May 13, 2016

The Mother Of Bad Decisions

It’s Friday desk clearing time for this blogger. “Sales of Chicago-area homes and condos priced over $1 million dropped 9 percent during the first three months of this year, according to Re/Max research. The median sales price of single-family homes dropped 2 percent to just under $1.39 million, compared with a year ago. And it took significantly longer to sell a home. The result is ‘a painful process’ as people wait for months to sell large luxury homes and ultimately cut prices sharply, said Lisa Dooley Trace of Griffith Grant & Lackie. Buyers are cautious now about buying large homes, she said. ‘They are savvy. They know that people lost millions of dollars as homes fell 35, 40 or 50 percent during the horrible correction. That’s made people conscious about risks in buying them.’”

“She noted a 1928 ‘gorgeous, magnificent’ 9,499-square-foot home that won a historic preservation award in Lake Forest. The owner had purchased the five-bedroom home for $4.87 million in 2006, did major improvements and tried to sell it for $5.2 million in 2014. Recently, the property went under contract after the price was cut to $3.495 million.”

“Few real estate markets in the United States have enjoyed a sharper rise the past few years than Manhattan, where the average price of a home now stands at a record $2 million, according to Douglas Elliman Real Estate. But despite a few record-shattering purchases, New York’s priciest borough is now in the throes of a softening at the very high end as a glut of expensive condominiums floods the market and demand for top-tier properties tapers off.”

“A construction boom targeting the upper end of the real estate market is the biggest culprit, says Robert Dankner, president of Prime Manhattan Residential. ‘We’ve simply had too much building of luxury products in the city,’ he says. ‘There’s a penthouse glut and now we’re seeing a penthouse correction.’”

“Manhattan is not the only affluent real estate market suffering a slowdown, of course. Across the United States, from Miami to Los Angeles, real estate agents are reporting sluggishness at the very top of the market as inventory piles up and wealthy foreign buyers remain hesitant.”

“In a typical Gillette neighborhood on a residential street lined with signs advertising homes for sale or rent, Jake Smith is busy moving his family out of their rental home. ‘We moved here in November,’ Smith said. ‘I moved here to work at Black Thunder (mine). They didn’t tell me they were going bankrupt before I moved up here.’”

“The effects of those layoffs are beginning to ripple through the community, and as people take their job searches outside of Gillette, the city’s vacancy rate is skyrocketing. About 18 months ago, finding an apartment to rent was difficult with a stingy vacancy rate of only 0.7 percent. By the end of March, the vacancy rate has jumped to 12 percent. The speed of which vacancies have increased ‘is scary,’ said Kristy Brayton, property manager at Indian Hill Apartments. ‘I’m not getting the quality of applicants that I used to get. It seems like I’m not getting the flat-out traffic that we used to get.’”

“This week, hundreds of foreign visitors are attending the World Economic Forum on Africa in Kigali, where four international hotels will open in the next three months. Hundreds of new homes are coming on the market worth $500,000 each - a huge sum for a country where most of the 11 million population are subsistence farmers and the per capita income is just $730, far short of the $1,045 that the World Bank defines as middle income. To the government, this is proof of Rwanda’s dramatic recovery.”

“The pace of change is starting to reveal the risks of going too far, too fast. As imports are sucked into a nation dependent on farming, foreign aid and modest mineral exports, the Rwandan currency has fallen, some banks are turning cautious on property lending and economic growth - while still strong - has slipped. All this is threatening to take the shine off President Paul Kagame, a former rebel who masterminded the revival but has drawn criticism from Rwanda’s tiny domestic opposition as well as foreign governments for changing the constitution. ‘If people start to question whether he can deliver, there will be trouble,’ said one Kigali-based diplomat.”

“Super-rich international investors in London property are likely to sell off some of their mansions and penthouses after the introduction of anti-corruption rules cracking down on offshore secrecy, a leading estate agent has said. Privacy-hungry oligarchs, media owners and tech billionaires from around the world could also abandon plans to buy homes in Britain because they would no longer be able to keep their identity secret by purchasing them through offshore companies, Trevor Abrahamson told the Guardian.”

“Abrahamson said the measure would drive down an already slumping property market in the capital. ‘At the same time the oil price dropped, the world stock markets went into gyration, the Russians had a problem with sanctions and the Chinese stock market crashed. Transactions at the £5m to £10m mark are down 50% to 70% over the last year and we have lost 75% of our buyers. Prices are dropping 10% to 15% a year.’”

“Bill Shorten has made Townsville his base for the first week of the election campaign, but the Labor leader won’t get much traction here for one of his signature policies: making housing more affordable. Last year, the Real Estate Institute of Queensland found Townsville’s home vacancy rate was at an all-time high - 5.4 per cent - with prices down five per cent year-on-year. Over coffee at the North Queensland Leagues Club, two locals, Gloria and Lesleigh, say Townsville needs something much bigger to boost the economy.”

“‘Townsville is bleeding,’ Lesleigh, a self-funded retiree and Liberal voter says. ‘If you want to sell your home then it is a terrible time - buyers can basically name their price.’”

“Moody’s Investors Service flagged worries over China’s burgeoning debt load, a day after a party newspaper branded high leverage in the economy as the ‘original sin’. The ruling Communist Party’s paper People’s Daily published a front-page interview with an unnamed ‘authoritative figure’ who said high debt levels are leading to risks in the foreign exchange, stocks, bonds, and real estate markets, adding that China should make deleveraging a priority. The ‘fantasy’ of stimulating the economy through monetary easing should be dropped, the person added.”

“The term ‘authoritative figure’ in the paper usually refers to high-ranking officials who are unable to go on record. State-run media in China is often viewed as mouthpieces for the government and scrutinized for any insights into opaque policymaking in China. The source in People’s Daily added China’s economic growth has been stable and ‘within expectations,’ but warned of problems such as a real estate bubble, industrial overcapacity, an increase in non-performing loans, local government debt and risks in the financial market.”

“Do you just love paying more for something you really need? No, I thought not. So, how to explain the ’scary’ crop of stories informing us that there is a major problem because Hong Kong property prices have started slipping? The answer is that there is nothing more illogical than the way otherwise sensible folk approach investment in the property market. This is particularly worrying as for most people a property investment is the largest they will ever make.”

“A sense of jubilation arises among property owners when prices rise. They gleefully regale each other about how much they have ‘made’ thanks to a rising market. This, of course, is pure nonsense because no money is ‘made’ until a transaction takes place. The trouble is that this kind of property euphoria also tends to be the mother of bad decisions. Flushed with the success of their property investment people who should know better start taking out loans to buy more property, maybe they even look overseas where the prices are lower.”

“Meanwhile as prices fall in Hong Kong chances emerge for more people to clamber on the property ladder. It makes a lot of sense to do so for those who are still renting, not just in fiscal terms but also in terms of the security and comfort derived from owning a home of your own. Price falls are also good for the commercial sector; those of us who spend our time dealing with rapacious commercial landlords have absolutely nothing to fear from price falls. On the contrary we look forward to the boot being on the other foot.”

“So, why are there so many stories using words such as ‘worrying’ and ‘concern’ when describing falling prices in the property market? A more appropriate word, in my view, is opportunity, opportunity to buy at lower prices and an opportunity to lower costs. None of this strikes me as a matter for concern.”