneously increase demand then the price for the good has no option but to increase. Whether its to buy it or rent it, the price is going up. In the face of constrained credit, it suggests more of the latter and less of the former.

Cheers,
Michael

 

[lizzie]

it was mentioned to me yesterday by a friend that they caught the end of a news announcement about the halving of stamp duty for investors.

anyone hear more?

 

[evand]

What do you mean by 'single step'?

When interest rates increase a lot of property will be on the market and this is increased supply.

The only things driving demand over supply at the moment is record low interest rates and temporary govt stimulus which the effects of seem to be petering out a bit lately.

You are only looking at it from a single step viewpoint.

The major problem with the US was excess supply (if i get kicked out of my home who cares, theres stacks of surplus rental properties available).

When push comes to shove, the supply is short, then it WILL act as a big support to downwards pressures on property prices, and WILL act as a big incentive to upwards pressure.

 

[MichaelW]

The only things driving demand over supply at the moment is record low interest rates and temporary govt stimulus which the effects of seem to be petering out a bit lately.

Hi Evand,

You're kidding right? What about record levels of immigration (increasing demand) and record low levels of building approvals (reducing supply). Put that in the context of already massive undersupply and you just get an escalating imbalance situation.

Its not all just about grants and interest rates, that's more a factor of affordability and purchasing power than demand/supply. And, as I said above, the affordability/credit situation more determines the rent vs buy decision. Demand and Supply of the product has nothing to do with financing.

If the credit market shuts up shop we'll get it in yields instead of capital gains. If it doesn't then we'll likely get it in capital gains. The demand/supply situation is virtually set in stone and we'll get our profits one way or the other.

Cheers,
Michael

 

[chilliaa]

What do you mean by 'single step'?

When interest rates increase a lot of property will be on the market and this is increased supply.

The only things driving demand over supply at the moment is record low interest rates and temporary govt stimulus which the effects of seem to be petering out a bit lately.

Given that 70% of property is still owner occupied, where do they go?
cant go into rental accomodation as its too tight.
Thats the key point im making.
It will effect MARGINAL decisions. Some maybe forced to, but unless interest rates go haywire, low underlying supply will act as a support buffer.
If supply was to increase though dramatically then that becomes a different situation.

By theway im one of those marginal players. If i the rental pool suddenly expanded rapidly then rents would drop, i would have lots of rental choice with limited compitition. This would have an effect on my decision whether i stay in my own property (given market price) or rent.

 

[evand]

I don't buy the immigration line as prices rise in non immigration areas as well. Sounds good tho.

Yes, rents will rise but my point is that tightening credit will not restrict supply, only demand.

Hi Evand,

You're kidding right? What about record levels of immigration (increasing demand) and record low levels of building approvals (reducing supply). Put that in the context of already massive undersupply and you just get an escalating imbalance situation.

Its not all just about grants and interest rates, that's more a factor of affordability and purchasing power than demand/supply. And, as I said above, the affordability/credit situation more determines the rent vs buy decision. Demand and Supply of the product has nothing to do with financing.

If the credit market shuts up shop we'll get it in yields instead of capital gains. If it doesn't then we'll likely get it in capital gains. The demand/supply situation is virtually set in stone and we'll get our profits one way or the other.

Cheers,
Michael

 

[Ausprop]

Yes, rents will rise but my point is that tightening credit will not restrict supply, only demand.

the crux of this argument is that NEW supply is irrelevant as supply can come from existing stock?