Friday, May 20, 2005

Price Slump Exposes Australian RE Schemes

In an article titled "Developing Storm", the Sydney Morning Herald puts the spotlight on RE deals that are turning into ponzi schemes. "In recent years, money has been pouring into property-based debenture and finance companies offering a range of high interest rate securities. 'High-yield debentures are a risky investment, and there is no guarantee that investors will get their money back,' the Australian Securities and Investments Commission said."

Apparently, these firms are allowed to 'revalue' their properties upward at will.

"'When the market is trending down, you naturally know that land values and development sites will trend down much quicker than the market,' Bill Moss said."

"In Sydney, Moss estimates site values have come down by between 30 and 40 per cent from their boom highs."

"In these circumstances, there is no flow back of cash from the developer to the debenture issuer until the development is completed. In the meantime, investors in these debentures are paid only from the cash raised from other investors."

"Given that unsecured investors stand last in line, there is no recourse available if assets are sold and used to satisfy first mortgagees."


At 11:24 AM, Anonymous Anonymous said...

This implies that there was a price correction in Australia. Does anybody has stats for it, it'd be interesting as a lead indicator for US.
I think in UK prices are holding up for now (flat for a year) but volume is down to 2/3 of year ago levels


At 12:44 PM, Blogger Ben Jones said...

11:24 anon,
When prices started to fall, the AU press quit putting out as much data; I don't know why. Last I heard, Sydney prices were down 40% from the peak and falling.

At 12:37 AM, Anonymous Anonymous said...

Ben, I expect the same thing here. When the stuff finally hits the fan, all the cheerleading will stop. Can you expect David LeReah to talk about how much the market has gone down every day?

At 3:54 AM, Anonymous Anonymous said...


The 40% you quote to 11:24 anon is not a general reduction, even within Sydney. That level of reduction has (so far) only occurred in a couple of specific areas;

1. Inner-city high-rise apartments in Sydney and Melbourne. These are the 2 largest Australian cities and between them have about 35% of the TOTAL Australian population. All the major media networks have head offices in Sydney, so the rest of the world tends to get a very Sydney-oriented view of Australia. (When I was in the USA and Canada on holidays in 2000, a lot of people I spoke with had the impression that Sydney was Australia's capital.)

2. The other area is where people have initially asked for ridiculous prices, assuming that 20%-30% annual appreciation could go on for ever.

Overall, I would say the SFH's in most of Australia have fallen by about 10%, and apartments in some areas a bit more, and prices are now more or less static because building costs are going up quite quickly, which cushions any tendency for further price falls. Some prices are still going up; I was myself considering a couple of months back a new house in a set of terraces off the plan at $290K, which was suddenly $310K with people still buying.

What IS happening is a significant slow down in sales, which I expect to continue for 2 or 3 years while prices remain relatively stable (or stagnant, depending on your perspective).


At 4:23 AM, Blogger ajh said...

Do I suddenly have a profile? This machine wouldn't allow me to set one up before.



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