Monday 11 February 2008

Which way from here

Watching the economy closely, anyone becomes very sensitive to the signs of economic stress.

Cairns is, I believe, past the "tipping point" into a downturn and recession.

Some of these signs:
  • The collapse of MFS and the Balé project in Port Douglas
  • The collapse of RPC and related companies on the Sunshine Coast
  • The consequent collapse of a local pool company, with more subcontractor collapses on the way
  • There has been a massive upturn in homes for sale, especially investment properties, in the Northern Beaches
  • Unit projects in Palm Cove, Port Douglas, and the Cairns CBD have completely stalled sales activity
  • Hedley, a major Cairns developer has postponed two previously-announced and approved unit projects

The developers are now playing a dangerous game of "chicken". All want to finish their current projects and get them sold so they don't end up holding a big bag of unsold units. As do the banks. One big difference is that a couple of the major Cairns developers haven't any fiscal discipline from the banks (which usually require 50% presales to protect the bank and developer).

Some of our local developers have been financing these new projects with little or no presales, leaving them exceptionally vulnerable to collapse, just like MFS. If this should happen literally hundreds of jobs will disappear into the fog of liquidation.

Even little things are very important indicators.

  • Areas of the city where used cars are occasional parked "for sale" this weekend have seen a massive increase in numbers. As the Christmas bills roll in, the additional interest rate increases begin to bite, and no letup in food, petrol, and other costs, the "second" car is often the first thing people sell for cash
  • An explosion in cars for sale advertisements
  • Anecdotal reports from merchants around town that credit card "declines" are rampant now, with restaurants especially being hit with this problem. In a couple reports, two and three cards have been proffered only to have all of them declined by the banks.
    (Most Australian banks announced in November that the usual "overlimit" flexibility shown by them was being discontinued as the credit problem worsens).

One needs to only visit any of the large building sites around town to understand what is likely to happen in the next few months. On any major building site, I would estimate 1/3 to 1/2 of the tradies vehicles still have NSW or Victorian regos on them.

These workers and their families came to Cairns for the big paychecks and heavy workload in construction (exacerbated by the Innisfail cyclone). When things slow down, an exodus of these workers will ensue. I would guess that between 4,000 and 7,000 residents of Cairns could be gone in the next 18 months.

All of this will alleviate the housing shortage here, the overcrowded conditions at Cairns Base Hospital, and other overloaded services.

And we'll have several hundred, mostly units, sitting empty.


Anonymous said...

As a small business owner, I agree that the recession has clearly struck Cairns. My customers talk about themselves, their family, and friends who are seeing their finances collapse under the weight of all the cost of living increases over the past two years. While many have contributed to their own troubles by succumbing to the "you can have everything" mantra in the media, the majority are just regular people who have little space in their budgets for $1.32/lt petrol, 9% interest rates, and food prices blasting into the stratosphere.

In my southern Cairns neighbourhood, for sale signs are also starting to spring up, as are the "cars for sale" sites.

This is going to get very ugly as it gathers steam.

Anonymous said...

The American economy is nose diving FAST into an ugly, deep recession. (Free market economics have shrunk the American middle classes and re-directed the money supply.) It is already impacting on our superannuation. (Check yours!!) With consumer spending right down in the USA, it is only a matter of time before China and India reduce output in their factories. This will then affect our "resources boom". I am predicting more interest rate rises, a steady rise in inflation, erosion of superannuation funds, a falling stock market and a housing bubble bust. You bet, it will impact on our area here.

Anonymous said...

There is a long wait before a Recession gets publicly acknowledged because it is defined retrospectively. The best evidence before the official criteria can be met is from anecdotal sources such as those you have described. I'd like to think it may take pressure off Cairns Base, but the other "discretionary" cash factor you've missed there is the dropping of private health cover that also occurs with harder economic times.