Abstract: An opinion piece on a possible key indicator of when the housing market downturn will no longer be deniable. Exploration of why the signal works and how different factor affect the Australian market.
I should begin by saying that this is a pure opinion piece. Nothing written here constitutes financial advice. I do not profess to have the investigative prowess of a journalist nor the professional credentials of an economist. I’m simply an avid observer and casual writer.
The Crane Harvest
Given how vocal I am about the excesses of the Australian property market and the greed of the finance industry, recently I’ve been asked by several different people for a more exact prediction of when the crisis with unravel. Rather than repeat myself, below is a summary of several points conceptualised during these discussions.
Building cranes are currently a prominent fixture on any Australian capital city skyline. Working in a recently built and half-leased building in Brisbane’s outer CBD suburb of Newstead, I could glance through the glass wall along just one side of the building and count out 10 cranes; all working on what were colloquially known as “Chinese money laundries”. Commuters arriving at just about any station along main inner Sydney rail lines will be greeted by the gentle swaying of these apartment block placeholders. The massive construction effort happening at Olympic Park is worthy of its place name, with rows and rows of apartments rising up between the under-utilised ferry terminal and the still under-developed vestige of the Sydney 2000 Games.
My predictions are not unique. The same indicator has been referred to in the past. They are even used as a boom-time index by some economists. In recent history, an excess of building cranes heralded the start of the property crises in Ireland and Spain. As such it is concerning that last year, Australia’s population of 23 million managed to raise more building cranes than the 320 million Americans who support a significantly more generous migrant intake policy. This is why I believe they represent a prominent lay-man, yet accurate indicator of when the unthinkable will finally become the undeniable.
When a building is completed and its crane disappears, several different factors combine to produce a drag on the economy.
1. Construction workers will need to find new projects to work on. In the past the mining industry would be able to absorb these skill sets, however with oil, iron and coal prices still swinging low it is likely miners will still be contributing to this pool of jobless than helping to absorb it. Current estimates peg about 200,000 jobs (1.6% of the workforce) associated with the property industry. In a country where at least a third of the population is paying off their own home, a rise in unemployment will result in a directly proportional rise in mortgage stress, mortgage arrears and ultimately, foreclosures or forced sale.
2. Reselling of newly completed developments. This is the pivotal point where a projected oversupply becomes realised in a way that can materially affect market prices and clearance rates. It is also important to note that there is asymmetry between the new, off-the-plan market and the second-hand, established homes markets. Due to recent law changes, foreign investors are generally prohibited from buying establish homes. In the absence of foreign investors, any distressed new owners will be forced to sell into a property market more than half the size (& demand) as the one they competed to buy into. Some emerging websites are trying to facilitate apartment contract transfers prior to completion, however the concept is so new that the statistics on these transfers are either not available or not captured in official government figures (both number of sales and selling prices).
3. Settlement risk. Most off-the-plan purchases are secured using a deposit that is only about 10% of the contract price. Buyers have to secure an approval from a lender to loan the remainder when the home is built and contract settlement can happen. This approval is not binding, and can be re-assessed at settlement. A year or two later, the risk appetite of the lender may falter, the buyer’s circumstances may change, regulators may clamp down to reduce home/investor lending or the home may be revalued lower. In fact all of these things have happened in recent reported incidents. Settlement may fail if one or more of the above happens, and the buyer is forced to find an alternate lender (on short notice) to fully fund or contribute additional money towards the contract price. If the prospective buyer fails to do so, they lose the deposit and the developer is forced to find a new buyer. The deposit taken is sometimes used to discount the property to lure a quick purchase, which impacts market pricing and contributes to lower valuations on other similar properties.
4. An oversupply of rental vacancies. Assuming that not all these new homes will be bought as investments, there will be a sizable shift in Australia’s demographic from renters to home owners. This mass migration would vacate an equal volume of rental properties in a market that is already at low rental yields. Landlords with empty properties may choose to sell-up rather than continue to absorb the on-going expenses, thus adding further to the market oversupply. This effect could be amplified in a positive feedback loop if lower prices facilitates even more home ownership, resulting in more vacant loss-making rental homes being sold at even lower prices, further increasing the affordability of home ownership.
Multiply these negative impacts against the 528 cranes working on the east coast and it is clear the Australian economy will face significant challenges when these building sites reach completion. It may already be too late for existing investors to exit the market. Declining building approvals marks the beginning of a decline in crane numbers. The point at which the crane harvest ends may very well be when what was sown is reaped. For the remainder, my only advice is to act prudently; plow your income into savings, fallow the downturn and think ahead towards the next planting season.