Old structures creak in the wind. Leaves swirl about the streets as the gusts gather in intensity. There are a few spots of rain...but they're hardly discernible.
People go about their business, unperturbed. They have faith in the structures. They've been there so long. They will always be there.
When it comes to matters financial, faith usually only lasts a generation. Very rarely does belief in financial matters endure. And when it does, it's belief in a way of doing business.
We don't accumulate knowledge and wisdom. In fact, we all start from the beginning. We mostly choose to ignore the lessons passed on from those who have made mistakes before us. We'd prefer to make them anew.
If there is one belief that has endured in Australia beyond a generation it is a belief in Australian property. At our inaugural investment conference last month keynote speaker Satyajit Das said he doesn't get into conversations about property with Australians. It's like debating the existence of God. The inference? Das is a property atheist.
We've been talking about the Australian property slowdown/bust for years now. So has our mate Kris Sayce over at Money Morning. You, dear reader, sometimes get annoyed when we're not all singing from the same hymn sheet. One of us sees a long slowdown while another sees a quick-fire bust. You think we're hedging our bets.
We just see a different route to the same destination. Whatever way it happens - via a bust or a drawn-out slowdown - hindsight will prove Aussie property vintage 2012 (and for many years previously) to be a bad investment.
Another gust of wind just blew in the gathering storm. Genworth Financial, a US-listed mortgage insurer, has abandoned plans to list its Australian division on the ASX. Genworth is Australia's largest mortgage insurer. The US parent company hoped to raise $800 million by selling 40 per cent of the business to Aussie investors.
That no longer looks likely. As a result, Genworth's US shares promptly fell 20 per cent. The decline doesn't simply reflect the lost transfer of wealth from Aussie investors to the US parent. It also represents the fear of more losses to come.
For years the Aussie mortgage insurance business was a big cash generator for Genworth. According to Morgan Stanley analysts, over the past two years it generated average quarterly earnings of $50 million. However, in the first quarter of 2012 it expects to report a small loss.
That's some turnaround. And US investors don't like the fact they're stuck with the business.
Genworth Financial Stock Price Plummets
In a statement to the US stock exchange, Genworth said its decision to pull the proposed float was due to...
"...elevated loss experience in Australia as lenders accelerated the processing of later-stage delinquencies from prior years through to foreclosure and claim at a higher rate and severity than expected, particularly in coastal areas of Queensland that experienced natural catastrophes and regional economic slowdowns and among certain groups of small business owners and self-employed borrowers."
That's a long sentence. And a lot of information. Those who genuflect before sitting on the Australian property pew believe this is just a temporary slowdown. It's mostly related to the Queensland floods...and the abysmal Gold Coast property market.
Others (your editor included) believe this is yet another sign that Australian residential property has entered into a long bear market.
According to today's Financial Review, 'Lenders use mortgage insurance where customers borrow 80 per cent or more of a property's value, with Genworth covering any short fall between the loan value and the property sale price in the situation of a default.'
Given the lax lending standards in the run up to the credit crisis in 2008, a 20 per cent deposit seems quaint. The banks may have tightened their lending requirements after the GFC scare. But we would guess a large proportion of first time homeowners in the past five years or so would not have scraped together a deposit of more than 20 per cent.
So that means a lot of mortgage insurance. And now, with the China slowdown in the early stages, Australia's subprime borrowers are getting into trouble.
Of course there is the tragedy of the floods to take into account. Queensland's natural disasters last year took lives and turned many others upside down. When that happens and you have debt, it's a vice-like grip that's hard to wriggle free from.
But that can only be a small part of the problem. When you go from making roughly $50 million a quarter to incurring a loss, there's something else going on. That something else is a silent sub-prime crisis. Busts and slowdowns ALWAYS start at the periphery...before moving to the core.
for The Daily Reckoning Australia
From the Archives...
What the News on Bond Yields Say About the "Resolved" Eurozone Crisis
2012-04-13 - Eric Fry
The Art of Selling Stocks
2012-04-12 - Chris Mayer
Misguided Faith in an Economic Recovery
2012-04-11 - Joel Bowman
Beware the Big Government Debt Switcheroo
2012-04-10 - Dan Denning
The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 - Nick Hubble