It’s getting a bit murderous out there… but is it really as bad as it seems?
Some big names are becoming collateral damage in the property market’s turn lower.
With sale volumes down and credit harder to secure, we might be looking at the end of some big household names.
Last week it was celebrity millionaire Mark Bouris’ Yellow Brick Road, which reported a $34m loss:
“It is now particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan,” Mr Bouris said in a statement.
“In all the years of being involved in the home loan business, I have never seen such difficult borrowing conditions. These factors have caused an adverse impact to our new lending, particularly in the December quarter,” he said.
“The whole regulated environment for home loans has tightened, particularly around credit approval processes. Every borrower is impacted, but self-employed, small business owners, and older borrowers are finding it particularly tough to get a loan,” he said.
…The AFR suspects Bouris’ tale of woe may be partly prompted by the need to justify the company’s $34 million half-year loss, overwhelmingly caused by a writedown of Yellow Brick Road’s goodwill in the lending and wealth divisions, from $24 million to precisely $0.
If you track YBR’s share price, it’s been on a slow-bleed down since a peak in mid-2014.
However, YBR has taken another leg-down recently, after the Hayne Royal Commission tore shrapnel holes in the entire mortgage broking industry. Mortgage Choice (yellow line) and AFG (red line) have also taken a bruising this year.
But we can’t really claim to be surprised. APRA and Hayne have ushered in one of the tightest credit environments in recent memory. It was always going to be an attack on the mortgage broking business model.
At the same time, real estate agents are also doing it tough in the light of a down-turn in sales.
Remember, real estate agents are much more sensitive to a downturn in sale volumes than they are to a downturn in prices.
The McGrath Agency is the poster boy for this. A few weeks ago they released their FH19 results, which delivered an 18% crash in revenue and an EBITDA loss of $2.5 million:
Their share price is now down 88% since the float in late 2015, with investors strapped in to a one-way ticket south.
Looks like John McGrath cashed out of the business at exactly the right time. Well played, sir.
Anyway, even though price declines have so far been relatively modest, the hits to big names like McGrath and Yellow Brick Road give us the impression that there really is blood on the streets.
But the point I would make is that both of these guys, and most of the big property names we’re familiar with, are volumes business.
And over the past couple of years they geared up to manage the huge volumes of trade that were pumping through the system in the boom.
When volumes returned to normal levels (which was inevitable, but did happen quicker than most people were expecting), they were always going to be left with excess capacity.
But you can’t shed capacity the way you turn off a tap. It takes time to figure out the right organisational size, recalibrate your systems etc.
So in the adjustment phase, you’re always going to have to cop some pain.
And that’s what we’re seeing right now.
And so it’s easy to sell a doomsday story here if you want to.
But so far, everything we’re seeing seems pretty orderly to me.