Re: 2005 and Beyond:The BEAR is BACK ?
ghotib said:
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"Forced selling by lenders"? Lenders can't sell property until they foreclose; they don't own it. Which is not to say that overstretched owners aren't selling at panicky prices and accelerating the correction, but let's keep our panics straight.
Ghoti
During the economic recession in the 1980's, I had to do some force selling (foreclosures of residential and commercial properties) when I was working in a bank. It was terrible work because of the human emotions involved and I decided to find another job function soon after.
If borrowers missed repayments, the bank sent a reminder letter. If overdue repayments continue unpaid, phone calls were made. Some borrowers could not meet repayments due to reasons like loss of job, fall in business income or business failure. At that time, I would discuss the financial situation with the borrower and see if interest only payments for six months to a year might help. If the borrower cannot meet interest only payments, for three months, a Notice of Demand had to be issued. Then, the bank proceeded to foreclose on the property and appoint an agent to sell the property. The property is auctioned as a Mortgagee Sale.
During the recession in the early 1990's, I worked in Head Office and, luckily due to previous promotions, did not have to do the numerous forced mortgagee sales that ensued. Still, I saw the effects. Many houses were being sold at 20% to 30% less than the 1989 peak valuations held on file. Some borrowers, in their discussions with the bank, decide to do the selling themselves and avoid the mortgagee auction. This way, they might be able to get a better price. The price falls (for houses) during that recession were presented in a chart in the recent weekend Australian Fin. Review. Commercial and industrial properties fell even more, some by 50% of 1989 peak valuations held on file. Vacancy rate was high and vacant properties do not yield any income to offset loan repayments.
That was a severe recession. Unemployment rose to 12%. Many businesses (of various sizes) collapsed, leaving workers unemployed and creditors unpaid. The domino effect happened. Businesses that lost money from unpaid trade debtors found financial problems all of a sudden. Less income in the economy led to less spending. I saw a few friends, who lost their white collar jobs, leave to work overseas. They sold their houses at whatever price they could get, even if a capital loss was incurred. Retrenchments were by the thousands. I saw many work colleagues being retrenched. It was terrible. It encouraged me to save money and invest in the sharemarket (mainly ASX 100 companies) even more, to achieve financial freedom.
Forced selling by margin lenders for shares happened during the tech wreck a few years ago and could be happening yesterday and maybe today.
I am not suggesting panic. Good solid businesses either listed or unlisted, would survive any economic conditions. The stockmarket will continue on irregardless. Just that some businesses will close and other new businesses will take their place (as has happened before). During that process, some investors could lose money.
Just to say what I have seen before. This forum could be about sharing information. For readers who might not have operated through a recession before, is it not worthwhile to know in advance, what can happen in a recession? If it is not worthwhile, then just ignore my post. No problem.
A few businesses (ION - in administration, Collins Bookstore in administration, a construction company - was it Walker or Walter?) have already had difficulties recently (even looking around the suburbs, some businesses have closed, leaving vacant shops).
Profit downgrades (PBB, PMP, FPA, GUD, FMG, Repco, AMC) have been frequent during the past few weeks. PaperlinX announced a 20% profit downgrade after close of trading yesterday.
There are a few indications taking place.