The Housing Bubble

Bloomberg reports on China. “New areas planned by China’s small cities could accommodate 3.4 billion people by 2030 — or almost half the world’s current population — a target that even Chinese state media calls problematic. A report by the National Development & Reform Commission, China’s central planning agency, found that small- and medium-sized cities were planning more than 3,500 new areas that could accommodate more than twice the country’s current population of 1.4 billion. The findings were detailed in an analysis by the official Xinhua News Agency, which criticized the planned new areas as unworkable: ‘Who’s going to live in them? That’s a problem,’ the piece said.”

From The Australian. “Stress is building from low levels across the housing market as more borrowers fall behind on mortgage payments, despite the lowest mortgage rates in a generation and price rises in many cities, according to new arrears data. And despite their sophisticated risk models, the major banks have more customers falling further behind than smaller lenders. For the seventh consecutive month, the number of home loans in arrears rose in May across ‘prime’ residential mortgage-backed securities, Standard & Poor’s said yesterday.”

“The ratings agency’s prime performance index, known as SPIN, rose to 1.21 per cent in May, from 1.14 per cent the previous month and 1.07 per cent a year earlier. It also showed the banks’ RMBS — securities backed by mortgages that lenders sell for funding — performed worse than non-banks, or institutions that do not take deposits. ‘Most of the increase in arrears for the month was in the more severe category of 90-plus days overdue. The larger upward movements were in the major banks and other bank categories, while nonbank financial institutions was the only sector to see a decline in arrears in May,’ S&P said.”

From News Talk ZB in New Zealand. “A property manager says the warning signs of Christchurch becoming a renter’s market were there 18 months ago. Landlords are having to drop their rents, and some are even offering free rent for the first week - with an oversupply of houses on the market. Brazier’s Property Management owner Tony Brazier said houses in new subdivisions are being bought as rentals - and that’s having a filter down effect right through the market.”

“‘Coming down from that, if you’re [looking for] a two bedroom flat and you can actually get a three bedroom house for the same price, then that’s what happens,’ he said. Brazier said already landlords are struggling to keep up with things like insulation, and that will get harder later on down the track. With rents dropping around the city, it could all prove too much. ‘If they haven’t kept up through the years then the costs of having to catch up may be too much for some of them,’ he said.”

The National on Dubai. “Villa and apartment prices in Dubai and Abu Dhabi fell between 4 per cent and 6 per cent during the second quarter compared to the same period last year as the economy slows amid softening oil prices, according to the property consultants Cavendish Maxwell. Banks are also still cautious when it comes to approving mortgages, exacerbating the slowdown.”

“‘Transaction activity is expected to remain muted during the third quarter, in line with past trends,’ said Manika Dhama, a research manager at Cavendish Maxwell. ‘Developers are promoting Ramadan-linked payment plans and the ‘affordable’ tag continues to be aimed at first-time buyers. However, this is unlikely to ramp up buying activity in the short term among this target segment given the restrictive mortgage-lending requirements and overall liquidity in the market.’”

“Declines were steeper in the second quarter in Dubai, where there is a bigger supply of real estate than Abu Dhabi. In the capital, property prices eased 4 per cent year-on-year. The consultancy said that house prices have been easing since the second quarter of 2014, when the price of oil began its descent. Since then, property prices in the country have dropped by 12 per cent. Rents have also declined by about the same amount as prices during the second quarter versus the first quarter, Cavendish Maxwell said. Drops, however, were most pronounced in certain high-end properties in Abu Dhabi such as Al Raha Beach because of job losses in the emirate’s energy industry.”

“London homebuilders are offering to pay sales taxes, gift 20,000 pounds ($26,800) of furniture and the chance to win a free parking space as Britain’s vote to leave the European Union damps demand. The U.K. capital’s housing market faces an oversupply of apartments that Londoners can’t afford and fewer landlords want after tax changes made owning real estate less attractive. Even before the vote, values were facing a ‘major shock’ as landlords offload properties after increases in levies and new lending rules reduced their returns to near zero, analysts at Deutsche Bank AG said a week before the referendum. Home prices fell 1.4 percent in May, the biggest monthly fall in about five years.”

“Pre-sales to Asian buyers, used by London developers to help raise construction finance, may not surge despite the fall in sterling since the vote. ‘I expected to see double the usual numbers of people turning up’ at a two-day property fair showcasing London homes in Hong Kong the weekend after the Brexit vote, ‘but it felt more like a normal exhibition,’ said Mimi Capas, head of international project marketing at Knight Frank LLP.”

The Khaleej Times. “Every social event, dinner, business meeting and strategy bull session I have attended since June 23 in Dubai has focused on sterling and London (and local) real estate. Investors in the UAE are shocked and unnerved by the trauma of Brexit, confused about its impact on sterling and London property, missold as a ’safe haven’ by so many brokers in town. A Pakistani friend told me he had bought two Nine Elms million-pound apartments as a ’safe haven.’ I did not have the heart to confess my conviction that Battersea projects are offplan leprosy that could well lose 80-90 per cent of their value.”

“From pied-à-terre in Edgeware Road to office leasing funds managed by Bahraini/DIFC/onshore Shariah-compliant banks, the Gulf has untold billions invested in London property. So what now? What next? London home prices, hideously expensive by any criteria, were a proxy for the tsunami of offshore global wealth creation that has now evaporated. Yet by any rational criteria of value, London is awfully overpriced relative to the rest of Britain and relative to UK income growth. There is no demand in Britian for 54,000 new multi-million pound flats sold as pieces of paper in hotel lobbies from Abu Dhabi to Hong Kong. Brexit is the catalyst for a property crash that has now begun.”

“The Russians, the Gulf Arabs, the Hong Kongers, the Malaysian Chinese, the (Benami) Indian oligarchs, the Pakistani (PMLN - dubbed the Panama Money Laundering Network by the media in my country!) money-mians are all gone. The party is over. Get set for ‘distress selling’ of Mayfair and Belgravia penthouses by cash strapped oligarchs. One of history’s great luxury home bubbles will unwind with Brexit - and ain’t no sunshine when the posh boys is gone and the white orangotang haunts the Foreign Office.”

“Do the math; the development pipeline is 14 million square feet. Sixty new projects launched since last October, twice credit bubble highs. Banking and finance is 40 per cent of office lease demand in London and the City is going to shed 100,000 jobs even before Brexit. One of my earliest, most traumatic memories in banking was watch my mates in Chase’s London dealing room get wiped out by the crash in London property just after the Kuwait war in 1991. If the plunge in sterling creates inflation, Threadneedle Street could even be forced to tighten monetary policy amid a recession. The macro tea leaves do not spell correction to me. They spell a full-blown office property crash.”