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Only higher interest rates or macroprudential tools can realistically end the housing boom; Over the past year Sydney has seen home values up 16% and Melbourne up 12%
Topic Started: 8 Sep 2014, 09:31 AM (2,680 Views)
Veritas
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b_b
28 Sep 2014, 12:48 AM
I don't agree with that. Prices can go way above affordability due to the banks being hopelessly pro-cyclical.
At what point did Irish house prices leave the "affordability" threshold behind?

My take on affordability is that if there are dislikeable personz buying them, they are affordable. Just as Shadberg contend.

Of course, not in the long term just at the point of purchase.

Whether that jumbo mortgage on the negative equity shitbox remains affordable five years down the line is the issue.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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peter fraser
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b_b
28 Sep 2014, 12:48 AM
I don't agree with that. Prices can go way above affordability due to the banks being hopelessly pro-cyclical.
Well yes the prices can go well above but the higher the price the less people there are who can afford it, and at the moment all borrowers have to be able to service their loans, and that ability must be demonstrated on serviceability calculators.

It's no longer possible to sign a declaration that says you're a nice guy and you can afford the loan, it must be proven that you can afford the loan. That doesn't mean that there won't be people on good incomes who can bid up a price, but a borrower on a good income is a safer debtor in a downturn than someone who actually could never afford the loan in the first place.

That's why we won't see a crash like Spain or Ireland here, although apartments seemingly bought for cash by foreigners but who in fact have borrowed heavily in their own country may come under intense pressure if they have credit issues at home. Apartments in the major cities look like the weak point to me.
Edited by peter fraser, 28 Sep 2014, 08:28 AM.
Any expressed market opinion is my own and is not to be taken as financial advice
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b_b
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peter fraser
28 Sep 2014, 08:26 AM
Well yes the prices can go well above but the higher the price the less people there are who can afford it, and at the moment all borrowers have to be able to service their loans, and that ability must be demonstrated on serviceability.
Current serviceability is based on historic lending decisions. Future sevicability depends on today's lending decisions - and we don't know that number yet.

Not suggesting there will by a housing crash like Spain. Just saying just because people are buying does not make it affordable. Bank lending standards change over time. And they get easier when the market gets hotter.
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peter fraser
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b_b
28 Sep 2014, 09:01 AM
Current serviceability is based on historic lending decisions. Future sevicability depends on today's lending decisions - and we don't know that number yet.

Not suggesting there will by a housing crash like Spain. Just saying just because people are buying does not make it affordable. Bank lending standards change over time. And they get easier when the market gets hotter.
I have seen first hand the changes in the lending standards from a FRB system when banks actively held back the economy because they were both credit constrained and morally constrained - even in that system there was a market correction in late 1974 and again in 1981 when the policies were similar. Another in 1991 although policies were looser at that time. Looking back no one considers the prices unaffordable in 1981 but at the time they were considered so because interest rates made the prices unaffordable. There was no less angst among the wanna be home buyers at the time, the only difference is that there was no internet to bring them together and focus their anger.

The fall in lending standards from about 2002 to 2008 was not in our best interests, but luckily we survived, probably due to the actions of Rudd and a sudden change in policy direction. From discussions that I have had with lenders, APRA have been paddling pretty hard behind the scenes and we have MP in all but name.

I have spoken with people from Genworth who stated that they would insure a 100% LVR product - but we don't have them. There are non-bank lenders who would jump at the chance to introduce and advertise a 100% LVR product (it's great click-bait) and yet no one is offering a 100% LVR product. Not even a 97% plus LMI product.

Why not? What is stopping them? The answer IMHO can only be APRA.
Edited by peter fraser, 28 Sep 2014, 09:23 AM.
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b_b
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peter fraser
28 Sep 2014, 09:21 AM
I have seen first hand the changes in the lending standards from a FRB system when banks actively held back the economy because they were both credit constrained and morally constrained - even in that system there was a market correction in late 1974 and again in 1981 when the policies were similar. Another in 1991 although policies were looser at that time. Looking back no one considers the prices unaffordable in 1981 but at the time they were considered so because interest rates made the prices unaffordable. There was no less angst among the wanna be home buyers at the time, the only difference is that there was no internet to bring them together and focus their anger.

The fall in lending standards from about 2002 to 2008 was not in our best interests, but luckily we survived, probably due to the actions of Rudd and a sudden change in policy direction. From discussions that I have had with lenders, APRA have been paddling pretty hard behind the scenes and we have MP in all but name.

I have spoken with people from Genworth who stated that they would insure a 100% LVR product - but we don't have them. There are non-bank lenders who would jump at the chance to introduce and advertise a 100% LVR product (it's great click-bait) and yet no one is offering a 100% LVR product. Not even a 97% plus LMI product.

Why not? What is stopping them? The answer IMHO can only be APRA.
Peter an lvr of 95% on a house at replacement cost is a much better loan than 90% lvr when prices are +20% above cost. In that example, the decline in lvr reflects a deterioration in lending standards - but APRA would be happy because they don't look at it this way. Neither do many of the banks. That is the risk in they system, despite the illusion of being "regulated". As you say serviceability is key. But that number comes from a spreadsheet, and is only ever as good as the assumptions used in the calculation.
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Lef-tee
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Another in 1991 although policies were looser at that time. Looking back no one considers the prices unaffordable in 1981 but at the time they were considered so because interest rates made the prices unaffordable. There was no less angst among the wanna be home buyers at the time, the only difference is that there was no internet to bring them together and focus their anger.


Actually, that was not my experience Peter - my angst was not about being able to service the loan, it was about struggling to get one in the first place. Lending was certainly rather tighter. Once we did finally get one, I don't recall that we ever felt any pressure in servicing it, even at interest rates more than double those of today. Was I to buy the same house today from scratch, repayments would be a much higher percentage of our household income, even though our household income has increased significantly in real terms since we bought and even though interest rates are as low as they've been since I was born.

But admittedly I'm talking about a later time period than 1981. Maybe everyone else my age has a vastly different recollection. Don't know really.
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peter fraser
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Lef-tee
28 Sep 2014, 09:39 AM


Actually, that was not my experience Peter - my angst was not about being able to service the loan, it was about struggling to get one in the first place. Lending was certainly rather tighter. Once we did finally get one, I don't recall that we ever felt any pressure in servicing it, even at interest rates more than double those of today. Was I to buy the same house today from scratch, repayments would be a much higher percentage of our household income, even though our household income has increased significantly in real terms since we bought and even though interest rates are as low as they've been since I was born.

But admittedly I'm talking about a later time period than 1981. Maybe everyone else my age has a vastly different recollection. Don't know really.
I was on a course in Sydney in circa 1981 - in those days banking was heavily regulated and trading banks were kept separate from savings banks. It was savings banks that were responsible for home loans.

We were addressed by the General Manager for savings banks who told us that the bank had to maintain about 44% in Statutory Reserve Deposits, so to make sure they didn't overstep the mark they kept lending ratios at about 35% of the Reserves.

lending was very restricted. Having a 20% deposit, a good credit record, and a well paying well established job wasn't enough to cut it for a loan then. If you were not a long established client with a long history of holding large deposits, or your family wasn't a major and valued client of the bank - you missed out.

Building societies were a lot easier, they would lend on 10% deposit and a good job, but they had no money. If you borrowed through them you needed a three month contract to have any chance because they would approve a loan today but not be able to fund it for months.

A system that severely restricts lending also severely restricts the economy, jobs and growth - can't have it both ways.
b_b
28 Sep 2014, 09:32 AM
Peter an lvr of 95% on a house at replacement cost is a much better loan than 90% lvr when prices are +20% above cost. In that example, the decline in lvr reflects a deterioration in lending standards - but APRA would be happy because they don't look at it this way. Neither do many of the banks. That is the risk in they system, despite the illusion of being "regulated". As you say serviceability is key. But that number comes from a spreadsheet, and is only ever as good as the assumptions used in the calculation.
I don't disagree, but I do make the point that lending now is much more difficult than pre GFC and it's that way for all the right reasons and not the wrong reasons.

I don't see how a bank could design a lending policy that increased LVR's during periods when prices were affordable and decreased them when they became overheated, especially when you take into account that some cities in Australia are quite affordable and some are not. The way that was overcome in the past was a circular instruction that brought in informal restrictions to certain areas or certain industries. Because those policy adjustments are never published it's impossible to know, although I do know that industries and areas of lending like land banking come in and out of favour depending on their economists long term forecasts, although the written policy stays the same.

The only problem that I see with APRA bringing in Macroprudential policies is that APRA won't be flexible enough either moving up or down.

the other issue that concerns me is that RBNZ made a complete hash of their MP policies and restricted lending to FTB's, so would APRA or the RBA be any better?
Edited by peter fraser, 28 Sep 2014, 10:28 AM.
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Count du Monet
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There's a simple solution to bubble house prices. Just stop printing money, or more precised keep about the same level of currency per capita. The simple cheat of making assets desirable for capital growth will instantly evaporate and house prices would plummet!
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Lef-tee
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Well no, I wouldn't like to see lending severely restricted, though exactly what constitutes that term will differ depending on who you ask.

We still eventually got a loan and so did most people we knew our age - but it was tougher and we could not get anything like the size loan that is typical today, even after taking inflation over that time into account. Naturally, given that housing is mostly financed with borrowed money prices were rather lower because if people can't borrow a half-a-mil, they can't spend half-a-mil on housing and the price cannot inflate to that degree. Simple really.

And of course you're right - if government dislikes spending as a matter of policy, then the void must be filled by private sector debt growth. Low private sector debt went hand in hand with strong economic growth for decades following WW2 because government was prepared to act as the economic engine. Until neo-liberalism became all the rage. Then of course lending standards had to become progressively more lax to allow lenders to offer bigger and bigger loans to average Joes otherwise the process would have struggled to continue. The question is - how much further can we now take that private sector debt growth? We can't make borrowing money much cheaper than it is now.

I'm sure you're not arguing that if private debt can't continue to expand from it's current stratospheric levels then it's "Game Over" for all of us. That would be a tad alarmist. Government will sooner or later have to get back to doing more rowing of the boat but the prevailing ideology seems to gaurantee that they will fight it kicking and screaming all the way.
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the other issue that concerns me is that RBNZ made a complete hash of their MP policies and restricted lending to FTB's, so would APRA or the RBA be any better?


That's a good point Peter - all they really did was dealt FHBers out of the equation even further. But I have to ask was that entirely a mistake? Perhaps they just felt as though they needed to be seen to be doing something as a matter of political expediency while really doing nothing that would harm vested interests - assuming NZ policy makers have the same sort of investment property portfolios as their Aussie counterparts.
Edited by Lef-tee, 28 Sep 2014, 10:48 AM.
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b_b
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peter fraser
28 Sep 2014, 10:13 AM

I don't see how a bank could design a lending policy that increased LVR's during periods when prices were affordable and decreased them when they became overheated, especially when you take into account that some cities in Australia are quite affordable and some are not. The way that was overcome in the past was a circular instruction that brought in informal restrictions to certain areas or certain industries. Because those policy adjustments are never published it's impossible to know, although I do know that industries and areas of lending like land banking come in and out of favour depending on their economists long term forecasts, although the written policy stays the same.
I agree - hence when assessing affordability, the simple observation that "people are still buying" is not very helpful.

MP in whatever form may cause some disruption but will ultimately fail - just like any other policy initiative which focuses on demand.
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