US report warns of imminent Aussie housing collapse

By Leith van Onselen

The Washington-based International Strategic Studies Association is the latest to warn of settlement risks in the apartment market, warning that “changes in local banking policies” could see foreign investment in the property sector “decline markedly”, precipitating a “market collapse”. From News.com.au:

“We estimate that Australia has about six weeks or so to turn this situation around, otherwise there would be a massive hit on property valuations and the building trades,” he said.

“The urgency is, I believe, based on the fact that this is about how long it will take for the banks’ policies to start switching off a lot of existing and planned contracts for Australian properties.

“The banks clearly believe Australian real estate values will decline, so they are attempting to avoid that risk. They’ve learned from the US collapse that seizing real estate collateral is a no-win scenario when the volume is great and the market slow.

“In so doing, they precipitate the market collapse but are less exposed to it.”

…“it is much more likely to be a self-fulfilling prophesy by depressing demand, creating oversupply and putting downward pressure on prices, thereby creating paper losses at the settlement date which would tempt buyers to walk away”.

I have little doubt that Australia will experience a clean out in the apartment sector at some point, but within six weeks or so sounds heroic.

2017-18 seems more likely to me, given the massive number of apartments still to flood the market:

ScreenHunter_14663 Aug. 29 14.33

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Leith van Onselen
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Comments

  1. What’s interesting about the report is I didn’t see it in msm media in Australia yet, but showed up early in the nz news papers. Maybe this may scare some investors away though and speed up the time to crash.

  2. Whack-a-mole…

    http://www.mingtiandi.com/real-estate/outbound-investment/bank-of-china-spends-100m-on-a-new-sydney-office/

    “It is now very clear why ICBC, Bank of China and China Construction Bank all opened retail branches in the best streets in the Melbourne CBD and Sydney CBD,” CBRE agent Mark Wizel explained to the Australian Financial Review. “They foresaw the potential challenges that Australian banks would face in lending to offshore apartment buyers.”

    http://www.theglobeandmail.com/real-estate/vancouver/out-of-the-shadows/article31802994/

    “Meanwhile, more recent documents show that Mr. Gu is moving into more sophisticated ventures. A recent business plan, written in Chinese, suggests he is crowdfunding to buy real estate, a practice that has been under scrutiny by regulators.

    The plan states that Mr. Gu finds properties to buy, and his clients cover the down payments. The rest of the money comes from bank financing and money raised through “social finance.” Properties are then flipped, loans paid off, and profits shared by all.”

    • I think all the kerfuffle about settlement risk is overdone for exactly that reason.
      Chinese banks are hungry to make mortgage loans. Just look at China where mortgage lending has increased 100% in under a year. Chinese needing money for settlement will find it.

      BTW have you flown into Sydney Airport recently. You are confronted with ICBC, BOC, CCB billboards the entire drive out.

      • Meaning that if it did happen, a collapse in Australian property could take out a bunch of Chinese banks?
        Now, THAT would be funny.

      • Suggest you go and talk to the mortgage department about settlement on an off-the-plan property. My wife thought the same thing and referred a couple of friends to BoC and ICBC after Westpac failed to cover the loan. BoC offered 30% of the property value up to a maximum of $300K with Chinese income and assets discounted while ICBC would not even talk to them unless they had a standing mortgage facility with them in China with over 5 years history.

        They may have relaxed this in the last 4 weeks.

      • Don’t be too proud of this numerical terror you have constructed. The ability to calculate the LVR is insignificant next to the power of the Force.

  3. Of course, if enough people shout from the rooftops that property will collapse within 6 weeks, it could become self-fulfilling.

  4. But at this point how could the surge in the construction of new apartments be ‘turned around’ even if ‘the forces that be’ wanted it to? Renege on much of the recently obtained building permits? Flat out decline the approval of loans in all but the most promising areas? And then what happens to all those construction jobs? I don’t see any path in which this ends pretty.

  5. Timeframe uncertain but it is good of them to add to the debate and assist the downward slide. Can this detailed reseqarch be uploaded to wechat or whatever it is that they read in Choyna?

    • This got my attention:

      We estimate that Australia has about six weeks or so to turn this situation around

      Six weeks to do what? Switch easy credit back on?

  6. Without Glen Stevens certitude in the glories of assets prices that rise ever upwards, doubt might creep in.

    One thing that could cause a problem is a half baked attempt to fix the problem.

    Any attempt to let some air out of the housing market must be accompanied by serious fiscal activity but is that a possibility with ignorant austerians spinning their bow ties and singing music hall favourites about the old bamboo?

    Though Glen Stevens gave the tin one last almighty kick down the road – to give him time to get into the responsibility deniability zone, a fumble and loss of nerve by those who remain might be the thing that sends the camel to the chiropractor.

    • Glen’s all about hard decisions he is, says there’s no real problem but the problem is getting bigger – and no one calls him a lunatic, and they actually paid him a million bucks a year…

      • Last week was unbearable with all the songs of praise being sung about Glenn and his 20 years of devotion …. to the interests of the public.

        A holy roller who believes in neo-classic economic fables……not exactly a rare beast but still makes one want to know whether Phil Lowe has been strumming along with Glenn on those semi-sacred John Denver greatest hits.

  7. 6 weeks is overly negative.
    It would take more than 6 weeks for auction clearance rates just to decline to sane levels.This puppy isn’t going to crash until the Chinese money stops. And that won’t be for a while yet.

    • Pretty much this. Remember when Brexit was the end of the world? Remember when Vancouver’s RE market was going to collapse?

      I don’t.

    • They are 50% below where they were same time last year based on volume. Volume is about to skyrocket into spring.

      Clearance rate is bollocks – total volume is all that matters.

      Apartments are already crashing.

      • Disagree, clearance rate is indicative of the supply-demand balance.
        The market is tight because there isn’t much supply and a lot of demand = higher prices…
        Simple stuff…..

        As for volumes skyrocketing… Why would anyone sell at the moment with the market as tight as it is? That is why volumes are so low. It is the strength of the market which is bringing down volumes NOT its weakness.

      • Gramus, we’re oversupplied period. Yes it’s already crashing. Yes, Just Sell Now! Oh wait… everybody’s already selling, but they’re drip-feeding that crap onto the market, hence low volume. Why? because most people are already underwater @ current values LOL!!!! Both apartments and detached are going down the shitter. Enjoy the sandwich….mmmm….

      • Everything that has transpired has done so according to my design. Your friends, up there in Melbourne, are walking into a trap, as are the Chinese. It was *I* who allowed them to know the location of the credit. It is quite safe from your pitiful little cautionary note. An entire legion of my best real estate agents awaits them. Oh, I’m afraid the auctions will be quite operational when your friends arrive….

    • Saw a news report recently claiming that Chinese money accounted for 28B in the last 6 years. It’s forcast to be 60B in the next 6.
      We.are.screwed.
      If you don’t own one now, you’re stuffed and the government couldn’t give less of a shit. (and most homeowners already in the market couldn’t either)

      • Don’t put too much stock in such ‘forecasts’.
        The Chinese money coming here is all leverage on the other side. It reflects the most extreme credit bubble humanity will ever see. The CPC is doing everything to keep it afloat but it will come down in time.
        When it does, Chinese will become net sellers of property. Just imagine what that will do to the market….

        The same thing happened when the Japanese bubble ended in 1990. It took Gold Coast property 20 years to recover.
        When will this happen? Not for a while yet (maybe another year or two). But not much longer than that.

      • @Gramus

        My very basic understanding of economics though is that the whole damn world has effectively outsourced production to this one country. So regardless if many of them are riding on credit, there still is a huge amount of very well of Chinese folk who own factories or work in management positions or shipping positions or god knows what else. Perhaps friends and family of said rich people.

        There’s a billion over there, I’d love to think that things will slow down but with such a vast number, unless we stop buying goods or start making them in Africa, the Chinese will continue to be immensly wealthy

  8. If IR’s start rising the panic will kick in.
    6 weeks may be achievable and the prophecy be fulfilled
    Bring on the long waited carnage


    • and the prophecy be fulfilled

      There shall, in that time, be rumours of things going astray and there shall be a great confusion as to where things really are, and nobody will really know where lieth those little things with the sort of raffia work base that has an attachment. At this time, a friend shall lose his friend’s hammer and the young shall not know where lieth the things possessed by their fathers that their fathers put there only just the night before, about eight o’clock

  9. Reckon it aint happening. The aussie bulls are such bulls, they don’t give a f*** about this article.

    • Watched The Big short at the flicks with one. The parallels didn’t register, not even for a split second. Blinkers. Confidence. Empowerment. Too many seminars, slick sales guys and dogmatic suburban accountants.

      • Exactly.
        For a “self for filling prophecy” to happen, they gotta believe the article. They don’t.
        All signs are for Perth prices to collapse, I don’t think it will, the tax concessions will keep prices where they are. Completely unnatural phenomenon.

  10. Anecdote evidence shows changes: local 300+ apartment building dropped the rental prices by whopping 5% and nearby established apartments went more than 10% down. This only for about 15/300 advertised new apartments for lease.
    2 more nearby apartment buildings to be completed within now and 6 months.
    .

    The way I understood the article is that they believe the banks will do preemptive strike:
    “In so doing, they precipitate the market collapse but are less exposed to it”

    If I understood this correctly, could this be the black swan moment?

    • My logic tells me the banks are on the hook and would be the last to pull the trigger. But who knows !

      • That’s why TonyDD i named it “a black swan” moment as it does not seem logical to an outside-of-bank observer.
        I am in not an expert, just trying to understand and comprehend the mechanisms, I just could not fathom that banks could be the ones pulling the carpet but now it makes sense – be the first to dump the RE held and you rip the benefit of getting the most; who cares about avalanche that follows if the balance sheet is positive.

  11. Guys I keep telling you the punters are shell shocked into disillusionment, how could all the promises they were made not pan out???
    the closure of the car industry and the bankruptcy of the farmers in central Victoria could be a catalyst.
    about 6 weeks is the US election. If the Donald wins, the punters will be doubly shell shocked.
    November also sees the closure sell off of Masters and the start of the wet season for the IO and coal miners.
    Not long to go before we find out. Mark 1st November on your fridge.

    BTW, just passed a pub in down town Coolangatta, Closed for maintenance, has anyone ever heard of a pub being closed for maintenance???

    • Mount Gambier during the week – had 4,000 jobs go after the pine plantations were privatised.

      No one in the shops – literally no one. Saw a couple of blokes in one pub (out of 6 or 7), theatre was empty.

      Pinning their hopes on the tourist industry. They have no bus service between the towns 2 days a week, have organised a mafia of taxi drivers to block Uber – 10k cab ride from the airport to town cost $40 and since there are no buses two days a week between towns I was quoted $300 to drive 100km down the road.

      Accommodation was $150 / night in ordinary digs – while a James Boags at the bar was $8 and shitty steak $35….

      These rural towns are completely dead – they have no idea about how to service tourists, how to cater to outsiders and just see them as cash cows to immediately rip off in any way shape or form. The main industry in town is gone and they are all just sitting around waiting for their town to die.

      Main street had lost half its shops, second street was just shut.

      I give it 12 months.

      • It’s a trap!!

        Yoda would say;

        Dangerous and disturbing this post is. Only a Moron could have erased those towns. But who, and why, harder to answer. Meditate on this I will.

        Palpatine would say;

        Come, boy, see for yourself. The town… will die. As will your friends. Good, I can feel your anger.

    • I live on the gc too and my gosh its booming here at the moment. I’ve been here for a few years and would like to buy a place but it is well out of reach recently, unless you look at apartments with really high body Corp. What do you think the market will be like in a few years after the games? I can’t even find a place to rent at the moment.

      • J, how about we get through the next 6 weeks first.
        There will be massive correction of the price of property all along the coast as the Chinese move out at the banks insistence. there are 3 highrises in Coolangatta, chinese owned and vacant.1 opposite the surf club.
        All the hype you read in the paper will not occur. You will have plenty of opportunity to buy maybe February 17.
        The Games may be a fizzer as no one has the funding to stage a proper show.

  12. 6 weeks! lol
    There you go put that date in the doomsday diary
    Aussie housing crash on Monday 24 Oct 2016
    Put that in the bulging book of crashnik nonsense
    Reminds me of what the crashniks said here 4yrs ago….except….
    there was no crash
    there was no slow melt
    there was a 40% increase in house prices nationally

    • howde’ TP, hope you have been well. I was missing your “cut teh rates” and “sham continues” quips.

    • Not this time TP
      it is serious and there will be no force on earth to stop it.
      Rate hike next week in the US and all follows.
      Time is over for the specufestors.
      Wait and see

      • I don’t feel sorry at all for what’s about to happen to those “SPECUFESTORS”. When you mix greed with stupidity and ignorance you’ll be making bankruptcy lawyers very rich indeed!

    • “40% increase in house prices nationally”

      This wording is very misleading. The boom in Sydney/Melbourne may have increased the national median by 40%, but house prices didn’t rise by 40% nationally.

      • Richmond Hill out of Lismore NSW
        checking RE there today,Feb – april this year, mid range ,asking high 400-low 500K
        July saw first $1million + sale, asking prices today mid range 750K

      • Bolstrood – some weird dynamics in that region. Goonellahbah, Alstonville very few rentals but not much by way of rental growth – suspect low ses constrained. Supply coming on strong in Wollongbar and (Richmond Hill?). Lismore not much movement? Like mining towns but without ever having the mining. Pure bedpan economy stuff. Some news of interstate buying – tree changers? Care to offer some views, recent history or on the ground insights?

  13. On the 6 week time frame… this looks to be the important line and its open to interpretation.

    Quote “…how long it will take for the banks’ policies to start switching off a lot of existing and planned contracts for Australian properties.”

    This could be six weeks from when the banks start – but they havent yet.

  14. Jumping jack flash

    yawn.

    There are two solutions.
    1) cheaper debt
    2) more buyers

    There’s a slight possibility that they will let a few markets/developers slide just to show everyone they “mean business” and to try and prove to the world, and to themselves, that we have a “robust” and “diversified” economy built on sound foundations.

    But in reality there’s nothing else of substance in our economy other than debt secured against house prices which are in turn inflated by that very debt.

    And thousands of hairdressers, baristas and imported furniture retailers taped together to look like an industry.

    Its fairly important that we protect these economic foundations as much as possible.

    The debt machine can never falter!
    Interest rates to be slashed again!
    Foreign investor restrictions to be lifted!

    • I have the same crystal ball ! Everything and everyone will be sacrificed to keep this music playing. Sadly

    • darklydrawlMEMBER

      “There’s a slight possibility that they will let a few markets/developers slide just to show everyone they “mean business” “…

      Aaaah, The ol’ ‘lehman brothers” bait and switch technique. Worked well for the US Federal Reserve back in the day 🙂

  15. The Afternoon news on 10 had a piece on 20% price falls on units in sydney .. i think that would have more of an affect than this …

    • I went and read the original transcript from the infamous bet. Words were put in Kean’s mouth. He originally forecast post 2017 for a crash. I put a lot of stock in his opinion.

      • I do as well. In his BBC interview he confirmed he said he did the walk to shut the property lobby up. He was not wrong, they twisted his timing to try and keep it out of the MSM back then. This time it is indeed different.

  16. This prophet of property crashes must go the same church that is predicting the end of the world, a bit of rapture.

  17. Im sure we will see a few cases of distressed sales here and there. Case in point: late last year, my partner and I managed to get a 50k discount on our flat as the original investor was having finance issues at settlement. (6 OTP flats in the same building! I guess that should teach him/her for being greedy).

  18. Timing a collapse is a fool’s errand. Remember the Sydney market’s been overcooked for about eight years now, may be 10 so a crash is imminent (yes has been for that period – markets remain irrational longer than … ) so it could be in six weeks with an external catalyst or the government may out and give first home owners 75k each to buy the apartments from the overseas buyers. Hope you get the point – markets over priced, dont care how you measure it and every over priced market either improves implicit yield or collapses in capital value. This collapse wont see a recovery either due to the automation revolution. How does one Short the housing market? Short the banks?

  19. There is no way Malcolm is going to let houses fall on his watch.
    FHOG, tax deductions for owner occupiers, drop teh rates, whatever it takes it will not happen!

    • The government/ RBA have been throwing petrol into the fire, but ultimately they are not in control.

    • Owner occupiers are the least affected. They can care only if IR goes up.

      It is the very good looking people that will suddenly look so ugly that need worryeth… before we all sink like an anvil

    • They can’t get anything through parliament – so much so the Senate LITERALLY has nothing to debate and are giving speeches on personal anecdotes down to what they watch on TV.

      They are STILL working on their omnibus bill.

      If anyone things they will just walk out and throw 50,20,10,5 or even 1 Billion on a grant they are deluded. Tax breaks ??!!! Ummmm – no.

      Its done, its dusted.

  20. I am very glad there is only six weeks to go. I read an article in The Economist saying Australia’s house prices were unsustainable. That was in the year 2004. I have been waiting since then. Just six weeks to go after 12 years of waiting, bravo!!!!

    • Haha… The number of times I’ve had to repaint my ‘the end is nigh’ sandwich board. I switched to red house paint last time! Finally, I get to stare down on those who stared down on me. Oh the joy! A few more weeks!

      • Maybe you should consider those signs they have at the soccer for substitutions which have the digital read out. No paint fade out problems and if you become a bull, you can also change your sign to read “Prices To The Moon.”

  21. Bring on the bust.
    The sooner we have this bust, the better,
    Property is no way to build a thriving economy.
    It’s an introspective, self-indulgence that only serves to take huge rents from those that can least afford it, and keep them a slave to a landlord who selfishly looks only to their own situation and not anybody else.

  22. “Regulations – In my opinion the October change to Money Market funds in the US is one of the biggest events in 2016, and the reason for this is that it dries out the funding for foreign banks in the US and Commercial Papers programmes:

    For those of you not yet familiar with these changes click here for a Vanguard customer briefing:
    Basically due to Lehman, Prime Funds can no longer guarantee the “buck” – or NAV of $1 – instead they need to trade at actual NAV – this has made Prime Funds less “safe” and since October 2015, $500 billion has left Prime Funds.

    Prime Fund vs Government Money Funds have one main difference: The ability to buy Commercial Papers issued in the US (foreign banks being bigger users of this facility) .”

    https://www.tradingfloor.com/posts/steens-chronicle-bubbles-regulation-and-credibility-8055331

    Worth considering in the light of this article. Implies that non-US banks will face increased costs of funding from the rules implementation in October 2016. Anyone else notice that the Aussie banks are increasing term deposit rates to attract more domestic funds at the same time they started to limit total borrowing?

    • A bit more perspective:

      “Institutional money market funds are required to maintain a floating NAV per share, rounded to the fourth decimal place. This means that such investors may lose the previous guarantee on their principal offered by this type of funds prior to 2014.
      Fund administrators are now allowed to impose a liquidity fee or suspend redemptions temporarily when a fund’s weekly liquidity level falls below the required regulatory threshold
      The SEC imposes additional requirements to administrators of money market funds, including increased diversification, enhanced stress testing, and additional reporting to the SEC and fund holders.”

      https://captain401.com/blog/october-2016-sec-changes-to-money-market-investments/

      Seems that around $500 billion has left these funds this year. Lucky the ECB and BOJ were picking up corporate paper….

  23. If USA had the subprime as a major catalyst to its bubble burst crisis.

    Australia has the “cheap” credit for investors and foreign investment.

    I mean, in USA atleast they actually have the population volume and industries to allow it to crawl out of the pits.

    Australia… not so much and it’ll just remain that way especially if they keep catering to China. Australia the good ol banana republic with the average person in the future working service jobs with 700K+ mortgages and 40K salaries, its lol.

  24. Nah mate, just an early climate change long by the penguins who want to lock in somewhere nice to live. And not all that far from the parents.