Yahoo Finance Another “housing crash” headline debunked
One of the most reliable features of Australian journalism is the ability of any “housing crash and recession” story to run big and long and attract plenty of eyeballs. Housing is the Australian equivalent of a Kardashian wardrobe malfunction.
And so it was no surprise that a report by a bunch of investment bank suggesting housing had peaked with a worst-case scenario of causing a recession received plenty of coverage. The CLSA analysts think there will be a correction in the prices and construction of cheap apartments that will spread through the sector, causing defaults and failures. Their base case is that the problem will be localised, but at the extreme, the R word was mentioned.
Thus CLSA has put a “sell” recommendation on the shares of companies they think would be affected by such a crunch, including CBA, Lendlease and Mirvac.
The CLSA report may have received more attention than it deserved because well-known banking analyst Brian Johnson was credited with being one of the authors. I happened to run into Johnson this week and he was quick to tell me he had nothing to do with that report, he had not written it. He also said the base case it put forward was not one of recession. So it goes.
The extent of a looming supply of “investor special” apartment remains a matter for reasonable argument. There are some parts of some markets already experiencing losses on the resale of apartments, never mind the Perth property market suffering the fallout of the end of the resources construction boom. But there also are key markets that are simply refusing to roll over with prices, auction clearance rates and pre-sales remaining stubbornly strong.
To deal specifically with the CLSA contagion allegation hitting Lendlease and Mirvac, there is some interesting research from Macquarie Wealth Management that concludes the current cycle has further to run yet.
The great bogeyman of buyers defaulting on apartment purchases hasn’t happened yet and, on Macquarie’s figures, would be far from disastrous anyway.
From the Lendlease and Mirvac figures for the June half year, defaults were less than 1 per cent of total settlements, in line with the previous half and effectively negligible. Over the whole year, the two listed companies settled 4,027 apartments. That’s a lot of flats.
Looking ahead, the Macquarie analysts say the pre-sold books are materially exposed to foreign investors – 27 per cent of Mirvac’s, 41 per cent for Lendlease. For a number of reasons, Macquarie sounds reasonably confident about defaults not getting out of hand, but, just in case, it built a hypothetical example of what the impact might be.
The example assumed a high 80 per cent foreign ownership of projects, a 20 percent default rate amongst those foreigners and the developers having to slash prices by 20 per cent to offload the units.
With the developers keeping the defaulters’ 10 per cent deposit, the impact on the developers bottom line would be to shave about 160 points off the developers’ margin on earnings before interest and tax. Instead of an 18 per cent margin, it would be 16.4 per cent – hardly a catastrophe.
But that doesn’t add up to a scary “housing price crash” story. You’ll probably only read about it here in the small print. Maybe we should start using Kardashian illustrations…
Meanwhile, Meriton founder Harry Triguboff has bought into the issue by saying an unspecified but “very significant” number of Chinese buyers are failing to settle their off-the-plan units. Harry, reportedly worth $10 billion thanks to building blocks of units, is never afraid to talk his own book and wants someone (i.e. the government) to do something about it.
Harry seems to have an idea that yet more assistance should be provided for investors to keep his apartments turning over.
Um, I suspect not. There’s nothing wrong with the overheated bits of a market cooling off – as long as it doesn’t get out of control. Triguboff suggests the market is taking care of the current level of people wanting to bail before settling with the value of units being discounted for third-party settlement. We’ll find out in time how widespread the problem might become.
Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.
