Minsky moment arrives for highrise apartment bubble

And so it begins. Market prices crack first. Later comes the economic fallout. We had the price bust now for the casualties, via The Australian:

The collapse of the prolific east coast suburban apartment developer Ralan Group, headed by British-born William O’Dwyer, owing creditors at least half a billion dollars has highlighted the fragile state of the high-rise property market.

The Sydney and Gold Coast developer fell into hands of voluntary administrator Grant Thornton as unit builders remain starved for credit amid warnings that settlement defaults could soar over the next 18 months.

The private Ralan Group specialised in high rise developments with a workbook of more than 3000 suburban apartments, but problems in the sector are widespread with Melbourne-based Stellar Group also put in receivership last month.

Said Jahani, national managing partner of Grant Thornton, said a range of small and large creditors were owed about $500m.

…The Ralan collapse also puts a dampener on the burgeoning non-bank lending sector which had stepped in as banks pulled back from residential projects.

Despite the promise of high returns for their wealthy investors, a series of mezzanine finance providers have been caught in the collapses of overstretched apartment developers.

Finance house Wingate told investors it had “a number of open debt positions” with Ralan but its position was secured by charges and mortgages over real property.

Does anyone remember why these chaps got into this in the first place? It was because the Aussie banks wouldn’t lend, with the memory of the commercial property crash and 1990 recession still embedded in their cultures. Then along come the shadow financiers with no memories at all who wanted to gouge a fleeting Chinese influx. Well, it’s gone.

Hello blowout spreads for new developments and goodbye OTC finance. It’s counterparty risk time!

Ralan and Stellar are the Minsky moment for Australia’s highrise apartment bubble. They will not be the last to fall.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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