The Housing Bubble

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A report from China Daily. “How much should two chicken pancakes cost? For Zhao Rui, a 28-year-old company executive in Beijing, they cost him 400,000 yuan when he missed the chance to buy a home at a lower price during his lunchtime. In early March, Zhao settled on a two-bedroom apartment in Beijing’s Tongzhou district. Except for the 18,000 yuan per square meter price, he was quite satisfied with it. So, before finally handing over the cash, Zhao and his girlfriend decided to have lunch. But when they returned to the sales office and were ready to pay, they were told that the apartments had sold out and they would have to wait another three weeks for the next building to become available.”

“A couple of weeks later, Zhao, fearing he could never afford such a home if he continued to hesitate, paid 400,000 yuan more for a similar sized apartment in the same community. Quite a number of projects in Beijing and Shanghai were sold out on their first day of trading. In Hangzhou, more than 4,000 people struggled for 224 apartments with an average price of 18,000 yuan per sq m last weekend, creating chaos and forcing the developer to call the police.”

“According to a report from the central bank, investment-oriented home purchases accounted for 23.1 percent in the first quarter of this year, reaching a record high in the past two years. The report also shows 14.2 percent of residents have more than one apartment. ‘With a spare 400,000 to 500,000 yuan at hand, could you find a better investment channel than buying properties?’ said Li Yan, a businessman working in Wenzhou and Beijing.”

“For people on average incomes in Beijing and Shanghai, a regular two-bedroom apartment may cost them 20 to 30 years’ income, far higher than the international average of six years. In a healthy market, landlords can reach the break-even point after receiving rents for 16 to 25 years. But in Beijing and Shanghai, they need 36 to 42 years to get the cost back, according to China Index Academy, a real estate research institute. ‘Buying an apartment, or more accurately, snagging a home at the moment, is no different from putting a time bomb beside you,’said Wang Liang, a college teacher who gives up his previous plan to buy a home in Beijing.”

From the China Post. “China’s central bank pledged to immediately implement new lending rules to cool real-estate speculation. China’s Cabinet, the State Council, announced higher mortgage rates and down-payment ratios for second homes on April 15 after property prices jumped by a record in March.”

“Investors ‘don’t realize how strong and resolute the political will is among top leaders to curb price gains,’ said Li Daokui, a newly appointed academic adviser to the monetary policy committee, on Central Television. The market is having its ‘last madness’ and speculation may dissipate in a year or 18 months on extra action by local authorities and an increased supply of low-price, so-called policy homes, Li said.”

“Under the new rules, down payments for second homes must be at least 50 percent, up from 40 percent, and mortgage rates can’t be lower than 110 percent of benchmark rates, the State Council said. Banks should also raise down payment ratios and rates for third homes ‘by a broad margin,’ it said.”

From CCTV. “The new regulations have astonished industry insiders, who say they will greatly help to curb surging house prices in China. ‘I think it’s an unprecedented move. It focuses on speculation, which is the key point, and the major reason behind surging prices. The move to postpone loans for a third apartment is to curb speculation.’ Ma Guangyuan, a Ph.D in economy, remarked.”

From Bloomberg. “‘These are the most draconian measures on the property market in history,’ Jun Ma, Deutsche Bank AG’s Greater China chief economist, said in a note to clients. Chinese press reports point to ‘panic selling’ by investors who own more than one home in Shanghai, Beijing and Shenzhen, he said.”

“Investors should ‘avoid the property, banking, steel and construction material industries,’ Morgan Stanley Asia Ltd.’s analysts Jerry Lou and Allen Gui wrote in a research note dated today. ‘The harsh tone in Saturday’s statement suggests that containing property price is now the top item on Beijing’s agenda.’”

“The country is ‘on a treadmill to hell,’ according to hedge fund manager James Chanos, who said in January the nation is Dubai times a thousand. ‘They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.’”

From The Age in Australia. “Georgina and Ronald Rae bought their first home in 1955 for $6900. It was a three-bedroom weatherboard on a dirt road in Box Hill North, with a septic tank on the back porch. It took them six years to save the $1510 deposit. They raised the rest with a serviceman’s loan. The Raes, who went on to have eight children, took 37 years to pay off their mortgage - starting out with monthly repayments of $20.72.”

“In December last year, their grandson, Joel Anderson, 31, bought his first home, a unit in Richmond, for $436,000. He has borrowed 95 per cent of the total from the bank ($414,200) and is receiving another $40,000 from his parents to pay for the renovations. His monthly repayments will be about $2425. ‘I think houses have become way too expensive. It’s way out of proportion, isn’t it?’ says Mrs Rae. ‘It’s crazy.”’

“Joel Anderson’s experience is typical of many young homebuyers. He tried to buy seriously for about a year: looking on the internet for an hour or more every night, going to inspections, getting outbid at auctions, and finally enlisting the help of buyer advocate Frank Valentic. House shopping was a ‘nightmare’, says the sales manager, who works in the family spa business and earns $60,000 a year. The market was ‘out of control.’”

“Eventually, he settled on a run-down unit in Richmond. More than 60 per cent of his weekly income now goes towards mortgage payments. His girlfriend will help meet the payments when they move in.”

“In 1955, the Raes’ house cost about twice Mr Rae’s annual income as a milkman. At that time people were typically able to afford a decent house on a single income, says Terry Burke, professor of housing studies at Swinburne University. These days, a family like the Raes with one income and eight children would struggle to buy a house anywhere in Victoria, he says.”

“Joel Anderson, who earns a typical salary and bought for less than the Melbourne median price of $524,500, paid more than seven times his yearly income for the unit. As house ownership slips further and further from reach, debt is ballooning. ”People are being seduced into a lifestyle built around debt,’ Professor Burke says. ‘Some of us would think that is madness, and the Americans have illustrated that.”’

“At some point soon, he warns, the difference between income and house prices will become untenable. ‘We must be close,’ he says.”

The Sydney Morning Herald in Australia. “With house prices across the nation showing double-digit gains over the past year it may not be a coincidence that Channel Nine is now reviving The Block, its 2003 property show that epitomised Australia’s exuberance for bricks and mortar during the previous boom. The seeds for the show’s revival may have been sown late last year when one of the Bondi units sold off as part of the previous show’s grand finale recouped its purchase price.”

“It took six years, but nobody is looking in the rearview mirror now. Australians have decided the global financial crisis was ’so last decade,’ and the property market is providing a barometer of just how much people are prepared to punt on good times ahead. Investment property loans rose 22 per cent to a record $289 billion in the 12 months to January. On the weekend before Easter, NSW had the second-biggest house auction day in its history.”

“The Reserve Bank governor, Glenn Stevens, took the unusual step last month of appearing on breakfast television to caution against speculating on property. ‘I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. You know it isn’t going to be that easy,’ he told Seven’s Sunrise program.”

“Mortgage refinancing accounted for more than one in three new mortgages last month, with a growing number of these borrowers effectively using the family home as an ATM once again. The money was being withdrawn against mortgages to acquire shares, ride the strong Australian dollar to an overseas holiday destination, or trade in the family car, with car sales hitting a record high that month. Five of the 10 brands that recorded the biggest sales growth in the first three months of this year were Lamborghini, Ferrari, Porsche, Audi and Jaguar.”

From Your Home in Canada. “Jimmy Millis and his fiancée Nicoletta Bisoukis spent more than a year looking for their first home. During that time, the couple visited dozens of properties in a journey that many potential buyers in the Greater Toronto Area can relate to. The first property they bid on last summer in Woodbridge was a four bedroom for $480,000. It ended up selling for $504,000. The pattern would repeat itself six more times — with the couple on the losing end of the bid. But while the journey was ultimately worth it — they did finally land their dream home in King City.”

“From one of the slowest markets in history at the beginning of last year, the pendulum has swung resoundingly back to a seller’s market. ‘We thought we would be buying in one of the best buyer’s markets and we ended up being thrown into these crazy bidding wars,’ says Bisoukis.”

“‘The sudden rally in Canada’s residential real estate market is surprising and troubling,’ says Desjardins Bank in a recent economic study. ‘However, this is not a bubble yet.’”

“‘We kept thinking prices would come down, but it kept going up and, finally, we had to jump in with both feet. We were getting married this year and we had to get along with our lives,’ says Millis.”

“On their seventh try, Millis says he got lucky. They bid more than half a million dollars on the property, beating out two other bidders. Bisoukis was actually in New York when Millis made the bid. ‘He said we would lose it if we didn’t bid right away,’ she recalls. Returning from New York later in the week she had ‘about 20 minutes’ after seeing the home for the first time to up their offer. Their new home is a 1,900-square-foot, 40-year-old renovated bungalow that they moved into last month.”

“‘It’s not a palace. But it’s our palace,’ says Millis.”

From CBC News in Canada. “Vancouver teacher Petr Pospisil and his girlfriend, Ola Rogula, put together ‘Crack Shack or Mansion,’ where players look at photos of a run-down house and guess whether it’s a hot property or a drug den. Pospisil got the idea after watching the average price of a single-detached house in Metro Vancouver creep toward $1 million, then looking at home listings online to see what that money buys.”

“‘If you didn’t know they were in Vancouver, you could think they were in Detroit or Chicago,’ he said. ‘They were run-down places….I was studying the States a lot and what happened with their real estate market. Just watching what was happening in Vancouver was a little bit scary.’”

“‘I thought about taking the heat off Vancouver a little bit and showing some of the other bubble areas in the world, like Australia,’ Pospisil said. ‘But I did a bit of searching and really found that Vancouver’s the most extreme example. A million dollars even in Australia will buy you a pretty nice place.’”

The Canadian Press. “Real estate agent Marcus Caporicci calls it ‘creative’ financing and expects to see more of it when tighter qualifying rules for mortgages take effect on Monday. The new rules are to discourage homeowners from taking out mortgages they might not be able to afford as interest rates start to rise and return to more normal levels. ‘Creative financing will become increasingly popular,’ Caporicci said from London, Ont.”

“Federal Finance Minister Jim Flaherty announced the new mortgage rules in February amid warnings that some homebuyers were taking on too much mortgage debt as house prices soared across the country and could be in trouble if rates rose. ‘There is no evidence of a housing bubble, but we’re taking prudent steps today to prevent one,’ he told a news conference in Otttawa at the time.”

“Under the new rules, the federal government will: -Require all homeowners meet the borrowing standards for a five-year fixed-rate loan even if they choose variable or shorter-term loans. -Lower the maximum Canadians can withdraw when refinancing their mortgages to 90 per cent from 95 per cent of the value of their home. -Require a minimum 20 per cent down payment to qualify for CHHC insurance for non-owner-occupied properties acquired as an investment - a move aimed at cooling real estate speculation.”

“Flaherty did not change the rules affecting the five per cent minimum down payment or the 35-year maximum amortization period for a mortgage. Almost all of Caporicci’s clients - he estimates 90 to 95 per cent -have been putting down the minimum five per cent down payment, often with the help of either their families or their own credit lines. ‘It’s hard enough for people to get their hands on five per cent down,’ he said, noting home buyers will continue with their creativity to get the money they need to enter the housing market.”

“Homebuyers also have been basing their decisions on a ‘buy now’ strategy to avoid the coming changes, Caporicci said.”

“Peter Kinch, a mortgage and housing expert, agreed that the new mortgage rules effect only a minority of buyers in each case. As a result, he expects the incoming rules will have minimal effect on Canadian housing prices. ‘In the big picture, it will impact those who are in the fringe and those who potentially could have gotten into trouble, but, at the end of the day, it’s not going to have a huge impact of cooling off housing prices,’ he told CTV News Channel on Monday morning. ‘I don’t think we’re going to see a major impact on housing prices at all.’”

The Global Post on Costa Rica. “A new crop of high-end shops is sprouting up in a leafy San Jose suburb, signaling a new trend in luxury shopping here, and raising brows about the habits of Costa Rica’s emerging ‘nouveau riche. Jewels by Tiffany, threads by Armani and shoes by Ferragamo are among the posh apparel that will adorn store windows. Granted, many of the Multiplaza’s prospective customers are foreigners.”

“Never before have riches in Costa Rica been so concentrated. The State of the Nation found that from the mid-1980s to the present Costa Rica’s wealthiest segment has nearly doubled its wealth, while other sectors have risen much more moderately. (Last year’s poverty rate went up one percentage point to 18.5 percent.)”

“In the eastern San Jose district of Curridabat, Jose Francisco Oreamuno makes heads turn as he pulls his silver Porsche Carrera into a Jose parking lot. He’s the president of the Porsche Club Costa Rica, a group that has about 40 members, more than half of them Costa Rican. Oreamuno estimates there are at least 75 Porsche owners throughout the country. ‘Now you find high-income segments of the population with cars that are very ostentatious, with homes that are huge and generally consume status products and wear certain brands that convey social status,’ said Miguel Gutierrez, director of nongovernmental research group State of the Nation.”

The Tico Times in Costa Rica. “In the last 16 years, Atlanta businessman Charles Brewer has created the Internet service provider MindSpring, founded a real estate development company, and developed a 28-acre residential, office and retail community in Atlanta known as Glenwood Park, which was his first excursion into the ‘new urbanism’ he is bringing to Costa Rica’s Pacific coast. But now Brewer has bigger aspirations: He wants to build a town.”

“Brewer, with contributions from a few other investors, purchased a 1,200-acre plot of land north of Flamingo Beach in northwestern Guanacaste known as Las Catalinas on the shores of Playa Danta and Playa Dantita. A few months ago, construction began on the first homes in Las Catalinas. Within the next year, seven homes and a restaurant, Lola’s del Norte, are expected to be completed. And over the course of the next several years, Brewer, Davey and a group of 25 other investors hope to construct a central road, a church, restaurants, several small hotels and around 2,000 homes.”

“Gadi Amit, president of the Sardinal-based environmental group Confraternidad Guanacasteca, expressed concerns that the idea behind Las Catalinas was ‘not ambitious, but unrealistic.’ Amit said that Sugar Beach, just south of the Las Catalinas land, is crippled by an erratic and insufficient water supply.”

“‘There is nothing on those beaches and there is nothing around it,’ Amit said. ‘It will be very difficult for the development they have in mind to be supplied with all the resources promised. I’m sure the developers have the best intentions, but creating a project as big as this is almost always accompanied by problems.’”

“The initial price range of homes has been set between $495,000 and $995,000, though Brewer said he hopes that as the community develops, housing options will be available for as low as $125,000.”

The Belfast Telegraph in Ireland. “The Republic’s Planning Minister Ciaran Cuffe has blamed city and county managers for approving plans that have left hundreds of ‘ghost’ estates dotted around the country. In his first public speech since being appointed to office last month, Mr Cuffe also confirmed the Republic’s ‘bad bank’ NAMA would demolish unfinished homes in exceptional circumstances — but that the bill would be picked up by the developer.”

“Estimates of the number of empty houses and apartments range from 301,682 to 352,414. ‘There will be isolated cases where there are health and safety issues, where there’s inappropriate development in absolutely the wrong areas. The best way to deal with it may be to get rid of it.’”

“IPI president Gerry Sheeran said the advice of local-authority planners was ‘often ignored’ and the ‘victims’ of such decisions were the people ‘living in unfinished housing estates or on land zoned on flood plains.’ Such is the excess of supply that receivers are selling homes at fire-sale prices, notably in Longford and Mullingar.”

The Irish Times. “New Green Party Minister of State for the Environment Ciarán Cuffe yesterday said the blame for unfinished, or ‘ghost’ housing estates lay with ‘the ‘cargo cult’ of rezoning for all the wrong reasons’ that drove development in recent years. In his first major speech since taking office last month Mr Cuffe said ’selective demolitions will be a necessary part of the tasks required to tackle the legacy of one of the more unsavoury aspects of Ireland’s building boom.’”

“‘I have no doubt that some loans that will come into the possession of the Nama will result in the demolition of badly designed buildings in inappropriate locations,’ he said.”