All Topics / General Property / The steps to watch for in the coming Australian housing correction

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  • Profile photo of fWordfWord
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    mattnz wrote:
    In Surry Hills where they were enquiring, $500k is a 1 bed apartment.

    Tough. Look to the outer suburbs my friends…decent 3 or 4 bedder for that price. On land. Cast your net wider than the 'trendy' inner suburbs where every man, woman and their dog wants to live. Furthermore, nowhere in that article (as far as my bespectacled eyes can see) does it state the journalist was considering to buy a $500K 1 bedder apartment in Surry Hills.

    Anyway, there were more crucial points I wanted to outline before. I'm still amazed at how much they were wiling to loan out in that example, because using me as a real life example, that wasn't what I experienced at all. Furthermore, to max out borrowings with a bank without a back up plan is sheer madness.

    Profile photo of ummesterummester
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    fword,

    they type of employment (as in wether or not the bank considers the income secure) matters also. One of the reasons ACT house prices grew so much in recent time is that the banks viewed PS wages as a safe place to load up debt.

    Just because you are a sensible borrower, doesn't mean that others are or that the banks are sensible lenders. When prices are on the up and up, maxing out your debt maxes out your potential returns, right?

    Profile photo of fWordfWord
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    ummester wrote:
    fword,

    they type of employment (as in wether or not the bank considers the income secure) matters also. One of the reasons ACT house prices grew so much in recent time is that the banks viewed PS wages as a safe place to load up debt.

    Just because you are a sensible borrower, doesn't mean that others are or that the banks are sensible lenders. When prices are on the up and up, maxing out your debt maxes out your potential returns, right?

    Indeed, stability of employment would be a big factor. Just to state, I'm a veterinarian who had then been working for a major charity organisation for 3 years, where they haven't historically fired anybody. We had plenty of business right through the GFC. Our company's annual report demonstrates rising income and donations every year. If this isn't a 'stable' job, I don't know what is. The figures in that article are just…'way out there'.

    Not saying that they didn't happen (because it very well could have), but I would be very careful about what I read in the media. For a bank to leave $900 in a mortgagor's budget for living expenses is ridiculous, regardless of how stable the job. In my case (speaking from experience), they worked in over $14K in annual expenses for me, a single, considering living with parents and not even paying for 'boarding', no debt, a car owned outright, plus a consistent savings record with the same bank to prove I have never spent anywhere near $14K annually. We actually do not know the circumstances that the journalist quoted to the bank which led to a pre-approval for that sum of money, hence it could very well be out of context.

    One of the big reasons for my initial post was to urge would-be homebuyers to be very careful when working out their figures. That would be the take-home message. $900 a month for living expenses should bring on alarm bells already. Flirting with the extremes is akin to playing with fire. You'll be burnt, and badly burnt for the life of that mortgage. One of the things I've learnt in my short life thus far is this: check and double check everything again. Sleep on it. Review it again. Repeat process till comfortable and dead sure.

    Yes, maxing out on debt maximises potential in a rising market. But it also maximises the risk. Is the mortgagor truly comfortable and aware of that risk? I'd be very happy for this big crash/ correction to come, because it'd separate the boys from the men…the people who did their thinking and those who didn't. It'd bring all the dirty laundry into public and it'd be wonderfully ugly.

    I'm looking forward to it.

    mattnz
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    I was going back through some of my older posts and found this gem…

    the average mortgage in NSW is $414k,
    Source: last line of this Jan 2010 article http://www.smh.com.au/business/westpac-rate-rise-pushes-customers-to-switch-banks-20100105-lsbd.html

    while the latest median household income is I could find was only $1036 in NSW (2006 census), so lets assume it may be $55k per annum now to allow for wage growth.
    Source: http://www.leaseinfo.com.au/docs/research/2006%20National%20Census.pdf

    Before people claim that primarily those on high incomes own investment properties, I am also aware that 75% of those that make negative gearing tax claims in Australia have an income under $80k (this came from the ATO, but can’t find it at the moment).

    It is clear from these figures that loans must have been made in line with the Journalist’s findings of 7.5 times income mortgage lending.

    Profile photo of fWordfWord
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    mattnz wrote:
    I was going back through some of my older posts and found this gem… the average mortgage in NSW is $414k, Source: last line of this Jan 2010 article http://www.smh.com.au/business/westpac-rate-rise-pushes-customers-to-switch-banks-20100105-lsbd.html while the latest median household income is I could find was only $1036 in NSW (2006 census), so lets assume it may be $55k per annum now to allow for wage growth. Source: http://www.leaseinfo.com.au/docs/research/2006%20National%20Census.pdf Before people claim that primarily those on high incomes own investment properties, I am also aware that 75% of those that make negative gearing tax claims in Australia have an income under $80k (this came from the ATO, but can't find it at the moment). It is clear from these figures that loans must have been made in line with the Journalist's findings of 7.5 times income mortgage lending.

    OK. Let's study these figures. Firstly, we should compare 'median' mortgage with 'median' household income, not 'average' mortgage versus 'median' income. 'Average' and 'median' are not the same things.

    Secondly, taking these figures on board, let's examine to see if it's feasible. That is, is it possible for a single person on $55K annual salary to own a negatively-geared property without living on cardboard and grass for the life of the mortgage. Correct me if any of the calculations below are incorrect, after all, I'm not an accountant and hate working with numbers. These calculations also do make some assumptions of course.

    An individual on a salary of $55,000 pa would have a marginal tax rate of 30%. He/ she would be taxed $4,650 plus 30c to the $1 over $37,000. This works out to tax of $10,050 pa. That leaves $44,950 after tax.

    Let's say this individual takes an unreasonably high loan of $400,000 to buy a property, considering today's calculations at NAB would only allow for a loan of $311,600 at this salary, at a rate of 7.29% (which I know you can get today at Homeside and fix it for 3 years, and this rate being neither very expensive nor very cheap). The sale price of the property is $500,000 (for 80% LVR) and generates $370 a week in rent for a woeful yield of 3.85% (easily achievable, just look around at real estate websites at properties for rent).

    Discounting for a moment, rates, rental agent's fees, repairs etc for the sake of simplicity:

    Loan repayments on property at 7.29% interest rate pa (interest only): $29,160
    Rent generated by property pa: $19,240
    Shortfall: $9,920

    A heavily negatively-geared property costing the owner just over $190 a week, before tax breaks.

    So, subtract the $9,920 shortfall from $44,950 after tax salary and that leaves the owner with $35,030 to survive on. That's roughly $3,000 a month for living expenses for a single person, in this example. And this example assumes no tax breaks from negative gearing. Under today's tax conditions, this owner could expect over $3,100 to fall back into his/ her lap after getting a tax refund on this property. Consider also that if this owner had a 100% offset account associated with the mortgage, he/ she would be making interest repayments smaller than that above, because any money in the offset account serves to effectively reduce the principle amount and hence reduce interest.

    Is it feasible then, for such an individual to own a negatively geared property? I think so. A person willing to buy a property and rent it out, and rent themselves can definitely make it work. If however, the said person prefers to pay off a massive mortgage on their own home PLUS own an investment property, things become very tight and only marginally 'do-able'. But that's a personal choice. I'd rather rent and have an investment property, rather than live in my own home and NOT have an investment property, although the bottom-line is the same: you get to control one property.

    A person doesn't need to be rich or have six-figure salary to have an investment property. The point that 75% of negative gearing landlords have annual salary of less than $80K is moot. More important is sitting down and working out the figures to see if it CAN be done. And this example shows that a person on $55K can do it.

    Profile photo of ummesterummester
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    fWord wrote:
    ummester wrote:
    fword,
    Yes, maxing out on debt maximises potential in a rising market. But it also maximises the risk. Is the mortgagor truly comfortable and aware of that risk? I'd be very happy for this big crash/ correction to come, because it'd separate the boys from the men…the people who did their thinking and those who didn't. It'd bring all the dirty laundry into public and it'd be wonderfully ugly.

    I'm looking forward to it.

    Well, I've said it many times on this forum and others, a crash is really only going to hurt those that bit of more than they can chew. Either by equity withdrawal for lifestyle spending, of IPs that are too highly leveraged. It won't hurt those that have borrowed or invested sensibly.

    Profile photo of fWordfWord
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    ummester wrote:
    Well, I've said it many times on this forum and others, a crash is really only going to hurt those that bit of more than they can chew. Either by equity withdrawal for lifestyle spending, of IPs that are too highly leveraged. It won't hurt those that have borrowed or invested sensibly.

    Haha, call it the culling of the weak, if you'd like.

    Profile photo of ummesterummester
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    fWord wrote:
    ummester wrote:
    Well, I've said it many times on this forum and others, a crash is really only going to hurt those that bit of more than they can chew. Either by equity withdrawal for lifestyle spending, of IPs that are too highly leveraged. It won't hurt those that have borrowed or invested sensibly.

    Haha, call it the culling of the weak, if you'd like.

    If weak = stupidly greedy, then yea, that's exactly what it will be.

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    Does anyone wake up to Kris Sayce from MONEY MORNING?
    I think the people he hates most in this world are Property Spruikers and his angle on the market is an interesting one.

    http://www.moneymorning.com.au/20110511/where-is-the-%E2%80%9Cpoint-of-control%E2%80%9D-for-aussie-housing.html#more-5138

    If he wasn't an advisor for shares and wealth management, he'd make a great stand up comic.

    Ian
    http://theblockblog.com
    Free Property Investment Info Tool and Resouces for Investors with a Sense of Humour

    mattnz
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    Confirmation of some of my predictions in the last couple of days:

    Concerns about banks being able to rely on LMI providers to bail them out.
    http://www.smh.com.au/business/mortgage-insurers-a-greater-threat-to-banks-fitch-20110517-1eqns.html?rand=1305700251520

    Credit downgrades for the big 4 Australian banks as they are highly reliant on overseas funding
    http://www.smh.com.au/business/moodys-downgrades-ratings-for-big-four-banks-20110518-1eso8.html

    Profile photo of ummesterummester
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    mattnz wrote:
    Confirmation of some of my predictions in the last couple of days: Concerns about banks being able to rely on LMI providers to bail them out. http://www.smh.com.au/business/mortgage-insurers-a-greater-threat-to-banks-fitch-20110517-1eqns.html?rand=1305700251520 Credit downgrades for the big 4 Australian banks as they are highly reliant on overseas funding http://www.smh.com.au/business/moodys-downgrades-ratings-for-big-four-banks-20110518-1eso8.html

    So, basically, Ozzie mortgages have been bundled more or less like American ones before the subprime hit.

    Mortgage insurers think the assets are worth less than what the banks want to think they are worth – meaning its only a matter of time before the banks let homeowners know their houses aren't worth as much as they think they are.

    At the same time, all our big 4 banks get credit downgrades. Seems like the world knows more about our banks and housing market than we are willing to admit to ourselves.

    What I find interesting about our big 4, though, is the current interplay between them. CBA and Westpac are more leveraged in housing than the other 2, so a moderate housing downturn (say less than 15%) may actually work in NAB/ANZs favour. A larger downturn will be bad for all.

    mattnz
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    Europe is a mess right now, the flow on effects in the debt markets from a default from Greece could be greater than GFC1

    http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/

    Profile photo of ZSlaveskiZSlaveski
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    It's so great to see this talk about the crash becoming more prominent in forums like this one. Awareness of the bubble is really seeping into the brains of the masses. IMO the biggest driver of house prices is sentiment, when consumers are confident they’ll bid up prices to crazy levels irrespective of fundamentals, but now the tides turning, panic is setting in and they’ll all run for the exits at the same time, especially the overleveraged profligate wastrels holding multiple “investment” properties.

    I can smell the fear. It’s palpable on the Australian Property Forum where the desperate bulls and spruikers are frantically posting threads trying to disparage the bearish message…

    APF – Check out the bearish sentiment in all threads!

    Sorry bulls and spruikers but the party is over and you know it. No more endless capital gains, no more rents through the roof, no more easy credit, no more lo w interest rates, no more mass immigration. No more stimulus. Nothing left to keep in air in the bubble. The govt is out of ammo. The RBA wants the bubble to deflate. Bulls… you’re on your own. If you sell now, you just might get out of this with your shirt!

    Zoran.

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    ZSlaveski wrote:
    It's so great to see this talk about the crash becoming more prominent in forums like this one.

    The talk about a crash was always here to see, what we did not see was the crash.

    Quote:
    I can smell the fear. It’s palpable on the Australian Property Forum where the desperate bulls and spruikers are frantically posting threads trying to disparage the bearish message…

    APF – Check out the bearish sentiment in all threads!

    Isn't APF the forum where most of the refugees from Global House Price Crash Forum gather ? Some of them have been waiting for a property crash since Halley's comet came near Earth last time and the rest of them since the Y2K bug was going to delete all property titles. Thanks for the link, they were always good for a laugh.  

    Quote:
    The RBA wants the bubble to deflate.

    keep them coming.

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    harb wrote:
    Isn't APF the forum where most of the refugees from Global House Price Crash Forum gather ?

    Nah, not the smart and reasonable ones anyway. We have our own quite place now.

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    I find it interesting that "bears" have this almost fanatical need to be right. It is in almost every post by a person that identifies themselves as a bear. They also tend to be "black-hat" or "critical" thinkers that are fantastic at finding statistics, graphs and interpreting the numbers. Obviously to support their negative sentiment. Many seem to take offense with so called "bulls" that have made good money, for whatever reason, be it dumb luck or smart investing. No matter how positive the market sentiment, the bears seem to always be posting about how and why they predict a collapse. Any mild decrease in any portion of any market is always considered to be the "beginning of the end". The bears also tend to congregate in "packs" to support their negative views. It is almost like a negative gravity well that sucks more into it.

    As for the "bull" posters, they on the whole just seem to be "glass half-full" positive-types. They don't seem to need to be told they are right.  It is almost like they don't care about being right, they just keep being positive and investing. They quote some statistics and graphs to support their way of thinking, but it often tends to lack any real independent substance and is often picked to pieces quite well by the "black-hat" bears. The "bulls" also don't seem to take any notice of the "bears" with their well-reasoned and logical arguments. They do seem to take delight in poking fun at the bears and getting them up on their "high horse" soapboxes to pontificate. They also seem to be getting independently richer. But this could just be the positive language rubbing off on the rest of us.

    Then there are the vast majority that swing on a personal pendulum between being bullish and bearish. They don't really know which way things truly are going at a macro level, but they are trying to do the best for their own personal wealth creation. They do tend to read the bear posts and wonder if they are right, but hope they are wrong. They read the bull posts and hope that they are right and can emulate their success, positivity and and creativity. I am on the "bull-faction" of this group I reckon. The bull part comes from being incredibly positive about my individual success no matter what the macro or global market is doing.

    Thanks for bothering to read this if you get this far. I just felt like sharing my observations.

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    Well said emptyvessel. It does seem that all the negative thinking bears want to do is stand on their corner soapbox and become pompous, pious, pontificating 'I know everything' preaching buffoons because most simply are jealous they haven't the balls to do it themselves. Cutting down tall poppies will always be the preferred route of the weak and fearful.

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    emptyvessel wrote:
    I find it interesting that "bears" have this almost fanatical need to be right. It is in almost every post by a person that identifies themselves as a bear. They also tend to be "black-hat" or "critical" thinkers that are fantastic at finding statistics, graphs and interpreting the numbers. Obviously to support their negative sentiment. Many seem to take offense with so called "bulls" that have made good money, for whatever reason, be it dumb luck or smart investing. No matter how positive the market sentiment, the bears seem to always be posting about how and why they predict a collapse. Any mild decrease in any portion of any market is always considered to be the "beginning of the end". The bears also tend to congregate in "packs" to support their negative views. It is almost like a negative gravity well that sucks more into it.

    As for the "bull" posters, they on the whole just seem to be "glass half-full" positive-types. They don't seem to need to be told they are right.  It is almost like they don't care about being right, they just keep being positive and investing. They quote some statistics and graphs to support their way of thinking, but it often tends to lack any real independent substance and is often picked to pieces quite well by the "black-hat" bears. The "bulls" also don't seem to take any notice of the "bears" with their well-reasoned and logical arguments. They do seem to take delight in poking fun at the bears and getting them up on their "high horse" soapboxes to pontificate. They also seem to be getting independently richer. But this could just be the positive language rubbing off on the rest of us.

    Then there are the vast majority that swing on a personal pendulum between being bullish and bearish. They don't really know which way things truly are going at a macro level, but they are trying to do the best for their own personal wealth creation. They do tend to read the bear posts and wonder if they are right, but hope they are wrong. They read the bull posts and hope that they are right and can emulate their success, positivity and and creativity. I am on the "bull-faction" of this group I reckon. The bull part comes from being incredibly positive about my individual success no matter what the macro or global market is doing.

    Thanks for bothering to read this if you get this far. I just felt like sharing my observations.

    You know the only difference between a black hat and a white hat is which side you are looking at them from, right?

    Scenario – MS hacks Sony. Blackhat to Sony, White hat to MS.

    Then Sony hacks MS  – the colour of the hats don't matter, it's understanding the whole game that does.

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    And so the debate rages on. You know, there was an irritating voice that started to play in my head. It sang annoyingly,

    'Would you like to take a survey??!!'

    A survey that reveals the following:

    – Are you a bear, bull or a 50-50?
    – How many properties do you control?
    – If you control properties (whether your own home or an investment property), how many do you own 'outright' (ie. unencumbered)?
    – Amongst the properties that you control, what are the approximate dates of purchase?
    – Last question: do you NOT control any property now and wish you did?

    Not an exhaustive list of questions, but a good start. If we ever started something like this, it would be very revealing. The opinions of people on threads such as this are usually very much divided. That's because these opinions stem from a thought process based on their current situation. I suspect that, in the end, the property market will do whatever it wants, despite what any individual might say. 'Getting it right' is nothing to brag about, whichever way things turn out to be. That's because if a person 'gets it right', he/ she does so by chance.

    People who are reliably able to pick a trend shouldn't be wasting their time here, or on television talk shows. They'd be out there spending all their time making billions of dollars.

    Profile photo of ummesterummester
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    fWord wrote:
    – Are you a bear, bull or a 50-50?

    Depends – on housing, 90% bear & 10% bull. On investment in general 50/50. Productive investment is good for everyone.

    fWord wrote:
    – How many properties do you control?

    None

    fWord wrote:
    – Last question: do you NOT control any property now and wish you did?

    No to both.

    fWord wrote:
    Not an exhaustive list of questions, but a good start. If we ever started something like this, it would be very revealing. The opinions of people on threads such as this are usually very much divided. That's because these opinions stem from a thought process based on their current situation. I suspect that, in the end, the property market will do whatever it wants, despite what any individual might say. 'Getting it right' is nothing to brag about, whichever way things turn out to be. That's because if a person 'gets it right', he/ she does so by chance.

    I don't mind being revealed. I have paid for 1 home loan in my life, back in the 90s but it wasn't in my name. It was an insignifigant part of my wage at the time. I've never paid a home loan since because since I have been interested in buying a house for myself, the loans no longer seem an insignifigant part of anyone's wage.

    fWord wrote:
    People who are reliably able to pick a trend shouldn't be wasting their time here, or on television talk shows. They'd be out there spending all their time making billions of dollars.

    Why? Why is making billions of dollars the be all and end all. There are greater things to invest in than money.

    And, before you ask, if I'm not interested in making money why post on a bullish housing forum – the answer is that the temperament of housing bulls gives me an insight into housing investment in this country, which I am interested in more for sociological reasons than financial.

    If I could add questions to your survey they would be along the lines of:

    How old are you?
    What is your family situation?
    What is your work situation?
    When are you looking to retire?
    What do you value most in life?

    The social functioning of this country has me far more involved than the financial and housing is as big a part of the social as financial.

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