Crashing investor mortgages ominous for house prices

By Leith van Onselen

With the recent release of the ABS’ lending finance data for June, it’s an opportune time to once again chart how capital city house prices are tracking against both investor and total housing finance.

As readers no doubt already know, housing finance has historically been strongly correlated with values, therefore it remains one of the best predictors of price growth.

The below charts plot both CoreLogic’s monthly dwelling values index against the value of investor and total finance, as measured by the ABS.

First, here are the national charts:

Next, Sydney:

Next, Melbourne:

Next Brisbane:

Next Perth:

And finally, Adelaide:

As you can see, investor and housing finance growth as well as house price growth has weakened across all major markets.

However, the decline is particularly sharp in the investor hotspot of Sydney, where investors are the marginal price setter.

We already know that investors are likely to face stiff headwinds in the period ahead due to:

  • The massive interest-only (IO) mortgage reset due to take place over the next several years which, according to UBS, will see the potential expiry of IO loans in coming years (assuming a 5-year maturity and no rollover to another IO term) of up to $105 billion in FY18, $133 billion in FY19, and peak at $159 billion n in FY20, thereby increasing repayments by an average of 35%;
  • Tightening lending standards arising from the banking Royal Commission;
  • Rising bank funding costs; and
  • Labor’s negative gearing and capital gains tax reforms should it win the next federal election.

These factors combined will continue to weigh on housing values and make investing in property a particularly risky proposition, especially in Sydney and to a lesser extent Melbourne, whose markets are most over-valued and where investors are the most dominant.

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Comments

  1. When speculators (mis – named ‘investors’) don’t see easy housing inflation ahead, they exit the market.

    The only question is … when will the trickle turn in to a flood … on both sides of the Tasman ?

    The large speculator segment of the market is particularly fragile. They frighten easy..

    Fear is a far more powerful motivator than greed.

    • Well put Hugh.

      Although some don’t frighten so easy, their belief that housing never really fails is almost unshakeable.

      Time will tell.

      • Yes a colleague of mine purchased in Alexandria 2012, has recently used the equity to buy an IP, she only just managed to get the loan in time. The Alexandria property she tells me is down 15% from peak, the new one has dropped 5% from purchase date.
        After telling me prices will bounce back, I told her lending data suggests prices to fall into end of year, to which she replied [email protected]%. She’s on one income

      • Arrow2, They punters in sin city and MelbMexico may take a bit longer to scare but credit revulsion appears to gave well and truly set in with the smaller states.

      • … Welcome to the real world …

        Vintage house ads show how dramatically costs have jumped in Sydney since 1965 | Daily Mail Online

        http://www.dailymail.co.uk/news/article-6030127/Vintage-house-ads-dramatically-costs-spiralled-Sydney-1965.html

        • Real estate guide from Sydney 1965 shows the huge difference 50 years makes

        • It shows houses available in Maroubra, Ashfield, Caringbah and Beverly Hills

        • The Beverly Hills house was for sale for £6,750 and described as ‘immaculate’

        • When inflation of 5.1 per cent a year is noted, this equals price of $179,744 now

        • A similar house is listed on the market today with an asking price of $1.32 million

        Life in Australia: Sydney (1966) – YouTube

        https://www.youtube.com/watch?v=vR1CU8NjGW0
        ..
        .
        Canada’s Garth Turner (former Conservative politician) of The Greater Fool blog summed it rather well …

        Garth Turner … Canada … The Greater Fool Blog

        http://www.greaterfool.ca/2017/05/01/mayday-2/

        … extract …

        … That’s the funny thing about bubbles. Everybody’s horny to get their hands on rising assets – until they’re not. It always happens fast, whatever the asset and no matter the trigger. Greed is a powerful emotion, but it wilts before the dominance of fear. If enough people fear houses will stop rising (prices don’t even need to decline), they’ll cease making the Herculean sacrifice required to buy one. And down she goes. … read more via hyperlink above …

  2. > We already know that investors are likely to face stiff headwinds in the period ahead due to:

    Should also include the falling rental market.

    Currently caused by falling wages and hours in the hospitality and retail industries.

    But as wage stagnation sets in, the rental market will remain poor for years to come.

    Temporary immigrants aren’t so stupid to waste their income on high rent, they’ll happily catch the train, except maybe international students.

    The thing is, last time wage inflation pushed the rent up and deleveraged property investors, this time around it ain’t happening.

      • The Horrible Scott Morrison MP

        $150 per week just shows how affordable Aussie housing is. You might even get the bottom bunk for less.

      • Yeah mark777. I’m glad in your world spots on a bunk bed aren’t being rented for $150. In the real world, they are.

      • Yes, very central renting is expensive the world over, and what we are looking at here is a hostel dormitory in a city with such awful NIMBY planners that not enough have been built. However, is this happening in any real way beyond a few select postcodes? Doubtful, otherwise rents wouldn’t be falling. Also, those two listings are in areas recording some of the largest and most precipitous falls in prices for units in the whole of Sydney. How do you explain that?

        Less blah blah and more facts, please.

      • reusachtigeMEMBER

        These are actually pretty-good value. The rest of us usually charge 200-300 a bed in good city locations and that’s with 4-8 bunks in a room. I think I’m gonna have to talk to some people about these under-cutters!

      • @Peachy gotcha, you can’t explain why rents and prices are falling in Sydney, and the latter especially in the area the listings you posted are in. Melbourne is on another planet for all I care.

        As I asked, is this happening beyond a few postcodes in any real or meaningful way in Sydney? Clearly not, because rents are falling AND in the slummiest areas there is an apartment glut that isn’t being soaked up by all your supposed slum rentals.

        I also love the subtext of these posts: that the migration system is pumping in people with such low and lacklustre income prospects that they have to share 4 to a room. Just lmao. Pathetic….aren’t these the same migrants who will save the bacon of massively mortgaged specufestors? Clearly not.

      • Gumtree isn’t data. The data tells us that Sydney rents are now falling.

        Perhaps immigration will be pumped harder, and supply halted, to reverse the falls, but that’s speculation your honour. Right now, it’s falling –

        Last week, CoreLogic’s Cameron Kusher posted the below chart showing that Sydney rents fell by 0.4% in the year to June – “their greatest decline in at least 12 years (timeseries of our data)”
        https://www.macrobusiness.com.au/2018/08/sydney-property-panic-as-prices-and-rents-plunge/

      • @GreedyPuppy at our current rate of progress, it won’t be long before we get to HK’s madness. 😀

      • Yeah but HK’s crash is just around the corner. According to bubble expert Brenton those countries that didn’t get housing busts post GFC will get one when the next global shock arrives (probably in 18mths). 1/4 acre 4×2’s for all HK residents! They will be ecstatic!

      • Yeah I back that. Back when I was house sharing.. but this would be like 8 years ago. Even back then, people called me up on a spare room asking for 3 people to share one room. So easily the rent can look to double because it becomes a chook cage.
        I can’t say that these investment properties will hold their value for capital gain though, the place is pretty trashed by the time 5 people live in a 2 bedder.

    • Nathan, I was explaining where swizzy is wrong in his idea that leveraged specufestors won’t be able to stay afloat. Which I have.

      If I haven’t answered your different question, I apologise.

      • If you are expecting “interesting”, prepare for disappointment. Have seen it many times before.

        Either the current corrupt duplicitous mob will get back in, or the other mob will get in and act equally corruptly and duplicitly.

        Ardern is a good recent example.

  3. Nice charts!
    They all look the same, though.
    Up and down…..up and down….up and…..,..
    The nature of charts, I suppose.

    • I’ve been to New York, good to visit, not to live. However I only spent time in Manhattan, and Brooklyn really.. I wouldn’t want to live there long term. Too much concrete, noise and and people everywhere. I’d imagine my stress levels would be through the roof in no time if I lived there.

      • Yes well exactly, some really cool bars and places to hang out, things to do and see. Central Park is really nice in particular. However I still couldn’t see myself living there. Given rents and cost of living along with no space to yourself.

  4. TheRedEconomistMEMBER

    Some Empty nesters sold there unrenovated family home after being there since the early 70’s

    I walked past with a cold tin in hand and few under my belt and noticed a current S Class Benz in the drive way and a late 50;s type on his mobile phone.

    I asked if he was the new owner and he proudly said “Yes”

    Are then asked if he was investor… Again he said “Yes”

    I abruptly continued my walk to the bus stop and did not say anything.

    He then followed me and asked who I was. I said “a neighbour.”

    He then mentioned he son was going to be moving in.

    How about not crowding out the next generation instead of renting the house to ya kids.

    Grubs like this is why I paid through the nose in the same street back in 2014.

    • If you paid through the nose then you are as much to blame as all the other grubs, depriving some poor family who couldn’t afford to pay as much.

      • TheRedEconomistMEMBER

        @bjw678

        Gee that is pretty harsh. So if you are an owner occupier (with a good credit rating and hard saved deposit) trying to put a roof over your families head by purchasing a property, am I just as much to blame for high prices?

        So am I just as much to blame, as the cash up investors or multi-generational offshore types who want there kids to go the school in you catchments?

        If you remove these two types of purchasers… you reduce the prices accordingly.

        Investors and offshore cash clearly distort the market.

      • Gee, triggered much?
        Why did you buy in that street?
        Why aren’t the investors and offshore cash buying in broken hill?
        Answer:- you are creating the environment that attracts the investors, whether you want to believe it or not.

    • Looks like the new owner comes from a pretty smart family. Rather than the son buying the house as a PPOR his dad may have bought the house as an investment so he can claim NG perks. (oh and just like you the new owner is also wanting to put a roof over his family’s head.)

      • Beat me to it Remote, we agree. I actually might ask my mum to do this, buy my house and rent it back to me. 🙂

    • To be honest my mum has a couple of investment properties. I would not expect her to let me live in any of them for free. I’d be paying some form of rent to her to cover expenses etc.. the biggest difference is I would be able to construct a garage, renovate the kitchen, have security of tenure and be able to change it and fix/improve it and I’m sure my mum would be fine with that.

      She couldn’t negatively gear it, as the places are paid off (many years back). However in your example the man buying and renting to his kids, if he can negatively gear it, put a roof over his kids heads and give them some security in tenure why not? They may inherit the place in future anyway, so rent paid now is really their way of paying off the home for him.. Seems logical to me.

      • He can’t legally negative gear it, the ATO doesn’t consider it an investment if it is for relatives.

      • Are you sure? I’m fairly certain that if you charge rates as per the area it’s fine? It’s when you undercharge that you can’t claim..
        https://www.ato.gov.au/Forms/Rental-properties-2013-14/?page=7

        Happy to be corrected, but I don’t see how they would police it? I mean my sister has a different surname to me. So if I rented a property to her and her husband how would the ATO cross check that?

      • Can be done –

        Letting of property to relatives

        13. Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms length situation.

        http://law.ato.gov.au/atolaw/view.htm?Docid=ITR/IT2167/NAT/ATO/00001

        Would seem the mains points are to use an agent and charge rent at market value

    • TheRedEconomistMEMBER

      Why did I buy in that street…

      1. My wife and myself grew up in the district
      2. My kids go to school 500m down the road
      3. My Bus stop to Sydney CBD is 500m up the road.
      4. The street has many young families who are similar age to ours.
      5. The house is a high maintenance corner block with large gardens and pool. (I like 2 stroke engines and pumps)
      6. Free standing home… No Strata debacles.
      7 .The bank would lend me the finance… just…. without LMI.
      8. As this is my forever house.

      Specufestor can f^ck off ….

      Whilst I battled to save a deposit for house (earning pittance as interest and paying tax on that interest at my marginal tax rate) the f^ckers were borrowing over above what is needed and then copping a tax cheque at the end of the year.

      • How is he a specufestor if the intent was to provide a roof over his son’s head? He is simply taking advantage of the environment he is in. Not very smart for a self proclaimed economist….maybe change your handle to TheRedFacedEconomist?

      • So basically, you should get whatever you want and everyone else can f%%$ off?
        Or everyone should get what they want?
        Or ?????

      • TheRedEconomistMEMBER

        @Remote… play the ball not the man…

        So you are all for people living off handouts and Largesse of their family?

        How about having the son having a crack himself and not encumbered to family and friends? Regardless the owner was probably telling porkies and going to rent it out.

        I would have preferred a young family buy the place and make it there home for 20+ years.

        Whilst another young family may rent it… how long will it be before the owner want a new S Class and decides to lift the rent and the family has to move on

        @bjw678,,, it is about community and not who is worth millions of dollars and who can lease the better car… Australia once a egalitarian society… Sadly it is loosing this …

      • “So you are all for people living off handouts and Largesse of their family?

        How about having the son having a crack himself and not encumbered to family and friends? ”

        Do you also suggest banning inheritances? Make it mandatory for all estates to be donated to charity? You know, so the kids can have a crack themselves

      • TheRedEconomistMEMBER

        @Remote

        Classic moving of the post…….

        I am not discussing inheritance…

        The biggest lesson in life is tell your kids there is no free lunches… no free houses… nothing

        Get out an make it yourself..

        You may have been born with a silver spoon up your ar$ehole… but there is nothing more annoying than kids living off Mum and Dad Capital.

        Now move on… you are just sounding like a astroturfing fool

  5. Excellent world Leith. Great to see state by state breakdowns. Looking at Perth and Brisbane you can really see how just a few years of finance commitments falling off can lead to decent price falls year after year.
    Looks like Perth going for another leg down. I would like to buy there in future.

    • But but but … everyone, every churnalist in ‘Perf’ is telling me that it’s bottomed out… it’s all coming up roses…