Would you continue to invest in IP if population growth stopped ?

Hi Pete

Hi Winnie

when there is an imbalance (excess or lack of) of any driver it becomes a key to what the market is doing, but the other drivers don,t become irrelevent.

Yes, but there are times, as during the last property boom (my original point), when demand was unmistakenly a dependent variable of credit availability and cost. i.e.

- the rate of sales increased due to looser credit, which drove fear of having to pay more in the future, and the greed to make profits.

- as credit tightened, demand hasn't mattered, as sales and new supply are being restrained by lenders, as outlined in my previous post (sans the FHB bonus).


By any stretch of the imagination, I find it hard to accept credit can ever be a dependent variable of demand. IMO, the primary driver of property will always be credit because the availability of (leveraged) capital to lend to buyers will always be the more finite commodity.......that is unless we move more towards borrowing evermore foreign capital, and the govt bails banks with big loans.

Just as the demand for red ferraris by teenaged boys will never be satiated, so too the demand for houses.


Not being an expert on this I would think that perhaps the problems they had
in accessing funds when the GFC began and then the increased costs of funds above the banks costs would not have aided them in keeping their market share and perhaps the fact that a number of non bank lenders were taken over by banks would also impact on market share or perhaps consumers became wary of borrowing from these lenders may also have had an impact.

But surely if demand is the more important driver, and people can't secure a loan from a bank, then they'd run off to a non bank lender, and pay a higher rate of interest.

The fact that many non bank lenders have had to close shop reinforces that it is not demand per se, that determines the market....rather it is that portion of demand that satisfies prevailing credit criteria, and that portion is far and away determined by lenders, not demanders.


Although a little confused about what your mate told you, with the banks
throttling the approval of home loans, in cooperation with the Fed Govt, to reduce the risk of a higher volume of defaults during a recovery, and to govern the volume of grant bonuses issued by the Fed Govt.

and you posted,

more loans mean more profits right?

Cheers

Pete

In my last bit which you found confusing, I was pointing out the paradox, that demand is high at the moment, as evident by overworked loan approval staff, so banks could be making much bigger profits if they lent more........but the banks are having to balance short term profits against the risk of long term losses, as when evermore borrowers become distressed by higher rates. The banks are also cooperating with the govt to govern access to the FHB bonus. The point of the bonus is to facilitate just enough property activity to keep the economy stimulated just so.

So I contend banks know credit is the primary driver of house price growth, and they realize there is little room to drive prices higher without also creating unbearable future risk to mortgage stress, in the face of some external shock.

So imho, I see credit becoming tighter into the future, despite the level of demand. And that means limited house price growth.
 
Hmmmm.....

Yep......just like profit is to banks.

Want to bet if Mortgage Insurers make it harder.....that banks will start self insuring?? Remember banks relay on lending to make their exceptional profits.

Also remember a safe market like Australia is still paying a premium for credit despite our government and banks having very good credit ratings.

What does that mean......international money flows to market which are safe but pay a good rate of return.

Hi Pete

So I contend banks know credit is the primary driver of house price growth, and they realize there is little room to drive prices higher without also creating unbearable future risk to mortgage stress, in the face of some external shock.

So imho, I see credit becoming tighter into the future, despite the level of demand. And that means limited house price growth.
 
Want to bet if Mortgage Insurers make it harder.....that banks will start self insuring?? Remember banks relay on lending to make their exceptional profits.

Also remember a safe market like Australia is still paying a premium for credit despite our government and banks having very good credit ratings.

What does that mean......international money flows to market which are safe but pay a good rate of return.

And what do mortgage insurers rely on to determine what represents a reasonable change in the price of an Aussie home? -> the credit rating of the country (and bank), global and domestic economic outlook, and central bank intentions on rates.....which is most clearly captured in the components of the CAD and NFD......which is why I take these two measures more seriously than some.
 
Hmmmm.....

Yep......just like profit is to banks.

Want to bet if Mortgage Insurers make it harder.....that banks will start self insuring?? Remember banks relay on lending to make their exceptional profits.

Banks don't really "self-insure". A number use captive insurers which then reinsure the risk...the banks' play here is not to hold the risk, just to take a share of the profit stream. In the absence of insurance (be it an external or captive), the capital reuired for loans >80% doubles and therefore you need double the net margin to make the same return as an insured loan.

And, yes, banks require on lending to make money. Equally, you lend the money where you get the biggest risk-adjusted return for your buck.

That needn't be housing.

Also remember a safe market like Australia is still paying a premium for credit despite our government and banks having very good credit ratings.

Not sure of your point here. We aren't voluntarily paying a premium...we are being charged one in spite of a sovereign guarantee. Best case scenario is that funding margins over benchmark rates get down to 3-4 times the pre-crash lows.

What does that mean......international money flows to market which are safe but pay a good rate of return.

Yes, cash is in demand and those holding it can pick and choose. You need to consider the merits/returns of housing-related finance in Oz with all the other options the globe has to offer and currency implications.
 
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Ask those who en mass went and invested in non main cities without regard to the population growth or industry of those towns.

Obviously they were under priced and people made money but there is now the risk that those holding in these areas will be hold illiquid property. They were originally illiquid which was why the returns were so high.


Andy, I presume you are saying 'underpriced', on the basis their yields were often higher than metro areas. However, whether they were underpriced on the basis of higher yield combined with lower growth, is another story.

Which affirms demand wasn't driven by fundamentals such as population growth, but rather, loose credit.....that seduced higher numbers of buyers via greed and fear into a frenzy of speculation. Steve McKnight and Brenda Irwin have told us all about it.



Just to throw some charts into the equation from the ABS we have the chart for population age groups in 1980, overlaid with 2008, which show just how severe the aging pop shift is. We differ slightly from the US chart as our peak extends through 15 years 35-49 whereas in the US the top is in the 45-49 age group.

This shift has to have some effect on the demand profile of property maybe not tomorrow but possibly in 15 years time.

Cheers

That chart should be considered in conjunction with population growth, which was 30% over the same period.

I made the point in another thread recently, that investors would benefit from analysing population data in more detail, to understand undersupply composition.

Many seem to think FHBs are undersupplied, however their problem might not be under-supply, as much as affordability.

With the more rapid rate of change in older age groups, and the limited number of development sites available, it is more likely undersupply is acute for downsizers and retirees wanting a quieter lifestyle in purpose built facilities, close to friends and family.
 
Australia has always had population increases - it's averaging more than 1%pa. It's current govt policy to encourage migration and also provide bonuses to those who have more kids.

If these policies were to change and population growth stagnated (like Japan), would you continue to invest in IP ?

Yes.

In desirable areas that are in demand due to location to amenities etc.
 
Credit is becoming more restrictive and this will ultimately be an entry on the neagative side of the ledger.

As a result of the loss of the securitisation market, particularly in respect of impaired or no-doc product, there is a cohort of borrowers who simply can't borrow that could do so as little as 12 months ago.

Yet despite this, house prices have been rising all year. Not only the FHB market, but also mid to upper level properties have all been rising strongly. Sydney and Melbourne are up around 7% so far this year. Perhaps credit conditions are not as tight as you think? The banks are still very keen to lend, and people are willing to buy, and able to pay higher prices than before.

What happened to the property crash you were warning us about? Has it been postponed for a few years?
 
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