What’s happening on the Sunshine and Gold Coast apartment markets is a mirror image of what happened in the housing markets in the southern and mid-west states of the US. And it provides a valuable pointer to answer the two questions that plague so many Australians: What could cause an abrupt end to the high level of Australian dwelling prices? Or, put another way, how do we maintain or increase Australian prices?
In both the US and the Gold and Sunshine coasts during the last decade we saw a mad scramble by lenders to fund dwellings. In the US it was all part of the sub-prime disaster. In the Gold and Sunshine coasts we saw overseas banks led by HBOS funding a series of apartment developments.
That convinced some local banks, including Queensland banks, to join the party. There were also a series of local non-banks who picked up funding of developments the banks passed over. As a result, we saw a big rise in the supply of apartments and the price of development land sky rocket.
The global financial crisis turned off the development tap in both the US and the Gold and Sunshine coasts, causing land prices to slump. Even more importantly, consumer lending by banks in these markets suddenly contracted sharply. This contraction in consumer lending was truly dramatic in the US, but it was also severe on the Sunshine and Gold coasts.
So we had a lift in supply created by banks and a contraction in demand mainly driven by banks.
The big US slump in dwelling prices that followed has been well documented. But the Sunshine Coast is nearly as dramatic but has been less well documented.
Late last year we saw Australia’s largest mutual, the RACV, buy a recently completed apartment complex in Noosa for just $60 million.
The Resort Corporation’s ‘Noosa Sanctuary’ had cost $210 million to develop but had been valued above $250 million. In effect we saw a fall in value in the vicinity of 75% – which is similar to the US falls.
The Sunshine Coast market is now flooded with apartments and if there was a forced liquidation that Noosa Sanctuary price fall could be duplicated.
However, it is most unlikely that will happen. But the Sunshine Coast price falls will still be severe.
The risk being duplicated in other Australian dwelling markets is not high.
Firstly, banks are deliberately restricting supply of dwellings by making the criteria for financing developers tough – the reverse of what happened in the US plus the Gold and Sunshine Coasts. Secondly, whereas they have contracted their consumer lending on the Gold and Sunshine Coasts in most other Australian markets banks are flooding consumers with loans.
As long as banks keep restricting the supply of dwellings and fostering the demand by generous consumer loans, dwelling prices will not slump.
But if Australian banks restrict consumer housing credit in the same way as the US banks and the banks involved in the Gold and Sunshine coasts market did we will see a big fall in property asset prices, which, in turn, will lead to a rise in bank bad debts.
In many ways the Australian banks are trapped. They must keep up consumer housing funding to avoid a fall. As long as the bankers understand their role in the game all should be well. But you can understand why some global investors get nervous. Bankers are not always that smart.
This article first appeared on Business Spectator.
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