Housing flippers burn as negative equity spreads

Via the AFR:

…”Now is not the time to be flipping,” director at Ray White Surry Hills Ercan Ersan said. “Anyone who bought in that period [between 2016 and 2017] and is now selling is doing it tough and they either have to accept current conditions or look at holding onto that property for at least the next three to five years,” he said.

Over the 12 months to September 2018, 1.8 per cent of Sydney properties resold within one year of the property being purchased, down from a recent peak of 3.1 per cent in June 2015, according to new data from CoreLogic.

“As dwelling values trend lower across Sydney, loss making resales are gradually rising, which will make it harder for flippers to turn a profit. Over the twelve months ending September 2018, 5.8 per cent of Sydney re-sales transacted at a gross loss,” CoreLogic head of research Tim Lawless said.

The fear of negative equity is starting to worry more broadly, from ME Bank:

A survey by home loan lender ME confirms house buyers who purchased in the past three years are the most worried by recent falls in house prices, particularly in Sydney and Melbourne.

The survey of 1,500 respondents also indicates the shift in the property market may also flow through to consumer spending.

Overall ME’s Property Sentiment Survey paints a picture of a market with polarised views based on if you own, and when you purchased property.

The key finding is that those who bought property in the past three years are significantly more worried about the impact of prices falling.

Purchased property when?

Last 12 months

12-36 months ago

Longer than 36 months ago

% Worried about value falling

70%

66%

49%

% Worried about losing money on a property

60%

68%

35%

% Worried about owing more than it’s worth

57%

62%

27%

% Regret what they paid

46%

48%

15%

But in a sign that ongoing price falls may hit consumer spending, 49% of respondents said falling prices made them feel less wealthy, while 73% said they would be more careful with their money in future.

In contrast to recent buyers and despite price falls in some regions, first home buyers are still worried about housing being too expensive, with 77% saying they’re ‘worried that housing is increasingly out of reach’.

Different opinions are also apparent when respondents were asked what they think will happen with property prices in the next two years, with 38% saying prices will go up, 26% saying prices will fall, and 23% saying prices will stay the same.

Those who think prices will go up outnumber those who think prices will fall in states except NSW, suggesting the reality of price falls in that state has affected future sentiment.

But one point on which most Australians agree is that housing affordability is still worsening, with 84% agreeing with this statement despite falls in prices in some areas, perhaps reflecting just how much property prices have risen over the longer term.

ME’s head of home loans Andrew Bartolo said: “There’s little point worrying about what will happen to prices short-term if you’re intending to live in a property long-term. Same goes for long-term investors.

“The Australian property market has seen seven price declines-recover cycles in Sydney since 1984 and all have seen prices recover, most within four years.

“When it comes to financial stress banks take a long-term view, focusing on the strength of the economy and healthy employment rather than house prices.

“Two of the factors contributing to prices falls in Sydney and Melbourne are macro prudential requirements and tougher credit assessment rules, which have tightened the supply of credit. Economic growth remains strong and unemployment is low.

“Those looking to borrow should ensure they have a strong savings history, a deposit over 20%, and can demonstrate they can keep their levels of expenditure to low levels long-term.”

Insert RBA stupidity here.

Comments

  1. Aaaah – August 2018 – that was a good vintage:

    https://www.fool.com.au/2018/08/09/dont-suffer-from-fongo/

    Foolish takeaway

    It’s important to not let fear dictate your financial decisions. Nearly every finance choice should executed thinking logically not emotionally. Who knows what property prices will do next? People fearing property price falls can self-perpetuate into prices falling.

    (emphasis mine)

    BAAAAAHAHAHA!!

    Oh dear!

    • Good read, flexible regulatory frameworks rather than legalistic fixed sets of rules. Reminds me what someone told me about the rugby codes once, rugby union has laws, rugby league has rules. The referee in rugby union has a bigger influence on the game than in rugby league. Laws are open to interpretation

    • Platypus Moment = Something so ridiculous that you need to see it to believe it.

      Like replicating pre-GFC conditions in Australia with low interest rates, lax lending standards, and expecting a different outcome?

  2. As we’re yet to see new listing rise materially higher than previous years I think we’re still in the good times despite falling sales volumes and prices.

    Yeah, let that sink in for a moment…

      • Look at new listings; they’re very similar to last year in trend and numbers. If (when) reality strikes and people panic new listings will shoot higher to be met by a massive shortfall of buyers.

        At that point we go from popcorn to canned food and shotguns!

      • One thing to consider that I have noticed in my area, is the limit of time on a weekend for the agents to show all the properties they have on their books, I notice a lot of places that get listed and then de-list after not selling only to pop up again with another agent at the same price, then rinse a repeat and list a third time, this time at a lower but still way to high price, I am sure that the agents loose interest in those places that are asking too much quite quickly too.

      • Uni resumes March next year. If transaction volumes numbers don’t start improving by then perhaps there might be a second order effect kicking in besides tighter credit standards. By that stage we should see Christmas consumer spending statistics come out. Also interested to see how much business Afterpay gets over Christmas.

      • CaptainFeatherSwordsGhostLivesOn

        I think the point is the new listings are tracking normally but the clearances have stalled leaving numbers of properties on market to skyrocket

      • Whatever the cause of the increased stock on market, it still reflects a dynamic of increasingly more sellers than buyers, which leads to falling prices.

      • My point was that while people aren’t buying and stock on market is rising, we’re not seeing people panic listing yet. Thus the current price falls and rise in stock on market is purely a function of a lack of buyers (presumably because they can’t get credit or are happy sitting on the side lines watching prices fall).

        So that means the current falls in price have occurred during the good times, being well before any sort of rush to liquidate property en masse which, if it were to happen, would move us straight from “housing correction” into “housing crash” or Martin N’s Armageddon scenario immediately.

        Yeah, so we’re still in the good times – a breather for a cigarillo between orgies in Reusa’s lingo – waiting for the crash to begin.

      • Properties are quietly discounted and sold. It’s going to get worse. Sentiment is worse. Volume is abysmal. Stamp duty is abysmal. This is much worse than you think.

  3. “There’s little point worrying about what will happen to prices short-term if you’re intending to live in a property long-term.”

    And while you may not have been intending to live there long term, you might find yourself trapped there in negative equity, unable to sell, unable to refinance. Best to get just used to it, keep paying off the debt, and hope the bank doesn’t get cold feet and repossess.

    Thanks ME Bank.

    • Exactly people could end up locked into a property during a “normal” market correction for maybe 5yrs, but this may not be a normal correction as there is a structural change to credit availability, this suggests to me people could be locked in negative equity for considerably longer. And some will have been already in some areas of Perth, Brisbane etc (My mate in Japan was for over 20yrs, luckily he had a job for life so never had to move)

      • +1 absolutely.

        In my opinion they shouldn’t allow flipping anyway… or it should be taxed up the warzoo.

  4. You mean it’s not ok to speculate on housing? Guess it’s time to start servicing that debt I never expected to have to pay off.

  5. Does not include approx 4% stamp duty in NSW.
    Nor does it include to 1-20% you might have thrown in for renovations which might not have appreciated the value.

    • People are still forking out major sums for renovations to their owner occupied house- they are planning to live there long term,but they still see it as n investment in selling at a much higher price later.
      And the ones l know haven’t saved for the renovation- they’ve backed it into their housing loan. So,it’s seriousmoney.
      And it will take forever to repay,on top of the housing loan,particularly as house prices implode( and l really agree with Geordie).
      Theses people are on the hook forever.

      • I am interested in this idea Pantone. I had read that most flipper profits are simply due to land value appreciation. Renos may mostly break even (this is what you are saying) but there must be plenty that are overcapitalised or inefficient and don’t break even, they just appear profitable because the land value went up.

      • Jumping jack flash

        Certainly!
        A lick of paint doubles the value, as the saying goes. Or perhaps replacing a single tap in the bathroom. Or just mowing the lawn. A potplant.

        Magical what debt can achieve.

  6. Indeed. Hold off. Reduce demand. Stay out of the market. Let prices fall, and then still stay out of the market.

    Stay away. Leave housing as housing, and stop using it as a financial tool for undeserved gains and the systemic transfer of wealth.

    Go away and don’t come back.

    /end rant

  7. I have been saying for years that Oz property taxation needs to change including:

    1. Remove NG, with grandfather clause and limit to new property (but of a maximum of five years for both)
    2. Capital gains tax regardless of tenure including owner occupation, based on a time scale – so if you buy and flip a home (living in it) within say 5 years of buying you pay 30% tax on all gains from original price to resale value, dropping down to say 5% if you hold for more than 20 years
    3. Stamps should be from $2k to $5k max, depending on value
    4. Land taxation on all properties based on 0.5% land value for owner occupation and 1% for investors
    5. Depreciation on all property assets, not just investment
    6. Annual interest payments tax deductible for all property types
    7. Overseas investors pay 2% land tax and if they don’t development within the set approval time frame they face a serious fine (like 5% of improved land value) and are subject to 50% capital gains tax if they flick a development site instead of developing – an acceptable escape clause might include a JV with an Australian business
    8. Stop all grants like the FHOG
    9. Limit combined taxation on new property development to 25% of land value – it is closer to 40%, 50% in some locations
    10. Set a maximum 2% sales commission and similar annual rental fee – if sellers/landlords want to pay extra then that is their call

    Problem solved – yes via a market correction (how serious depends on timing) – but then we will get through it and most will buy a home to live in and investors will buy based on rental return and then we (the Oz population) can focus on more apt economic pursuits like science, technology, medicine, food production, energy supply rather than being real estate agents and property developers.

    Oh and whilst I am at it, the RBA should meet once a year – in June – and set the years agenda. If they cannot forecast a year out then they don’t deserve the post. Meeting every month is such BS.

    And I work in the property sector!

    And of course pay veteran property analysts what they are really worth!

    Comments?

    • “3. Stamps should be from $2k to $5k max, depending on value”

      Geez, that’s a big step up from the $1 they cost now.

      Also, your #1 and #4 appear inconsistent.

    • Nothing will really change the dynamic while the 30 year mortgage exists……..it will just be another bigger or smaller cycle. Any advantage accruing to anyone..owner or government gets reverse amortised by the banks with their 30 years of compounding interest charges, but no-one notices.

      The 30 year mortgage came into being around the time modern central banks got the bit between their teeth. Probably too late to go back to 50% down with a 50% balloon payment 5 years later but we need to go to somewhere in between or this will just keep happening.

    • There should be a CGT exemption if you’re selling a PPoR to buy another within a short time (say, less than 6 months).

      You shouldn’t have to downgrade your home just because you move.

      • Because the point is to not disadvantage people who are just moving from one place to another (job change, child, divorce, etc).

        If you want to sell your massively bubbled up PPoR and then use the $$$$ for something else, or sit on them for years waiting for prices to go down, then you don’t get the unearned gain.

        This is the system in Switzerland (and Germany, from memory).

      • Stop foreign money flowing in. Render the A$ to its real value that balances our external account. Don’t compensate or penalise wages for changes in the A$. The rest would look after itself – if we weren’t already so far down the road to oblivion.
        The answers lie back in time.

    • From the picture in the article: “A property in Newtown that sold for $1.3 million last year is now on the market for $1.225 million despite being newly renovated.”

      Looking at the photo from the backyard, it looks about 75% overvalued even with the reduced price.

  8. SoMPLSBoyMEMBER

    Observed a guy ‘returning’ a Dewalt table saw to Bunnings ( Box Hill, MEL east) and had this funny feeling that it was not about a defective machine. Then, noticed lots of returned ‘defective’ electric, battery and petrol power tools in the trolley. Last time this informal ‘index’ seemed this high was in the GFC. Without cash flow, we all fall down.

    • I love these informal indicies. Mine is single cab Toyota landcruiser utes.

      Jan is going to be interesting, as I remember jan last year a lot of properties came onto the market. I image there are even more sellers waiting for the new year.

      • Yup. Mums and Dads are going to go through their financials over the Christmas break, realise they are deep in the financial p** and decide to sell.

        It will get interesting when thousands of like minded people come to the same conclusion.

    • I’m seeing lots of Toys (cars) for sale on Gumtree. R32 GTR listed at $35k dropped to $30k which is cheap for an R32 GTR these days. Lots of other performance vehicles up for sale too! All very tempting for someone like me with cash haha.

      • I assume you mean VW? Not into the Euro stuff.. but I recently installed the CarSales app on my phone. 1 advantage of it is, if you star a car as a favorite and it has a price drop you get notified on your phone instantly. I’ve been seeing more and more discounts on some of my starred cars.

        I’m guessing car sales are slow at this point in time and therefore more discounting is going on than usual.

      • This is what I mean, this FD RX-7 (RZ) was dropped in price.
        https://imgur.com/a/TWKOFgp
        from $64,000 down to $59,000.

        Still well elevated compared to what they were selling for 3 years ago.

        I suspect this 1 however is a dodgy import (wound back odometer). It’s also missing the correct “Recaro” seats.

      • I just sold my sports car >100k
        Had it for a few months but no good for the back, lost a couple k but with the way things are going, goddamn its good to have sold that baby now. Time to baton down the hatches, on a more personal note, I have a friend with over 500k in savings in the one bank in 2 term deposits expiring within 6 months. Would you advise my friends to move 250k to another adi, put in usd, international vanguard or put it all on black. Nothing will be construed as advice just personal opinions.

        Cheers

      • I would be careful about buying anything of value off Gumtree, it is rife with unsavoury types.

  9. The key finding is that those who bought property in the past three years are significantly more worried about the impact of prices falling.

    In a while, those people who bought 4 years ago will get the memo, and start to feel worried. Then, after a while, as prices continue to decline, those who bought 5 years ago are gonna start feeling anxious as well. Then, as prices trend inexorably downward etc etc…

    Different opinions are also apparent when respondents were asked what they think will happen with property prices in the next two years, with 38% saying prices will go up, 26% saying prices will fall, and 23% saying prices will stay the same.

    Bwahahahahahaha….Clear evidence that 38% of the population is completely deranged and unable to process the evidence that is clearly in front of them, and a further 23% are still deluded, but to a lesser degree, leaving less than a quarter of respondents actually in touch with any sort of reality. And 38+26+23 = 87% I believe, leaving 13% who presumably have NFI about what’s going on.

  10. FONGO in Domain? WTF! “Shane Oliver said that many investors may look to sell to avoid suffering from a several-year property downturn. He thinks that prices in Sydney and Melbourne could fall another 10% to 12%.”
    It would appear that Domain is only interested in turnover.

  11. The old saying…”when everyone is thinking the same, someone is not thinking”…Pre housing crash..!

  12. A friend of mine was just cold-called by Bank of Melbourne offering a home loan – she previously held a loan with them but sold and no longer has any debt… anyone have any ideas why they’d be doing this?? My general impression was that the market is struggling due to credit tightening.. but this suggests otherwise!

    • Exactly the reason she was called…no mortgage no debt, Banks will still lend and these guys still have to do their job just that they wont be lending the huge amounts to individuals that they used to and she will probably get offered an amount that is in tune with her financial position. They are not shutting down business…..Just looking for AAA people to lend too.

    • There are no credit worthy people who want to purchase a house. There is a large and increasing supply. It’s gonna be a nasty crash.

    • Yeah thought the timing was interesting – clearly there’s something going on for them to be cold-calling to sell credit..

  13. REUS, Its time to come clean so everyone here knows…
    Sydney down 9%, month by month accelerating. Melbourne, almost 6%, same pattern.
    I was here years ago when you decided to change your position from one of disgust, to one where you would encourage the stupidity to move this party along quicker.
    No more blue suits, brown shoes and bbq pissing contests for you old boy.
    Come out here and remind us of who you are, I shall be the first to welcome you with open arms

    one of us, one of us

  14. Jumping jack flash

    “or look at holding onto that property for at least the next three to five years,” he said.”

    3 to 5 years? And then what will happen? The second comming?

    Lols, 3 to 5 years. Try 30.
    Pray to your deity of choice that rates don’t go up in that time.

    Or sell for a loss.
    The gain was only someone else’s debt anyway. Tree, forest, one hand clapping, etc.