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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 7 April 2016

Whyalla wipeout on the brink (redux)

Chart packs out

The Reserve Bank of Australia (RBA) has released its Chart Pack to the end of the first quarter of 2016. 

The household sector and housing prices charts shows the impact of credit rationing on prices by the end of 2015, though prices now seem to be rising again in most capital cities, if more steadily than before. 

Darwin and Perth remain in a downturn, but at the city level a few indicators have suggested a stabilization, and prices do seem to have flatlined somewhat of late.

Recent indicators have continued to suggest that Hobart's tightening market has resulted in a long overdue spurt in dwelling prices.  

Sydney continues to perform strongly in its inner suburbs, but poorly in a number of secondary areas, leading to some recent indifferents result in aggregate.

At the capital city level both Melbourne and Brisbane look set for another calendar year of gains, with some more mixed fortunes at the sub-regional level. 

Prices in "steady Eddie" Adelaide have been sneaking higher for a few years now, without ever really threatening to shoot any lights out, although elevated unemployment remains something of a worry. 

Housing Prices graph

Regional prices are declining in aggregate, largely thanks to some adverse results in mining and resources regional towns, but naturally this statistic masks a wide range of performance in different conurbations. 

Some of Queensland's coastal areas are faring rather well as they enjoy the lower dollar and a surge in tourism activity, for example, while the state's mining regions are amongst the very worst of performers of all since 2012. 

Whyalla wipeout

South Australia has headaches, not least in the form of Whyalla where the town's major employer is suspended from trading on the securities exchange having failed to guide its steelworks back to break even over recent years, despite continually cutting costs and capex, and having unveiled a recapitalisation proposal back in February that has now been rejected.  

Steel company Arrium Limited (ASX: ARI), which employees thousands of workers and has an export port facility at Whyalla, has been stuck in a trading halt and has been suspended from official quotation, with the company staring down a possible bankruptcy or a likely voluntary administration and its last traded share price at only 2.2 cents.

Source: ASX

It was announced to the ASX this week, in the euphemistically graceful way of these things, that the Chief Financial Officer of the company has resigned "to pursue other interests", while the company attempts to refinance its massive and unsecured $2.8 billion debt burden.

Whyalla already felt the pain of OneSteel shedding jobs last year and further cuts were made by OneSteel this week, with approximately 1,000 jobs lost in Whyalla since the beginning of last year as South Australian unemployment spiked to a 14 year high. 

Given that Arrium employs about 10 per cent of Whyalla's working population, the potential closure of the steelworks could rip the local community apart, having a more devastating impact than the closure of Holden upon South Australia, potentially resulting in related job losses variously estimated at between 3,000 and 4,000 (Arrium has about 10,000 employees in total, and the possible closure of the steelworks itself would directly account for 1,100 jobs). 

These are desperate numbers for a town with a population of only 22,000, and any such closure would inevitably result in an exodus or population outflow from the region. Let's sincerely hope that doesn't happen, though at present the outlook seems bleak.

Property market decimated

Median house prices have reportedly fallen sharply in Whyalla, while there have been few takers for attached dwellings, resulting in a crushing of unit prices.

It was reported this week that more than a billion dollars has been wiped off the value of Whyalla's property market in recent years - from $2.7 billion to $1.5 billion - as homeowners flood the market with for sale boards (though quite how those figures are derived given that so few dwellings have actually transacted is open to question). 

This may sound like catastrophising, but vacancy rates are threatening to go through the roof, with scores of properties listed for rent in Whyalla and hundreds more in surrounding suburbs.

Note that the dynamics described above have transpired while Whyalla's official unemployment rate is still relatively speaking quite low, at 7.2 per cent  as at December 2015.

Slow house sales

In truth it is very challenging to get an accurate read on housing market prices, since although there are now hundreds of properties listed for sale, comparatively very few of them have been selling. 

Looking at some specific examples suggests that if outright panic isn't on the cards yet, it may not be that far off if Arrium does shut up shop. As noted above, hopefully this proves not to be the case. 

By way of one example, following a few false starts and 372 days - more than a year - on the market, this house finally sold for $140,000, 36.4 per cent less than it was originally listed for. 

Other examples suggest that prices may now be down by about a quarter over the last couple of years, but this statistic is essentially useless to individual prospective sellers, since it really all comes down to the asset in question and whether a willing buyer can be found.

While Arrium's steelworks fate is not yet decided, unfortunately this is becoming an all too familar story with regards to these small towns and cities that are so heavily reliant on a small number of employers.

No doubt it's great if you can buy at the beginning of a resources boom and nimbly sell before the peak, but if you miss the precise turning points these markets have the potential to become frightfully thin and illiquid, and there may be nobody to even rent your property to, let alone sell it.

Share indices

Another related graphic from the RBA Chart Pack worth looking at is the Australian share price indices chart. Note that the y axis here is presented on a log scale - the swan dive in the resources index since its peak has been nothing short of breathtaking.

Australian Share Price Indices graph

To a certain extent the resources index has been reflected the fortunes of property markets in resources heavy regions, albeit not coterminously.

Sure, if you got in to the resources penny dreadfuls in 2000 and sold out in 2007 then you'd say that the resources minnows and micro-caps are the best thing since sliced bread, but over the longer term the self-sustaining industrials and financials triumph.

Yes, I get the counter-arguments, if you bought a house in Whyalla for $150,000 in 2000 today it "could" be worth double what you paid for it, assuming you can find a willing buyer (i.e. a "when to" investment rather than a "how to" investment).

That said, looking at actual resales of like-for-like properties shows that price performance has not been as smart as suggested by median prices (which are distorted by development).

Unfortunately many property investors hopped on to the mining boom bandwagon around 2012 egged on by seminar groups and promoters, and are somewhat more precariously placed as voluntary administration looms large for Arrium.

Don't get me wrong, I hailed from a depressed steel city myself, and the last thing anyone with a heart wants to see is a single job lost. But the steelworks is not viable, and it appears likely to close without government handouts, and as such the housing market is wobbly to say the least.


Been stuck in my head all week - sorry to inflict...