August 21, 2016

Irrational Exuberance At Its Worst

A report from Bloomberg. “Chinese authorities said 450 suspects have been arrested this year in a crackdown on using offshore companies and ‘underground banks’ to transfer money illegally, underscoring the scale of the task for officials trying to control capital flows. The cases involved almost 200 billion yuan ($30 billion) of transactions, the Ministry of Public Security said in a statement on its website. A net $55 billion exited in July, compared with $49 billion in June, Goldman Sachs Group Inc. analysts wrote in a note. Outflows surged during the second half of last year, rising to as high as $171 billion in December, according to a Bloomberg estimate.”

NewsHub on New Zealand. “A Chinese-New Zealand real estate agent says some foreigners are buying Auckland property purely for profit. Adam, who did not want his surname revealed, has worked in real estate in Auckland for almost four years. ‘A good proportion of foreign buyers come here as speculators. They think the New Zealand housing market is very hot and the price may be in their opinion still under-valued. So they come here to buy and they have an intention to sell,’ he says.”

“He says he felt so strongly about the issue he emailed NZ First leader Winston Peters, who today put out a press release quoting Adam. ‘The agent said many foreigners did not pay tax, bought and sold through their own circles and would sell in bulk and abandon New Zealand if there was a downturn in property values,’ says Mr Peters.”

“He admits his comments around the Auckland housing market are not based on fact, but rather his dealings with foreigners in Auckland. ‘A good proportion of Chinese, they come here with bags and bags of cash. I am dealing with a lot of foreign buyers and many of them come here to buy property, to live in New Zealand with an intention for education or business, but some of them come here for investment purposes.’”

The New Zealand Herald. “It’s tempting to join the chorus of sinophiles who slapped ‘Adam’ for suggesting Chinese speculators were building the Auckland property bubble. But the spectre of large-scale money-laundering through cash buys in the Auckland market - which the anonymous real estate agent also raised - must be investigated. It must not be simply swept under the carpet while the Government meanders slowly towards cracking down on the estimated $1.3 billion of ‘dirty money’ washed through New Zealand each year.”

“The Chinese agent - who wrote an article in Monday’s Herald and spoke with radio host Duncan Garner - painted a disturbing picture. ‘Adam’s’ claims were evocative: ‘I remember seeing young couples with their hands clenched and eyes glued to the auction screen, only to find their first dream house outbid by someone screaming in Mandarin. And I shudder to imagine their feeling when they see the very house they missed out on back on the market within a couple of months with 200k added on top … meanwhile, a champagne is uncorked at another New Zealand property expo in China.’”

“This is because while the property market has been reflecting an exhilarating population growth, it is also fuelled by the widespread assumption that ‘the Chinese pay the most’. It is irrational exuberance at its worst.”

The Daily Mail on Australia. “Chinese buyers are increasingly dominating home auctions as they race to get on the property ladder soon after arriving in Australia. Such is their enthusiasm that in some suburbs it is rare to find house hunters of other nationalities bidding on family homes, even in crowds of 50 or more. All but one of seven auctions Daily Mail Australia visited in Sydney’s northern suburbs this weekend was won by a Chinese bidder, with one home only contested by Chinese buyers.”

“Kitchen supplies wholesaler Andrew Shen was one of dozens of bidders for a four bedroom house in Epping that sold for $1.8 million on Saturday. The 26-year-old, who moved from Jaixing, near Shanghai, in 2010 and is now an Australian citizen, was looking to move his new family out of their cramped flat. He said he had been house hunting in the area for more than two months and had his heart set on the brick home next door to West Epping Park, but was priced out by another Chinese buyer.”

“‘I think this price was a bit too high for the market. It was incredible, crazy. I hope I can find another one,’ he said. ‘I’ve worked so hard to get money and buy a home for my family.’”

“Mr Shen first came to Australia to study at university, following his older sister who moved years before, and was soon joined by his parents. He is now married with a five-month-old daughter and his parents and sister now own property in Sydney, and came to the auction to support him. Like many young Chinese homebuyers, he got help from his parents to buy his first property – a flat nearby he acquired in 2014 – but said he had to finance the new house himself.”

“‘I have to work very hard to hopefully get a big house, that’s my dream. I hope it comes true,’ he said, adding that he also planned to keep the flat as an investment.”

Domain News in Australia. “The Hunters Hill trophy home of Cate Blanchett and her husband Andrew Upton is set to return to the market after the buyer was forced to default given problems getting their funds out of China. The historic residence, Bulwarra, made headlines when it sold for $19.8 million last August, not only because of its high-profile ownership, but because the sale came less than three weeks after it hit the market. Property transactions at this level usually involve a 10 per cent deposit, which represents a $1.98 million loss for the Chinese buyer.”

“The Hollywood A-listers exchanged on the sale of their historic home a year ago and have since moved to the United Kingdom. Earlier this year China started forcing its state-owned banks to delay or block large sums of money going overseas. By law, individuals in China are restricted to moving the equivalent of $US50,000 out of the country each year.”

“Foreign buyers relying on finance from Australian banks hit a roadblock in May this year when the big four started clamping down on loans obtained based on overseas income. Property developers have reported concerns with smaller-priced investments to foreign buyers defaulting as a result of the crackdown on foreign capital outflows from China.”

“Until now the trophy home market was said to be immune to the moves because buyers at that level usually already have their money in offshore accounts.”

The Australian. “As buyers returned to the Sydney dwelling market over the weekend, taking auction clearances to a one-year high, on the other side of the Pacific in Vancouver, prices are down 20 to 30 per cent. Vancouver, Sydney and Melbourne are, in a strange way, ’sister’ cities because all three have been subjected to unprecedented Asian buying of domestic real estate, which has sent prices so high that young locals are being priced out of the market.”

“So, what has happened in Vancouver in the last three months is of vital interest to the Sydney and Melbourne real estate markets. Two blows have hit Chinese buyers of Vancouver real estate — the increasing difficulty of moving money from China and the implementation last month of a 15 per cent property tax by the provincial government of British Columbia.”

“Both Victoria and NSW have imposed property taxes on foreign purchases but nothing on the scale of what was imposed in Vancouver (in Sydney it is being levied at 4 per cent of the purchase price). Before the tax came into effect, Vancouver experienced the same developments that we saw in Sydney and Melbourne — such as deals falling through as foreign buyers forfeited deposits on binding deals.”

“Then the Vancouver market received an extra blow — local buyers began withdrawing offers in expectation that the market would soften. Volume slumped dramatically. While August is typically one of the slowest months for real estate transactions in Vancouver, the number of homes sold during the first two weeks of August in Greater Vancouver dropped by 85 per cent on average.”

“Solo, a Canadian real estate brokerage house, reports that the City of Vancouver currently has an average apartment price of $1.1 million, down 20.7 per cent over the last 28 days and down 24.5 per cent over the last three months. Real estate experts say that the foreign buyer tax has certainly stopped speculative buyers. This has caused many other buyers to take a wait-and-see approach, which has essentially frozen the market. Australia is not experiencing such a development but if the Vancouver slide continues, it should raise property alarm bells around the world.”

A Market Gone Wild

The Globe and Mail reports from Canada. “A year ago, when Bank of Canada Governor Stephen Poloz cut interest rates for the second time in six months, we knew we’d have to take the bad with the good. Slashing the bank’s overnight rate in half to 0.5 per cent would surely further inflate regional real estate bubbles. But that, we figured, was just the price to pay in order to fuel non-energy exports and a sustainable recovery.”

“Hewers of wood and drawers of water, not. Canada is now a real estate nation, with little else to keep the economy from sinking into an even deeper funk. Gross domestic product shrank 0.1 per cent in May, and that’s after excluding the negative impact of Alberta’s wildfires on oil sands output. Yet, we’re still buying houses like there’s no tomorrow. And there may not be a tomorrow for the suckers who buy in at the peak, whenever it comes.”

“The so-called economic rotation from oil to manufacturing exports that rate cuts (and the related decline in the Canadian dollar) were supposed to produce has not only failed to materialize but policy makers have pumped helium into an already overheated real estate sector that is masking structural weaknesses in the economy and setting us up for a bigger fall.”

“Politicians who claim to be fighting for the middle class have priced most of them out of the Toronto and Vancouver housing markets. But worry not. B.C. has slapped a 15-per-cent tax on foreign buyers and Ontario could follow, while Ottawa is contemplating raising minimum down payments and slapping a hefty deductible on banks’ insured mortgages.”

“These and other demand-side policies might indeed lead to a real estate slowdown – to wit, the 18-per-cent year-over-year drop in Vancouver home sales in July. But at what cost? If prices do start to fall, even moderately, buyer psychology will shift rapidly and a reverse wealth effect will set in. A real estate crash (which bypassed Canada during the last recession) could become a self-fulling prophecy. On the bright side, policy makers might finally get their economic rotation.”

From Metro News. “Following the introduction of B.C.’s 15% tax targeting foreign homebuyers, realtors say local buyers no longer seem to be feeling the FOMO that had been spurring them to compete in bidding wars.”

“‘What it did, in my opinion, it’s changed the behaviour of the locals where everybody before was rushing in to buy something, going in way over their head with multiple offers,’ said Steve Saretsky, a realtor with Sutton Group West Coast, describing a situation in which local buyers expected prices to continue to rise because of interest from foreign buyers. ‘Then (the tax) came out and everyone’s like oh, all these foreign buyers are going to leave the market, maybe I’ll wait.’”

“There has already started to be some price reductions in some detached homes in Richmond and Tsawwassen, Saretsky said, markets that had seen detached home prices rise a nosebleed 47 and 42 per cent, respectively. ‘It just couldn’t keep going,’ Saretsky said.”

The Nelson Daily. “Last week the province instituted a tax on foreign ownership, increased fines for realtor misconduct and moved to create a provincial superintendent of real estate, who will take over all regulation and rule-making duties from the Real Estate Council of B.C. The moves are in response to the ongoing public outcry for reigning in skyrocketing real estate prices in the Lower Mainland and drafting tighter controls for the industry across the province. However, the need for control of a market gone wild in the rest of B.C. is not reflected in the market of Nelson of the present day, say some local realtors.”

“In fact, Valhalla Path Realty’s Robert Goertz doesn’t foresee a foreign ownership tax being implemented in Nelson, since the heritage city does not have the same issues with foreign ownership as Vancouver does. ‘People are buying in Vancouver on speculation. People who own homes in Nelson use their homes, even if it is as a secondary dwelling,’ he said.”

“But Century 21 realtor Brian Euerby said a foreign ownership tax may come to pass in Nelson, even though the tax was largely targeted toward those from mainland China that are making offers without seeing the properties. ‘The demographic of the (buyers) would suggest they prefer the larger urban lifestyles,’ he said about Nelson. ‘That said, though, this model is being watched carefully by other levels of government and there has been some discussion that this tax may well spread throughout the entire province if foreign ownership spreads to the Interior.’”

“The province could allow the City of Vancouver to impose a tax on vacant homes, with a city-led study finding over 10,800 empty homes in the city in 2014. The province could allow other cities to implement similar taxes. ‘You would be surprised as to how many vacant homes there are out there, but none of which I would suggest are as a result of the foreign buyers that are being targeted on the Lower Mainland,’ Euerby said.”

“‘People need a place to live and rising prices are the reality they are faced with even if it means over extending themselves,’ Euerby said. ‘I personally believe people are over extending themselves to reach up for prices. Any rise in the interest rates and this is going to tip many over the edge, a society that is already statistically spend $1.60 for every $1 earned.’”

“And a good deal of the $1.60 is simply debt service, he said. ‘If this tax, and it is substantial, spreads nationwide, it will have an impact,’ he said. ‘Two things are driving this market: foreign investment in larger urban centres; and low interest rates. If one or the other of those is taken out of the equation then Houston, we have a problem. If both change, well … stay tuned.’”