August 8, 2016

Some Chinese Buyers Will Break Their Contracts

Bloomberg report on Canada. “British Columbia’s decision to impose a 15 percent tax on foreign buyers to cool Vancouver’s scorching housing market is poised to derail more than 400 home purchases worth millions of dollars and may prompt calls for legal action. At least 427 deals are likely to collapse due to the new measure, according to Dan Morrison, president of the Real Estate Board of Greater Vancouver, citing responses from 27 brokers to an e-mail inquiry. The group didn’t calculate the value of those sales, though they would be worth about C$404 million ($307 million) based on the average purchase by a foreign buyer of C$946,945.”

“That may just be the tip of the iceberg. ‘It’s a domino effect,’ said Elton Ash, Western Canada regional executive vice president for Re/Max Holdings Inc. Not only will foreign buyers be hit but also Canadians who had contracts to sell and had already put offers on their next house, he said. Morrison said the effects could take years to play out given some deals involve the sales of condos still being built.”

“British Columbia joins governments from the U.K. to Australia imposing measures to tame markets that have become unaffordable for many local residents. Public support for intervention was building in Vancouver, where anecdotes abound of offshore investors bidding up prices then leaving homes empty.”

The Australian. “The ingredients for the next banking ’scandal’ are now sitting on the table ready to be mixed. It will be a scandal like none other in Australian history because it will involve Chinese rather than Australian residents as the victims. Readers will be well aware that this year I have been documenting the Australian bank antics which played a big role in the apartment building boom which has caused some 230,000 apartment to now be under construction and due for settlement in the next two years or so. The vast majority have been bought on 10 or 20 per cent deposit by Chinese and other Asian investors.”

“The Reserve Bank has forecast a glut of apartments but has not explained to Australians the involvement of the Australian banks and APRA in creating this crisis. I want to first emphasis that where there are legal agreements for Australian banks to fund the settlement of apartments sold to Chinese, or anyone else, they will be honoured. But in the vast majority of cases there was no legal agreement. The Chinese investors were usually given non-legally-binding comfort by the banks that they would fund about 70 per cent of the purchase price. There were usually tags on the non-binding offer like ‘subject to market values’ etc.”

“On many occasions, bank executives may not have made direct contract with Chinese buyers but instead the assurance was given by an agent with the middle ranking bank executives turning a blind eye. But there is little doubt they knew what was happening.”

“If the Reserve Bank is right and there is to be an apartment glut causing severe damage to the building industry, our education industry and our international reputation, it may require a royal commission or a Senate inquiry to find out what really happened in the banking industry.”

ABC News in Australia. “Chinese property buyers are the biggest group of offshore investors, having spent $24 billion in the year to June 2015. But many are now facing challenges of obtaining finance as the big four banks tighten their lending restrictions at a time when most Chinese buyers want to get their loans financed through Australian banks. Often, Chinese buyers don’t want the Communist Party to know exactly what they own, and Chinese residents are only allowed to take $50,000 out of the country a year.”

“‘Whereas before they might have used to take overseas income as part of their allowance for paying off the loan a lot of banks have said no we’re only looking at domestic income,’ BIS Shrapnel property analyst Angie Zigomanis said.”

“Real estate agent Yang Li regularly sets up stalls at China-related events around Australia and said half his clientele is from Asia. ‘80 per cent of the investors who invest in Melbourne properties … they just trust the law, they reckon it’s a proper economy here,’ Mr Li said. ‘In the last couple of years Australian property market is really, really hot but I think from end of last year early this year it has cooled a little bit — due to bank policies. It’s hard to get money from the bank’.”

“With a lot of supply coming online in the next few months, Marshall Condon, a mortgage broker who provides finance for development projects, including Chinese buyers, warns some will break their contracts. ‘We might see a few more fall-overs and people not settling,’ he said. ‘In saying that what we’re hearing in the market — 50 per cent [of the offshore sales are] a bit of a concern.’”

The Wall Street Journal. “It was only a matter of time before defaults emerged in China’s self-extolled offshore bond market. The disruption that has ensued is telling. China City Construction International defaulted on 2.5 billion yuan of debt in recent weeks, making it the first credit event in the market for so-called dim-sum bonds—yuan-denominated bonds traded Hong Kong. The market was meant to be a proving ground for the internationalization of China’s currency.”

“Theoretically, bondholders should put their faith in Beijing. But in late April, CCC International’s parent company suddenly disclosed there had been a change of major shareholder: The central government had gone from 100% owner to 1% owner, with control shifting to Huinong Fund International Investment, whose stakeholders include large state-controlled Chinese banks and asset managers.”

“That triggered a ‘change of control’ clause allowing CCC International bondholders to redeem the bonds at 101% plus accrued interest. CCC International initially said it would comply, but then said it couldn’t, and informed bondholders it was in default on the principal payment, according to Moody’s. So much for that sturdy state sponsorship.”

A Growing Sense The End Is Out There

The Dallas Morning News reports from Texas. “Apartment rents in North Texas have never been so high. Rents are up almost 6 percent from a year ago and have risen almost 30 percent in the last five years. Even the boom in apartment building hasn’t taken the bite out of the annual increases. Almost 50,000 new rental units are being built in the Dallas-Fort Worth area. But most of those units are aimed at the upper end of the market. Middle tier D-FW apartments have the lowest vacancy rates, about 4 percent. And rents in these units, which average $959 a month, are about 7 percent higher than in mid-2015. One reason occupancy levels are so high in these properties is that developers are knocking down older apartments all over D-FW to replace them with newer, more expensive units. ‘Class A rent growth is the slowest because of all the new supply that’s coming to market,’ said Greg Willett of Richardson-based apartment analyst MPF Research.”

The Longview News Journal. “The continuing downturn in the oil industry has put a damper on home building in Longview this year, with activity not keeping pace with sizable increases in home sales in the same period. Why no developers took out permits for apartment complexes is a subject of speculation. ‘I think we are kind of oversaturated in the market for higher-end (apartments),’ said Karen Holt, housing navigator for the aging and disability center operated by Community HealthCore. ‘I think that is why you are seeing a downturn in the permits.’”

From News Channel 10. “Texas home sales and prices may be the only thing rising as fast as the summer temperatures. It’s no different in Amarillo. Realtors are busying and the amount of time the average homes stays up for sale is decreasing. ‘It’s been a record setting year in Amarillo,’ said Kent Meyers with the Amarillo Association of Realtors. ‘We have sold more houses in the first two quarters in 2016 than ever in history that we’ve kept record.’”

“But one small set back is houses in our area are more expensive. ‘Median prices are just a little bit above $200,000. The prices continues to move up just slightly,’ said Meyer. ‘That’s basically due to the lack of inventory in Amarillo and that’s a problem we’ve had, we just simply don’t have enough houses to meet the demand on new homes and existing homes.’”

“According to Meyer, homeowners will barely feel the impact of the pricey homes. ‘Our interest rates remain incredibly good,’ said Meyer. ‘When you buy a house, that’s an investment, probably the biggest investment that any family ever makes.’”

From News West 9. “The Texas Quarterly Housing Report shows that the state is experiencing gains in home sales and prices. But in the Permian Basin, that’s not the case. The Midland median home price is down 3.5 percent from last year. Although there are more active listings now than there were a year ago, the number of closed sales is down 4.2 percent. This means houses are staying on the market, and not selling. And those same numbers are down for Odessa.”

“Texas Association of Realtors Regional Vice President Warren Ivey said it’s no coincidence this is happening at the same time the oil industry is trending downward. ‘You bet,’ said Ivey. ‘Because our employee base is based mainly in the oil industry, when the price of oil goes down, people get laid off. There’s not as many buyers ready to buy a house at that point and therefore, prices of the homes come down.’”

“The active listings is up more than 73 percent and the housing inventory is sitting at 5.3 percent. However, Ivey said it’s not something to worry about because it’s not a huge slide in the market, especially compared to where the rest of the state sits. ‘The median sales price in Midland for a home is $237,000 and we are down from last year,’ said Ivey. ‘The state of Texas, across the state, the median sales price is lower than that and they’re up. So that goes to tell you, in the past couple of years, we’ve had great sales prices on our homes.’”

“Ivey said that if you’re looking to sell, you won’t get as much as last year, but that shouldn’t stop you from testing the market.”

The Midland Reporter Telegram. “At 2016’s midpoint, the Midland-Odessa regional economy continues the contraction fueled by the sharp drop in oil prices and oilfield activity. But there is a growing sense ‘the end is out there,’ said Karr Ingham, the Amarillo economist who prepares the Midland-Odessa Regional Economic Index for the Midland Development Corp.”

“Ingham reported that the June index is down 12.2 percent from year-ago levels and, nearly a year and a half into the economic slowdown, has fallen by nearly 16 percent on the heels of a five-year, 70 percent economic expansion. Midland and Odessa continued to shed jobs amid the downturn, with Ingham estimating total payroll employment in the two cities has fallen by an estimated 14,300 jobs since peaking in November 2014. Unemployment in the second quarter is up 33.6 percent over the second quarter of last year and so far this year is 39.3 percent above the first six months of 2015.”

“In Midland, the second quarter home sales price averaged $274,083, down 2.1 percent from $279,871 last year. The year-to-date sales price averaged $272,278, down a mere 0.9 percent from $274,773. ‘On balance, the economy looks like it’s expected to look like in response to the dramatic circumstances surrounding oil prices,’ Ingham said. ‘It’s responded as expected and appropriately.’”