Has the siren blared for the Australian stock market’s record run and the future health of the economy?
July was notable for Australian investors. The local market was one of the best performed around the world with a gain of 2.9% for the month while the likes of the Dow, the S&P 500, the Japanese and Chinese markets and Europe all saw falls.
July was also when the Reserve Bank of Australian cut its key cash rate for a second month in a row — a decision investors cheered. But the events of yesterday, Wednesday July 31, should be a wake up call.
The gains of July could quite well be the peak as the predicted slump in property, construction and housing sectors gathers pace and starts consuming the stock market and the economy. Such a slide will be effected little by the Morrison government’s tax cuts.
Yesterday also saw the RBA release its private credit data for June and 2018-19. Home lending grew at just 3.5% in the year to June, the lowest since records started being collected in 1976. Loans to property investors were flat for sixth months in a row and grew at just half a per cent over the financial year — the lowest on record. Meanwhile, owner-occupier lending rose just 0.2% in June compared with May.
Goodbye Ralan Group
But the biggest event of July 31 was the collapse of a large east-coast privately-owned property developer Ralan Group, which has appointed accountants Grant Thorburn as administrators. Don’t be surprised if receivers are also appointed to effectively wind down the business. Ralan has a reported $500 million debt, with 3,000 apartments in various stages of development on the Gold Coast and around Sydney (where prices are already weak because of the construction certification scandal).
Grant Thorburn will have to quickly work out whether Ralan can be saved in any way. The problem will be how many of the 3000 apartments have been sold, and of those apartments already sold how many are secured by deposits.
A steady sale of the apartments looks unlikely given the slump in home lending and the overall softness of the property market. The chances of saving Ralan are looking remote because no one (investors, home owners or rival companies) will want to buy into a softening market when prices are weak and could fall further.
Thousands of jobs will be at risk in and around the Gold Coast and Sydney as subcontractors suffer cash flow problems, unless the administrators can get financing to keep the company alive. The $500 million in debt could very well rise (the first estimate of debt and losses in a collapse is often the lowest). The banks should all know this but with the last property shakeout happening in the GFC, a lot of corporate knowledge inside the banks has probably retired or retrenched.
What it means for banks
Banks and other lenders are already under pressure from weakening property prices and are scared regulators will take a harder line on future lending because of the looming overhang.
The banks will demand more equity from buyers; with household income and savings under pressure, this will be a hard ask. In fact, this collapse could halt the small improvement in home and apartment prices. No one can point to how and where demand will be revived — after the Ralan collapse it won’t be the Gold Coast or Sydney.
The next warning signal
July 31 also saw another warning. Adelaide Brighton Cement, one of the country’s major cement makers, told the ASX it is now looking at a sharp fall in profits this year with earnings down at least 40% and a $100 million asset write down to be announced later in August.
It was the second downgrade by the company since May because demand for its cement is weakening and prices are falling thanks to rising competition for fewer jobs. Adelaide Brighton shares fell 18% yesterday and are down 48% so far this year.
That in turn saw the share price of Boral, a major rival, fall 8% while CSR, a major building products group saw its shares drop 6%. Shares in Brickworks fell 1.5%. With a major private developer collapsing and thousands of apartments overhanging the market, investors will soon awaken to the dangers for listed property groups such as Stockland and Mirvac which develop upmarket homes and townhouses. Australia’s biggest apartment builder, Meriton, is privately owned by one of country’s wealthiest people — Harry Triguboff who has been complaining for the past two years about the impact of (mostly federal) government restrictions on Australian property purchases by foreign buyers — especially Chinese — on his huge development business.
The situation could be stabilised if Grant Thorburn can convince Ralan’s banks to support the developer into a reconstruction to stop the dumping of the 3000 units/projects onto an already weak residential property market. But bailouts generally don’t work in property unless everyone, especially the banks, are prepared to hang in for five years or more.
The problems at Adelaide Brighton are a warning that worse could be on the way. All it will take will be another developer with problems and/or a big building products group warning of difficult trading conditions and falling profits.
Having reported on and observed all the big property slumps since the 1970’s, it’s been the way the shakeout evolves. This one is ready to follow the pattern.
Is a property slump inevitable? Write to boss@crikey.com.au and let us know your thoughts.
THe ASX has been lifted by the ridiculously low interest rates of course, but there would have to be some overvalued rubbish out there as a result. As for the apartments, why would anyone in their right mind go near that? You could easily be looking at so many Opal Towers. The result of unfettered captialism is always a crash.
In a word – obviously. It is the obvious consequence of the neo-liberal delusion that the scared ‘market’ fixes everything. I take no pleasure in predicting that this could be Australia’s own version of the sub-prime crisis in the US. Only this is not based on exotic derivatives that nobody, including their creators, understand. This is the consequence of plain old political economic mis-management, the illogical and inequitable negative gearing idiocy and the myopia and stupidity of over-optimistic property industry players. And this is all the work of this incompetent, clueless and corrupt Coalition government. But as always, the self-important idiots who have created this mess will, in the main, suffer a great deal less than the rest of us who have not contributed to the lunacy of Australian property prices at all. The other victims will be the aspirational types whose greed has been justified by negative gearing. There will be lots of fire-sale units available to those who simply aspire to having one home in which to live. But none of them will qualify for lending reserved only for the stupid and greedy rich. Regrettably we will learn nothing from this because it will all be mis-represented by the Coalition as some sort of neo-liberal necessity.
I assume that “the neo-liberal delusion that the scared ‘market’ fixes everything” was meant to be “..SACRED market”.
Though your original is much more apposite.
Odd times, ASX at record highs, interest rates at record lows. Looks like a bubble to me.
Building approvals where also down -1.2% in July while economists had predicted a 0.2% rise.
And the big one that the media almost completely ignored was the release in June of the first quarter HPI (Housing Price Index) which was down a massive -3% which is the largest fall in prices ever, worse than anything we saw in the GFC. It was also the first time there has been 5 consecutive quarters of negative HPI values in history.
https://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0
Want house building numbers to rise? Easy, release more land and/or allow 2 to 3 floor apartment buildings in small towns! Want more jobs away from city centres? Easy, decentralise government departments, incentify private business to decentralise, build satellite towns and cities, expand fast NBN services to rural areas. None of this is brain surgery or hasn’t been done before. Lismore was a thriving city until the NSW moved govt departments to Sydney and dropped rail services. I hear Armidale is similarly suffering. Why does everything seem to be so impossible these days. It’s time our politicians started earning their money and deliver real solutions to real problems.
Admidale is running out of water as well. The economic driver of the University of New England is diminished because of the changes to the way tertiary education is delivered. The population is stuck at around 24,000. Real estate is generally overpriced and the train takes 12 to 14 hours to get to Sydney, air fares are very high and no services to Brisbane any more. There is good NBN, fibre to the premises thanks to Tony Windsor. Guess who the federal member is?
China’s latest fast train replaced a 130km/h train. The Sydney to Brisbane train averages about 70km/h and doesn’t have wifi. An apt simile for the state of our nation!
Release more land? Have you seen how far Melbourne has spread already? It hasn’t helped house prices.
Well, it doesn’t all have to revolve around the major centres. Thats why I talk about decentralisation. But ultimately the house pricing is based on availability. NSW housing numbers are around 200,000 below the demand, so no wonder prices are sky high. If you are serious about lowering prices in Melbourne or Sydney, you need to build far more 3, 4 or 5 storey apartment buildings. Anyone who has travelled knows this. Anyone who has travelled to Europe will see plenty of examples of town planning which is both medium density and very pleasant to live in. Looking at medium density buildings scattered willi nilly around our city suburbs show that Australian town planning acuity has a hell of a long way to go to catch up.
I’d say not so fast, the Reserve Bank is going to drop interest rates to 0% to keep this party going……. there’ll be one more round of the dancefloor yet before this one blows up. Prices are rising again, All the hacks associated with this insanity are putting their party hats on again.
https://www.afr.com/property/residential/house-prices-rise-for-second-month-in-a-row-20190731-p52co7?
I keep hearing about this rebound in the property market.
July saw 0% growth in property prices nationally and June saw – .2% .
That isn’t a rebound, maybe a consolidation after the record fall in Q1 but we could well see a continuation of the fall.
Just had a notification of the roll-over of a fixed term deposit – @2.05%.
Yay, break out the Pomagne.