Signs of Trouble in Brisbane: Forerunner for the Nation?

Comment on RogerMontgomery.com on 3 November 2017 at Money News 31.10.2017:

I was at a small suburban shopping centre 8 kms south of Brisbane CBD that has 5 or so restaurants, and 2 fish and chips takeaways as well as several chain takeaways, at 7.15 last Thursday picking up some takeout… Two cars in the 30-odd capacity car park in front of that particular restaurant (and a normally busy fish and chips + another restaurant)!! Yes, there was a storm around but nothing out of the ordinary for Brissie this time of year – I typically hate parking at this centre because it’s pokey and difficult to find a spot – at least it used to be!

Been going to the restaurant for 15 years so know the owner well. He was complaining bitterly about business – said last year was bad, so when this year started better it was a relief, but it has dropped off badly through the year. (Seriously, it almost felt like tumble weeds would blow through.) Restauranteur said that his supplier has said that his business is down across the board except for the outer areas, and put it squarely at the foot of over-leveraged middle to upper income households.

Saw McKibbin talk the other night and he made the point that if the RBA was concerned about leverage/housing bubble then they should not delay rate increases to address this and as a sort of stress test. It’s what I have been thinking that they have actually been doing already with pushing through repricing of interest only borrowing.

I am the first to admit that one observation does not at all suggest a trend. But the restauranteur did supply information suggestive of a worsening trend. And, even if this particular night were an aberration, it was truly alarming compared with what I have witness at this centre over the years. I’ve seen nothing even remotely like this previously.

I was shocked because 1) data suggests that employment is improving in the Brisbane area with the (perhaps temporary) revival in resource industry prospects, and 2) even though the oversupply of apartments would create weakness in that segment of the market and that would cause some spill-over effects to the general property market, I thought the fact that Brisbane prices have not run anywhere near as hard as Sydney and Melbourne in the last decade would protect it somewhat from a sharp down turn.

These observations are leading to me to reconsider that view and I was wondering whether you have had any feedback on the general economy of this region?

As much as you hear anecdotes of politicians visiting cities and noticing too many cranes, suggestive of an economy running too hot, for me this portends the next phase is here…

(with respect to John Fraser’s comments late Friday, absolutely politicians have let Australians down in their disinterest in economic and social reform – but senior bureaucrats have sat by and done little to discourage massive household leverage and the blowing of a serious housing bubble)

Related comment RogerMontgomery.com on 8 April 2018 at ABC Nightlife:

I just want to pick up on the discussion about retail. What [is said in the article] about the global access to specialist retailers is spot on. What’s more, and actually I am surprised that this has not really featured in discussion I have heard on the topic, I think the impacts on general retail are much deeper than many appreciate.

I noticed several years ago the emergence of items on Ebay that seemed so incredibly cheap, even after postage costs, that it was trivial to “have a go” and purchase accepting that it probably was too good to be true. (In other words, the monetary loss was so trivial it was worth the risk that the item never arrived at all or was completely unusable.) Low and behold, the many products that I have bought in this time have turned up and nearly all have been at least as good as I would have purchased through mall or other brick and mortar retailers.

For our household this has ramped up in the last 6 months with the “discovery” of Wish (which incidentally is a major sponsor of the LA Lakers). For example, my wife is “known” at her workplace for her shoe collection. In fact, a few weeks back a sharp-dressing and well-informed male colleague held the lift door open to admire her shoes, enquiring “are those Christian Louboutin?” (Here in lies perhaps one weakness of this model – my wife is so discrete about her “thriftiness” that she dare not admit to anyone other than her closest friends about her new-found favourite shopping experience 🙂 ) All of her shoes she has purchased for less than $20 inclusive of postage – and she has even been fully reimbursed for very minor defects (which in no way lessen their appearance or wearability/longevity) on a couple of them. She has also purchased clothing, jewellery and lingerie for what can only be described as ludicrously cheap prices, sometimes free with postage costs of a few dollars! (which translates to incredible value seeing as they have all arrived and have not disappointed in terms of quality).

I suspect that the impacts of this fast-moving development is the reason why after years of whinging Gerry Harvey (“I don’t think this internet thingy is going to be much at all but I guess we have to do something”) looks like he is going to get his tax on all imported goods!

But the truth is that, while a $5 tax will double the price on some of these goods, when retailers have to pay mall owners tens of thousands of dollars each month in rent to have the space to retail what can be purchased directly from China for as little as 10-20% of the price, I doubt it will have a noticeable or enduring impact. (But it will annoy the general populace – and one has to wonder just how much flack is Mr Turnbull prepared to take on taxes for the business community… then again I strongly suspect many large businesses are “over-employing” as a down-payment on those tax cuts, eg. my local Bunnings!)

And these developments, I believe, is why Mr Lowey is pretty keen to get his sale off as soon as possible. Certainly the strains of this retail competition in combination with an over-leveraged “consumer” (afterall we aren’t people any more) are obvious to anybody walking around my local Westfield which is one of the largest in Brisbane! Yet another shop closure this past week, making around 15 closed with 13 or so closed since end of January. (It’s been rather humorous to watch their creativity at disguising just how many spaces are now vacant.) But on a serious note, it surely has not escaped the attention of most people employed in the centre and unfortunately I have seen nothing to dissuade me of my prediction of 4 months ago (on this site) that my region is heading toward recession, if not already in recession, as a consequence of over-indebtedness (due mostly to real estate speculation). What’s more I think it likely a forerunner of what will be seen throughout the country as particularly Sydney and Melbourne begin to digest the consequences of the extreme run-up in property prices over recent years from already lofty levels.

With an annotation on 10 April 2018:

Make that two more closures this past week – just noticed another store with boarding, this time covered in advertising for the neighbouring store, but enquiries within revealed that store is not expanding into the vacant space (so an attempt to reduce the proliferation of the black boarding reading “another exciting retailer opening here soon”) … retailers remaining in the centre – many with signs indicating major discounting – must be negotiating very hard indeed for rent reductions …

Comment on 26 September 2018 at Doing it Tough in Aussie Retail:

That [a recession is where we are] heading is now my base case…

And it is living in Brisbane – intuitively not the first city that one would imagine to show these stresses as house prices have risen much more modestly here over the last 6 years – but perhaps on deeper reflection that may actually be the reason – that has provided me with this insight…

I wrote about some observations from around Brisbane last November in the comments section of a post [and] it would be helpful if I updated you guys on my observations… At that time I noted an eerily empty car park in a suburban shopping centre with a number of restaurants on a Thursday evening, followed with the details of a chat with that restaurateur who described how poor business had gotten over the 2 years leading to that nadir (especially in the inner and middle rings of Brisbane), vacancies in that same centre, and then the closing of a large café in the very large Westfield centre that I frequent just at the beginning of the pre-Christmas period… Then I said in as much as Paul Keating famously worried for what was coming after seeing (too) many cranes in Australian cities, I feared what this portended…

Well since then I have seen nothing that assuages my concerns… More spaces in the smaller centre have become vacant and none have been leased… The high proportion of vacancies in small centres and shopping strips has been recognised and discussed in various newspaper articles in Brisbane… As has been the closing of large numbers of restaurants… From speaking with several restaurateurs a common story has been takings down by around 30% from 5 or so years ago, while costs have continued to increase (often by over 10% in the last year as rents continue to increase)… Under these conditions many have not increased menu prices for 5 years… Of course restaurants are under similar disruptive pressures to retailers…

The most marked changes that I have observed, however, are in the large Westfield Centre (one of the 3 largest in Brisbane)… Over a 1-2 week period at the end of January/start of February around 10 shops closed suddenly… I spoke with employees at a Jewellery store pasted in sales signs and they spoke of being frightened at how quickly it was happening and how they did not know what was happening to their own store… That store closed a few weeks later…

Since the café closed last November, I have counted a total of another 29 businesses that have closed in this centre (that does not include store relocations, nor does it included small temporary stores or kiosks in the aisles of the shopping centre which are much harder to keep track of but are clearly much fewer in number than several years ago)…

Most vacant spaces remained boarded up for months and some spaces – including that original café that closed – have remained vacant 6 months or more… And some businesses that opened in a space have then closed after trading for only a few months…

In total I have counted 11 stores that have opened in vacant spaces, but that count stood at only 4 until mid-June, suggesting that the impending end of financial year may have caused a flurry of activity to acquire new tenants…

Clearly many spaces have been boarded up or left abandoned at any one time over the last 6 months, and this has not gone unnoticed by shoppers and especially those working in the centre…

In the mean time, the centre has increased its parking fees to customers by around 50%, which has not been mentioned in the local press, but one has to wonder whether that is going to further deter “consumers” from coming and “experiencing” the centre…

Also cost-cutting measures being undertaken may not be conducive to enhancing that experience – for example it is clear that the centre has became less well-lit in recent months…

This centre is a little unique in that it is 50% owned by a REIT in which it is the only asset, so I was keen to look at its financial year results… The only suggestion of deterioration in the results was a decrease in property income of 1.6%, but apparently the leased rate increased from 99% to 99.4%, and I could find no mention of the increase to parking fees… What I did also notice was that David Jones will only be re-leasing one of the two floors it currently leases from 2019, and the report suggested that this will have an impact on reporting for two years… so it will be difficult to ascertain the quality of earnings on the asset for a further 24 months…

The final observation that I will make is that a number of the business closures have been in the food court and none of these have been re-tenanted… where there were kiosks they were removed, so what was once rather tight seating is now very spacious… I would suggest that the apparent lack of uptake of shop vacancies in the food court is a reflection of a lack of confidence, even with reduced competition, and that would be partly related to the lower level of confidence among workers at businesses in the centre who are fearful of losing their own jobs and are cutting back on expenses by bringing their own lunches, etc….

Of course those aiming to downplay the pressure on households – from overleverage, improved bank lending standards (back towards prudent, sustainable practices), low wages growth and rising interest rates – apparently wishing not to dent”confidence” among “consumers” – have some factors available to muddy the waters as these industries are currently under disruption… But I think it is clear that what is occurring goes well beyond that…

It remains unclear whether this period will ultimately be recorded as a recession… I am aware that most business people in Brisbane consider that they went through a recession in the early 2000s – interesting since it was ended by the arrival of the housing bubble – that was not recorded as such… However, even though the level of immigration and the Volume of resources exports may reduce the likelihood of an official recession being recorded, I can’t help but think that, once these stresses to households flow through to other cities as their house prices don’t just rise slowly (as in the Brisbane experience) but fall, these mitigants will be overwhelmed and we will indeed record an official recession.

And, just as the lived experience of the majority of Australians is not as good as the GDP statistics alone would suggest, GDP will not accurately reflect the depth of the recession experienced by Australians.

The real shame if it is that it is now unavoidable – our economy was pushed to extremes in certain areas that have made it unsustainable – and nobody in a position of power has had the courage to do anything about it (remember Joe suddenly realising negative gearing wasn’t a good idea – when he had quit as Treasurer and was leaving parliament?)… The GFC provided the greatest ever “cover” in history to deflate a bubble, and that’s what was happening, until the RBA began listening to those that said “we need a little more confidence in our economy”… even when they, themselves, were warning of the risks of providing that confidence through unsustainable leverage… Now the RBA seems to be in search of another “crisis” on which to pin another bout of arse-covering – like a trade war – but I suspect it is all too late and the system has become entirely unstable…

In all honesty, there have been times when over the last year I have walked around feeling like the guy in “Margin Call” when he’s driving around and looking at all of the unsuspecting people hurrying about their lives…

Having gone so long without tough economic times, this will be hard-felt by many… Already a loving father of one of the restaurateurs that I spoke of above is very concerned about the mental health of his son, suffering depression… he hopes his son manages to sell his restaurant (in one of the most affluent suburbs of Brisbane)…

I can understand those in positions of power wanting to avoid recession – but doing so is always the best outcome, also, for those in power – and it really can’t be said to be for the betterment of our country if the tough microeconomic reforms required are not undertaken in the breathing space given by anti-recession spending… This was the case in our post-GFC period due a lack of genuine political-economic leadership and I fear Australians will now pay a heavy price…

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