Tuesday, 19 April 2011

Plenty of room at the Hotel California

Robert Gottliebsen in the Business Spectator on Nov 29th wrote an article titled Noosa's Hotel California.

Noosa Heads, Australia, is a long way from Ireland and California but it has experienced a similar real estate shock – a 70 per cent fall in the value of a major property. It’s a long time since Australia has seen prime property fall by that much.

The ingredients which caused the big value falls in California and Ireland were repeated at Noosa (and the Gold Coast). In the boom there was a huge influx of loan money, fanned by overseas banks led by HBOS, small regional Australian banks, independent Queensland property lending groups and the major banks. This sent property values through the roof and triggered a large number of development projects.

Then suddenly the money disappeared. Most of the foreign banks went home, the independent financers went broke, the regional banks went back to what they were good at and the majors also cut back lending. In Noosa the value of run-of-the-mill apartments has fallen between 20 to 30 per cent and similar declines would have been experienced on the Gold Coast.

But 20 and 30 per cent is a long way from 70 per cent.


In all Resort Corporation spent $210 million on the Noosa Sanctuary resort and clearly believed that the market value of what they were creating was much higher than that.

The project went into receivership and it was generally thought that the very worst case scenario was a 50 per cent drop in value to $105 million. That would have gone close to covering the HBOS first mortgage debt which was in the vicinity of $120 million. But no. The highest and winning bid was just $60 million, payable in 21 days. HBOS lost half their money on a 60 per cent first mortgage security. Second and third mortgage holders plus the equity funds were wiped out.

$210M to $60M? Carnage.

The Gotti wrote a new piece today titled Why Australian Property is Losing its Shine.

What’s happening on the Sunshine and Gold Coast apartment markets is a mirror image of what happened in the housing markets in the southern and mid-west states of the US. And it provides a valuable pointer to answer the two questions that plague so many Australians: What could cause an abrupt end to the high level of Australian dwelling prices? Or, put another way, how do we maintain or increase Australian prices?
Reflecting local and global concern at Australian dwelling prices we have seen enormous traffic generated by two recent commentaries on Business Spectator (This housing bubble could break our banks, April 12; and Time to sell Melbourne housing? April 16, 2011).
In both the US and the Gold and Sunshine Coasts during the last decade we saw a mad scramble by lenders to fund dwellings. In the US it was all part of the sub-prime disaster. In the Gold and Sunshine coasts we saw overseas banks led by HBOS funding a series of apartment developments.
That convinced some local banks, including Queensland banks, to join the party.

And quite the party it is.

Gotti tries to polish the turd a little in the hope that Property Investors don't start queuing on the Storey Bridge to do a swan dive.

As long as banks keep restricting the supply of dwellings and fostering the demand by generous consumer loans, dwelling prices will not slump.
But if Australian banks restrict consumer housing credit in the same way as the US banks and the banks involved in the Gold and Sunshine coasts market did we will see a big fall in property asset prices, which, in turn, will lead to a rise in bank bad debts.
In many ways the Australian banks are trapped. They must keep up consumer housing funding to avoid a fall. As long as the bankers understand their role in the game all should be well. But you can understand why some global investors get nervous. Bankers are not always that smart.

Too late Gotti, too late mate.

 Even the professional spruiking vested interests are surrendering. From Lateline Business last night.:

EMILY STEWART: Clearance rates in the two major auction markets, Melbourne and Sydney, remain down on this time last year.

Preliminary figures from RP Data show there were more than a thousand properties up for auction in Melbourne last weekend, but only 60 per cent sold. That's down from around 80 per cent this time last year. And in Sydney, around 800 properties were auctioned, with a clearance rate of 65 per cent.

David Airey, the president of the Real Estate Institute of Australia, says the slowdown began in Perth in 2009.

DAVID AIREY: Prices have certainly softened in every mainland capital city and Tasmania as well through - more noticeably over the last six months, but in particular the trend has been over 12 to 18 months.

EMILY STEWART: Andrew Harvey from the Housing Industry Association says a spike in prices in the major markets last year was caused by the Federal Government's stimulus package for first home buyers. He agrees that demand is now softening and that it's mostly down to recent interest rate rises.

ANDREW HARVEY, SENIOR ECONOMIST, HOUSING INDUSTRY ASSOCIATION: These corrections we're seeing in the housing market are entirely appropriate. They're what you'd expect after those interest rate increases. And also, they're basically what the RBA would be after to be slowing the demand a little.

EMILY STEWART: And as for claims that a housing shortage exists in Australia, David Airey says the opposite is in fact the case and there is a significant oversupply of houses in the market.

Last night Standard and Poors put the USA on negative rating watch as their govt debt hovers around 100% of GDP and rumours circulate that QE2 will be the end of QE. Dow promptly dumps 140pts.

Click and weep: US Debt Clock

The PIIGSUK will take out global credit markets, the USA will take out equity markets, Australian property crash will take out at least one of our banks. "Easing",flatlining and soft landing my arse.

Mirrors on the ceiling,
The pink champagne on ice
And she said ’we are all just prisoners here, of our own device’
And in the master’s chambers,
They gathered for the feast
The stab it with their steely knives,
But they just can’t kill the beast

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
’relax,’ said the night man,
We are programmed to receive.
You can checkout any time you like,
But you can never leave!

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