Today’s Profit Watch needs to look back in order to have a chance of seeing what’s ahead. That means I’ve got New York on my mind.
No, it’s not hot dogs on the sidewalk and leisurely strolls through Central Park.
It’s the declining property market over there. It’s a very auspicious time for this to be happening…
What’s the story and why do we care?
Property problems can show up in this key sector
The Financial Times reports1 that the average price in Manhattan dropped 7.5% from a year ago earlier in the last quarter of 2019.
Sales are dropping too and leaving properties sitting on the market for the longest time since 2011.
Of note is that this is happening while Wall Street is booming.
Our concern is not that a bunch of super rich aren’t splashing out for the latest apartment with all the trimmings.
It goes back to a story we’ve been following since January last year. That’s the rise of Central Park Tower.
Need a refresher? This is the tower a developer called Extell is building and due to open this year.
It’s destined to be the tallest residential tower in the world — with the most expensive price tag — US$4 billion.
In January 2019 there were already rumblings that there were too many luxury apartments coming to the market in New York.
That’s a problem for Extell — which, back then, needed to sell $500 million worth before December 2020 and pay down $300 million of his construction loan.
And this is the rub for us. Could the New York real estate start showing up as bad loans for the US banks?
This is the kind of thing few people are watching for right now. The problem may not even be confined to New York.
A former fund manager I follow from time to time over in the US linked to an article suggesting that Miami real estate is on the verge of collapse.
Why? Too many apartments have gone up, especially considering they cater to the rich. Prices are falling.
Foreign money is less inclined to enter the US in the age of Trump, as well.
You might recall that last year I pointed out that veteran US real estate player Sam Zell has pulled his chips out of the US property market.
Hmm. All this is not to say US stocks can’t keep rising. Only that there are stresses forming in US property.
This can show up in the banking system all too easily…and that’s when trouble can really start.
Interest rate cuts coming to juice stocks
It would also certainly give further credence to the idea that the Fed could cut rates further in 2020 to try and prop up leveraged speculators.
That could juice the equity market even more in the short-term.
For now, our playbook remains the same. Equity markets are likely to float on central bank stimulus.
Here in Australia, the market now has a 60% probability of the RBA cutting rates again when it meets in February. It was 38% at Christmas.
Neither recent data nor the bushfires across the country are helping the opposite case here. This is likely to bolster the ASX.
The open question if the cut happens is, how much pass through comes from the banks?
Contrary to common perception, the banks do not automatically have to move in line with the RBA.
But monetary policy loses power without pass through to the household sector.
Only January data releases for late last year can confirm which way things are likely to go here.
For now, keep one eye on the RBA — and one on New York and Miami.