April 13, 2012

The Feast Is Coming To An End

It’s Friday desk clearing time for this blogger. “Baoding has reported rapid increases in new-home prices, from about 3,000 yuan (Dh1,750) per square metre in 2007 to 6,000 yuan in 2010. With 1,800 luxury apartments in a prime downtown location, Guo Zhai Hua Yuan is just one of countless schemes emerging in this city of 1.6 million. An hour south-west of Beijing, the former capital of Hebei province is at the frontline of China’s building boom, with a cityscape full of cranes and half-finished apartment blocks. At its peak, residents were ‘crazy about buying property,’ said Ma Tengfei, Huazhong Realestate’s sales manager.”

“‘We gave our customers only half an hour to decide whether to buy or not because we had other customers interested. People were in such a frenzy, they didn’t worry about the quality. They were just worried whether they could get one,’ he said.”

“Across China, potential buyers are now holding off. Mr Ma said at the peak his offices received 20 to 30 visits a day from families or other potential purchasers. Now the figure is five or six. With the market in limbo, those who snapped up property several years ago are glad they did so. Pei Wenbo, 31, an accountant, bought his three-bedroom flat in the north-east of the city in 2008, paying about 3,000 yuan for each of its 167 square metres. He has since bought a second, yet-to-be-completed flat as an investment.”

“‘It’s a huge relief that I got this apartment earlier,’ he said. ‘Nowadays there’s a huge pressure on people thinking of buying a flat. Wage earners find it almost impossible to afford an apartment, because incomes haven’t kept up with property price hikes.’”

“Twice a year, one of Beijing’s largest convention venues holds a large-scale international property fair. Developers and agents spruik property from all over the world - the United States, United Kingdom and Singapore all have a large presence, as does Australia. The drawcard, it seems, is more than property. One booth, which advertised property from all across the Australian east coast, prominently boasted: ‘Invest in property; speedy migration.’”

“One prospective investor, who gave his last name as Wang, said Beijing property prices were too high and unstable. ‘I have a friend who has ten properties in Melbourne. I want to invest too,’ Mr Wang told BusinessDay.”

“One Chinese agent explained: ‘You need over $600,000 in Australian assets, and have a controlling share in a company for more than two years with a turnover of more than 2.4 million yuan (about $350,000).’ It all sounded a bit too hard, one investor remarked.”

“‘Will you only consider Australia for migration? What about Canada?’ came the reply.”

“‘Blaming Chinese For High House Prices in Vancouver Is Racist,’ April 6. Pretty strong stuff from Allen Garr last week. Hello? Vancouver real estate made headlines around the world, shooting to the second least affordable city on the globe. And the media have told us why in clear terms: international investment—spurred by China’s new wealth. Here’s a small sample of the headlines: Bloomberg: Chinese Spreading Wealth Make Vancouver Homes Pricier than NYC. Wall Street Journal: Chinese Fuel Vancouver Home Boom. China Daily: Chinese Drive Up Vancouver Home Price. South China Morning Post: Chinese Love Affair with Canada Continues. Globe and Mail: Canadian Real Estate - A Piggy Bank for Chinese Investors.”

“It’s only now that the public is questioning its practices that the real estate and development industry has hit full tilt back-pedal mode. Denial, denial, denial, with a helping of racial invective on the side. Richest of all is the quote from Larry Beasley, identified by Garr as a former city planner, who dismisses public anxiety about international capital as ‘bullshit,’ adding that it’s ‘racist.’ Interesting that Garr didn’t mention that Beasley is now VP of Aquilini Developments—part of the Aquilini Group reported in the media for inking its strategic partnership with Asian developers, and for its proposal to market the remaining Olympic Village condos to—where else—China.”

“A significant part of China’s growth since 2007-08 has been an illusion. Its headline growth of 8-10 per cent since then has been driven by new lending averaging 30-40 per cent of GDP. Up to 20-25 per cent of these loans may prove to be non-performing, amounting to losses of 6-10 per cent of GDP. The case for a soft landing assumes that the investment and property bubbles are less serious than thought. The case for a hard landing assumes the rapid and destructive unwinding of asset price bubbles and problems within the Chinese banking system.”

“A poor external environment and losses on foreign investment exacerbate the problem. Growth collapses, triggering massive social unrest and political tensions. But the end of a cycle of debt- and investment-driven growth is typically disruptive. Japan’s experience, which China has drawn on in shaping its economic model, is salutary. Japan grew by 10 per cent in the 1960s, 5 per cent in the 1970s, 4 per cent in the 1980s, and has remained stagnant since, adjusting to the deflation of its debt-fuelled bubble.”

“The global economy increasingly looks to China to drive the world’s growth. These febrile expectations are ill-founded. There will be significant effects on commodity prices and volumes, affecting resource producers and commodity-exporting nations such as Canada, Australia, Brazil, Russia and South Africa. It will also affect demand for industrial goods, especially advanced machinery. Chinese demand for US dollars, euros and yen will diminish. This will force borrowers, primarily governments, to find alternative buyers for their bonds.”

“A hard landing will be especially traumatic for the global economy, which has not dealt with its core problems – excessive debt levels, weak non-debt fuelled demand and global imbalances. The crisis and its effects have been masked in developed economies by artificial demand from government spending, which is proving increasingly difficult to sustain. In China, it was masked by debt fuelled investment. Now, that feast too is coming to an end.”

“Sherry Cooper was reminded of just how devastating the U.S. housing crisis has been for families and the overall economy in that country after speaking recently with a friend who is having trouble selling his house in New Jersey. Ms. Cooper, the chief economist at Bank of Montreal, is starting to worry about Canada’s housing market after refuting the arguments of the extreme bears in the past.”

“But now Ms. Cooper is looking at the debacle in the United States and the blistering pace of the market here and warning people to tread carefully. I can add a story to the mix: I have a family member who paid about $750,000 for a house in Indiana in the late 1990s. She doesn’t think she could get $350,000 for it today.”

“She also knows that, if she were to list it, her house would be competing with swathes of newer houses built on the surrounding farmland during the boom. Meanwhile, her husband’s job has been re-located about three hours away in Chicago. They’re stuck with a house they can’t sell without taking a huge loss. How many years will they have to wait for it to recover its value, if it ever does?”

“‘I’m not forecasting a crash landing but it would be foolish to ignore the lessons learned south of the border, Ms. Cooper says.”

“Sales by Realtors of single-family homes in Jupiter were more brisk in February than elsewhere in Palm Beach County and Florida. Though the median price was almost 5 percent down from a year ago, sales volume was up almost 21 percent. Though new listings are up 10 percent from a year ago in Jupiter and 21 percent throughout Palm Beach County, the inventory of available homes is down 37 percent in Palm Beach County, even sharper than the 34 percent decline statewide.”

“‘More people are looking, and there is an influx of Canadian buyers,’ Chris Cox, president of the Jupiter-Tequesta-Hobe Sound Realtor Association said in an email.”

“Across Tallahassee and throughout Florida, it’s a scenario that is played out thousands of times and for a host of different reasons. The result, however, is a distressed property and an often frustrating effort by the homeowners to resolve their situation. After more than three years of phone calls, faxes and correspondence, Neil and Jane Mooney’s foreclosure ordeal may be over.”

“For the Mooneys, making the $1,188.88 monthly payment on the Cabin Hill house was not feasible and, in fact, took a chunk out of their retirement income they could not sustain. ‘We were not able to continue doing that,’ Jane Mooney said. ‘For a long period of time we went through the modification, trying to get a modification and all this kind of thing. Finally, they did give us what we thought was a forbearance on the situation, but we learned later that money had not gone toward the payment, but had been put into a fund to pay the taxes.’”

“Jane Mooney concedes that she’s not ready to celebrate having the case behind them, not yet. The retired Tallahassee couple anticipated a resolution before, only to face repeated disappointment. ‘I realized when I was about a month into this that it was going to be a long time. That’s the thing. I knew that it was going to take a while and sure enough, it’s been three years now and still no resolution to this situation,’ she said.”

“Other sellers are on the sidelines, as reflected by the 7,000 houses in this market the past five years that didn’t sell and are no longer listed, said Joe Manausa, broker and owner of Century 21 Manausa & Associates. ‘It’s another 10 years before we work our way out of them.’”

“Recently, Gov. Scott Walker was the featured speaker for Realtor/Government Day in Madison. This is a time when Realtors (such as me) from around the state meet with their government officials to rally support for issues vitally important to homeowners. He did give a nod to the importance of Realtors. Glaringly missing, though, was any defense of his taking of $25.6 million from distressed homeowners and instead applying it to ‘plug holes’ in the state budget.”

“The money is part of the state’s $141 million settlement with big banks responsible for foreclosure fraud and mortgage-servicing abuses. It is intended to be used for foreclosure remediation. The money could provide up to $2,000 in aid to two of my neighbors who have lost their homes to foreclosure (due to tragic illnesses). It could prevent another neighbor, who took a lower-paying job when he lost his, from doing a short sale and instead refinance at a lower rate. It could help one of my clients who was a victim of Wells Fargo’s ’servicing abuses’ (the bank actually renegotiated the loan to a higher rate).”

“It could prevent three of my military families (recently deployed out of state and out of the country) from losing their homes. It would allow my daughter to refinance her condo (devalued by foreclosures in her complex) at a lower rate.”

“Our home has dropped $23,000 in assessed value since the housing decline started, yet we still have a property tax increase of over $500. We Realtors are not happy with this. Realtors are on the front lines dealing with the fallout of the depressed market on homeowners. Walker took money that could prevent this from happening to you. This money could help keep up the value of the house you own.”

“Foreclosure activity in Shasta County extended its downward trend in March. But experts say the recent decline isn’t necessarily an indicator that the supply of distressed homes has been exhausted. Banks continue to do a good job of manipulating the flow of foreclosures as they work to sell off these repossessed properties, said Curt Largent of Sheldon Largent Realty in Redding. ‘It will continue to be a very controlled flow,’ Largent said. ‘Banks are managing the flow of foreclosures, whether it’s the number of homes they are actually foreclosing on, the number they are postponing or delaying, or the number they are sending to market.’”

“The number of homes for sale in Shasta County is low, down roughly 30 percent from a year ago. The low inventory has made the lower end of the market, homes priced below $200,000, very competitive. ‘There is a lack of inventory under $200,000; there is a huge lack of inventory under $150,000,’ Largent said.”

“Doug Juenke, board president of the Shasta Association of Realtors, believes banks are seeing that values may be coming up, so they are ‘metering’ the release of foreclosed homes in their portfolio accordingly. ‘That means if they are holding and releasing at a slower rate, they will get more money,’ Juenke said.”

“‘Through relentless meddling with delusions that ‘foreclosures are bad,’ they effectively destroyed the macro housing market,’ says California-based mortgage analyst Mark Hanson, referring to government intervention in the housing market. ‘Contrary to popular thinking, the eradication of foreclosures will lead this housing market into paralysis, not recovery.’”

“Hanson claims that the lack of ready and available distressed supply, ‘portends big trouble’ for the overall housing market, but more pointedly for California, Nevada and Arizona, where distressed supply and sales are the bulk of the market. Some of the modifications, claims Hanson, are even more ‘exotic’ than the loans borrowers defaulted from in the first place, like 2 percent interest-only loans, 40 year amortizations, 33 percent forbearance, and five-year fixed rate loans. This as more than 11 million borrowers (22 percent of homeowners with a mortgage) owe more on that mortgage than their homes are currently worth. ‘Legacy borrowers are now more levered than ever,’ worries Hanson.”

“‘It will soon become apparent that ‘foreclosure prevention’ was one of the biggest housing and finance policy blunders of all time. That’s because it circumvented interest rate policy in part aimed at household de-leveraging, kicked the problem forward and spread it out over many more years.’”

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