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Australia Faces Its Demons

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IO mortgage problems in Oz.They're only 39% of new business

http://www.news.com.au/finance/real-estate/buying/caution-as-interestonly-mortgages-continue-to-rise/news-story/3efcd43756c9da36fbf9558963ca7cac

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According to APRA’s latest quarterly property exposure statistics, released last week, interest-only home loans increased by almost $8 billion in the September 2016 quarter. These types of mortgages now make up 39 per cent of all residential home loans.

But with evidence that house price growth is easing — capital gains recorded over November were the softest they have been since December 2015 — and with mortgage rates on the way back up, the rise in interest-only lending is beginning to ring alarm bells.

“In slow growth markets, which most markets in Australia currently are, if you’re not paying down the principal loan amount and there is a market event that leads to a drop in property prices, a homeowner with an interest-only loan could be left dangerously exposed,” the CEO of HomeStart Finance, John Oliver said.

“Even in current high-growth markets such as Melbourne and Sydney, there is speculation about a potential bursting of the property bubble. If this happens, it could lead to a lot of homeowners losing their properties.

“Australia’s property market is littered with periods when the value of properties actually fell, such as the Sydney market between 2004 — 2007 where prices fell by 8 per cent and Adelaide between 2010 — 2013 where prices fell by 4 per cent.”

CoreLogic figures showed Melbourne house prices dropped by 1.5 per cent in November while Sydney prices rose by just 0.8 per cent. The combined capital city index grew by just 0.2 per cent over the month.

A SLEEPING PROBLEM

Interest-only home loans have typically been popular among property investors because it minimises mortgage repayments in the short-term while investors bank on capital growth in the long-term. So with property investors such a strong force in the Australian property market, Martin North, Principal of Digital Finance Analytics said the increasing popularity of interest-only isn’t surprising.

“We need to understand who are getting those interest-only loans. There is a very strong correlation between interest-only loans and greater investment lending,” Mr North told news.com.au.

“In the last three or four months we have seen investors come back and investor loans are driving the market again.”

But this love affair with property investment, and the subsequent rise in interest-only lending, could now start to cause real headaches at a time when interest rates are starting to rise.

“We have got two issues. The first issue is we have got this continued growth with investor loans and my research tells me investors are still pretty keen on the market ... and therefore interest-only loans are being sold,” Mr North said.

“The second issue is we have got interest-only loans with people currently and when they come up for renewal, with interest rates rising, the bank will be asking harder questions about whether they can refinance and repay the capital. And some of those [investors], from my surveys, would indicate they don’t have a plan to repay the capital. That means there is a sleeping problem for those with interest-only loans currently.”'

Edited by Sancho Panza

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" interest-only home loans  "

 

I#ve posted elsewheer about the insanity of I/O loans.

 

As interest rates tend to 0, amount lent can increase exponentially.

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https://www.businessinsider.com.au/australian-house-prices-are-showing-no-sign-of-slowing-down-2017-3

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Here’s a table from the group showing price changes in Australia’s five mainland state capitals over the past week, month and year.

Australia-capital-city-house-prices-Mar-Source: CoreLogic

Prices rose in all capitals last week, according to the group, led by Adelaide and Brisbane at 0.5%.

Over the past month, Melbourne, at 3.7%, have seen prices surge higher, closely followed by Sydney where they’ve increased by 2.2% over the same period.

Prices in both cities have now increased by 4.3% and 5.0% respectively so far in 2017. Adelaide, where prices have risen by 1.9% over the same period, comes in at a distant third place.

Reflective of the trend over the past 12 months, prices in Sydney have now increased by 18.9% from the same week in 2016. Price growth in Melbourne over the same period isn’t far behind at 14.7%.

CoreLogic says that prices in Sydney grew by 104.5% from January 2009 to February 2017, outpacing Melbourne where they increased by 87.7% over the same period.'

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http://www.theaustralian.com.au/business/opinion/brace-for-the-selloff-property-market-at-a-tipping-point/news-story/3b48c6724b028f579c3161344a221cd4?nk=5f7caa79bc4aa07b952e187cb804050c-1490052423

'It has begun. The much maligned prediction of a sell-off in property prices is beginning to come true.

Of course, you wouldn’t know it looking at the headline-grabbing median prices and the ridiculous prices being paid for shoe boxes in Sydney — “Hey,” says the buyer, “what’s an extra million when the additional interest is $45,000 a year.”

And that is the point. We know the boom in property prices has little to do with anything other than historic low interest rates, which appears to have made paying an extra million at auction as insignificant as an impulse purchase of a bar of chocolate at the supermarket checkout.

I have now heard every possible explanation for surging house prices and the only one that matters is interest rates being lower than at any time since Captain Cook.

Surging house prices have nothing to do with a shortage of land. Hong Kong has less land and a much higher density of people per square kilometre and that has not prevented falling property ­prices. Moreover, surging dividend incomes, retiring baby boomers and Chinese fondness for our climate and air quality are all “weight-of-money” arguments that have never prevented falling prices.

Sydney, Melbourne and Brisbane property buyers are merely pawns in a global game of Central Bank Chess whose end has ­arrived.

As central bank bond buying, also known as quantitative easing, pushed government bond yields lower, investors were forced to seek higher returns elsewhere. Corporate bonds were next to surge, then junk bonds, equity and property. And record prices for art, low digit numberplates and collectable cars came soon after.

But keep in mind, few investors have any experience navigating a sustained secular increase in ­interest rates and inflation and even less would know anything about “credit events”, which long-duration assets are always susceptible to.

Property income yields are at historic lows and yet property buyers couldn’t be more enthusiastic. Buyers who tell me that they don’t mind buying on a yield of 2.5 per cent because they will get a capital gain need to understand that the capital gain will only come when a buyer is willing to accept an even lower yield.

 

And yield’s cannot fall much further when your oversupplied property is vacant and your yield is zero — as many leveraged Brisbane apartment owners are about to discover.

The end of every bubble is marked by the appearance of the greater fool principle: betting a bigger fool will come along and ­accept an even worse return. It’s speculation, pure and simple.

Nobody will escape

Am I going too far? Think of this: record levels of household debt to GDP, household debt to income and record levels of credit card debt means that when bond interest rates rise — and they’ve ­already started rising — investors will be able to least afford the additional costs thanks to having previously paid and borrowed too much.

Within five kilometres of Brisbane’s CBD, 5500 apartments were completed and available to be moved into by owners or tenants in the nine months to September last year.

During the same period, vac­ancy rates rose from 2.7 per cent to 4.7 per cent — a near doubling — 5km-15km from the CBD. Landlords who purchased a flat that has no tenant need to deeply discount their rent or accept zero income. And that puts financial stress on the landlord even if they haven’t lost their job.

Most worryingly, another 13,300 new apartments will be completed within 5km of the CBD before September this year.

Meanwhile, some financial planners have reported to me being cold-called by developers with offers of 7 per cent commissions to market properties to their clients. This inducement comes on top of the free holidays, free cars and free frequent flyer points being offered as incentives to property buyers.

As supply increases, (see graph) these discounts will become more aggressive, ensuring lower prices. Reports of some apartments being revalued 30 per cent lower than 18 months ago will not help.

Financial stress occurs when AMP and CBA, Westpac and others, tighten lending restrictions on particular types of loans or blacklist your suburb, thereby pulling the rug out for any new buyer of your desperate-to-sell property.

Many believe their suburb will be immune. Many believe the falls won’t impact houses and will be quarantined to apartments. Many believe their property won’t be affected because it has some special quality. Such beliefs are nothing more than head-in-the-sand wishful thinking.

My bankers have told me all of their smartest and most successful property investors have sold up or are getting out, and they cannot lend them a cent — they won’t take it.

Drop a pebble in a pond and the ripples will eventually impact the entire pond and everything in it.

Why should Tweed Heads and Bowral prices be nine or 10 times incomes when thousands of similarly-sized towns around the world — and the same distance from capital cities — can be purchased at half the multiple? It doesn’t make sense and it isn’t sustainable. And neither are low interest rates. Hold on tight.'

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wherebee   

As you lot know, I bought a house in Australia in 2014.  It's the house we will go back to.  It's a great house in a good location with good commuter links and good access to several areas of outstanding beauty.  We've had the same tenants since 1 months after buying it.

And yet, if it is worth more in USD terms when we go back than I paid for it I will be bloody amazed.  I would never, ever, buy a place in Australia for yield or income or capital gain. We bought - and it was right for us - rather than have all of our savings in one asset form (digital blips in the financial systems computers).

 

 

 

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Timak   

Spoke to our friends in Melbourne last weekend.

They are doctors and moved out from the UK a couple of years ago. 

The expense of getting any trades in is astounding them. $450 a day for a gardener is the going rate.

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steve99   
On 24/03/2017 at 5:01 AM, wherebee said:

Dont worry, the Chinese that matter, ie the rich and connected are still getting their money out in the doses required to buy Aus/UK/US property.  Still snapping up everything in their target neighbourhoods. No change, nothing to see, move on.   Unfortunately for the real people.

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steve99   
12 hours ago, Timak said:

Spoke to our friends in Melbourne last weekend.

They are doctors and moved out from the UK a couple of years ago. 

The expense of getting any trades in is astounding them. $450 a day for a gardener is the going rate.

Ahh, but they are getting more money than in the NHS which is their main reason I would bet for coming to Aus? The place is a double edged sword as many Brits have found out in recent years, You know you could leave a nice English town, sell your house for the outrageous price of say 3 or 400K and find you have to spend 2 or even 3 times as much to get the same amenity in say Melbourne.  Also particularly those that got caught up in Western Australias mining boom, or should I say Perth property buying.  A lot of people do not realise what a rip off, greedy, arrogant, self serving collective Australia has become.  The land of the 'fair-go' and egalitarianism is long gone.Most successful businesses in Australia do or have to run at rip-off levels of pricing and seem to get away with it.  Landscape gardening as opposed to cutting grass  is very much in the rip off category, aimed at the rich in expensive suburbs. These people do not operate at the level of the 'little man in the village'.   Electricians and plumbers who both have to be licenced to operate can charge like brain surgeons and in fact many like my brother in law for eg really do believe that they are up there with the highest professions when it comes to required skill and brain power to do the job.

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steve99   
18 hours ago, Eddie_George said:

:lol::lol::lol::lol::lol:

C7v0_IoVwAABThD.jpg

There is nothing more ridiculous than an Australian house auction.  This one would look particularly ridiculous with all these arrogant EAs standing around like spare thingy's at a wedding.  A  French freind of ours who was over a year or so ago a) could not believe how high house prices were and b. could not believe that dead basic, boring, not that well connected, poorly built, surrounded by roadside armageddon houses are sold like fine art is sold in Paris.

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ccc   
4 hours ago, steve99 said:

Ahh, but they are getting more money than in the NHS which is their main reason I would bet for coming to Aus? The place is a double edged sword as many Brits have found out in recent years, You know you could leave a nice English town, sell your house for the outrageous price of say 3 or 400K and find you have to spend 2 or even 3 times as much to get the same amenity in say Melbourne.  Also particularly those that got caught up in Western Australias mining boom, or should I say Perth property buying.  A lot of people do not realise what a rip off, greedy, arrogant, self serving collective Australia has become.  The land of the 'fair-go' and egalitarianism is long gone.Most successful businesses in Australia do or have to run at rip-off levels of pricing and seem to get away with it.  Landscape gardening as opposed to cutting grass  is very much in the rip off category, aimed at the rich in expensive suburbs. These people do not operate at the level of the 'little man in the village'.   Electricians and plumbers who both have to be licenced to operate can charge like brain surgeons and in fact many like my brother in law for eg really do believe that they are up there with the highest professions when it comes to required skill and brain power to do the job.

Yes - when Oz blows it's going to be a sight to behold. 

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steve99   
2 hours ago, Kiwi_Muncher said:

Fantastic. So are the other people there out of fascination ? Paid to be there? Enjoy watching idiots spend money?

Yes indeed, neighbours want conformation as to the 'value' of their 'investment'  people about to buy start turning up to watch.  I cant wait for a crash to put all these nit wits back in their place.  Also to note, worse than say an auction of say the MonaLisa  the estate agents are there in number, say one auctioneer and maybe between 4 and 6 fluffers to encourage bidding by the nit wits.. All these REagents are wearing dark suits, no matter how hot it is and look like undertakers.We also do a good line in dummy bidding in all its forms from a fly on the wall to a Chinaman on the phone.

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42 minutes ago, steve99 said:

Yes indeed, neighbours want conformation as to the 'value' of their 'investment'  people about to buy start turning up to watch.  I cant wait for a crash to put all these nit wits back in their place.  Also to note, worse than say an auction of say the MonaLisa  the estate agents are there in number, say one auctioneer and maybe between 4 and 6 fluffers to encourage bidding by the nit wits.. All these REagents are wearing dark suits, no matter how hot it is and look like undertakers.We also do a good line in dummy bidding in all its forms from a fly on the wall to a Chinaman on the phone.

I can't think of anything but a tulip auction. Mania.

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38 minutes ago, Kiwi_Muncher said:

I can't think of anything but a tulip auction. Mania.

Much as I think the UK property market is crazy (now I am back here), after 10 years or so in Aus it pains me to realize that things could still get much worse here, when you see how bad is has got in Aus. Australia knocks the UK into a cocked hat as far as property prices and ramping in general are concerned - as hard as that is to believe. At least government policy in the UK seems to be (slowly) heading in the right direction (e.g. BTL tax breaks) - precious little evidence of that in Aus, where I wouldn't be surprised if more props are wheeled out if things get wobbly (e.g. use of pension fund for FTBs is something that occasionally gets aired - what a batsh!t crazy idea that is).

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3 hours ago, mattyboy1973 said:

Australia knocks the UK into a cocked hat as far as property prices and ramping in general are concerned - as hard as that is to believe. At least government policy in the UK seems to be (slowly) heading in the right direction (e.g. BTL tax breaks) - precious little evidence of that in Aus, where I wouldn't be surprised if more props are wheeled out if things get wobbly (e.g. use of pension fund for FTBs is something that occasionally gets aired - what a batsh!t crazy idea that is).

Mattyboy speaks the truth. When it comes to House price mania, the United Kingdom is far more sophisticated in its appreciation that things cannot continue the way they are, and many are not only standing on the sidelines but say quite clearly that the whole HPI thing will lead to a smoking crater in the near to medium term future.

Australia is nowhere near that level of understanding. If the first step to resolving a problem is admitting that there is in fact a problem, Australia has a very very long way to go. Many people believe in their heart of hearts that it truly is nothing more than a supply and demand issue and that their capital gains are nothing more than richly deserved gains for being really smart investors.

I would add though, that it seems to be overwhelmingly a Sydney/Melbourne/Canberra type problem.

In Perth, prices are back to 2006/2007 levels and still dropping steadily, and Brisbane and Gold Coast have barely advanced to match CPI inflation, but for some reason those RE stories never seem to seep into the Greater Sydney or Melbourne area. The pyschosis is local, but since 65% of the population is in the three cities affected, its considered national.

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On 3/25/2017 at 2:34 PM, Timak said:

Spoke to our friends in Melbourne last weekend.

They are doctors and moved out from the UK a couple of years ago. 

The expense of getting any trades in is astounding them. $450 a day for a gardener is the going rate.

...a good gardener or tree surgeon would cost at least that in the UK ....where's the problem.....:rolleyes:

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5 hours ago, mattyboy1973 said:

Much as I think the UK property market is crazy (now I am back here), after 10 years or so in Aus it pains me to realize that things could still get much worse here, when you see how bad is has got in Aus. Australia knocks the UK into a cocked hat as far as property prices and ramping in general are concerned - as hard as that is to believe. At least government policy in the UK seems to be (slowly) heading in the right direction (e.g. BTL tax breaks) - precious little evidence of that in Aus, where I wouldn't be surprised if more props are wheeled out if things get wobbly (e.g. use of pension fund for FTBs is something that occasionally gets aired - what a batsh!t crazy idea that is).

Pension for FTB? Wow, that is like a pyramid scheme where you are the sole participant and still lose everything.

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1 minute ago, Kiwi_Muncher said:

Pension for FTB? Wow, that is like a pyramid scheme where you are the sole participant and still lose everything.

The "let FTBs raid their super pots for deposits" idea has been mooted more than once in the Aussie mainstream press. I have no idea how much traction it has politically, but nothing would surprise me with that lot..

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2 hours ago, Society of fools said:

Mattyboy speaks the truth. When it comes to House price mania, the United Kingdom is far more sophisticated in its appreciation that things cannot continue the way they are, and many are not only standing on the sidelines but say quite clearly that the whole HPI thing will lead to a smoking crater in the near to medium term future.

Australia is nowhere near that level of understanding. If the first step to resolving a problem is admitting that there is in fact a problem, Australia has a very very long way to go. Many people believe in their heart of hearts that it truly is nothing more than a supply and demand issue and that their capital gains are nothing more than richly deserved gains for being really smart investors.

I would add though, that it seems to be overwhelmingly a Sydney/Melbourne/Canberra type problem.

In Perth, prices are back to 2006/2007 levels and still dropping steadily, and Brisbane and Gold Coast have barely advanced to match CPI inflation, but for some reason those RE stories never seem to seep into the Greater Sydney or Melbourne area. The pyschosis is local, but since 65% of the population is in the three cities affected, its considered national.

As an outsider I don't know much about Australian property markets. I assume that, like the U.S., it is not a national market but one built on regional centres which form their own discrete markets that might only be tenuously connected. How much experience do Australians have of property busts ? Anyone over 50 in the UK probably got burnt one way or another in the early 1990s bust if they had bought in the late 1980s boom. Does Oz have that sort of folk memory amongst its population?

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7 hours ago, stormymonday_2011 said:

How much experience do Australians have of property busts ? Anyone over 50 in the UK probably got burnt one way or another in the early 1990s bust if they had bought in the late 1980s boom. Does Oz have that sort of folk memory amongst its population?

There's a recent memory of a time from 1990 to about 1995 when house prices dropped slightly and then didn't move at all for 2 or 3 years. But that's the only recent dip.

Some political analysts credit this phenomenon with Paul Keating losing the 1996 election, pointing out that there has hardly been an Australian Prime Minister in 40 years who has not been re-elected when house prices were rising during the preceding term.

What is utterly unprecedented about the recent rise in the past 7 or 8 years has been the speed and magnitude of the House price rise, which far outstrips anything that has taken place before in Australian property investment memory, and its overwhelmingly driven by cheap credit, little more.

Its such a pity, because, as I have pointed out here before, there was a time from the 1890's to the 1960's when Australian house prices did not move at all in real terms. For three generations of Australians, the notion that house prices would appreciate in value was nonsense. But then it all changed, and it hasn't been derailed since. Australian federal and state governments haven't got the balls to fix the problem, and many of the MPs are as conflicted as all hell. I heard there was one QLD MP who has 41 properties. ( And I heard that the Prime Minister has seven) .

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