yeah it's easy - only lend 70% then auction the property off at 70% reserve if it goes to the crapper.
Are credit conditions easing?
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yeah it's easy - only lend 70% then auction the property off at 70% reserve if it goes to the crapper.
if the banks did that they would destory their security base
one in ten aint gonna affect them too much.
What I meant was that the banks do not appear to be pricing in higher costs of capital. They doubled the RBA rate increases during the GFC when money market funds starting drying up. The banks' offshore borrowing costs did increase, but part of the domestic rate increase was a result of pricing in the perceived higher costs of funding into the future. Despite all the negative talk, it doesn't seem like the banks expect that the global credit supply will contract in the near future. They certainly aren't pricing it in.
Of course, I'm assuming that Oz banks are as dependent on o/s funding as they were in 2008. It may be that the funding mix has changed.
Of course, I'm assuming that Oz banks are as dependent on o/s funding as they were in 2008. It may be that the funding mix has changed.
I read somewhere that they're getting something like 50%+ instead of 40% odd funding from local savers nowadays, so they're feeling less exposed and dropping their term deposit rates quickly accordingly. Seems a small change to me, but I guess I'm not Swiss enough in these things.
Waiting for the boom.
Then he's in good company. (Gulp!)
Hi all... I'm still around, but mostly hanging out on the Australian Property Forum these days.
I'm expecting interest rates to be cut next month (November at the latest if the RBA decides to wait for the next inflation figures just to be certain).
I'm also expecting moderate gains in Sydney, moderate declines in most other cites, and flat prices nationally for the next year or two.
Sydney construction boom to kick off very shortly (note recent NSW government initiatives to boost construction).
That sounds too much to hope for, but dear Lord make it so! The construction industry in Sydney as far as I can see has descended into a frenzy of price-cutting cannabilism, with far too many players chasing far too little work for anyone's good.
And this....again, will depend on the banks.
Doesn't matter what incentives O'Farrell gives, if the banks just aren't lending.
Regards JO
Banks back to risky lending
Accodring to http://www.news.com.au/money/banking/banks-back-to-risky-lending/story-e6frfmcr-1226140008162
So is credit loosening or tightening?
I also have seen a few more articles on non-bank lenders re-entering the market now.
Accodring to http://www.news.com.au/money/banking/banks-back-to-risky-lending/story-e6frfmcr-1226140008162
So is credit loosening or tightening?
I also have seen a few more articles on non-bank lenders re-entering the market now.
Whether credit is being 'loosened' or not depends on your definition of what 'loose' is. As far as IDing a customer goes - the banks are getting tougher and tougher since the NCCP came out. In that way, they're not 'loose' because they aren't simply lending their money out to anyone. Same thing applies to Lo Doc/No doc loans - harder to get now because there's less non-conforming lenders, and those that still remain charge exhorbitant rates. Hardly a loose credit environment in my view.
That's the supply side of the equation, but the demand side is also very bad.
There just aren't many construction projects going forward. Architects, project managers, builders, trades suppliers, etc - everyone I'm talking to - they're all saying the same thing: There are simply no active clients out there.
Basically, with so much economic uncertaintly, businesses and high-net worth households that normally drive a solid core of construction activity with new builds, refits and renovations have all postponed or abandoned their plans. They're nervous and holding back (even if they can easily obtain finance), so price-cutting to the point of near-insanity is taking hold in the building sector.
Most in the Sydney construction sector were at least looking forward to a recovery of office and retail fitouts this year, because so very few occurred in the last 2 years that it only made sense that there was a backlog of latent demand to keep premises up to rental grade spec. With one or two key exceptions, that didn't eventuate. The Sydney Westfield was the 'the only game in town' over the last 18 months, and now that that's finished, there's very slim pickings to be had indeed.
O'Farrell can't do much if anything about turning around confidence with the state of the US or European economies (and hence crucially the international financial industry), and that seems to be the fear gripping everyone at the big end of town. And without them ordering, construction activity just seems to have collapsed.
A few hundred acres of new land releases on the outer fringes or a couple of thousand off the fees for developing an apartment won't change a thing. We need the construction equivalent of half a dozen Snowy River schemes to soak up a spill this size. That, or the labour force just leaves and heads for the mines, as the RBA appears to intend.
But only with phenomenally increased risk of your builder going broke mid-project!
It's happening all over town, if you really didn't know. Indeed, It's basically reached the stage where suppliers won't supply on credit anymore; tradies are demanding immediate payments to complete or install, and projects are slowing down because payments to everyone are being 'rationed'.
(And I know this because I'm experiencing it firsthand right now working with arguably the best of the Sydney building industry, not the wannabees. The NSW Master Builders Association best house of the year award went to a job we did the interior stonework on, and it was one among many variously awarded that we did the stonework on. And all of these builder are struggling with cash flow. NB: We'll win next year's best house too, in Bondi.)
This 'push down of construction costs' isn't good for consumers: Construction completion risk is absolutely mushrooming!
Why? Simply because builders don't live or die on profits, they live or die on cash flow. Surely as a civil engineer you appreciate this as a simple, factual and irrevocable business reality with all of your exposure to project pressures?
Nevertheless, let me explain for others: No sane builder uses his own personal cash to try to complete a project: He uses the next customer's cash injections and suppliers' credit to keep the ball rolling until he can bank the profit less payables from his last job (excuse the gender bias, but they are predominantly males). There's a normal 2 to 3 month cash flow delay between completion and final client payment (while defects are sorted and hundreds of variations toted up and approved). Meanwhile, business has to go on. . . .
But here's the rub: Your merchant bank or merchant banker client has just lost a motza on the sharemarket, and there's simply no cash available. Sure, the credit's impeccable, everyone will get paid. But when?
Mary in St Marys meanwhile doesn't understand why her tiler won't deliver let alone install the tiles she's paid for, because said tiler can't pay his last bill to the tile supplier to get Mary's tiles released on normal credit terms. Said tiler has no cash in the bank because he's a just a regular grunt living from week to week.
Good for construction costs? Only theoretically, at best.
TomW is possibly also a civil engineer, in which case he would be spinning out that you knew that without him mentioning it or he is not one and you possibly have him confused with me due to the same first name.
Nonetheless kudos for your post but I do disagree just a little around what you say on cash flow and risks around them going broke.
Besides engineering companies are more than capable of losing truck loads of money without having to even think into complexities like cash flow. Just look at theiss, john holland, macmahon and a myriad of others in the middle of our boom for evidence of this.
Of course when you have bad jobs cash over time becomes tighter cause lets face it losing money also means you run outta cash just like poor cash flow does when you are making money. When you have good profitable jobs, typically it follows that it is easy to manage cashflow. Tight as a fishes and cashflow also suffers even if payment terms remain the same.
I often think though cash flow is like the easy way of telling your creditors to hold off for a month or two on a payment because to tell them, yeh we have not been making money in a while, indeed losing a bit at present usually has them reaching for the securities of payments act or debt collectors...
Of course you can go into liquidation on cash flow alone even turning a profit, indeed I think it was Len Buckridge (BGC) over this way who said a boom is the best time to go broke!
That said when payments are stalled there is often a good reason for it, quality compliance, incomplete works etc so a company which is in financial strife often will report it has income due when in reality they are never gettin paid just to appear like they remain liquid.
You really gotta know what you are doing to buy construction company shares. Why I buy no shares these days (well not in a material way). If I have dedicated 15 years to construction and still do not feel comfortable buying shares in my own industry, than how the hell would I go choosing the right bank stock etc when it was only about a year ago I worked out loans are actually assets to banks...
Oops, sorry Toms. Tom32 (Why 32 anyway? Pants size, shoe size, inside leg size? ), stay away from construction company shares! TomW though, thanks bringing up 'the advantages' issue.
[Talking about John Holland, I had a subbie's interview at one of their offices today about a project, and happlessly joked that if the 8-tonne internal feature wall we were discussing did collapse the best place to be would be on a plane. Not even a smirk: Just Adam's apples bobbing like a wave on an oscilloscope around the room. Now I know what keeps these guys awake at night!]
You're totally correct Tom32 about cash flow dangers in a boom too (or on massive projects, which are sort of the same thing): I recently declined to tender on a couple of very 'substantial' project opportunities because the cash downlay required to reach a significant payment point would have likely ruined us (to say nothing of the prospective workload potentially overwhelming our finite facilities, possibly resulting in further delayed payments).
But the biggest risk today undoubtedly lies in being forced by irrational competition to underprice work. Start doing that, then no matter how well the job goes, you'll end up going backwards. And then desperation sets in, and down the slippery slope toward oblivion you go. Know your costs, go keen, but never underquote is my mantra.
(NB: And no, I didn't succumb to 40 minutes of pressure to drop our offer price to JH today. I simply repeated, "There's no way it can be done correctly any cheaper." Failure is not my nightmare: It's theirs.)
), stay away from construction company shares! TomW though, thanks bringing up 'the advantages' issue.[Talking about John Holland, I had a subbie's interview at one of their offices today about a project, and happlessly joked that if the 8-tonne internal feature wall we were discussing did collapse the best place to be would be on a plane. Not even a smirk: Just Adam's apples bobbing like a wave on an oscilloscope around the room. Now I know what keeps these guys awake at night!]
You're totally correct Tom32 about cash flow dangers in a boom too (or on massive projects, which are sort of the same thing): I recently declined to tender on a couple of very 'substantial' project opportunities because the cash downlay required to reach a significant payment point would have likely ruined us (to say nothing of the prospective workload potentially overwhelming our finite facilities, possibly resulting in further delayed payments).
But the biggest risk today undoubtedly lies in being forced by irrational competition to underprice work. Start doing that, then no matter how well the job goes, you'll end up going backwards. And then desperation sets in, and down the slippery slope toward oblivion you go. Know your costs, go keen, but never underquote is my mantra.
(NB: And no, I didn't succumb to 40 minutes of pressure to drop our offer price to JH today. I simply repeated, "There's no way it can be done correctly any cheaper." Failure is not my nightmare: It's theirs.)
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