wages economics Alan Krueger

Has the siren blared for the Australian stock market’s record run and the future health of the economy?

July was notable for Australian investors. The local market was one of the best performed around the world with a gain of 2.9% for the month while the likes of the Dow, the S&P 500, the Japanese and Chinese markets and Europe all saw falls.

July was also when the Reserve Bank of Australian cut its key cash rate for a second month in a row — a decision investors cheered. But the events of yesterday, Wednesday July 31, should be a wake up call.

The gains of July could quite well be the peak as the predicted slump in property, construction and housing sectors gathers pace and starts consuming the stock market and the economy. Such a slide will be effected little by the Morrison government’s tax cuts.

Yesterday also saw the RBA release its private credit data for June and 2018-19. Home lending grew at just 3.5% in the year to June, the lowest since records started being collected in 1976. Loans to property investors were flat for sixth months in a row and grew at just half a per cent over the financial year — the lowest on record. Meanwhile, owner-occupier lending rose just 0.2% in June compared with May.

Goodbye Ralan Group

But the biggest event of July 31 was the collapse of a large east-coast privately-owned property developer Ralan Group, which has appointed accountants Grant Thorburn as administrators. Don’t be surprised if receivers are also appointed to effectively wind down the business. Ralan has a reported $500 million debt, with 3,000 apartments in various stages of development on the Gold Coast and around Sydney (where prices are already weak because of the construction certification scandal).

Grant Thorburn will have to quickly work out whether Ralan can be saved in any way. The problem will be how many of the 3000 apartments have been sold, and of those apartments already sold how many are secured by deposits.

A steady sale of the apartments looks unlikely given the slump in home lending and the overall softness of the property market. The chances of saving Ralan are looking remote because no one (investors, home owners or rival companies) will want to buy into a softening market when prices are weak and could fall further.

Thousands of jobs will be at risk in and around the Gold Coast and Sydney as subcontractors suffer cash flow problems, unless the administrators can get financing to keep the company alive. The $500 million in debt could very well rise (the first estimate of debt and losses in a collapse is often the lowest). The banks should all know this but with the last property shakeout happening in the GFC, a lot of corporate knowledge inside the banks has probably retired or retrenched.

What it means for banks

Banks and other lenders are already under pressure from weakening property prices and are scared regulators will take a harder line on future lending because of the looming overhang.

The banks will demand more equity from buyers; with household income and savings under pressure, this will be a hard ask. In fact, this collapse could halt the small improvement in home and apartment prices. No one can point to how and where demand will be revived — after the Ralan collapse it won’t be the Gold Coast or Sydney.

The next warning signal

July 31 also saw another warning. Adelaide Brighton Cement, one of the country’s major cement makers, told the ASX it is now looking at a sharp fall in profits this year with earnings down at least 40% and a $100 million asset write down to be announced later in August.

It was the second downgrade by the company since May because demand for its cement is weakening and prices are falling thanks to rising competition for fewer jobs. Adelaide Brighton shares fell 18% yesterday and are down 48% so far this year.

That in turn saw the share price of Boral, a major rival, fall 8% while CSR, a major building products group saw its shares drop 6%. Shares in Brickworks fell 1.5%. With a major private developer collapsing and thousands of apartments overhanging the market, investors will soon awaken to the dangers for listed property groups such as Stockland and Mirvac which develop upmarket homes and townhouses. Australia’s biggest apartment builder, Meriton, is privately owned by one of country’s wealthiest people — Harry Triguboff who has been complaining for the past two years about the impact of (mostly federal) government restrictions on Australian property purchases by foreign buyers — especially Chinese — on his huge development business.

The situation could be stabilised if Grant Thorburn can convince Ralan’s banks to support the developer into a reconstruction to stop the dumping of the 3000 units/projects onto an already weak residential property market. But bailouts generally don’t work in property unless everyone, especially the banks, are prepared to hang in for five years or more.

The problems at Adelaide Brighton are a warning that worse could be on the way. All it will take will be another developer with problems and/or a big building products group warning of difficult trading conditions and falling profits.

Having reported on and observed all the big property slumps since the 1970’s, it’s been the way the shakeout evolves. This one is ready to follow the pattern.

Is a property slump inevitable? Write to [email protected] and let us know your thoughts. 

Peter Fray

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