April 14, 2016

The Systemic Risks Connected To Real Estate

The Edmonton Journal reports from Canada. “The number of new, unsold homes in the Edmonton area soared more than 70 per cent over the last year, preliminary figures from Canada Mortgage and Housing Corp. show. There were about 1,800 vacant housing units in the area in March, a huge increase from 1,046 unoccupied homes the previous February. ‘Unfortunately, we live in a province driven by energy and the boom-and-bust scenario,’ said Lai Sing Louie, regional economist for the Canada Mortgage and Housing Corp. ‘We’re in a down part right now.’”

“Condos, apartments and other multi-family homes were hardest hit, with the number of units waiting to be purchased or rented more than doubling to 969, while new unsold single-family houses went up 42 per cent to 841. The ‘841 is an elevated number. You have to go back to the recession of 2009 before you get to a higher level,’ Louie said.”

From CBC News. “The number of new but ‘unabsorbed’ houses has spiked in Calgary, according to a new report by ATB Financial. Unabsorbed houses are newly-built single and semi-detached houses that don’t have a binding, non-conditional agreement in place yet for their purchase or rental. There were 27 per cent more of these properties in Calgary on the market than last year, according the report’s authors Todd Hirsch and Nick Ford.”

“A high number of new and vacant homes could have a negative effect on prices and slow the construction industry at a time when it’s already suffering, the two economists say. The trend is another indication that the downturn in the energy sector is dragging down the housing industry. Housing starts in Alberta are down 56 per cent from last year.”

The Financial Post. “Officials in Canadian cities are trying to figure out the best way to move oilfield workers from camps into permanent housing. Allan Vinni, deputy mayor of Wood Buffalo, a large municipality that includes Fort McMurray, notes, ‘We’ve got tons of condo buildings that are standing empty.’”

“During the oil boom, there were 80,000 people living in camps around Fort McMurray, flying in and out of an area where there were not enough locals to do the work. Today, Vinni said, the number is estimated at 26,000. Housing booms have similarly gone bust in Canadian oil towns such as Fort McMurray and Cold Lake, leaving behind a mix of empty condos and houses and near-empty camps in the oilfields.”

“In Cold Lake, Mayor Copeland said it is difficult to encourage oil workers to buy homes right now, given that tens of thousands have been laid off as the downturn persists. ‘The people working in the oilpatch are holding onto their money pretty tight,’ he said, ‘because they don’t know if their job is next.’”

The New York Times. “Andy Guo, an 18-year-old Chinese immigrant, loves driving his red Lamborghini Huracán. He does not love having to share the car with his twin brother, Anky. The $360,000 car was a gift last year from their father, who travels back and forth between Vancouver and China’s northern Shanxi province and made his fortune in coal, said Andy Guo, an economics major at the University of British Columbia.”

“Many wealthy Chinese are increasingly eager to stow their families — and their riches — in the West, where rule of law, clean air and good schools offer peace of mind, especially for those looking to escape scrutiny from the Communist Party and an anti-corruption campaign that has sent hundreds of the rich and powerful to jail. Residents angry about the rise of rich foreign real estate buyers and absentee owners, particularly from China, have begun protests on social media. The provincial government agreed this year to begin tracking foreign ownership of real estate in response to demands from local politicians.”

“The anger has had little effect on the gilded lives of Vancouver’s wealthy Chinese. Indeed, to the newcomers for whom money is no object, the next purchase after a house is usually a car, and then a few more. Jin Qiao, 20, moved to Vancouver from Beijing six years ago with his mother. During the week, Jin drives one of two Mercedes-Benz SUVs, which he said were better suited for the rigours of daily life. But his most prized possession is a $600,000 Lamborghini Aventador Roadster Galaxy. Jin, a lanky design major who favours Fendi clothing and gold sneakers, extolled the virtues of exotic cars and was quick to dismiss those who criticized supercar aficionados as ostentatious.”

“In Vancouver, there are lots of kids of corrupt Chinese officials. Here, they can flaunt their money. ‘There are so many rich people in Vancouver, so what’s the point of showing off?’ he said. Asked what his parents did for a living, Jin said his father was a successful businessman back in China but declined to provide details. ‘I can’t say,’ he stammered with evident discomfort.”

The Province. “In a private speech to the B.C. Real Estate Association, the province’s top financial regulator warned realtors ‘your business is dead’ if the public loses trust. Superintendent of real estate Carolyn Rogers also said she is ‘worried’ that risk conditions prevalent in B.C.’s housing market are ‘creating many other risks’ across the financial system.”

“The text of the March 31 address by Rogers was obtained by The Province. Rogers oversees a number of sectors as the chief of the Financial Institutions Commission (FICOM). What is striking in her speech to the association, whose members are regulated by the B.C. Real Estate Council, is how concerned the government is about systemic risks connected to real estate, and Rogers’s warning that the industry’s ‘privilege’ of self-regulation is in danger.”

“Rogers stressed it is false for realtors to dismiss media scrutiny by saying, ‘This is just a few bad apples.’ ‘Let me be clear — we have a problem and it’s not the media,’ Rogers said. ‘Your business rests on the public’s trust. You handle what is, for most, the single largest financial transaction they will ever make. If they don’t trust you to act in their interest, your business is dead.’”

“The speech came in the early stages of a special panel review of industry problems including widespread failures to report identities of clients, leading to money-laundering concerns, and allegations that realtors are colluding with certain clients to scam home-sellers in so-called assignment clause flipping schemes. She said she has heard numerous reasons why realtors do not report on bad actors, including fear of reprisals from colleagues or firing by bosses, but these excuses are ‘not acceptable.’”

“‘Self-regulation works when an industry holds itself to a higher standard than anyone else does,’ she said. ‘Self-regulation puts on each of you a positive obligation to report any, and all bad behaviour — anything that has the potential to harm the public — there are no exceptions.’”

“NDP MLA David Eby, a critic who says the council is not capable of self-regulation, said the message of Rogers’s speech is, ‘There can’t be a conspiracy of silence.’ Eby said, though, he understands why realtors are not confident in reporting others to the council, because it mostly seems to issue wrist slaps in punishment. ‘There are no consequences, except professional consequences,’ Eby said. ‘Someone pays a $1,000 fine and then comes back to work and makes your life miserable. So until more licences are cancelled, that is the problem.’”

“Eby said he believes the risk factors Rogers spoke of in the speech include B.C. banks that are currently issuing 50-per-cent mortgages to offshore buyers with no proof of income, which raises concerns of exposure to bad debt and money laundering.”

A Prosperity Cycle Based On Credit

Reuters reports on China. “Home sales in the red-hot property markets of Shanghai and Shenzhen tumbled sharply in the week after authorities made it tougher to buy homes in the cities to prevent a property bubble, surveys by a major Chinese realtor show. After Shenzhen and Shanghai property prices had jumped 57 percent and 20.6 percent in February from a year earlier, local governments tightened downpayment requirements for second homes and raised the eligibility bar for non-residents to buy in the cities.”

“In the week beginning March 28, the first after the new rules took effect, the total floor area sold in Shanghai fell 60 percent from the previous week to 283,600 square metres, according to nationwide agency Hopefluent Real Properties (China), whose surveys are based largely on government data. Shenzhen sales fell 28.2 percent to 71,000 square metres.”

“Prices also eased 3 percent week on week in Shanghai and 4.2 percent in Shenzhen, according to the surveys. ‘A lot of people don’t want to get into the market now, so they’re not buying. This is giving me a headache,’ said 56-year old Ding Xiaoping, a furniture salesman who is trying to sell two of his apartments. ‘Many sellers are thinking about cutting prices. I’m thinking of lowering the price by a little, too.’”

“‘China’s property investment in the first two months was doing better than our full-year forecast of a 5 percent drop,’ Nomura chief China economist Zhou Yang told Reuters. ‘We expect both sales and investment in the coming two quarters will remain robust, but the second half is likely to ease on housing recovery slowdown, affected by tightening in the first tiers and glut in the third and fourth tier (cities).’”

The South China Morning Post on Hong Kong. “Recent poor sales at some private residential projects as well as a subsidised development indicate rich and not so rich homebuyers are staying out of the market, pushing up expectations that a price correction could accelerate. On Saturday, Mantin Heights in Ho Man Tin, built by Kerry Properties, became the third private project to see disappointing sales, with just 31 per cent – 34 units out of 108 – sold at the luxury residential project in the first two days following their launch.”

“Wong Leung-sing, associate director of research at Centaline Property Agency, said the failure of the subsidised housing project to drum up sales despite being offered at affordable prices would negatively affect overall market sentiment. ‘The majority of these eligible buyers decided to abandon their purchase rights as they expect home prices will fall further,’ he said.”

“Flats at De Novo were offered at 20 per cent discount to prevailing market prices. In the private residential market, defaults have been rising for both mass-market and luxury homes, especially in Ho Man Tin and Yuen Long. ‘But developers did not slow down the launch pace,’ said Alfred Lau, a property analyst at Bocom, adding they had instead opted to offer more favourable terms and prices in an attempt to attract buyers. ‘We believe developers will accelerate turnover even at the cost of lower margin, rather than sitting on the land bank, given the abundant pipeline and pessimistic outlook,’ he said.”

“Individual owners have joined the price cuts in a bid to speed up sales. with more secondary market transactions concluded at bargain prices. Herman Po, a senior sales manager at Hong Kong Property’s Taikoo Shing branch, said a 598 sq ft unit at Po Shan Mansion, Taikoo Shing, had changed hands for HK$7.8 million, or HK$13,043 per square foot. ‘The vendor offered the unit for HK$9 million in December but only found a buyer after reducing the asking prices by HK$1.2 million,’ he said.”

The Epoch Times. “China has a huge real estate bubble, yet Chinese economists and the government still don’t seem to have a clear understanding of the damage, and continue to infuse more credit into sectors related to real estate. New loans of 2.51 trillion yuan ($387 billion) have been issued in January, the highest single month on record, and the growth rate of M2 monetary supply increased 14 percent, the highest in 18 months, according to data released by China’s Central Bank.”

“The majority of these loans went to individual mortgages, affordable housing developments, land development, government projects, transportation, and wholesale and retail trade —with three areas directly related to real estate. So, who are the buyers of expensive real estate in major Chinese cities? One businessman, who has bought dozens of houses, said the price of real estate in first-tier cities has skyrocketed because rich bosses have closed their companies and factories and have invested cash in real estate. Running a real business is extremely tiresome, full of risks and responsibilities, and profits are less than gains from real estate investments, he said.”

“According to Ren Zhiqiang, the Chinese real estate mogul whose remarks recently brought down official wrath, the Chinese real estate market is designed to build houses for the rich, so they can buy houses for investments. In other words, this round of China’s real estate upsurge is not because of an actual demand for housing, but solely because of speculation by rich people with few investment opportunities.”

“However, regardless of the reason, when houses are sold, the government makes money from selling land, banks earn interest from loans, and real estate companies make commissions. It is a prosperity cycle based on credit. As long as banks continue to provide loans, those with money can make use of it and play the investment game.”

“Overall, long-term high real estate costs have a detrimental effect on business, reduce urban employment opportunities, and reduce government revenue. Pouring more credit into the real estate sector has only further inflated the bubble and broadened the wealth gap.”

“When poor people have trouble making ends meet and hope for lower rents, does it make sense to lend money to the wealthy to speculate and make a big fortune in real estate? When small and medium enterprises need funds to maintain their operations, does it make sense to pump money into the real estate sector that will hike up the costs for small and medium enterprises? Real estate speculation does not improve the economy or the lives of the majority of people.”

When You Make Money This Cheap, You Create Bubbles

CNBC reports on the UK. “The spotlight on the London property market as a destination for colossal sums of money has intensified after the so-called Panama Papers leak. The documents have led to various reports detailing the foreign ownership of multiple prime London properties, sparking fears that some multimillion-dollar deals are being financed with laundered money. London property is a compelling choice for criminals looking to make dirty money clean, according to law enforcement agencies. The city also has a highly competent and extensive professional services industry to provide all of the financial, advisory and legal support necessary to buy a house. These agents are tasked with raising red flags if they suspect corrupt money is in play but United Nations data show only a minuscule fraction of deals involving laundered money are ever flagged.”

“At the turn of the century, according to Nationwide data, the average first-time buyers’ house price was at a 4.3 multiple of their average salary. Now that figure has billowed out to around 10.1. Another negative side effect is said to be a prioritization in recent years by U.K. developers of building luxury developments instead of desperately needed affordable accommodation. Transparency International cites house price manipulation and the growth of ‘ghost’ areas as concerns. Indeed, an Evening Standard investigation in 2014 revealed £3 billion worth of London mansions sit empty, with the negative knock-on effects for local services and communities.”

London Loves Business. “Asking prices of homes in London are actually falling, according to a report by property agents Propcision. The study found that roughly 40% of properties listed for sale in Earl’s Court have had their price cut since coming to market. While 35% of properties listed for sale in Chelsea and Knightsbridge have seen a price reduction, 29% of properties in Hammersmith and Fulham have seen asking prices falling too.”

“Michelle Ricci, co-founder of Propcision, said: ‘The data suggests that we are seeing resistance in the central London market. To make an analogy, it’s like throwing a ball into the air, at some point the ball will stop moving upward and shift downward. In statistics, we call this a point of resistance…There are particular areas of vulnerability that may start to show demonstrable evidence of a downward trend - most notably new-builds.’”

The Daily Express. “Sales interest from property investors plunged by 27 per cent in March from the same month last year, showed data from Rightmove. The new tax was introduced to make it longer and more it difficult for investors to secure a profit on buy-to-let. More tax measure to reduce landlords profits are to be brought in next year. This appears to have put buyers off investing in property to rent, with a slowdown in investor spurchases, according to the property listing site.”

“Sam Mitchell, Rightmove’s head of lettings, said: ‘This waning of interest definitely seems to predict a slowdown in the buy-to-let market, but what’s not yet clear is if this will only turn out to be a short-term pause.’ The drop in investor interest already appears to be feeding through to house prices in parts of London. Asking prices in some of the most exclusive areas have dropped by more than 10 per cent this year, it was recently revealed. Some critics have predicted new build flat prices could plunge by as much as 20 per cent this year.”

The Independent. “House prices are always interesting and hugely important to the economy, but something is happening in London in recent weeks that gives them a special significance. It is a twist: central London prices are falling, particularly in the so-called super-prime postcodes such as SW1, but outer suburban prices are rising, in some cases sharply.”

“Of course the fall in central areas may not just be fear of Britain become more isolationist, and tax disincentives for foreign purchasers may also be having an effect. In addition, there are a lot of luxury flats hitting the market, especially along the Thames and this may be holding down prices too.”

“At any rate, according to some calculations from Land Registry stats made by Bloomberg, SW1 (that’s Belgravia and Victoria) is down 7.6 per cent year-on-year, and W2 (just north of Hyde Park) is down 12.2 per cent. As for the Crossrail impact, it doesn’t open until 2019 but already there seem to be mini-booms close to its stations. For example, prices to the West in Ealing (in W13) are up nearly 30 per cent, and to the East by Stratford (in E10) are up 28 per cent.”

The Guardian. “There has been a failure in both the media and government to properly diagnose the cause of high house prices. Until the causes – our systems of money and planning – are properly understood, we cannot hope to fix the problem. The standard solution is: ‘we need to build more,’ but this is not a simple supply-and-demand issue. Between 1997 and 2007 the housing stock grew by 10%, but the population only grew by 5%. If house prices were a function of supply and demand, they should have fallen slightly over this period. They didn’t. They rose by more than 300%.”

“The cause of house price rises is the unrestrained supply of something else: money. Mortgage lending over the same period went up by 370%, thinktank Positive Money’s research shows. It was newly created debt that pushed up prices in a decade of extraordinarily loose lending, which gave birth to a national obsession. Houses were no longer places to live, but financial assets. Property owners became immensely wealthy without actually doing anything.”

“When you have runaway inflation such as this, the Bank of England has a responsibility to quash it, usually by putting up interest rates. But – and here is the great sleight of hand – the Bank has seen fit not to include house prices in its measures of inflation. So, throughout the 90s and 00s, they could then ‘prove’ inflation was low or moderate and interest rates meandered lower. Meanwhile, more and more mortgages were issued, and so more and more money was created, and it pushed up prices. The government didn’t mind.”

“The fraud persists today. The Bank of England says inflation is 0.3%. Really? With house prices up by 10% last year?”

“When you make money this cheap, you create bubbles. Combining a money system that requires ever-expanding debt to function with a national policy of ignoring where that money goes is asking for trouble. And trouble is what we have.”