The Housing Bubble

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The Toronto Sun reports from Canada. “Last year’s comeback for Canada’s housing market will carry through early 2010 but subdued activity is on the horizon as higher prices and interest rates make property less affordable, Scotia Economics says. The first half of 2010 will cap off a real estate decade fit for the record books, Scotiabank said. The last 10 years has seen the largest real price appreciation in at least 50 years and new home construction was at its strongest since the 1970s during the period. Canada leads the pack of developed countries in terms of real estate coming out of the recession with inflation-adjusted home prices in the fourth quarter up 19% year-over-year compared with a 12% rise in the third quarter. Australia maintained the second place position reporting a 12% annual increase in real price gains during the fourth quarter.”

“‘We’ve come to the end of the real estate boom globally,’ said Benjamin Tal, a senior economist and real estate watcher at CIBC World Markets.”

The Vancouver Sun in Canada. “A pair of surveys on housing prices released Wednesday show that many Canadians are worried about rising prices and interest rates, but that is not stopping many from entering the housing market sooner, or taking on more debt than they want to. ‘Housing prices have risen 89 per cent since 2002 — vastly outpacing family income gains,’ Sal Guatieri, senior economist at BMO Capital Markets said.”

“According to a new BMO survey, 71 per cent of current and future homeowners think house prices are too high and 33 per cent complained they have lost sleep due to the stress of trying to buy a new home. However, it was exactly this feeling that housing prices might spiral out of reach that has led first-time homebuyers to feel pressure to buy homes sooner. ‘There’s definitely a sense of urgency among home buyers,’ Lynne Kilpatrick, senior VPof Personal Banking at BMO said.”

From USA Today. “In this former Chinese fishing village where skyscrapers are springing up almost as quickly as the population of 9 million is growing, it’s not hard to find people who think real estate prices will keep rising, as well. Zhao Jin is a believer. In late 2008…he bought a modest three-bedroom apartment on the outskirts of Shenzhen. The property’s value has soared 63%, prompting an avalanche of calls from property agents asking whether he wants to sell (the answer is no).”

“‘Property prices will definitely go up more,’ says Zhao. ‘I’m an example of why the demand for real estate is there. People hear their country boy did good and come to seek their own fortunes.’”

“In Shanghai’s older Puxi area, at the Baccarat , most of the buyers are wealthy people from Hong Kong and Taiwan. The apartments, which range from about 900 to 1,600 square feet, cost $1.2 million to $3.5 million. ‘People made a lot of money from stocks in 2006 and 2007, and came and invested’ in the building, says Xie Jun Ling, a Shanghai real estate agent, noting that these investors typically already have three to four homes. ‘The rental market is not that great, so they buy and hold it.’”

The Strait Times on Thailand. “An executive condominium (EC) site in Sengkang has drawn a whopping 11 bids, with the winning offer trumping analysts’ expectations by a fair margin. Frasers Centrepoint’s Opal Star and Lum Chang Building Contractors valuation of the asset came to $193.28 million, or $315 per sq ft (psf) of gross floor area. The units are not expected to be cheap, given that the top bid is the highest received for an EC site since land was made available for sale from this source in 1997, property experts said.”

“‘This site is well located, and in view of the tight supply and great demand, we are confident that it will be an attractive development especially to home buyers who have been recently priced out of the market,’ a spokesman said.”

From Phuket Wan in Thailand. “A dismal picture of the property development scene on Phuket and Samui emerges from the latest figures provided by the Government House Bank, which specialises in loans for housing. Given low demand, there appears to be an oversupply of both villas and condominiums. Phuket and Samui are experiencing an oversupply that could take years to whittle down. Three villas were sold on Samui in Q3 of 2009, the report says, while results have been equally stagnant on Phuket.”

“On Phuket, the report says, 13 villa projects were offering discounts of between 10 and 20 percent. Given the outlook, it’s little wonder that upmarket villa and condo estates have converted to resorts to retain cash flow and a positive future.”

From Scoop in New Zealand. “New Zealand home loan affordability was steady in February from January as house prices and interest rates were broadly unchanged, interest.co.nz’s Home Loan Affordability report shows. ‘There is a Mexican Standoff in the housing market where some buyers are holding off until after the May 20 Budget and sellers are reluctant to accept price reductions after the rebound in late 2009,’ said Editor Bernard Hickey. ‘However, the pressure is mounting for price falls as swathes of new listings have hit the market in February and March and many buyers are preparing for higher variable mortgage rates later in 2010,’ Hickey said.”

“The median house price as measured by REINZ was steady in February at NZ$350,000, just off a record high NZ$360,000 hit in December and 7.7% above its January 2009 trough of NZ$325,000.”

The Press in New Zealand. “I was wandering around Christchurch’s four avenues looking at all the leaky apartments and townhouses. Once you know the telltale signs of what to watch out for, they leap out at you everywhere. It seems no-one wants to talk much about New Zealand’s leaky buildings scandal - not the owners, architects and builders, council or government.”

“But walk around the streets, and it is staring you in the face. A few are also realising it could be New Zealand’s greatest single financial disaster. Auckland pilot Paul Lyons is telling me about an investment unit he owns in a four-storey block in Bealey Ave. He says many of the block’s residents are elderly or still struggling to get their heads around what might be the worst case for their own building. Then there are those with investment properties who fear that if they go public and potential tenants take fright, the empty units could quickly bankrupt them.”

“However, Lyons is fuming at what the inspections have been uncovering. The 42 apartments were completed in 2000. Lyons says he bought his rental unit in 2006 after careful checks. ‘We had an engineering report done. The property had a proper Code of Compliance certificate. All the boxes had been ticked,’ he says.”

The Sydney Morning Herald in Australia. “Interest rates may be rising, but that’s not stopping people from dishing out more than $1 million for prestige property, a leading mortgage broker says. Loan Market says its brokers have seen a 30 per cent increase from people seeking loans in excess of $800,000 in the past year. While first home buyers are finding it harder to get into the market, partly because of tougher bank lending criteria, those already on the property ladder are not as affected.”

‘This is because upgraders have large amounts of equity in their homes and have a track record paying off a mortgage. As a result, Loan Market chief operating officer Dean Rushton said they were viewed more favourably by lenders. Some experts predict median house prices in most capital cities will double by the end of the decade due to population growth.”

“‘Those making a move now on a prestige property could certainly realise significant gains if those sorts of predictions eventuate,’ Mr Rushton said.”

“It’s official: 60 per cent of investors believe Australia has a property bubble. A confluence of housing shortages, low interest rates, speculative fervour and last year’s move by the Rudd Government to relax foreign ownership rules on real estate have turbo-charged house prices.”

“When asked if it was a good time to buy an investment property, 67 per cent agreed that it was because the supply shortage would support rental and price yields. Another 21 per cent thought prices would stagnate and only 12 per cent believed that prices would fall.”

“On the future of the boom, 32 per cent could see it running another year, 44 per cent for two or more years, and 7 per cent forever.”

Money Morning Australia. “If you’re one of the many Money Morning readers suffering from property and housing withdrawal symptoms then don’t worry, because this morning we’re back on the bandwagon. And if you’re one of the many Money Morning readers who’s glad we’ve stopped banging the housing drum then all I’ve got to say is, ‘Sorry, we’ll have a non property article for you tomorrow.’”

“Since we last stuck the boot into property a couple of weeks ago there have been more ridiculous headlines from the property spruikers than we could eat. We had intended on keeping a record of them, but we figured it was a waste of time as it’s basically the same story being recycled every day: ‘Sydney property prices set to double’ – News.com.au.”

“There is no doubt at all, that the concept of risk in the Australian property market is completely and utterly absent. Market signals that should indicate to borrowers the level of risk have been manipulated to such an extent that what is high risk now has the appearance of low risk. And that’s the core of the problem. Strip away all the opinions, statistics and indices and you’re left with the simple and unarguable fact that the perceived risk of housing has been eliminated from the market.”

“Just at the time when it’s at its highest risk – it’s all upside and no downside apparently.”

“To our way of thinking it’s not a chronic housing shortage that’s pushing prices up, it’s the availability of easy credit and no comprehension of risk by buyers of taking out a recourse loan – although perhaps the golden years of easy credit could be coming to an end, we’ll see. So, as I say, imagine that all the things the property spruikers claim to be true aren’t true. What will happen then? Well, is it possible we’ll experience what the Yanks are going through with their housing bubble and crash?”

Fin 24 on South Africa. “After being banished to the financial product wilderness, the 100% homeloan is making a guarded comeback. Absa this week announced that people earning less than R15 142 a month can now apply for loans of up to 110% of the value of the property.”

“The return of these loans has been met with a huge demand, with statistics from the mortgage originator ooba showing that by December last year, 44% of homeloan applications were for 100% mortgages. However, banks are not scrambling to grant these loans and approval rates have been fairly limited - and with half of the approved applications, the banks still required some kind of deposit.”

“Local banks - like many banks worldwide - got burnt by 100% loans during the credit crunch. While the easy availability of these loans to people who could not afford deposits helped inflate property booms, many home owners were left devastated after the crash. The value of their properties was worth less than their 100% home loans, which will run up huge interest charges during the course of the loans. Many defaulted on their loans.”

“While Adrian Goslett, CEO of RE/MAX of Southern Africa, isn’t in favour of a return ‘to the crazy years when we had to fight off the banks as opposed to fighting with banks,’ he does think 100% home loans have a role to play.”

“Many South Africans simply do not have 10% or more to deposit just to initiate the investment. And if you want to buy a property of more than R2m, some banks will require a 20% deposit while for vacant land, most banks ask 40%. The advice to prospective home owners may be to wait, build up some capital first and only then to enter the market, said Goslett. ‘The problem is the opportunity exists now. Property prices and interest rates are at a low and won’t remain there indefinitely,’ he said.”

From Finfacts Ireland. “The Irish Independent reports that Bundesbank boss Axel Weber said last night that the German authorities could not let Hypo Real Estate Bank fail when it ran into difficulties with its Dublin-based subsidiary Depfa. Speaking at the Institute of European Affairs, Mr Weber said we future banking regulations must be changed to allow some banks to fail.”

“‘We need a regime where banks can fail in an orderly fashion and this is where the idea of a ‘living will’ comes in.’ He added that there was a risk that the banking problems and the shortage of credit would put a break on recovery.”

“The Bundesbank president held up the stable German property market as an example, noting that home buyers typically have to have 30pc to 40pc of the cost of the house in cash. ‘Both the idea of 100pc mortgages or even 100pc mortgages is inconceivable,’ he said.”

“Earlier, in a speech in Trinity College, Mr Weber said new bank regulations need to address the issue of moral hazard or another crisis will happen. Mr Weber, who is widely tipped to become the next head of the European Central Bank and is now busy helping to draft a new regulatory framework for world banks, said the basic answer must be to increase the amount of money lenders have to keep in reserve for emergencies, known as the Tier 1 capital ratio. The Tier 1 capital ratio should be highest for banks which have a systemic importance and are too big to fail, Mr Weber said.”

From TIME. “Donald Trump has never been accused of subtlety. So there is nothing retiring about the celebrity real-estate magnate’s venture into Panama. His 70-floor sail-shaped Trump Ocean Club, under construction in Panama City’s exclusive Punta Pacifica district, will be the largest and most expensive building ever built south of the Rio Grande. ‘Nothing like this has ever been attempted in Latin America,’says head developer Roger Khafif. ‘When you think of Sydney you think of the Opera House, when think of Paris you think of the Eiffel Tower, and when you think of Panama, you are going to think of this building.’”

“The 1,080-unit building’s construction has now reached the 62nd floor and is scheduled to be inaugurated by the end of the year, complete with luxury condos, a five-star hotel, six restaurants, a Las Vegas-style casino and a private yacht club on the nearby Isla Saboga. The project is 10-to-20 times more expensive than that of any other skyscraper in Panama City. It will be 20% bigger than the AOL-Time Warner building in New York City, Khafif says.”

“More expensive than Miami real estate and priced three-to-eight times higher than property in the rest of the Panamanian market, the Trump Ocean Club is partially financed by a $230 million bond offering from Bear Sterns. That bond is now being handled by JP Morgan following the collapse of Bear Sterns in the 2008 global financial crisis. ‘Without Trump, we would have lost our shirt,’Khafif admits.”

“Since then, more than 2,000 construction workers add a new floor each week, silencing many of the earlier skeptics who claimed the project would never get off the ground.”

“But some doubts remain. Eric Jackson, owner of the English-language Panama News thinks that many of buyers in the Trump Ocean Club, which claims it is 90% sold, could be speculators rather than future tenants. ‘You go around Panama City and look at these new ’sold out’ luxury towers at about 8 p.m. and there are hardly any lights on in them,’ Jackson says. Samuel Taliaferro of the PrimaPanama investment blog agrees. ‘I have received emails from a number of speculators who never intended on taking possession.’”

“Khafif says Trump’s name will help the country’s image makeover. ‘Before it was Panama and Noriega,’ he explains. ‘But now it will be Panama and Trump.’ Or at least he hopes so. ‘We bet $400 million on it,’ Khafif says.”

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