Banks are running a closed shop
I've been warning my readers about the high-rise apartment sector for what… like 3 or 4 years now?
They're still standing… Is it time to admit that I'm wrong?
While I generally agree with the line that being wrong about the timing is the same as being wrong, I'm standing by what I said. In fact, if you followed my advice and steered clear of the high-rise sector in recent years, I expect a thank you card for Christmas.
And if things play out how they look like playing out, I expect you'll want to throw in a top-shelf bottle of whiskey to accompany that card.
So if things are as shaky as I've been saying, why haven't we seen more cracks starting to appear in the high-rise foundations? And apart from blacklisting a few suburbs here and there, why aren't banks back-pedaling harder on their exposure to the sector?
These are good questions. One of the old salty dogs of the Australian economic commentariat, Robert Gottliebsen had a crack at answering them the other day. I think the answers were interesting:
“Nowhere in Australia are there more danger signals than in inner city apartments. Most of the property commentaries look at average dwelling prices in particular cities, not at specific markets.
Broadly one and two bedroom apartments units sold on a “used” basis are down about 20 per cent in the three main markets – Sydney, Melbourne and Brisbane. Melbourne has a very serious problem in this market because a large number of the apartments have explosive high fire-risk cladding that must be replaced, which will either send builders and other industry players to the wall or will be paid for by owners who are risking their own or their tenants' personal safety each day. As this becomes understood the value of these apartments will fall by a lot more than 20 per cent.
Ok, hang on a sec. “Explosive” high fire-risk cladding? I've written about the cladding issue before, but I'm not aware of anyone saying that the cladding had the potential to “explode”. Maybe it was senior moment… Anyway:
Right now there are series of developers and apartment owners that in years gone by would have seen the bank heavies move in and take control.
But the banks are just sitting there watching the crisis unfold. Why? Here are five possible reasons and I give my rating out of 10 for each of the reasons.
Firstly the banks have changed their spots and are going to be soft in the future. Possible accuracy rated out of 10 – nil.
Secondly, the banks are scared about the impact on the total market if they pull the plugs. Rating – nine.
Thirdly, in Melbourne, taking control of fire risk apartments either by appointing receivers to builder/developers or taking control of individual apartments is extremely dangerous for banks. Stay low: Rating – nine
Fourth, the banks are worried about the royal commission and don't want bad headlines at this time. Rating – eight.
Finally, when interest rates are low banks are less likely to be vicious because the cost of allowing money to be frozen while the borrower tries to solve the problems is low. Rating, seven. But this will change if interest rates rise.
At some point the banks will have to confess their problems in this area and my guess is that the combination of higher global interest rates and the royal commission will force those confessions.
Maybe. I suspect to the only way to get the truth out of the banks is to pry it from their cold, dead hands.
However, on the idea that the banks are colluding to prop up a sector and to prevent the entire industry taking a bath… well, we've seen it before and it certainly wouldn't surprise me if that was the case.
I think the banks probably did get a little blind-sided by the king tide in foreign capital – a tide that came in quickly, and is quickly on the way out.
They don't want to be left holding the baby on that one, but they're stuck with it.
A managed unwind is actually probably the best we could hope for.
I think the next 12 months are going to be make-or-break. Developers and early buyers will be looking to off-load stock on a new generation of buyers.
But the only generation of buyers that's going to fall for that – or be dazzled by free i-pads, and interest free furniture packages – is a generation that is probably not going to be particularly savvy.
(They're not going to be readers of my blog, that's for sure.)
That also means that they're probably not going to be in a super-strong financial position. They're more likely to struggle with mortgage payments if the economy stumbles.
That is, the market is trying to hand-ball the baby on to a new bunch of suckers, and those suckers are the most likely to go down, fall hard, and go down en masse.
That wouldn't be fabulous for the economy.
So spread the word. Is grandma thinking of tipping her nest-egg into an off-the-plan apartment in inner-city Brisbane?
Get her to think twice.