June 10, 2013

They Thought The Checkbook Would Be Open Forever

A housing bubble report from around the world. “Cash-strapped Mexican homebuilder Corporacion Geo SAB said late Wednesday it has reached a ’standstill’ agreement with its principal bank creditors that would allow the company to restructure obligations with the banks and secure credit lines to continue operating. As the companies’ finances deteriorated, banks began to tighten and even cancel credit lines for Geo and several other top builders of affordable housing in Mexico earlier this year. ‘They [the builders] thought that the world’s checkbook would be open forever,’ said Gene Towle, managing director of Mexican real estate consultancy Softec. Mr. Towle said the warning signs for the sector were apparent for several years until, finally, ‘the market reached tipping point.’”

IFR Asia on China. “The tumoil in China’s money markets last week was worrying enough in itself, but the bigger issue is potentially catastrophic. Reports that one mid-sized lender defaulted on a Rmb6bn (US$978m) repo payment triggered a chain reaction, sending the recipient scrambling for funds at 100bp above the prevailing market repo rate to cover its shortfall and others running for overnight cover. The liquidity squeeze pushed up the overnight repo rate to 10% on Thursday, having been quoted at an average 4.74% the previous day, and as high as 15% on Friday.”

“It raises the issue of how quickly a liquidity shortage can induce systemic contagion and, more importantly, how the Chinese banking system will be able to cope with default. One of credit rating agency Fitch’s senior China banking analysts Charlene Chu reckons the country’s banking system is standing at the brink of collapse. It has been adding assets at such breakneck speed over the past five years that the total debt burden amount equates to 198% of GDP, having stood at 125% only four years ago.”

“It doesn’t take a vivid imagination to work out how it might have gone, or indeed how it might go next time. Cash providers might suddenly start to worry about the creditworthiness of the collateral they have taken on board, and start to demand early repayment of the repo.”

The South China Morning Post. “Driven by the surging demand, land prices in tier-one cities surged by 25 per cent month on month and 328 per cent year on year in May, according to China Real Estate Information Corporation. In the first 24 days of last month, land sales in tier-one cities were already nearly 16 per cent higher than the entire month of April, said another data provider, China Real Estate Index System.”

“Investment bank Jefferies warned in a newly-released research report: ‘We have reservations on the hot land market as the ‘land kings’ may trigger policy concerns.’ The report said the aggressive bidding was underpinned by easier financing, positive sentiment on presale and scarce prime land sites. ‘Overly aggressive land banking will jeopardise developers’ cash flow and profitability,’ it added.”

Focus Taiwan. “Despite oversupply and a high vacancy rate, Taiwan’s real estate market has been bullish over the past 11 years. In the past four years, in particular, speculators have been scrambling to pour capital into the housing market, mainly due to increases in money supply as a result of an easy monetary policy and low interest rates. At present, 20 percent of housing units around Taiwan, or 1.43 million, are not occupied. Rapid population aging and the falling birthrate are worsening the problem of housing oversupply.”

“Furthermore, because housing prices have become excessively high and unaffordable to the majority of potential home buyers, home buying will become a mere money game involving speculators.”

“The price to income ratio in Taiwan is now over 8, while mortgage payments exceed 30 percent of household income. Outstanding mortgage loans, meanwhile, account for over 40 percent of gross domestic product, and for many years, housing prices have risen at a faster rate than the country’s economic growth.”

Channel News Asia on Singapore. “Singapore’s resale property market continues to slow as buyers remained on the sidelines after the government’s latest round of property cooling measures. Year on year, transaction volumes slumped 36 per cent. There were 2,000 HDB resale flats transacted in April 2012. Earlier this year, the government lowered the mortgage servicing ratio (MSR), from 50 per cent to 30 per cent.”

“Mohammad Ismail, CEO at PropNex, said: ‘On average, banks would give 50 per cent of someone’s income to finance the monthly instalment but that has been reduced to 30 per cent and that’s a drastic drop…and that causes a lot of people to think twice. It is very glaring that the public housing is heading for a correction in price. In another word, the heyday of double-digit growth is over. For that matter, even last year’s 6-over percent growth is not likely to be repeated.’”

ABC News in Australia. “According to government figures, Chinese buyers poured $4 billion into the sector last year. Sharon Zhang is the face of this new trend. She migrated to Australia six years ago from Canton and has funnelled the profits from her fashion-importing business into property.’China is a nation that loves to save money. To buy property is in our bones so [if] you have the money but you don’t have [any] property to buy, the investor will start to look overseas,’ Ms Zhang said.”

“‘I know some of my friends, they just fly for the weekend to look for properties. It’s great, you fly overnight and look at the properties for two days and you place the deposit, and you fly back Monday and go to work,’ she said.”

From Stuff.co.nz in New Zealand. “Would-be house buyers in Auckland were asked late last month to absorb yet another depressing fact about the city’s overheated housing market. The city now has 17 suburbs where the average house price exceeds $1 million, 10 more than was the case just three months earlier. Chris Hawes, an estate agent based in the Auckland suburb of Kingsland, says the prices paid by some people entering the property market in Auckland are ‘frightening.’”

“‘First-home buyers are spending $850,000,’ said Hawes. ‘Houses are going for $1 million in Sandringham. It would have been unthinkable two to three years ago.’”

The Mail Online in the UK. “In the northern seaside town of Blackpool, property prices have fallen by 8 per cent this year. It’s a far cry from reports about the start of a house price boom which has seen average values across the UK increase at their fastest rate in six years. In the window of one estate agents in Blackpool a one-bedroom flat is on offer for £25,000 — it has been on the market for 488 days. In another, the price of a two-bedroom house has been cut by 47 per cent to £45,000 — it’s been for sale for 389 days.”

“And it’s not just Blackpool that’s suffering. In Hartlepool, Leanne Jones, 28, has had to resign herself to the fact she has lost tens of thousands of pounds on her three-bedroom terrace house. She bought it for £80,000 in 2007, with a 100 per cent mortgage from Northern Rock. Just weeks later the credit crunch began and property prices plunged. A similar house on her street recently sold for £50,000.”

“One three-bedroom house has now been on the market for 572 days. The asking price has been cut from £71,950 to £29,950. Miss Jones, a teacher says: ‘A house in our street has just taken a year to sell. Another person we know put their house on the market for £130,000 — but has now had to list it at £90,000. We’re trying not to worry about the house falling in value. But if interest rates go up, life could be very difficult.’”

“Mr Dowson had snapped up their three-bedroom new-build property for £165,000. Today it is worth £135,000. Mr Dowson says: ‘When we bought, prices were just starting to go down — but we thought that meant we had a good deal. I’ll never buy a new-build again. Their prices are inflated and then they have people over a barrel. After all I’ve put into it, I can’t sell the house in Bourne now. I’ve spent a fortune. All I can do is look at the long term and hope prices go up.’”

“In grimy and busy Tooting prices have also climbed 15 per cent over a year. Roberto Leto, sales manager at estate agents Credential, recently put a three‑bedroom terrace home on the market for £535,000. It sold days later for £582,000. He had six offers and three people saw it before sale signs were even pinned up outside the property. Mr Leto says: ‘If people get a sniff that a property is about to go up for sale, then they’re coming to us to get put on a list before it’s even on the market. There is a real shortage of family homes. That there is such a lack of homes coming up for sale means demand is sky-high.’”

News Vietnam. “From June 1, 2013, the VND30 trillion bailout which aims to revive the real estate market would take effects. The VND30 trillion package would be pumped by the State Bank of Vietnam into the market through the five state owned banks. Of this amount, real estate firms would be able to borrow 30 percent, or VND9 trillion. Under the State Bank’s Circular No. 11, which guides the disbursement of the bailout, the real estate developers to be eligible for the loans are the developers of the housing projects for low income earners.”

“Director of the State Bank’s Credit Department — Nguyen Viet Manh said it’s a right decision to lend money to project developers as well. Once accessing bank loans at low interest rates, the investors would be able to make low cost houses to sell. If the loans only target low income earners, or the buyers, the bailout would fail. Also according to Manh, the Bank for Investment and Development of Vietnam has registered to borrow VND10 trillion from the package for re-lending.”

“The biggest obstacle for real estate firms is the lack of collaterals for the loans. The assets of the firms all have been mortgaged at banks for the previous loans. Therefore, it would be better for the firms if they can mortgage the projects they develop with the banks’ money.”

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