Does a failed ponzi scheme point to something more serious?
I’m guessing your probably saw this story about six LJ Hookers in Melbourne being shut down.
From the ABC:
More than 100 customers are owed “substantial” sums of money following the collapse of six LJ Hooker branches in Melbourne, with the couple involved in running the business under investigation for allegedly misappropriating their clients’ money.
The ABC has learnt that six LJ Hooker branches in Melbourne were shut down by the company’s head office last week with customers claiming that hundreds of thousands of dollars in deposits had gone missing.
In a statement to the ABC the real estate giant said that it had stepped in to end their relationship with the franchisee involved.
“On 21 April 2016 LJ Hooker terminated the franchise offices of LJ Hooker Glen Waverley, Keysborough, Box Hill, Mount Waverley, Doncaster and Burwood … due to a fundamental breach of its franchise agreements,” the company said.
The ABC understands the owner of the closed franchises Judy Thanh Truc and her husband Joseph Ngo, are accused of spending home deposits that were supposed to be held in trust for their clients.
So it turns out that embezzling clients deposit money and running off with it is a fundamental breach of the franchise agreement. No kidding.
Ms Truc has told the media that someone has tried to hack her account. But LJ Hooker refute this, saying they’ve never heard anything about any hacked accounts.
It’s all a bit embarrassing for LJ Hooker. JLH’s team was “Team of the Year 2015.”
But for the people who’ve just lost a deposit on a house it’s heart breaking. Haul ‘em over the coals I reckon.
So is it just a couple of rogue operators? I suspect it is, but my feeling is they may have been using the Chinese buying spree as cover for a bit of a Ponzi scheme.
If you look at the areas they were operating in, they were hot areas for Chinese buyers until recently.
And we know that Chinese buyers have found it tougher in recent times, both to get money out of China, and to get finance in Australia. There’s growing reports of Chinese buyers failing to make settlement.
So it wouldn’t surprise me if these guys had siphoned off some of the flow of Chinese money for themselves, using tomorrow’s buyers to pay off today’s. But when that flow started to dry up, they were caught short.
And their customers are suffering for it.
We’re hearing similar stories of Chinese hardship in Sydney. From The Australian:
Asia-based buyers scouting homes on Sydney’s upper north shore are requesting delayed settlements and are walking away from deals as local banks clamp down on lending to buyers who earn income offshore, and China tightens restrictions on outflows.
Agents marketing properties in well-heeled suburbs, including Wahroonga, Pymble, Roseville and Killara, have noted price falls of up to 3 per cent and softer levels of demand, as the appetite from Asia-based buyers falls away.
Other sources indicate price falls could be as high as 8 per cent.
“We’ve noticed it since November and the number of overseas buyers is dropping,” Savills Cordeau Marshall chief executive Craig Marshall said.
…“They know what’s going on here, and they’re tightening up on funds leaving the country; it’s absolutely going to continue to have an impact on our market.”
And for real estate agents that have grown used to the flow of Chinese money, that’s not good news. Witness the recent profit warnings that the recently floated McGrath’s has announced.
As I said, Chinese money is being squeezed by two thighs. The first is tighter lending conditions in Australia. In recent weeks, Westpac, CBA and ANZ have all announced much tougher conditions for foreign buyers, and a refusal to accept foreign income in serviceability calculations.
Yep, not that long ago you could say that you were getting money from a Chinese-based fairy-godmother, and still get finance.
Those days are gone.
At the same time, the domestic situation in China is also getting tougher. The Chinese authorities have been fighting hard to maintain the value of the Yuan, and a big part of that is stemming the bleed of foreign capital.
That means it is much harder to get money out of the country. The days of the Chinese cash buyer may have come to an end.
What’s more, the rise of the Aussie dollar so far this year, means that Aussie houses have actually become more expensive, and they need to get even more money out of the country.
Based on currency movements, settlement is now going to cost you 10.5% more than 6 months ago – a typical settlement period on an apartment.
The Aussie dollar is now stronger than at any point in 2015, so every Chinese buyer is looking at a more expensive settlement than they possible planned for.
Of course, if Chinese buyers think the Aussie dollar will depreciate – something everyone is still waiting for – then delaying settlement could make sense. Faff around with settlement for a few months, and you could save yourself 5% or something like that.
It could be worth it.
Chinese money has been one of the big stories in property in recent times – particularly in inner-city, off-the-plan apartments. But it now looks like the tide is turning.
This will drag on growth in the immediate term, in the same way the inflow of money caused a short-term boost. In the long run I wouldn’t be too fazed.
But if you’ve been using Chinese buying to cover a real estate Ponzi scheme, look out. The tide is going out.
What do you reckon is going on here?