There is a serious topic I want to share with you today. I do not do this with a sensationalistic media slant to sell you on my story and to keep you hooked with gore and the unimaginable. If you are a regular reader of my articles, you know I like to call things as they are and that I am a student of history and data.
Yes, the bottom is about to fall out of the property market in a spectacular way. Is this speculation on my part? Well, yes, it is. No one has a crystal ball; however, we do have data and, since the invention of money, every time there has been a recession the property market has taken a dip. If we look back into the not-so-distant past, during the GFC we dropped around 30% in the market. Although, if you have been following the news lately, apparently the GFC did not qualify as a recession. Granted, yes, we did not feel the effects of the GFC to the same extent as other countries around the world, but our property market sure did. So, if that was not a recession, but this one is…. well, logic tells us this is going to be a humdinger. So, it is time to start setting a new course to avoid the storm or trim the top sail and batten down the hatches to weather this one out. Whatever you decide to do, you need to do it today.
Let us dive into this a little more. What facts can we pull together to support this hypothesis?
Firstly, look at the data. If it has happened before, it will happen again. If you read an older article of mine, Diamond Tiaras and the Next Great Depression, I speak about the merry-go-round of recessions from 1785 to 2009. My advice is if you are worried about national and global events, go back through history and find a similar sequence of events and see how it relates to you. We know what happened in 2009 with a global financial event, so what happened to you? In hindsight, what could you have done better? And armed with that information, what decisions do you need to make by 5pm today?
Secondly, funding market news is out there for you to read, so it is just a matter of putting together the pieces. Let us do domestic retail first. Home mortgages have had a six-month reprieve from lenders to help with the COVID-19 restrictions. Some of these loans have been added to the end of the loan term, which is amazing. Also, a really good time to say a big thank you and give a slow clap to these lenders in general. They were not forced into making these decisions. Although it did become a directive by the RBA later, the banks jumped up to offer before being asked. It really warms my heart. Some people have deferred payments, which will need to be made up. I do not see a huge amount of strain on the system from either of these options as everyone is pulling in the same direction. However, the emotional perception of this looming concern will make up one of the too-many bricks sitting on top of the trap door of the housing market.
Thirdly, and this is the big one, borrowing in the major property market – this is to the developers, land bankers and wholesale property purchasers. My biggest concern is for the developers. These are the guys buying up five to 20 property sites at a time as land-bank for future developments. They build broad acre subdivisions of 30 to 1,500 homes and based on a decade of personal experience and friendships with these people, they live in the red. The adage of “robbing Peter to pay Paul” does not even hold a candle to the fancy footwork that goes on in this environment. Poor Peter is lucky to have any teeth or kidneys left by the time Paul gets his money, and he gets that payment later and in default. This is not from anything nefarious, it is just the nature of the game and the nature of these entrepreneurial property moguls. They live in a constant state of speculation, “if I buy this today, it will be worth more later. If I pay for my permits now, I will have more value then. If all of that works out, I can settle my loans at X.” From personal experience in lending to this market, I can tell you that a developer’s X-date is always about 12 months premature. What this means is that their internal model is to borrow now on a promise with the intention of getting an extension or a refinance. Now, here is the issue in the market right now: these loans have been put on hold until September; however, these developers are not going to be able to repay their loans in that time, either through bad planning or simply because people have not been able to work. The list of reasons will be long and there will be many a song to be sung in the next few months (another brick on that trap door).
The other side of this coin is where the money is coming from. The lenders who lend to most of these developers are from the second-tier market. It is family offices and mortgage managers, institutions that borrow their money from investors. A lot of these investors are pulling out of the market. In short, they want their money back so when developer loans fall due there is not going to be a lot of money to go around to extend these loans. These loans are going to be called and, much like the GFC, as soon as the first loan is called and that first property is ceased and sold as a mortgagee in possession… that, my friends, is the ball game (the last brick).
Once we hit this catalyst, the risk profile for lenders changes. This applies to the whole banking system. Major lenders will reduce loan-to-value ratios (LVR) for lending to developers and not just for new loans. Consistent with the GFC, they will chance lending policy: a loan that a developer has today at a 70% LVR will suddenly have a maximum of 50% LVR, letters will be sent to every developer who is above that 50% mark telling them they have 60 days to reduce their loans or they will be called. This is exactly what happened as a result of the GFC.
And for the retail clients, banks will make decisions based on postcodes to limit their exposure on their lending books. Postcodes will suddenly have reduced LVRs for maximum lend If you already have a purchase contract and a conditional approval from your bank for a 95% owner-occupied lend for that apartment in Neutral Bay or an 80% lend of an investment property in Docklands and you are getting ready to settle, suddenly the bank will say the same to you: maximum LVR for those postcodes is 75% and 60%, respectively. Again, this is exactly what happened during the GFC.
Now, if these things come to pass, and I can see no possible scenario where it does not (the banks did this to protect their exposure and bottom line in the GFC, so why would they not do the same thing to protect themselves now after taking MASSIVE losses over the last six months?), at this point the trap door is hinged open and blocked by all of the purchase contracts and bad developer debt flooding through.
Fourthly, the government is starting its property stimulus. This happens when the government needs to stimulate the economy. There is nothing better to stimulate the economy than through the building industry, chippies chipping and plumbers plumbing. This is always a good indicator on the type of data the government is playing with and what they are worried about. In this instance, it is no surprise that they need the country to get back to normal following all the lock downs.
My last and fifth example is when agents and property magazines start advertising that things are looking great and that there has never been a better time to buy, all while the world is going up in flames… This is an emergency-flare-at-sea-type beacon. These companies and the industry as a whole are looking at the real data and they know, so they are scared for their livelihoods and are trying to shore up their positions.
Okay, that is all really scary stuff. I even have a knot in my stomach writing about it but let us all take a collective breath… in through the nose and out through the mouth. It is time for level-headed thinking and planning. You need to game out all of your options and you need to assess your situation. Number one do not call your property broker. As charming as he is, he is probably the first guy you had over to your home to show you an investment property. You most likely never spoke to anyone else, and I bet you did not ask him about his qualifications or expertise or look at his LinkedIn to see if he sold hospital equipment before this role. I am not saying he is a bad guy, and I bet he actually believes everything he told you about the market because someone else told him. It is time for real advice on your personal position. Call your accountant, look at your loans – make sure you are on interest only, and put any spare money in your offset account because the rainy days are just starting.
Today is the top of the property market. Are you already selling? Well, then get the money in the bank now. Do you have purchase contracts? Check your get-out-of-jail-free clauses and start negotiating right now if you do not have one (build in a back door). And, if you are really cleaver, get into a buying position. The market is going to do what it always does, the bottom will drop out and buying will go through the roof.
Gang, this article is getting a little long-winded so I will leave you here. I will publish another article on this topic highlighting the opportunities and how to capitalise on them and the evil monster you need to watch out for, “negative gearing.” I feel dirty just saying the words.
My friends, thank you for reading. Take care of your neighbours and do something nice for someone’s mum.