February 16, 2016

A Doom-Loop Of Debt Gorging And Economic Vulnerability

The Toronto Star reports from Canada. “High-end executive rentals are sitting empty, or being rented for far less than they fetched when St. John’s was booming with oil-related business. ‘In the executive rental market, the inventory is triple what it was even two years ago,’ said real estate agent and landlord Larry Hann.”

“He’s been trying to find a renter for a condo that rented for $4,800 a month in 2014, and is now priced at $3,500. It has been on the market for seven months. Home sales in St. John’s fell three per cent in December compared to a year earlier, while prices in the province fell 2.4 per cent to $267,093. Housing starts in 2015 were 20 per cent lower than the year before. There are holes in the ground where condo projects have been shelved. Many for-sale signs have a ‘new price’ sticker as sellers reduce expectations.”

The Evening Standard on the UK. “For the past few years, the developers have been propped up by the swathe of overseas investors coming to London. Suddenly, though, they’re not there any more. The first sign of what may lie ahead comes from the failure of Asian buyers in particular to complete on their purchases. They put down deposits and now I’m told they’re turning round to the builders and telling them to keep the cash, they’re no longer interested. If the developer wants the rest, it will have to sue them for it. They will have to sue, typically in a Chinese court.”

“We’ve grown used to boards going up saying ‘85% sold’ when barely a single brick has been laid. Often, the block has been sold off-plan to investors in centres such as Hong Kong, Moscow, Mumbai or Shanghai. Now, however, all that has changed. China’s stalling economy, Russian sanctions, the falling oil price and the increase in stamp duty on expensive homes have combined to convince them prices are going to dip. They’d rather cut their losses and say goodbye to the £2000 than follow through on buying the apartment. Developers are left holding properties they thought they’d sold. There’s talk of 50%-plus price falls ahead.”

The Malaysian Star. “The idea that property development in Iskandar would satisfy spillover demand from Singapore was tested to its limit last year. Despite the weakened ringgit, which provided a lower entry cost for investors, there was not a notable increase in sales to foreigners, say developers and analysts. Upfront price discounts of up to 20% by some developers also failed to move units. Some property firms have had to re-strategise product offerings, while others deferred new launches.”

“Aggressive marketing of huge developments by Chinese developers has also stoked fears of a glut. Country Garden Holdings said 25% of its 6,000 units at Danga Bay were sold to Singaporeans. The Chinese developer remains undaunted by the slowdown. Its spokesman told The Straits Times: ‘We do not wait for the customers. Our philosophy is that we will create the market and the customers will arrive.’”

Bloomberg on Hong Kong. “In the latest sign that Hong Kong’s property correction is deepening, a parcel of land sold by the government in the New Territories went for nearly 70 per cent less per square foot than a similar transaction last September. The plunge in the price of land comes amid weaker appetite from Hong Kong developers against the backdrop of a nearly 11 percent drop in housing prices since their September high, according to the Centaline Property Centa-City Leading Index. In January, sales of new and secondary homes reached their lowest monthly level since Centaline started tracking data in January 1991.”

“Recent land sales have been dominated by mainland Chinese developers. Hong Kong property companies have been less active, as they’re struggling to sell existing units in their inventories and offering discounts of more than 12 percent to entice new buyers. Nicole Wong, head of property research at CLSA Ltd. said mainland companies are outbidding their Hong Kong counterparts because they expect lower margins and are also anxious to park money offshore given the devaluation of the yuan.”

“‘You see more Chinese developers for these lower entry sites because they are better than their projects in China in terms of profitability,’ she said in a phone interview. ‘And because of the renminbi depreciation, some want to get money out.’”

The Australian Financial Review. “Zaki Ameer, who has amassed a $3.5 million portfolio of 15 negatively geared investment properties in Sydney and Brisbane, says Labor’s plans to limit negative gearing to new homes could trigger a house price crash. ‘It would be a shock to the economy. It would shock investors, which could turn into panic and cause the housing bubble to burst,’ Mr Ameer told The Australian Financial Review.”

“All of Mr Ameer’s investment are in existing properties, as are those he advises his clients to purchase. He said changes to negative gearing would hit property values and also affect the wider economy. ‘Investors buy properties in rundown areas and improve them. This creates construction jobs and rental accommodation. The Labor plans would really scare people. My clients would be freaking out,’ he said.”

Stuff News in New Zealand. “Global banking sector woes are a warning for New Zealand. We are stuck in a doom-loop of debt gorging and economic vulnerability. Banks should be made to hold more capital and aggressively manage the risks at home: a distressed dairy sector and a ridiculously overinflated housing market in Auckland. The Reserve Bank can and should do this.”

“Bank share prices are falling globally and their cost of borrowing is going up. This has spread to the Australian parents of New Zealand’s four major banks. There isn’t the same panic as the Global Financial Crisis of 2007, but then history doesn’t repeat but it rhymes.’

“New Zealand is vulnerable because we have not learnt our lesson. We gorged on debt through to noughties to buy houses from each other at ever higher prices and loads of dairy conversions. When the recession hit in 2007, we paid down some debt. But since then we have gorged on debt again. Relative to the economy, we have as much or more debt in mortgages and farm borrowing, as we did before the last crisis. The borrowing in housing has been mostly into Auckland and the borrowing for farms has been mostly for dairy.”

“The Auckland housing market has turned in recent months. The highest ever median house price was in September of $771,000. In January is was $720,000. If someone borrowed a ‘normal’ mortgage of 80 per cent of the house value in September and they sold in January, they would have lost a third of their investment equity, or $51,000. If house prices go back to where they were in January 2015, they would lose two thirds of their equity. If prices go back to where they were in January 2014, their mortgage would be $36,000 more than their house. It will not take much of a reversal in Auckland house prices for a horror show to unfold.”

“New Zealand banks perpetuated the bull run in Auckland house prices and dairy conversions, by lending freely. When prices were going up, all cracks were papered over. Now that prices have recalled the laws of gravity, banks will see bad debts rise. The Reserve Bank is complicit, as they regulate banks. It’s time the Reserve Bank better regulated banks to stop the repeating cycle of debt gorging and economic vulnerability.”

Bits Bucket for February 16, 2016

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