From Gotti today who this time is off the blower from Highrise Harry:
The banks finance the developers on the basis that those developers have sold their apartments to both local investors and Chinese/Asian investors.
…In the case of local buyers, banks have usually indicated that when the apartments were completed they would fund the buyers, but there is rarely a firm commitment.
…The Asian buyers believe they will either be able to gain the money from China and/or the local banks to fund the deals.
…The banks are relaxed because they have not made loan agreements and, as we know, they are constrained by APRA as to how much they can allow their residential portfolio to grow. In addition, there are a series other tighter clamps.
At the same time as this credit squeeze is taking place, it is now much harder to get money out of China, so Asian investors are now much more dependent on the local Australian banks coming to the party.
In theory that should not worry the banks because there is no commitment to the apartment buyer. But many of the developers the banks loaned to will go broke if buyers walk away because of a lack of funding. The banks will have significant bad debts owed by developers. The building industry will crack and there could be a nasty spiral.
Yes, yes, Gotti. It’s old news. We’ve been warning of this for years. As I’ve noted many times, during the GFC the banks froze up on developers because offshore buyers defaulted en masse.
It’s coming again. APRA and the RBA waited far too long and acted pro-cyclically. But the bubble is blown, and the worst thing you could do now is make it bigger still.
