When the market pivots to the low end

We already know that the top-end of town is bearing the brunt of recent price declines.

Falls are pretty much isolated to the top 25% of the market. The bottom 75% is steady or even growing.

But it’s about to get worse.

APRA is introducing a new rule in the coming financial year. Going forward, banks are going to look not just at your loan to income (LTI) ratio, but also your total debt to income DTI ratio.

Banks are no longer going to be looking at your ability to service the loan you’re applying for, but all of your debts – including other mortgages, auto loans, credit cards – the whole kit and caboodle.

And they reckon they’re going to cap debt at 6 times your income.

We don’t know how ruthless APRA are going to be about it, but UBS reckons if they make it a hard limit, it’s going to crimp people’s ability to buy.

In particular, they reckon it will put the median house in Sydney out of reach of the median buyer.

That is, an average income earner won’t be able to afford an average house.

These numbers are a bit rubbery, but the general idea is right. People aren’t going to be able to spend as much as they used to.

So what’s going to happen?

Well, as that graph shows, the median house might be out of reach, but the median unit isn’t. And I’m guessing the median town house won’t be either.

So what I’m guessing we’ll see is a lot of energy that would have been reaching towards the top, being redirected towards the lower ends of the market.

The top end is in trouble.

But that also means there’ll be competition for cheaper and mid-priced stock. That means that stock will get bid up in price.

And so what I’ll expect we’ll see is a compression of prices around these limit points.

Prices above will get pulled back down, while prices below will be pushed up.

Now, which kind of property do you want to be owning in that scenario?

Yep, solid, investment grade properties at the more affordable end of the spectrum.

What’s more, cashflow has never been more important. Forget carrying negatively geared properties. That strategy is dead in the water now.

Going forward, it’s all going to be about cash flow, and carefully watching your debt to income ratios.

The property game is changing.

Is your strategist across all this?

Spiro Kladis
Managing Director, Cashflow Capital

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