Apartments to collapse in six weeks. Really?
We don’t believe anyone can be so precise about the market prices for any asset class.
Nevertheless one US think tank believes Australian property is just six weeks from falling over the precipice of property price.
In an article yesterday on the News.com.au website;
“AUSTRALIA has roughly “six weeks” to prevent a housing market collapse caused by the banks’ crackdown on foreign investor lending, a US defence think tank has warned.
The Washington-based International Strategic Studies Association, in an article contained in its latest Global Information System newsletter, (in turn described as a “strategic intelligence service for use only by governments”), argued “changes in local banking policies” could see foreign direct investment in the property sector “decline markedly” and that “This will profoundly impact the Australian government’s ability to fund major programs in the defence and civil sectors”.
ISSA president, West Australian-born Gregory Copley AM, told news.com.au the “banks’ caution is precipitating the market collapse”.
“We estimate that Australia has about six weeks or so to turn this situation around, otherwise there would be a massive hit on property valuations and the building trades,” he said.
“The banks clearly believe Australian real estate values will decline, so they are attempting to avoid that risk. They’ve learned from the US collapse that seizing real estate collateral is a no-win scenario when the volume is great and the market slow.
“In so doing, they precipitate the market collapse but are less exposed to it.”
It comes after Australia’s richest man, billionaire property developer Harry Triguboff, warned that a “very significant” number of Chinese buyers were now failing to settle their off-the-plan units and urgent action was needed.
But Mr Triguboff, founder of Australia’s biggest apartment builder Meriton, warned the real risk was looming in the new wave of developments. As apartment price growth stalls or goes backwards, the risk of buyers walking away from their deposits grows.
At Montgomery we have long been warning that an apartment oversupply along with any proportion of off-the-plan purchaser defaults would force developers to discount properties to avoid going broke. We have previously noted discounting is already underway with developers offering free holidays and 10 year rental guarantees to purchasers.
Balancing out the bears in the article was NAB chief economist Alan Oster who “described the ISSA’s prediction of an imminent collapse as “garbage”, adding that the CLSA report was “very poor analysis”.”
Of course that is coming from a bank.
Another banker, ANZ economist Daniel Gradwell said while there was “definitely” a risk of rising defaults, “from our discussions with developers in the industry we are feeling a little bit like ‘where there’s a will there’s a way’”.
“There is still an incredible amount of demand coming from these Chinese buyers,” he said. “If they’re not getting finance from the major banks, it seems there are other options out there including non-bank financing.”
“It’s worth remembering there is still a lot of money out there searching for a home or somewhere to invest.”
Commonwealth Bank said concerns about a peaking in the residential construction cycle “look overdone” and it wasn’t expecting any “significant contraction” until late 2017 and early 2018.
“CBA estimates of the apartment construction pipeline point to a significant lift in supply that will ultimately weigh on new construction. That point still seems some way off.”
You can read the full article here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Spiro
:
Hi Roger
Your blog is becoming a source of opinion combined with other financial articles. Thank you.
Do you think that a correction in apartment prices would flow to other forms of real estate?
What is your timeline on when the apartment market will peak?
I reside in Perth, do you think that our correction will occur prior?
Regards
Spiro
Roger Montgomery
:
Hi Spiro, WA prices have already been softening in apartments and houses are taking longer to move. The extent to which a decline in apartment prices influences houses depends entirely on the proportion of people who are see houses as interchangeable with apartments.