Is Easy Credit On Its Way Back?

Who crashed the economy » Blog Archive » Spring is in the air : Australia returns to subprime lending

I think if this trends continues, we could see the Australian housing market start turning again!



There is nothing like cheap and easy credit to help inject some hot money into an asset bubble. But of course will the trend continue is the big question?

 

Chris,
While there are signs that some of the lending practices and policies are easing, I do not think we will go back to prior practices for a long time. Mortgage insurers are still very strict in what they will approve, irrespective of what the lenders may promise as a headline LVR. The low doc loans are still very difficult to get, especially for an investor who cannot provide BAS and trading statements. Low doc refinancing with 'cash out' to free up equity to purchase again is still almost impossible to achieve unless at high risk rates.

I would agree with you, it has been the ease of credit more than anything else that has been the driver behind housing price increases as well as other assets.

I know some commentators have talked about the housing bubble in Australia, I am not a believer as they have failed to show the drivers that will enable prices to crash. We are not talking about pieces of paper (share certificates or derivatives or whatever else) that have no inherent value in themselves and have no other purpose.

I look forward to someone mounting a convincing argument that will support the assertion that housing prices will crash by 40% or whatever.
Greg

 

They won't fall 40% if credit is easy to obtain (at least not in the short to medium run).

As for why they would fall 40%. If they do fall, it will be for the same reason all asset prices fall - the prospect of future income becomes less than what it was previously anticipated to be.

So in the housing scenario, if you take away the credit injections into the economy investors are force to consider the idea that some of the returns on their investment that they had expect in the form of capital gains will now no longer be as likely leaving only rental yields justifying the investment which might not cover the financing costs at which point rational investors would chose to sell.

Of course if there is lots of easy credit available for housing investors I don't see the market starting to price in a future of no capital gains.

 

Chris,
Only about 30% of the housing market is investor owned.
Of that 30%, I think I read somewhere about 70% of those investors only own 1 IP and some will be holiday type places anyway.

I agree with the sentiment if there is no capital growth, why would investors be in the market, set aside the properties that are returning 6% + yields. Is the theory any different to the share market, value equals discount cash flows? On that basis, how do some shares get anywhere near the price they do?

There may be a time where the market or segments (as did some of Sydney) stagnate for a period, rents gradually increase due to demand (based on population growth) so there will be a point where rent yields become attractive.
It is also about understanding of the asset class and bricks and mortar has been heavily pushed into our psyche for a long time.

 

It's irrelevant what percentage of the market is owned by investors because prices are set at the margin, as in prices are set by the marginal buyer.

Market prices for the most part are set like auction prices, if there are 5 people willing to buy a property but they all have a different amounts they are willing to pay the house is bought by the person who is willing to pay the most, but he pays $1 more than what the second highest bid was.

So the problem is on the buyer side, as in, prices can crash quite severely regardless of what percentage of the property market is owned by investors because it's the marginal buyer that sets the price and if all the buyers price expectations have fallen significantly, then prices will fall significantly.

Also I'd say there is a very large number of home owners who own property because they were bombarded with slogans like "rent money is dead money" and "buy today or be price out forever". So if their dreams of making healthy returns off the back of their PPOR are dashed they may be just as likely to sell as investors.

Simple people obviously believe the future cashflows justify it. Other common causes over priced assets include "irrational exuberance", "mania", "greater fool theory", "general stupidity" etc

In rational economic theory the overpricing of assets shouldn't happen - but scientists are only just discovering that it turns out humans aren't rational... who'd have thought.

People definitely love property, but people like to not be poor more.

So if things do take a turn for the worst I expect a number of property die hards to be amongst the first to jump ship.

 

How do you think commercial property will fair in all this?





Johny.

 

I agree, although I believe house prices are over valued relative to wages etc, when things turn down (economy or whatever) people just don't sell. People who are over commited may be squeezed out but generally people just hold and wait out any downturns. As long as you can meet repayments (I know unemployment usually goes up in recessions) but it would have to be one hell of a spike to cause mass sellouts, which if everyone is out of work, who buys them.

As mentioned above, easy credit was one aspect of fueling the house prices but another one, which I know reasonably well is delayed applications with local councils, state goverment agency's etc. I am a surveyor, and what used to take approx 6 - 12 months to get a simple one into two subivision, now can take anywhere up to 2 - 4 years. The amount of bureaucarcy today is ridiculous. So when development is delayed and demmand outstrips supply, coupled with easy credit then prices will stay where they are.

I think a precipice is coming where the price point will get to a level where it just makes more sense to rent (cost wise). That will probably have the affect of flattening house prices for a few years and as demmand increases for rentals, yields wil rise (with wages) and the ratio of income to house prices will get closer and the cycle will repeat.

Sorry for a little off topic.

 

Australian house price debate continues.....

Always interesting to hear different people's opinions regarding aus house prices.

I think both sides of the argument have real merit.

Anyone who has attempted renting recently will know there is definetely a shortage of properties around capital cities.

But at the same time, rental yield and house prices relative to wages should raise a few alarm bells i would have thought. Will be interesting to see how it turns out.

Think i'll stay well clear until we see how it all holds up during a proper recession or period of above average interest rates.