Too big to fail, mate: Here comes the great Aussie housing industry bailout

And so it begins. On the point of bankruptcy, one of EZFKA’s largest builders is getting the 2008 Wall Street treatment:

“It comes as rumours continue to swirl about the future of Metricon, the nation’s largest building company for six years running — it has repeatedly denied experiencing solvency issues, with figures at the top saying it was “business as usual”, but reports this morning suggest the company is nearing bankruptcy.

Representatives from Infrastructure NSW, Treasury, the office of Premier Dominic Perrottet and the State Insurance Regulatory Authority were in talks yesterday about a bailout, which could be hundreds of millions of dollars in value.

The rescue package could allow Metricon to complete 300 ongoing construction projects, or compensate customers who have purchased house and land packages that cannot be completed.”

Some of this is being pinned on the sudden death (seems to be the #1 cause of death these days) of their CEO Mario Biasin. We know that’s patently ridiculous given the last two years and with building costs sky rocketing in the face of ever rising prices regardless.

If Metricon gets one, they’re all going to have their hands out. This is EZFKA, and no-one faces downside risk except the plebs. I wouldn’t be surprised if Harry Trigaboffsteinwitzberg is already waddling his way down to Dom Perrottet’s office where he used to live when Bob Carr was Premier.

My view is that Metricon won’t be the first and Albo may do what Scomo did on mandates and get the states to foot the bill, at least in the first instance. How I have no idea, but that hasn’t mattered for years anyway, let alone the last three years.

Many have posited the theory that they’ll either be forced to save the housing market or save the banks by year’s end. I have no idea, but in my opinion houses (and by that, I mean builders and developers) will get the nod if forced with that choice. They’ll throw a bank under the bus to save face (probably Westpac and they’ll just get merged with another bank) if this worst-case scenario happens.

Bail-in legislation goes brrr.

Coupled with Albo’s 40% ownership for FHB’s and we aren’t far away from Chinese-style state owned economy considering housing is most of it. All it needs now is overt seizure of our mining industry and a few farms and we’re there.

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Reus's Large MEMBER

Fuck Harry, I had was starting to respect Dom, but if he folds to Harry and bails him out then I am going to round up support for legal action to be taken against the government.

LSWCHP

Harry will have his hand out for public funds, regardless of the state of his company.

I’m looking forward to reading the news of his death, hopefully one day soon.

Coming

tarric booker posted that Australian housing value is greater than all US housing and share markets combined , relative to GDP

which is an insane statistic

still we don’t know what bailing out Metricon entails

if it just means paying out contractors in order to complete the already contracted houses , and winding the company up, then I don’t have a huge problem with it – that is taking care of the little people

if it involves making the bond holders and banks whole then they can go get fucked – they should be getting 0 cents on the dollar

Reus's Large MEMBER

Harry is a billionaire, I am sure he has the funds to pay the contractors to finish the jobs, but he won’t he needs those funds to acquire the stems cells for the treatment to keep him alive.

Coming

Harry doesn’t own Metricon

the guy who does already necked himself

Ramjet

Harry owns Meriton and not Metricon. It would probably be better for Harry if Metricon goes bankrupt as more migrants and less housing means more $$$s for Harry.

Ramjet

How to get the states foot the bill? They will need to recapitalise the insurers as given the builders going bust they are technically insolvent, but I am sure an actuary was smarter than me would prove otherwise.

Be prepared for Home Builder 2 to get people to sign new contracts at inflated prices to keep the industry afloat.

DictatorDavid

Anyone hazard a guess what it would cost to bail out Metricon? and then anyone else with their hand out? The governments already $1t in debt and eastern states are broke asf. Can’t see any of them being too keen to go deeper into debt at current.

Peachy

Well, depends on the nature of the issue in Metricon.

if it’s jsut short term cashflow/liquidity – bailout could be made to look effectively costless: gov just steps in and guarantees liabilities or provides some bridging finance (interest free or low rate).

if they have fundamentally unprofitable contracts – who knows how big the hole might be. Ultimately if the contracts are unprofitable die to materials costs, after metricons profit & equity has been taken, the customers just have to pay, don’t they?

Peachy

A good bailout would come with serious strings (chains) attached and hurt like hell. It would hurt just a little less than bankruptcy.

so the lenders and equity both take it in the back pocket, but allows the business to keep operating (profitlessly) and saves the management getting done for insolvent trading.

of course in EZFKA this won’t happen. Lenders will be whole, equity will probably still get a 15%+ return and the company will have to jsut submit to a monitoring regime or something equally toothless.

the real losers will be the other builders who don’t get the government assistance.

.
as an aside, I think the reason why gov are so keen to keep Metricon out of administration/liquidation is that they must have a sizeable land bank. A firesale of a large landback could seriously fuck up house pricing and therefore transfer duties across the whole state.

A fly in your ointment

interesting view the land banking.
no matter if the top reason or not, it is a major one.

Coming

yes good point

this is the game plan from 2008

government supported “bailout”, where the recovered assets all go to a bigger (land) banker at a bargain basement price, and the liabilities end up with the taxpayer

Of course, in an ideal world the NSW government would take over metricon’s land bank and use it to build public or affordable housing

But the game of mates will ensure that the land ends up in the hands of another developer at rock bottom prices, that they will drip feed on to the market when the time is right

Ramjet

The land banks would already be pledged as collateral for their existing loans otherwise they could easily get new lending on decent terms.

canuckdownunder

This is peak Australian exceptionalism, our brightest and best can’t even make money flogging off property in a massive RE bubble.

Let the money printers go brrrrr to bail them out, the shitshow is coming regardless so may as well make it as entertaining as possible.

Eurozone inflation over 8% now, does anyone really believe that this is transitory? Petrol already north of $2 again and they haven’t put the excise back on. Household budgets cooked and rates going up, up and away!

A fly in your ointment

does anyone really believe that this is transitory?

ummm, errr, there’s that chap over the rainbow in the Embeeland.

Sinbad-Da-Sailor

This seems like a coordinated suicide of the housing industry.
Remind me, didn’t Harry’s dad make a killing selling stolen artillery to the Japanese?

Peachy

This seems like a coordinated suicide of the housing industry.

it doesn’t seem to be the carrying out of some cunning and premeditated plan.

more like the result of a bunch of operators flying by the seat of their pants and taking on greater and greater risks in terms of financial and operating leverage. Worked fine when times were good and getting better (read: falling interest rates), as they largely have been for decades. But vulnerable to turn to shit quickly when things stopped going from good to better.^

remember, these people are generally. not financial geniuses, just some guys. The conservative ones have largely been marginalised (or driven out of business altogether) over the years. Good times make soft men, and all the rest of it.

^edit to add: this was a winning strategy, by the way. Most of them have taken their winnings off the table as they went. Indeed, that’s why now there is only a weak husk of a company left to go bust – rather than a well capitalised juggernaut with a massive lick of equity on the balance sheet.

Last edited 6 months ago by Peachy
Freddy

MB seems to have backflipped realising there is perhaps some merit in the high interest rates being predicted by money markets. Is this the contrarian indicator the world has been waiting for? Will we immediately get a global recession and deep cuts to interest rates?

Btw, money markets have upped the ante to 3.55% within 11 months. 0.25% next week and then closer to 0.4% every month until the end of the year.

On Metricon. They are involved in a lot of government projects. The bailout seems to be a lesser evil.

Last edited 6 months ago by Freddy
Peachy

Btw, money markets have upped the ante to 3.55% within 11 months. 0.25% next week and then closer to 0.4% every month until the end of the year.

I think I might wade in and pick up some bonds of 2-4 year maturity. Because at the moment, I am not really feeling that there’s a strong likelihood that the money markets are significantly underestimating.

so more upside than downside.

Freddy

I prefer to buy shorter maturities otherwise you are effectively speculating on the inflation and interest rates. Having said that, I still got plugged rolling over to a bunch of 14 month maturities before rates took off.

Peachy

On Metricon. They are involved in a lot of government projects. The bailout seems to be a lesser evil.

a better solution would be to tell them to bugger off and step out of the way while government runs the project to completion themselves.

of course in the EZFKA ,the government has long since lost the capability of running anything, so it wont happen

The90kwbeast

I’d the cash rate goes to 3.5% in 11 months this country is rooted

My no evidence back of napkin feels estimator says that much more than 1.5-2% will break the camel’s back

Last edited 6 months ago by The90kwbeast
Ramjet

If we are getting stagflation, what would be the best course of action: raise rates or let inflation rage? I am guessing the latter as higher rates will hurt the elite more. So agreeing with you that rates won’t hit 3.5%.

Freddy

The guy with the glasses would be Phil Lowe

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Last edited 6 months ago by Freddy
bjw678

If we are getting stagflation, what would be the best course of action: raise rates or let inflation rage? 

If stagflation is being driven by rising energy costs will raising rates reduce inflation in anything other than the unmeasured housing cost?
I really can’t see it reducing inflation in anything imported.

Coming

Lol a cash rate of 3.5% takes us back to 2011

since there’s been no major wage increase since then you’d have to imagine that house prices would also have to reset to around those levels

Thats a >50% fall

I just don’t believe it’s possible

the banks would be gone at that point

BUT as insurance, how would one short the banks ? Or is it so apocalyptic you wouldn’t get paid out

even if there was a bailout surely would include some shareholder wipeout

Last edited 6 months ago by Coming
Freddy

Wages have gone up close to 30% since 2011. If you factored that in it will be closer to a 30-35% fall which is close to what the mortgage calculators spit out as the reduced loan amount.

That is all things being equal. But we know they will play games to reduce the falls. APRA would probably reduce the serviceability buffers back to 2% or less, home owner grants again, etc

The90kwbeast

If houses crash 30%, again surely this country is rooted. That would be bank nationalisation type stuff of at least one of the big four.

Chris Joye is saying 15-25% correction is about it, I’d be getting worried if I were the RBA and seeing housing correct even more than 15%

Freddy

I don’t know about that. Post-GFC the banks no longer have to use mark-to-market. It would need to be a large number of borrowers that default with negative equity. Then factor in the Scomo’s deposit guarantees and we are talking price falls of at least 20% before the banks feel a thing.

I believe the banks could handle 30% falls. I suspect APRA and government would intervene well before that to limit the price falls.

There is also nothing stopping RBA taking over those distressed mortgages. This was one of the original proposals in the USA during the GFC with US Fed to spend $4t buying up all the toxic assets. They actually did start off with that proposal called TARP (Toxic Asset Relief Program) but they limited it to a few hundred billion, and then Bernanke chose to reinflate the bubble instead.

Last edited 6 months ago by Freddy
The90kwbeast

Following from what you have said, I guess the question is, even at 3.5% cash rate, that’s approaching 6% mortgage rates, can the average aussie household weather that, especially for many who bought in the last couple of years?

Further, how much can homeowners increase rent to cover their IPs bleeding cash on monthly repayments, on tenants about to get smashed from all angles? Will property investors simply get their way and bleed tenants of all their disposable income so they can keep their IPs?

If no to the above, would that not cause a large number of borrowers to start to default which directly impacts our banks?

We’ve seen from the royal commission and ‘no worries its fine’ banking propaganda pieces being rolled out already that we’re already hearing everything is fine. But is it…?

Last edited 5 months ago by The90kwbeast
Freddy

especially for many who bought in the last couple of years?

I agree those who bought recently will get burnt. But what I am saying is with the government deposit guarantees the banks won’t feel a thing until prices fall more than 20%. I have seen some analysis from Tarric which shows the number of people in at the top of the market is quite small.

Those with IPs can handle the repayments especially with rents rising as NG. In my response to Coming below I mention that I am saving more than $200 per week working from home. I believe this extra disposable income is what is largely driving rental price increases. The RE agents know there is more blood to be sucked.

Coming

what’s the cost of living done since 2011?
More than 30% surely

Don’t the banks take that into account

Freddy

Leith often mentions real wages going nowhere over the last decade. That implies wages are rising in line with the cost of living.

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Sort of related. I have been thinking about this in the context of real wages going backwards in a hurry at the moment. Working from home is saving me more than $200 per week. There has been a one-off behavioural adjustment that has dramatically reduced the cost of living for most office workers. This is not reflected in CPI figures.

A fly in your ointment

there is a hypothetical middle ground with slow release of the bottom rot until every sucker lost their money. it means a straw to clutch and creativity to prevent the sudden market flood and prolonged movement to nowhere (small ups and downs to maintain the illusion of a side movement and boom just around the corner).
alas…

Freddy

John Adams has backflipped in his latest video. It was just a couple of weeks ago that government would not allow property prices to fall, hyperinflation, etc. This week the RBA are incompetent and will overcorrect. Adams is wanting to buy a bigger house and will wait for prices to fall.

Regardless of whether prices rise or fall I am sure that in two years’ time Adams will point to the relevant video that proves he was right.

Anil Kumar

Too right mate! Blocks like John Adams gives me lot of confidence to start my own youtube channel and make economic predictions!

Coming

He’s goofily charistmatic

I think his position in this video (I couldn’t pay attention the whole time), is that it will be a fakeout.

The RBA will do a bit of QT and rate rises, the market and the economy will crash, and they’ll reverse course (well before they get to 3.5% or unwind all of QE)

So his plan was to be on the lookout for a distressed family home to buy at the nadir, before the RBA goes brrr again

Pretty reasonable

Freddy

It is fairly obvious that CBs are trying to kill off the possibility of an inflation spiral by killing demand and killing workers’ ability to ask for large pay rises. That is the plan. It will also be the plan to back off once demand collapses and unemployment rises.

My issue with Adams is not so much what he says it is the way he says it. He does not understand what central banks are trying do. He is the ignorant one. Not the central banks.