Gottiboff: After the housing collapse comes the job losses

By Leith van Onselen

After yesterday warning that “significant parts of the Sydney apartment market and the associated apartment land markets have cracked and are now suffering serious falls”, Gottiboff has returned with another dose of Sydney housing panic:

…once the flower of confidence is badly damaged it takes a long while to restore. I don’t think there is going to be any sudden bounce back in Sydney apartments.

In a city like Sydney the dwelling market is really a series of markets and they will perform differently. The fall has been created partly by excess lending on the way up which has been replaced by a vicious credit squeeze…

Australia escaped the blows of the mining investment downturn by a massive investment in dwellings and now the we face the prospect of apartment construction falling by at least 50 per cent in Sydney and a sizeable fall in Melbourne. That is going to amount to monumental job losses and a fall in economic activity in our major cities. It is highly likely to force investor properties on the market, particularly in Sydney. Very few of the regulators have personally experienced what happens when dwellings fall 20 to 25 per cent and negative equity creates misery.

In Australia rising dwelling prices has reduced the impact of stagnant salaries outside the public service and higher energy prices. Once dwelling prices reverse there will be a total reexamination of discretionary spending priorities. The 20 to 25 per cent fall in used near city apartment prices will not be duplicated across the Sydney dwelling market but auction clearance rates will stay low or fall back and many areas will be soft.

The properties most vulnerable are those priced well over $1m because the major banks are making the borrowing game too hard.

In the property crash after the 1987 share crash it was the expensive properties that were hit the hardest and that pattern likely to follow.

In 1990 the banks suffered big losses. My broker friends remain confident that the banks will not suffer the same fate in 2017-18 but they will not escape unscathed. There is an absolute desperation among many apartment developers and they are throwing their vacant land on the market in ways that shows they have big debt problems.

Be ready for some crashes and banks will be involved. The banks’ problems will multiply if the investors (or residential buyers) they loaned money to lose their jobs in the downturn that follows a 50 per cent fall in apartment building in Sydney.

A falling or soft residential real estate market will cause a deep revision of people’s discretionary spending. Accordingly we are going to see a fall in trading in areas that lose out in the discretionary spending cuts.

Pass the popcorn.

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Comments

  1. The insane fool may be right. Although I still believe the USA is the main game. Every FED rate raise cycle produces a financial crisis somewhere in the world. I suspect that a few more fed hikes will be enough to cause a global recession and kill our property market stone dead. It could still go on for a year or two as is.

    • darklydrawlMEMBER

      He is right. As I have mentioned in these comments before, unemployment follows housing losses down. They are a *symptom* of falling house prices, not a cause. Too many fools think that unemployment comes first and will drive house prices down prices, they are going to be dead before they see the danger.

      • kiwikarynMEMBER

        That might boom. It might be so difficult to sell that doing a makeover and using staging furniture becomes a must have item in order to get a buyers attention 🙂

      • Its a chicken and the egg situation DD.
        Houses start selling slower with discounting to make the sale, so dwelling starts reduce, which makes it harder to get construction work, which puts pressure on mortgages, which induces forced sales, this increases stock on the market, which reduces available building work, then unemployment increases…. and you can see where it goes on from here.

      • boomengineeringMEMBER

        Kiwi k We did our place beautifully, desperately trying to sell during the 89–81 property crash. No point, no one to see it when there are no buyers even looking.

    • He appears to be suggesting that the liquidation of decades of malinvestment is a bad thing i.e. a ‘policy mistake’

      It will happen, voluntarily or otherwise.

  2. But where are all of the new immigrants going to live, with the number coming into the country will these price drops be taken up before they get anywhere near 25%?

    • Once dwelling prices reverse there will be a total reexamination of discretionary spending priorities.

      When this happens it means that the two bit jobs in restaurants, 7-Elevens and servos currently occupied by migrants will vanish (i.e. when the restaurants, servos etc start closing), at which point they’ll go home. In the last recession annual NOM bottomed at 30k (year ending June ’93) – more than low enough to crash a housing market that completed 60k dwellings in the last reported quarter (in a country with an occupancy rate of a little over two people per dwelling)

      • Maybe that why the government makes it so easy for immigrants to buys houses so they have a wealth tie to the nation that they just can’t up and walk away.

      • Yes, defo every 20 year old Indian behind the counter at a 7Eleven or bringing over naan bread to your table at your local curry house has recently bought a house at current Melb/ Sydney prices with their 50% of local wages cash income.

    • The infamous population ponzi introduce by the then prime minister John Howard and the critical inflationary energy costs has not been factored into this commentary.

      • Not the ones who have any ambition to buy a property there … or have I mis-read who is now eligible?

    • I would have thought that immigrants would not want to come to a country with rising unemployment.
      Would they?
      If Ausatralia is in a tough recession my expectation is that most immigrant will look another country to move to which is performing better economically and offers greater prospects.

      • I don’t think anybody knows. There is no data available. Lets say you own a business that doesn’t mind fudging things a little. Which would you more likely hire in a recession? The $14p/h guy with no TFN who sees the job as a huge opportunity, or the local at $18 p/h with a TFN who sees the job as a placeholder? Having experienced it, I can tell you that there are ways to obscure the fact that an employee is under paid. Employees suffering from that situation also find it difficult to rectify. Both because they’re not 100% sure the situation is illegal, and even if they’re sure they don’t feel like they could control the outcome of speaking up.

        The prime example is staff who get paid and are then expected to hand over cash. That is blatant. Less blatant is stuff like getting employees to maintain their own equipment. No fuel reimbursement for example, or reimbursement logged wrong. There are other ways- uniforms, events, training etc.

      • Fekname, you are all over this stuff. Wow. I run my own small business but now I feel like a bit of dill as I’m over paying people.
        I’m going to include a lunch allowance. Mine. The employees can get me lunch each day. Hah. Or a unitform allowance as you suggest. “Employee number 2, go get me some shoes for my uniform! RM Williams will do at only $500 bucks a pair.”.

  3. While Gotti is running a classic scare campaign to drive some new supplies of pork for the residential asset price ponzi an interesting point does arise.

    Eventually APRA and the RBA and the Federal and State Governments will be forced to cave in if asset prices soften significantly.

    Unless they have a plan B they simply cannot stand by and allow the fundamental driver of the economy to collapse. Without ever higher levels of private bank credit creation driven towards residential asset prices, the ‘wealth effect’ dribble will dry up completely and that means a massive crunch. Gotti is not exaggerating in that respect.

    What should be Plan B?

    As private bank credit creation directed to asset price speculation is restricted there needs to be an expansion of credit creation towards productive purposes.

    The only problem is that there are few if any productive purposes that require interest rates as low as they currently are.

    To the extent there may be some productive applications of private bank credit, forcing the banks to give up the unproductive credit creation should encourage them to sniff out customers with productive projects that require credit.

    Without a massive expansion in productive credit creation by the private banks, and their track record is pathetic, ultimately Plan B must be directed to addressing slowing credit creation or outright credit contraction.

    The simplest and most effective way of doing that is by cutting taxes and increasing fiscal spending directed to clearly productive purposes.

    But that is where the REVOLUTION in thinking is required as the status quo insists that ALL fiscal deficits must be funded by selling bonds to the private sector and as we know selling bonds to the private sector involves paying interest and sensible people understand that governments paying interest to private interests has its limits.

    Plus selling bonds to private interests is not necessary when private bank credit creation is contracting in a very low inflation environment as an outright monetary expansion by the public sector is essential.

    What is required is that a portion of the fiscal deficit be funded by direct monetisation. A simple way to do that is for the AOFM to sell a few tranches of 0% non-transferable bonds to the RBA.

    They can say it is an experiment if they wish.

    The important thing is to demonstrate that well managed and limited monetisation is not the end of the world and in fact is absolutely essential when managing a contraction in private bank credit creation.

    • Plan B:

      Triguboff was asked, “But might rents fall in Sydney and Brisbane when all the new apartments are completed in the next two years?”
      He responded, “Then I will bring in more migrants.”

      • According to Gottliebsen yesterday, Triguboff has already lent overseas buyers $400 million to ensure they settle rather than walking away. Even Triguboff’s coffers have some sort of limit. In the mean time, note that Gotti apparently believes that there has already been a fall of 33% in the value of apartment-suitable land in Sydney (and according to the MB ‘Gottiboff’ meme, so does Triguboff) – it’s already too late to bring in more migrants.

        From the article yesterday –
        “About a year ago prime apartment land in Sydney (with approvals) was selling between $350,000 and $400,000 per apartment that could be developed on the site.
        Now anyone who bought that land would be lucky to get $280,000 and the desperation of highly leveraged selling and the lack of buyers can result in some land going for $230,000 per apartment — a fall of above 33 per cent. The losses are sickening. “)

      • Triguboff obviously understands the exponential function – he uses it regularly in respect of his private wealth.

      • I assume the banks are not going to be happy that he is lending out money to people that the banks themselves wouldnt touch with a bargepole. I imagine they will be keeping a very close eye on his banking covenants, and if they are wise, stepping in to tighten them up. Lets see how he himself copes with a credit squeeze. There is no way the banks are going to lend him more money if they know its just going straight out the door to finance high risk mortgagees.

      • Freddy,

        That is exactly what is happening. New construction is being crunched to limit new supply while the rate of immigration is being kept high. With residency vacancy rates in Sydney and Melbourne already very tight it will not be difficult to engineer a very tight tenancy market that will push upward pressure on rents and maintain upward pressure on prices.

        The only question is what happens to unemployment if property construction slows too much. Chances are that a fair few of those working in the industry are temporary residents and will leave if they lose their jobs.

        Don’t assume that our policy makers have any intention of allowing the nominal prices of real estate to fall. They will do whatever it takes it support asset prices.

        Unless of course they see the light and realise that a monetary model dependent on unproductive credit creation needs to be taken out to the shed and shot.

      • “a fall of above 33 per cent”
        …and yet the median asking price for a Sydney unit has increased 6%yoy
        More Gottliebullshit


    • Unless they have a plan B they simply cannot stand by and allow the fundamental driver of the economy to collapse.

      ‘Standing by’ and letting disaster befall the country would be entirely in character for our current political leaders. I’d suggest that ‘too little, too late’, is a very reasonable base case for what they will do.

      • Robert,

        There is too much self interest at stake for them to do that other than by accident. As the whole show is being held up with ZIRP capital inflows from trading partners eager to protect their local production by manipulating exchange rates, our clown army in Canberra will simply do nothing but allow the country to continue to export claims on our assets and future income as an economic model and wait for the external sector to eventually call time on the fiasco.

        Calling time on the fiasco will look like this.

        1. Increasing cost of capital inflows that reduced local demand for the inflows

        2. A rapidly declining AUD as a result of the reduce demand from offshore parties for AUD.

        A real slow down in China’s demand for our actual exports is also a possibility but considering that China estimates it still needs to at least double its freight rail network to match the US network – we are talking another 150,000 km of track. We might find that the slow down is not as slow as many currently expect.

      • Yes, ‘by accident’ is exactly what I mean – the current governing party doesn’t know how to keep an adequate dirt file on the opposition. They don’t always get enough of their own people into the House to win votes. They can barely tie their own shoelaces – it is absolutely a possibility that they don’t notice what is happening until it is too late, or that having noticed what is happening fail to take effective action.


        we are talking another 150,000 km of track.

        At 60kg/rail.metre, and assuming this is a dual rail system that’s slightly less than two months of Port Hedland shipments to China. It’s not nothing, but I’m not convinced it’s a complete get out jail free card.

      • In fact, they are so incompetent they can’t ensure their deputy leader has the right to be in Parliament.

    • @pfh007…economic cycles are long, and all I see is the gov countering this with higher immigration. My BIL in Canberra says he only has a few Aussie he’s building for and the rest of the construction is for migrants. It been that way for a while now according to him. It’s only one example though. What about the cost of gas/elec on jobs, a China slow down which may happen, and then how will that effect jobs? If immigration is reduced I see that as a trigger, but with NZ changing it’s policy will those foreign investors come here and save us (sarc)?

  4. According to the British journo George Sala who coined the expression “Marvellous Melbourne” in 1885. 6 years later property imploded, every financial institution in the colony of Victoria was devastated and the Marvellous Melbourne, with its gilded arcades and neo Gothic bank buildings, was plunged into a deep depression that spread across the whole continent and triggered the tensions between labour and capital, leading to the shearer’s strikes and the formation of the Labor Party in QLD to represent the working man.
    Melbourne, filled with beggars and women driven into prostitution by desperation became the scene of the most cynical sort of politics and criminality that was immortalised in fictional form, Power Without Glory.
    There were to be 2 World Wars, a great depression and an industrial revolution in Australia before Melbourne property values regained their 1890s levels.

    • Yes Wiley Wolf. But these days Young Women call it being a “Sugar Baby” . Gets them the extras in life without having to work at K Mart or KFC like previous generations did.
      So I am not sure what level they will sink to when they actually get truly desperate.

      • You already know, opiates.
        TD says its the biggest killer in the USA
        In shepparton, the grannies are being robbed of their prescriptions, as we type
        the biggest problem on the gold coast is drugs,and crime, but the recently fired editor of ruperts rag here wouldnt report that “cos the crooks liked to see their name in print”
        The Philippines has the solution!

      • WW
        Isn’t there a “Final” in that last sentence somewhere! When I worked in Saudi Arabia I hated it, but one thing stood out: They didn’t mess around with thieves and drug addicts. “I blame my parents” was not an excuse. Crime rates were, as a result, non existent. I don’t think the bleeding heart left solution is working. I don’t believe in killing people either, but, Aus is an ideal continent for work camps. One lifetime crimo after another arrested while on parole? No, there is a better solution.

      • RB what is actually occurring along that work camp path is that the wealthy are quarantining off the others, so that outside their walled estates the others can do what they like to emselves and each other and to their local economy.
        I see plenty of the chronic unemployed and drug dependent up here and I can tell you that chronic unemployment and drugs of any sort, in excess, which is not much, somehow affects the brain of the user. From that time on they are a non viable member of the community.
        The final solution in the Phillipines is common in most of the older established societies of the globe. Try it in china. We are still on the learning curve where the do gooders are hell bent on sinking the ship under their feet. Well I for 1 have my own ship. The rules for survival are simple, mostly just dont start. The other thing those on welfare quickly learn is that no one really cares, to think some will assist you on your way down is folly despite what is put about in the media. If they really knew that no one cares they may pay more attention to not falling.

  5. Gotti’s right in all his predictions. It’s just that his motivation’s wrong. He’s trying to protect and sustain the system that has created this mess, rather than drive towards the opportunity for national renewal via an extremely painful but finite shock.

    • TailorTrashMEMBER

      Correct !………and I notice he has stopped prefacing his comments with the ridiculous ” I was having a chat with Harry Trugaboff the other day ”
      ……..mind you he is still having the chats ….and still taking the instructions …….this is all trying to get Scomo and co to turn up the power on the spluttering engine ……

    • While Gotti running around screaming the sky is falling the sky is falling is not quite enough to get this old perma-bear hard, I agree the only thing that will cure Australia of it current politico housing complex cancer is for the whole thing to collapse with much pain and misery. It is the only way people will learn nd the only way new ideas can be born from out of desperation and necessity.

      Not to mention the time to think and create that comes with deep unemployment:)

  6. truthisfashionable

    If only the great idiots of Australia didn’t turn housing from it’s true utility of shelter into a financial asset there wouldn’t be any problems with price falls.

    Housing was meant to provide shelter, just like a refrigerator provides for the storage of food.

    If you read the above replacing all the references to dwellings/housing to refrigerators it really shows how idiotic we act around housing.

    Although perhaps I am being silly, it’s hard to launder money via Refrigerators.

    • Buying houses and condos does not hide your ill gotten gains as there is a clear record of transfer of title and exchange of funds at settlement. A fridge under ten grand can be paid for in cash without any record of the purchaser!

  7. What Gotti misses is that it will be far better for almost everyone under 30 to be out of work for a year or so than to work an extra 20 years to buy a roof.

    • If only the youngsters realised that and sat on their hands for a year or 2, the joint would collapse and they could get a foot in the door.
      the surest way to disrupt a ponzi is to not participate.

      • You and I both know that if you have to verbalise it, it’s not going to have any impact. This needs to happen as an unspoken action.

        Silent revenge is the best revenge. No reasons, no justifications, no rationalisations… nothing else but action.

    • Yeah but that don’t work for HRH. He’s pretty old, may not have too many 2 year waiting blocks left, especially when the goal is to be the richest bloke in the cemetery.

  8. Vicious credit squeeze, major banks making the borrowing game too hard… LOLOLOLOL

    This is NOTHING. If we see an external shock, then we might see a proper credit contraction. At the moment they’re just separating the “monumentally-leveraged” from the “obscenely-leveraged”

    • Yes, I had a chuckle at the “vicious credit squeeze” too. Banks are still lending out eye-watering sums of money and yet it’s a squeeze compared to where it was a few months earlier. But thank goodness Australia didn’t go down the path of US and maintained prudent lending standards!

  9. Soft landing will be better than hard landing. I think our financial institutes are doing enough to avoid hard landing. They have to keep Melbourne in check too. Better if prices go down gradually without job losses that will be win win situation.

    • I like your optimism. It ain’t gonna happen like that but boundless enthusisim is what got us here in the first place, highest personel debt levels in the world.

    • With 40 percent of housing loans interest only, I would consider their behaviour appalling. These overpaid clowns should have been stained down by APRA-RBA but we got nothing. The taxpayer will foot the bill.

  10. “In Australia rising dwelling prices has reduced the impact of stagnant salaries outside the public service and higher energy prices”

    Screw you, Gotti you fat, entitled, old bastard.

    • That is akin to saying that “our sex life may not be too great, but that’s ok, because that’s compensated by the koalas getting it on in the trees around the house” … Oooh, Gotti! You are turning on the koalas…

    • Yep, these nasty vermin are here in Melbourne now, dropping cigarette butts and spitting on the streets.

      Those who aren’t in 250k high end vehicles, driving from apartment block to apartment block they own.

  11. None of the proponents of the housing bubble and insane increases in population have considered the consequences of a downturn which will likely eviscerate the ‘FIRE’ sector. Trumbull’s much vaunted low pay and low skill ‘service economy’ will be in tatters. I think many on a temp visa might have a problem.

  12. Gavin HegneyMEMBER

    in perth it was the mining construction that contributed to the downturn. Then housing construction turned down which is a far bigger employer. Each dwelling being built employs about 5 people so when approvals drop there are about 5 times the number of jobs lost . Construction in housing is a big employer . Perhaps it early days and still plenty of time to exit the market given that after a 10-15% price drop in the short term comes a long term rust period where opportunity cost becomes relevant . No need to panic , just sell if you think this is what is set to happen .

    • The other issue when comparing Perth and the mining downturn to a Sydney building downturn, is that it doesnt take into account the FIFO’s.
      Not all the mining workers returned to Perth or had property in Perth so some of the down turn effect was dispersed across the country. With Sydney the workers live and work in the same place so the effect maybe larger.

  13. Sydney crashing lol
    That’s what you said 3yrs ago
    Cut teh rates
    No risk of driving up prices
    We’ve got MP
    Then the Syd median house price increased by $300,000
    Melbourne glut!
    That’s what you said 3yrs ago
    Ignore the the low VR. Its irrelevant.
    Cut teh rates
    No risk of driving up prices
    We’ve got MP
    Then the Mel median house price increased by $300,000
    WrongnWrong

  14. In yesterday’s article this guy says – “And for those who say the bank formula estimate of living expenses is too high, the banks begin a detailed examination of their expenses often asking for receipts. The end result is normally a sharp reduction in what the banks are prepared to lend and that drives what potential buyers are prepared or able to pay. When I first discovered this process I alerted readers to the danger.”

    Alerted readers to the danger of not being able to max out on debt any more. LOL Australian housing market is basically people maxing out on debt, and everyone knows and talks about this like it is a normal thing.
    And Glenn STevens drops rates to record lows without introducing any controls.

  15. ‘Very few of the regulators have personally experienced what happens when dwellings fall 20 to 25 per cent and negative equity creates misery.’
    What is this negative equity … must be like equity no mates.

  16. “Very few of the regulators have personally experienced what happens when dwellings fall 20 to 25 per cent and negative equity creates misery.”

    OMG – people with negative balance sheets!!!
    Gotti has to alert the world to this impending crisis. It’s up there with the Rohingya and the Middle East refugees.

  17. “In 1990 the banks suffered big losses. My broker friends remain confident that the banks will not suffer the same fate in 2017-18 but they will not escape unscathed.”
    That’s because your broker friend knows that the banks have a plan to deal with it, something they didnt have in 1990.

    As I have mentioned here before, a big 4 bank state manager told me that if it goes the way it did in 1990, they are prepared for it. Rather than dump all the foreclosures on the market, they are going to hold onto the properties and rent them out. When property prices stabilise, the banks will trickle feed the properties back onto the market to avoid flooding it and devaluing their assets.
    The banks have created the perfect long con against an entire nation. Create a problem and then benefit from it.

    Its mercenary rat cunning at its finest.

    • Bubbly, if it only were so simple, buddy. For the banks to go into the real estate business en masse, they would need to employ tens of thousands of people plus pay for agents fees and commissions, etc. Makes you wonder if that was the answer why didn’t happen in all the other places that went tits up, including Japan or the Gold Coast or Darwin?

      • Do you mean the 1990’s or now?

        They didnt have a plan in the 90’s but they do now. As for employing thousands of people, yes it will but it will still be less of loss than the 1990’s.

        Losses will be within calculated tolerences.

      • And the ones that don’t attract tenants – will they sell those, or just keep them on their books as unproductive assets?

      • Increasing migration AFTER a once in a century property crash sounds a bit like installing extra cooling water piping after a nuclear meltdown .

    • Rather than dump all the foreclosures on the market, they are going to hold onto the properties and rent them out.

      Really? So the big 4 are planning to minimise their losses during a recession by converting their business model from one that is based on lending money, to one that is based on owning investment properties, then flooding the rental market with recently foreclosed homes during a period when unemployment is likely to be surging and half the temporary residents currently in Australia have gone home.

      Righto then.

      • This is only what one state manager of a big 4 bank told me. I cannot speak for the other 3.

        Keep in mind that those people who went from having a mortage will move back into the rental market as they have to live somewhere.

        The alternative is to flood the real estate market with foreclosed properties in a recession. This didnt work in the 90’s or the GFC in America so they are trying something different this time.

      • True.
        The thing that does my head in is that the big banks have a plan, a plan for the problem they caused in the first place.

        And yeah, the evil side of me would love to see the banks get punched in the face, but then the tax payer gets punched in the wallet and I’m not so happy about that.

    • How would this work ? The value of the property on their balance sheet would have decreased – and the banks would need to value the asset at market prices if the loan was in default(which it would be if they now own the property)

      Banks flooding the market with sales will for sure lower prices more than otherwise, however if so many homeloans are in default for the banks to become outright owners of large numbers of properties then the market would have already fallen. The banks will then need to revalue based on current pricing, which will likely be less than the mortgage(given generally high LVR) , therefore the difference will need to be recognised as a loss. Will the loss be enough to wipe out the banks equity?

      Australian banks are well capitalised aren’t they ?

    • I doubt that will work for the following reason:

      When the customer finally walks away because they can’t or won’t make their payments, a transaction needs to occur with the titles office for the customer to no longer be associated as an owner of the property. If the bank becomes the new owner they need to buy the property and there will need to be an accounting entry on the banks books. Therefore, they can’t slow down the flow of people defaulting turning into transactions at the titles office. There will need to be arms length valuations done each time. So if the rate of defaults can’t be slowed down and valuations need to be done for each transaction. Hence that plan won’t work.

      On the flip side if this is a plan they have then it would be a source of complacency for the risk management in the bank.

    • Mate – it’s 10-20% in the first year only.

      “One industry contact puts a 90 per cent probability on a 10-to-20 per cent decline in house prices in the next 12 to 24 months,” Mr Lloyd and his team wrote in a note to investors.

      • A 20% drop in Sydney means a 20+% drop in the regions and coast. What will the + amount be? And that is where the banks troubles will begin, in the regions.

  18. Nothing to get excited about yet. Its less than 2 months of stats.

    I’ll start looking perkier than a Meerkat when its 2 quarters of data.