The Housing Bubble

A look at supply and demand in a housing bubble, starting with Radio New Zealand. “Reserve Bank measures have had little success in reining in the market, with house price growth in New Zealand’s largest city starting to accelerate again. According to figures from QV, the market has increased 15.4 percent year on year and 3.3 percent over the past three months - pushing the average house price to $955,793 in May. Prime Minister John Key told Morning Report the Reserve Bank still had options open to it to curb the city’s over-heated property market. ‘I know people are sick of it but all roads lead back to supply - you have to build enough housing. But my simple point would be if you want to do more around borrowing in that area, and the capacity for those people to access that market, the easiest road home there is through the Reserve Bank’s actions.’”

“Mr Key said he would potentially support Finance Minister Bill English’s loan-to-income ratio idea, and the bank could consider a range of actions. Martin Hawes said negative equity - when a home is worth less than the money owed on it, was a distinct possibility if the trend continued. Mr Hawes said, as an investor, he would not buy property in Auckland at the moment. He said the high value of the rental market and the easy availability of credit were signs the city was in a housing bubble.”

“‘There’s a loss of touch with intrinsic value, that is, the market becomes so highly valued that the income from the market, in this case in terms of rents, becomes quite different,’ he said. ‘Second, there’s almost always easy credit when a bubble inflates. My concern is that every day Auckland house prices continue to inflate, the chance of a violent end and a very unhappy ending to the whole market increases.’”

The New Zealand Herald. “More than 33,000 Auckland dwellings are officially classified empty as the city grapples with a crisis of affordable housing and homelessness. Auckland’s 6.6 per cent vacancy rate is higher than either Sydney (5.2 per cent) or Melbourne (4.8 per cent), where there has been an uproar over ‘ghost houses’ deliberately left empty by speculators trading on a soaring market.”

“Labour’s Housing spokesman Phil Twyford said it was not surprising that the super-rich were happy to leave houses empty when Auckland prices were rising so fast. ‘It’s madness, and says a lot about the housing crisis, that we’ve got thousands of homes deliberately left vacant by their owners while in South Auckland there are kids sleeping under bushes.’”

“Chris Haturini of Mt Albert said her family had suffered for two years living alongside a ‘ghost house,’ which she said was owned by an overseas-based investor. It had been infested with rats and occupied by squatters and drug users who left used syringes lying about. Ms Haturini, who is in the property management and now home staging business, said she had heard up to 35,000 residences in the city could be empty. ‘People are afraid to talk about this … But it’s just nuts.’”

News 1130 in Canada. “The Bank of Canada believes rising prices in Vancouver’s real estate market are not sustainable, but there seems to be two schools of thought on what is fueling them. One local academic says addressing foreign ownership, and not a lack of supply, is what will really calm things down. SFU Assistant Professor of Public Policy Josh Gordon says we keep building and so prices will keep rising and he thinks that’s enough evidence that pumping in supply will not slow the market down.”

“Gordon thinks government should address foreign ownership first. ‘[With] Some form of tax. I also think simply cracking down on money laundering and enforcing those provisions a bit more strictly.’ He’s concerned adding too much supply will worsen any correction down the road leading to unsellable condos. ‘There is this attempt to shift the blame and say it’s all about supply even when it obviously isn’t. This is really damaging and it’s upsetting to a lot of people. People in Vancouver just aren’t buying it anymore,’ adds Gordon.”

The Province in Canada. “A Vancouver west-side house that changed hands five times in just over two years shows prices are being pushed up by speculators, says a Vancouver real estate agent. The house at 6712 Adera St. first sold in March 2014 for $3.2 million, and last sold in May, for $7.6 million, said Steve Saretsky on his blog headlined: Vancouver Real Estate Speculation Runs Rampant.”

“He said the house’s final sale was among 179 west-side house sales in that month. Of those, 28 houses — or almost one a day — had been sold at least once in the previous 12 months, said Saretsky, who went through the tax histories of each of the sales to come up with the number. That works out to 16 per cent of all May sales, he said. ‘It’s like a lot of speculation out there,’ said Saretsky, who works for Sutton West Coast Broadway Realty. ‘It is happening. They (buyers) are hanging on to it like stock and then selling’ it at a profit.”

“The Adera property sold in July 2015 for $6.4 million before being sold for $7.6 million 10 months later, a $1.2-million profit. The buyer made a gross profit of $120,000 a month or $4,000 a day. Saretsky acknowledged there is ‘nothing illegal at all’ about homeowners selling properties held for a short period of time, and speculation is risky if the market crashes. But ‘it’s adding to the problem’ of unaffordable housing, he said. The rising prices ‘aren’t all about supply and demand.’”

The Tennessee Ledger. “It’s easy to watch a renovation show on HGTV or the DIY Network, see how much money can be made and think, ‘Hey, I can do that.’ And with a housing market as hot as Nashville’s, what could possibly go wrong? Turns out, many things can go wrong if you don’t have experience. One expert even suggests Nashville is getting close to ‘flipping out,’ reaching a peak at which house prices are so high that not everyone, especially less experienced or new flippers, can make a profit.”

“But it’s the hope that things will go very right – like $100,000-profit-on-a-flip right – that makes it so appealing for those already lining up financing in their mind while watching at home with a bowl of popcorn and a glass of wine. Nashville’s Troy Dean Shafer happens to be one of those creative contractors you’ve likely seen renovating old homes for a profit on TV. His show, ‘Nashville Flipped,’ premiered in April on DIY Network.”

“One of the homes Shafer flipped on his show was in Madison, a property he bought for $78,000, put $45,000 into and then sold for $169,000 the first day it went on the market. He’ll take profits like that all day. ‘It wasn’t like a grand slam as far as a ton of money coming in after Realtors and everything, but as far as an ROI, to only be into it for $125,000 and then to clear $25,000, that was a good ROI,’ he says. ‘I’m always thinking, ‘What’s next? What’s the next big area? Is it Madison? Is it Buena Vista? Is it Bellevue? Is it Hendersonville?’”

“‘What we’re seeing in the data is that basically Nashville is approaching its peak flipping point, which occurred back in 2006,’ says Ralph McLaughlin, chief economist with Trulia. ‘In 2006, about nearly 12 percent of all transactions were flips, and just in the last quarter of 2015, it was 8.3 percent, so it’s getting close to flipping out, so to speak, in that it’s approaching the peak level of flipping that was occurring before the crash.’”

“The big question is whether or not that is indicative of a bubble because a rise in house flipping can be considered a sign of an overheated housing market. But McLaughlin says they are not concerned about Nashville or any other hot flipping markets experiencing a bubble. ‘There was a sharp increase in flipping activity in Nashville since the recovery started,’ McLaughlin points out. ‘It looks like things are flattening out, so it doesn’t look like Nashville will totally flip out.’”

“David McKinney says the value of property has gone up so rapidly all over that it makes it difficult to find a flip property that is worth the return on investment. ‘Now the land’s more valuable than the house and property were just a short time ago, so that’s why so many of them are being torn down and two to four are being built in their place,’ he says. ‘The people who’ve been there are a long time, some of them are asking amounts for their property that they don’t necessarily think they’ll get and, lo and behold, someone ponies up the paycheck for it. It’s causing the property values to go up exponentially.’”