Why Will Property Values Fall?

Despite the property bulls (who seem to be a bit quiet just now) there are a series of logical reasons why prices will indeed fall from current levels.

First net migration into Australia will stop period. We have been seeing around 300,000 each year, which was one factor supporting demand in some areas.

Second, new property transactions will stall. No one will want to attend an open house, yet alone an auction in the current conditions. Sales transactions have risen more recently, but that just got turned off. How soon will it be before we see zero auctions reported on a Saturday?

Third, property investors, will continue to flee – they already saw rental returns dropping, now no capital growth. Demand from new investors was weak, it will die. They may have to subsidise renters who cannot pay rent due to job loss or income decline.

Fourth, existing mortgage holders will face cash flow issues as income stalls. We already have more than 1 million households in cash flow stress, another 200,000 or so are set to join them, in short order. Around one quarter of households have less than one months free cash available if incomes stall.

Fifth, banks will (are) cut back on mortgage lending. With margins already low, experience from Europe suggests it is unprofitable to lend. They will also lift risk underwriting standards. Meaning people if they want to borrow will get a lower available loan. Loan books will likely contain more defaults and higher risks – meaning more capital. Some may choose to shrink their balance sheets as liquidity stalls. Recently first time buyers were getting $420,000 mortgages no problems, with income ratios of 6, 7, 8 times or more. Debt servicing ratios are still high – and servicing is now an issue.

Income multiples often assumes double incomes. If one income stopped that would be a big problem.

Sixth, forced sales will eventually occur though nor immediately. I expect banks to support households in financial stress by loan and interest payment postponements, for a time. But eventually forced sales, at lower than current market values will follow. In addition, given the death rates among older people, more supply could well come on stream as estates are liquidated.

Seventh, States will take a hit from falling stamp duty as transactions slow. They will not be able to reverse this.

Eighth, Government will try various stimulation moves to try to prop up the market – but persuading people to buy now will be like selling seawater on the beach. They may well provide cash support direct to households for mortgage and rent payments – they probably should.

Ninth – the property wealth effect, which was a mirage, is dead. Finally. Until the next bubble starts, which it will, unless policy changes. I will have more to say about that ahead.

Finally, its worth thinking about this. On average, prices are 40% over their fundamental value. So they have a long way to fall.

And debt to GDP ratios are, and will go further off the charts.

Tasmania Isolates

From midnight, Friday 20 March, all non-essential travellers departing for Tasmania will be required to quarantine for 14 days, as announced today by Peter Gutwein, Premier. He said:

This is a tough, but necessary decision to flatten the curve, putting Tasmanians’ health and wellbeing first.

The quarantine period will not apply to essential travellers – such as health care workers, emergency workers, defence personnel, air and ship crew, specialists, and essential freight personnel (truck drivers/spirit freight), and there will be stringent guidelines to manage this.

Travel restrictions do not apply to Tasmanian residents on our islands, such as King and Flinders, flying into mainland Tasmania.  However they will apply to anyone travelling inbound to the island from mainland Australia including residents returning home to the island. Mainland Australians flying into our islands then onto mainland Tasmania will need to self- quarantine when they arrive.

All passengers will be screened on arrival and must demonstrate they meet the essential traveller criteria.

If they are deemed non-essential, they will be directed to quarantine themselves at their stated place of address.  Tasmania Police and Biosecurity Tasmania will ensure compliance with the quarantine measures, helping people to access support and follow up to ensure the process is adhered to.

Breaching the quarantine process may incur a penalty of up to $16,800.

The message is clear, and the penalties are severe for anyone who does not comply with the mandatory quarantine.

Freight will continue to come in and out of our state, and with TT-Line having capacity to carry extra freight, Tasmanians can be assured we will have the essential supplies we need.

Those requiring interstate medical treatment will also be able to utilise the Royal Flying Doctor’s Service.

There is nothing more important than Tasmanians’ safety, and while the economic impact will be significant, we have a chance now to slow the spread of COVID-19 in our state.

This will provide Tasmanians with more certainty, help us to recover more quickly and make our state safer.

Under a State of Emergency, we will activate the State Control Centre, which will be headed by the State Controller (Commissioner of Police, Darren Hine) in close liaison with the Director of Public Health, to coordinate whole-of-government responses to COVID-19.

As an island we are well placed to implement these tough restrictions and slowing the spread of coronavirus will ensure we are better placed to protect all Tasmanians.

Build More Ventilators

General Motors Co.’s Mary Barra offered to manufacture hospital ventilators in auto factories shuttered by the coronavirus outbreak, an effort that would echo Detroit’s contribution to Allied powers during World War II. Via Bloomberg.

GM’s chief executive officer floated the idea during a conversation with top White House economic adviser Larry Kudlow, he told reporters Wednesday. On Fox News earlier, he described an unidentified auto executive’s offer to call back workers to idled plants to make the medical devices needed to treat critically ill virus patients, and said it was made “on a voluntary basis for civic and patriotic reasons.”

Barra, 58, suggested ways the company could help during the crisis, a person familiar with the matter said. GM could use some of its excess factory space to build ventilators and has people looking into how that would be done, said the person, who asked not to be identified describing a private conversation.

After U.S. President Franklin D. Roosevelt called for arming and supporting Britain, France and other nations in 1940, Detroit’s auto industry quickly transitioned their car assembly lines over to make military jeeps, tanks and bombers. Within a year and a half after the 1941 attack on Pearl Harbor, 350,000 workers moved to the Motor City to join in the war effort, according to the Detroit Historical Society.

U.K. Prime Minister Boris Johnson earlier this week called on manufacturers to build ventilators. Carmakers Jaguar Land Rover Plc and Toyota Motor Corp. are among the companies that have offered to help.

ECB Launches €750 billion Pandemic Emergency Purchase Programme

More stimulus from the ECB, including the purchase of non-financial commercial paper. Following Japan, UK and USA. But just pause, to ask how will yet more liquidity helps – sure it might move bond rates, but support for real households and businesses should now be the main focus. Repeating the past mistakes and expecting different outcomes is.. well, a little mad. “The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area”.

The Governing Council decided the following:

(1) To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

For the purchases of public sector securities, the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks. At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.

(2) To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector. This will ensure that counterparties can continue to make full use of the Eurosystem’s refinancing operations.

The Governing Council of the ECB is committed to playing its role in supporting all citizens of the euro area through this extremely challenging time. To that end, the ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to families, firms, banks and governments.

The Governing Council will do everything necessary within its mandate. The Governing Council is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock.

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.

The BankDoctor Says Government Must Act Now To Support Small Businesses

Excellent piece on an important subject – cashflow is the problem! We sure need more than lipservice….

Tens of thousands of small businesses are facing imminent collapse as revenues tank and they run out of cash. Urgent action is required to avert the disastrous consequences which will follow.

Sensible government intervention like travel bans should flatten the coronavirus curve but we need to also need to flatten the curve of small business insolvencies. Unless they get through the next few weeks, a massive number will not be around when the inevitable recovery takes place.
 
Banks have a crucial role to play but there is only so much they can do. We should not expect banks to simply offer an open cheque book because that would not be responsible lending. No lender can or should lend to a small business which has no or drastically reduced revenue. So what are the banks saying and more to the point what can they actually DO in this situation?

This is what ANZ’s Shayne Elliot has to say…..


And from NAB’s Ross McEwan…..

There is a general acceptance that post Royal Commission the banks are trying harder to be good corporate citizens and they have all since signed up to the Code of Banking Practice that includes a section on “When things go wrong” but all the codes and commitments in the world are of little comfort to small business owners right now when time is of the essence and if they don’t have:
 
 – A manager they can talk to.
 – Time to prepare a loan application and wait for an approval.
 – Profits which can be offset by tax breaks.
 – Term deposits to access.
 – The demand to justify new investment (unless they are a toilet paper manufacturer).
 
What they need is liquidity and if there is one lesson from a career in banking it is that “Cash is king”.  This is as true today as it was after the stock market crash of 1987.

In 1987 we saw the collapse of asset values, predominantly equities, today we are facing a dramatic economic downturn which is causing a cash flow crisis that is a particular threat to thinly capitalised small businesses. The only effective solution is to quickly get cash into their hands. And the only party which can pay for this is the federal government which means the taxpayer. The challenge is how to do this in a very short period of time.

In hindsight everything is always much clearer but the truth is we have missed the boat when it comes to establishing a government agency that could perform this function. This 2015 newsletter reveals how USA’s Small Business Administration has successfully funded the small business sector for over 60 years.

And this 2017 newsletter talks about the UK’s success in government funding for small businesses referencing the British Business Bank. The concept of an equivalent to the British Business Bank has drawn support from a number of other parties including Kate Carnell, the Australian Small Business & Family Enterprise Ombudsman.

Whilst for years the US and the UK have wholeheartedly and very successfully committed taxpayers funds to support small businesses, we have just begun dipping our toe in the water with programs like the $2b Australian Business Securitisation Fund and the Australian Business Growth Fund which is funded by the banks to the extent of $540m.

We are now paying the price for this lack of foresight and commitment but that aside, we must find a way to quickly get cash into the hands of small businesses.

THE SOLUTION?

The government provides a guarantee to enable approved lenders to grant registered businesses interest free loans up to $50,000 for a period of 12 months. Parameters that would need to be worked out include:

 – Definition of an ”approved” lender eg non-banks, challenger banks, fintechs etc.
 – Amount (should it be more or less than $50,000?)
 – Term (should it be more or less than 12 months?)
 – Amount of government guarantee so the lender has some risk.
 – Repayment terms and arrangements at maturity including potential for rolling over.
 – Size and reputation of borrower (employees/turnover, ATO compliant etc.)

In broad terms, if there are 600,000 small business owners that qualified and every one took out a $50,000 loan and every single one defaulted, it would cost the taxpayer $30 billion.

Given that the coronavirus crisis will end up costing the country many times more than this sum, the question for our Government is “what price do we put on the small business sector?”

Bank Of Canada Underscores Importance Of Cash

Interesting statement from the Bank of Canada, their central bank.

During this time of heightened public health measures intended to limit the transmission of COVID-19, some consumers and businesses are choosing not to use cash to limit potential exposure. Refusing cash could put an undue burden on people who depend on cash as a means of payment. The Bank strongly advocates that retailers continue to accept cash to ensure Canadians can have access to the goods and services they need.

This is important, and like the Reserve Bank of New Zealand who also recently underscored the importance of cash in the economy, it reinforces the importance of keep real money available.

Preliminary Retail turnover Rises 0.4% in February

The Australian Statistician announced on 16 March the commitment of the ABS to provide the community and governments with access to additional, more up-to-date information on the economic responses of individuals and businesses to the coronavirus, COVID-19.

This preliminary retail turnover data release is the first in a series of additional product releases over the coming months to help measure the economic impact of coronavirus. This release provides the preliminary estimate for Australian retail turnover for the month of February. This estimate will be subject to revision with the final monthly estimate published 3 April, 2020 in Retail Trade, Australia (Cat no 8501.0). Future preliminary retail turnover estimates will be published around two weeks prior to the advertised release date of Retail Trade, Australia (Cat no 8501.0).

Australian retail turnover rose 0.4 per cent, based on preliminary figures, in February 2020, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

The preliminary figures indicate a rise in food will be slightly offset by falls in industries such as clothing, footwear and personal accessories and other retailing. While some businesses (e.g. those that rely on tourism) reported that coronavirus negatively impacted turnover, a range of other businesses saw limited impacts from coronavirus in February.