The Housing Bubble

A report from the Post and Courier in South Carolina. “Marc Ross, chairman of the National Apartment Association, visited the Lowcountry last week on a five-day tour of four markets as distant as Seattle and Birmingham, Alabama. Right now, the apartment home business in the U.S. appears to be healthy and active. ‘Real estate is very attractive. It’s the darling of investment,’ says Ross, a San Antonio, Texas-based real estate developer and manager. Most metro areas are ‘a little bit overbuilt (apartment-wise) but that’s not dangerous,’ he says.”

The Lansing State Journal in Michigan. “There’s a bar chart on Michigan State University’s website that looks like a city skyline, except it’s upside down. It depicts the huge drop in Michigan high school graduates over the next decade. And international students from China, a big driver of enrollment at MSU in recent years, is also leveling off, the university reports. In fact, MSU President Lou Anna K. Simon has told local officials there’s no need for more off-campus housing.”

“I’m not the only one wondering if this trend is going to collide with the ever-growing number of construction projects along the corridor that runs alongside the university and west along Michigan Avenue to the state Capitol. I hear it over coffee and cards. I’m glad the Great Recession is over. It stunk. I’m glad to see cranes outlined against the skyline. But, I’ve got to ask, who will live in these apartments and what will happen to those left behind?”

“Bob Trezise, executive director of the Lansing Economic Area Partnership, is in the business of encouraging development. He’s excited to see the projects along the corridor but acknowledges there may well be a student ‘bubble’ – more supply than demand. ‘I do think there’s probably some sort of student housing bubble going on but I think that’s a good thing because it increases competition,’ he said.”

The Columbus Dispatch. “This fall, about 3,000 Ohio State University sophomores who in past years would have lived off-campus moved into OSU dorms, in the first year of the university’s policy requiring sophomores and freshmen to live in residence halls. And on the edges of campus, developers are building pricey new apartment buildings aimed at students who can afford a bit of luxury. When all the new buildings are open, that’ll be another 3,000 or so bedrooms.”

“There seem to be more ‘For Rent’ signs on houses and apartments near the campus this fall than in past years. ‘One guy told me, a small operator with 10 units, that half were unrented,’ said Wayne Garland of Buckeye Real Estate, which rents 950 units. ‘It has become more competitive.’ Garland said 97 percent of his units are occupied, but only after he knocked down the monthly rent on some two-bedroom units that were going unfilled from $1,050 or $1,100 to $700 or $750, to attract single tenants.”

Crain’s Chicago Business in Illinois. “It’s too early to tell, but banks may be starting to provide the downtown Chicago apartment market with something it could use right now: restraint. They’re tightening lending guidelines for new developments and being more selective when picking projects to finance. With more than 6,000 apartments under construction downtown, that’s widely viewed as a good thing, a sign of a market that is functioning well.”

“‘The market’s a little tighter,’ says Chicago developer Tony Rossi Sr. ‘There’s a lot of product out there, and people are getting a little nervous.’”

“Still, the lending slowdown isn’t apparent to the naked eye. Banks held $5.9 billion in Chicago-area construction and land loans—a figure that covers all property types—at the end of the second quarter, up from $4.7 billion a year earlier, according to research firm Trepp. Also at the end of the second quarter, 21 apartment buildings with 6,385 units were under construction in downtown Chicago, according to Appraisal Research Counselors, a Chicago-based consulting firm.”

“The numbers suggest a pullback in bank lending may be coming too late to avert an apartment glut. Appraisal Research forecasts that developers will complete a record 5,000 apartments downtown next year and about 3,800 in 2018. Those numbers far outstrip a key measure of demand, absorption, which is averaging about 2,500 units a year.”

KDVR in Colorado. “Denver’s apartment rental market could finally be cooling after years of increasing prices. A record number of new apartment communities means more vacancies and and falling rent prices for consumers. ‘I’ve never seen anything like this. We haven’t been building this many apartments since 1973,’ said Cary Bruteig, President of Apartment Appraisers & Consultants, Inc. & Apartment Insights.”

“Bruteig said that 110 apartment communities are currently under construction in the metro and 125 more properties are in planning stages. ‘Right now renters are moving into apartments at a very fast pace but we are still building faster than that which is why vacancy rate is already moving up and why rent growth is already slowing,’ Bruteig said.”

“With a vacancy rate of about 5%, some buildings like the brand new 7/S Denver Haus in Capitol Hill are offering a free month’s rent and luxury amenities to lure new tenants. ‘Concessions are the early warning sign that the market may be softening,’ said Bruteig. ‘We’re probably close to the peak of the rental market right now.’”

“The largest concentration of new apartment buildings is in downtown Denver. That also means the area has the highest number of vacant units which is good news for renters who now have the slight upper hand when shopping around for a place to live.”

A report from the Daily Telegraph in Australia. “Finding a property can be like striking gold in the Sydney market, but one developer is letting buyers have both. Johnson Property Group, the developers behind Trinity Point at Lake Macquarie, is giving away 500g gold bullion bars valued at $28,888 to those who buy at the October 9 launch. It is the latest in a raft of new incentives offered by ­developers, as fears of a ­future oversupply of apartments and a drop in values threaten to deter some from buying off the plan. SQM Research founder Louis Christopher said it was not out of the ordinary for ­developers to try alternate ways of attracting buyers.”

“‘Most developers, even in good times, will offer some type of carrot to differentiate themselves,’ Mr Christopher said. ‘They want to hold the face value of the offering of that property, so during bad times you’ll find incentives get stronger and stronger, anything besides dropping the asking price. It effectively means that anyone who buys in is buying at a lower price, but that doesn’t affect the face value listing of that property.’”

From Domain News. “Golden Week, which kicks off on Saturday, is one of just two major holidays in mainland China, and many cashed-up citizens visiting Australia on vacation also jump at the opportunity to inspect real estate. Sotheby’s principal and agent Michael Pallier said there had been somewhat of a drop-off in Chinese buyers recently. In September, of four sales he made of homes worth more than $10 million in the eastern suburbs and lower north shore, three were made to Australian buyers, with just one to a Chinese buyer.”

“‘If I had done that this time last year, it would have more likely been three Chinese buyers and one local buyer,’ Pallier said.”

“Beijing-based real estate promoter Arron Liu agreed business had declined in recent months. Mr Lui, who organises tours in Australian cities for prospective Chinese buyers, says more restrictive lending requirements from Australia’s big four banks, aimed at foreign borrowers, were to blame. ‘Last year, we organised about three trips a month of about five or six people each time,’ Mr Liu said. ‘Now we only have a few people [interested] but we have yet to have enough to form a group.’”

The Australian Financial Review. “Plane-loads of wealthy Chinese will once again travel to Australia for holidays and a spot of property shopping during China’s ‘Golden Week’ break which starts on Saturday, but this year’s trade will be different, agents and consultants say. Luxury agent House 18’s Michael Zhu was not upbeat about the market. ‘Sure, people are still looking but the buying has lessened,’ he said. ‘The borrowing conditions are a joke. It has turned off a lot of people. The number of Significant Investor Visa approvals have also dropped so many on-the-side property acquisitions have also fallen away.’”

“Queensland’s implementation of a foreign 3 per cent surcharge next week, joining NSW and Victoria, could deliver another blow to foreign capital, especially at this time of the property cycle, Grant Thornton head of real estate and construction Sian Sinclair said. ‘When Victoria introduced it, the housing market was going gangbusters… investors were still interested in investing here,’ she said. ‘It will be interesting to see if [Queensland tax] takes more of a bite especially since we’re inching towards the end of the cycle. We have many markets in Brisbane and Melbourne with surplus stock particularly with investment products.’”

“‘It’s just been really a cumulative wave, which started with the FIRB (Foreign Investment Review Board) fees and the federal government introducing foreign CGT withholding tax. It’s not a ‘welcome to Australia’ to foreign investors.”

The Australia Business Review. “Scott Morrison says we’ve got five years or so to ‘increase our resilience’ because of China’s growing debt problem. We may not have that long. China has become the great innovator of global finance: socialism with a credit bubble. Eight years after the headquarters of capitalism, the US, had one of its periodic rediscoveries of the consequence of financial excess, the People’s Republic of China has discovered the bountiful alchemy of housing and debt. For the moment, the consequences of it remain undiscovered.”

“If China’s debt-fuelled housing bubble does actually burst, Australia will need all the fiscal and monetary firepower it can get, and both are in short supply at the moment, what with the policy rate at record lows and the budget deficit at record highs. But will such firepower be needed? That is the question. Will China’s obvious housing and debt bubble burst untidily, or will Karl Marx tidy it up?”

“The main problem in China is not so much the level of debt — ­although that’s bad enough — it’s that so much of it has been wasted, with the result that credit intensity (the amount of credit needed for a given increase in GDP) is ­collapsing. That’s because 50 per cent of China’s debt lies in the SOE sector, which is hopelessly unreformed and inefficient.”

“And with a Politburo rotation due at the next Party Congress in 2017, it’s very unlikely that any tough reform decisions will be made in the short term — in other words, credit expansion will continue to be main source of growth, even as its efficiency continues to decline. It’s not as if the government is unaware of the problem. At the G20 meeting in Hangzhou in September, President Xi Jinping campaigned for structural reform and said: ‘Following the old road of relying purely on fiscal and monetary policy leads to a dead end.’ But talk and walk are strangers in China.”

The Sunday Times. “The Barnett Government is being accused of misspending hundreds of millions of dollars in property investments in the Pilbara. The State Opposition pointed to new figures which show scores of Government-owned properties remain vacant and the value of taxpayers’ investment in Pilbara real estate has nosedived. ‘The Liberal-National Government has a lot of explaining to do,’ said WA Labor leader Mark McGowan. ‘Taxpayers have been hit with losses of hundreds of millions of dollars.’”

“‘Over half of the government-owned properties are sitting empty and it seems no end is in sight. The Government flooded the market at the worst time, after the boom, when the market was on the decline and jobs were already being cut. The decision has impacted mum and dad homeowners directly, with many Pilbara residents unable to sell their own property because of the oversupply,’ he said.”

“National Party leader Brendon Grylls – also the Housing Minister – said a decision to invest in housing in the Pilbara was made because ‘in 2011 the Pilbara had a problem’ with sky rocketing rentals and property values. On Port Hedland’s Moore St, near one the world’s biggest bulk export port, there is a house that symbolises WA’s post-mining boom economic slowdown. Built in 1965, 57 Moore St is a three-bedroom brick and tile home set on 964sqm that sold for $939,000 in August 2008, just one month before the start of the global financial crisis.”

“Five years later in July 2013 – when the iron ore price was at US$140 per tonne – it was put back on the market for a $1.59 million. Three months ago the home was finally sold for $340,000 – a staggering $599,000 loss on the original investment. In fact, the sale price was $5000 less than it exchanged hands for in 2006./;

“An analysis of the Pilbara property market by The Sunday Times uncovered numerous other example of houses selling at losses close to half a million dollars. This includes a three bedroom South Hedland home bought for $750,000 in 2012 and sold in May for $230,000, and a four-bedroom house in Karratha bought for $840,000 in 2009 and sold for $270,000 this month.”

“In Newman, the median sale price has collapsed 75.7 per cent from $805,000 in 2013 to $196,000 this yea, according to CoreLogic data. Port Hedland recorded a 56 per cent drop in median price from $1.2 million in 2013 to $525,000 in June. It was a similar story South Hedland, which had a 60 per cent fall over the same period, from $895,000 to $355,000.”

“Despite the grim figures, there is a silver lining. South Hedland selling agent Jim Henneberry said local families who had been priced out of the market during the boom were now able to afford to buy their own home. He said while it was devastating for those who bought property for close to $1 million in 2011 only to then have it repossess by the bank and sold for as low as $200,000, the adjusted market opened the door for owner-occupiers.”