October 5, 2016

A Sign The Boom Is Starting To Unwind

A report from the Financial Post in Canada. “Cross-border tax and legal advisors are in for a busy week as a retroactive closing of a tax loophole that allowed foreign home buyers to avoid paying capital gains taxes went into effect this week. Derek Holt, vice-president at Scotiabank Economics, points out that a lot of foreign investors just lost a big chunk of the gains they’ve made on their investments. ‘American, Asian and European clients are — or should be — suddenly sweating over losing up to a quarter of the value of past investments in Canadian real estate,’ he said in a note to clients.”

“The closing of the loophole went in to effect the day before the announcement. Holt notes it was a smart move, because there would have been a flood of for sale signs being erected if a future date had been set. But Holt also questions implementing the law at all, especially because it’s not quite clear how many foreign buyers only invested on the assumption that they could avoid paying capital gains taxes. The economist adds that another concerning part of the law is that it essentially means that the primary residence exemption, often cited by home buying advocates as a big reason to own a house in Canada, is no longer untouchable.”

“‘The first barrier to potentially one day taxing your principal residence has been removed by now requiring full disclosure of sales to the CRA in tax filings going forward,’ he said.”

From News.com.au in Australia. “As if saving up the deposit and getting a loan wasn’t hard enough, now buyers are facing a new challenge to break into the property market — savvy homeowners banking on an increase in property prices. Darren Davey, real estate agent on the Gold Coast, said homeowners are being particularly confident that prices still have plenty of room to rise. ‘I have one particular homeowner over the course of the last three years where they have said that they wanted a certain price and I’ve said it is probably $50,000 under the price they wanted to sell at. I’ve then come back six to nine months later to tell them I think I can achieve that price now, only for them to turn around and say they want another $50,000-$60,000 on top of that. That has happened to me three times now with the same owner,’ he told news.com.au.”

“After such strong growth it is hard to remember that property isn’t immune to normal market cycles — the fact is that what goes up must come down. LJ Hooker chief executive Grant Harrod said the number of properties being sold is considerably fewer than last year. ‘We have certainly seen some properties in the last couple of weeks that had been on the market for a while because vendor expectation around price was a little bit too high, and they have had to adjust and then the property was sold,’ Mr Harrod said.”

“Mr Davey cautioned that by continuing to hold off now, homeowners on the Gold Coast could actually see prices drop by the Commonwealth Games. ‘They seem quite savvy, but at the same time if enough people are doing it, it is going to have the reverse effect. It will turn into a bit of a glut of property on the marketplace,’ he said.”

The Korea Times. “Businesses and self-employed people borrowed more than 160 trillion won ($144 billion) from financial companies in the first half of this year, hitting a record-high level, the Bank of Korea said. As a result of the government’s policy to bolster the economy by heating the property market, real estate-related loans surged 56 trillion won over the past three years. There are voices expressing concerns about the concentration of real estate loans. The ‘abnormal boom’ of property market amid the overall economic slump of less than 2-percent growth could work as a time bomb if the economy fell further, experts said.”

“According to the Hyundai Research Institute, the domestic real estate market peaked in mid-2015 and has been in retreat since. Noting that the real estate market is booming only in Seoul and its vicinity, the think tank said that when supply exceeds demand in the future, there might be a massive increase in unsold apartments. Any abrupt cooling of the property market would lead to an enormous amount of bad debts, the experts warned.”

“‘It is a serious problem that loans are being concentrated in real estate and rental businesses while those for science, research and information service sectors are relatively sluggish,’ a member of the central bank’s Monetary Policy Board was quoted as saying. ‘If the real estate market sags, it might not only harm financial stability but also aggravate the slump of overall economy.’”

From Bloomberg on Japan. “Sales of new condominiums in Tokyo have fallen to the lowest since the nation’s 1990s property bubble collapse, a sign the real estate boom fueled by Bank of Japan easing is starting to unwind. New apartment sales in and around the country’s capital fell 32 percent to 13,303 units in the first eight months of the year, the least since 1992, data from the Real Estate Economic Institute Co. show.”

“Potential buyers, faced with almost stagnant wages, are turning down 35-year fixed-interest mortgages as low as 1.06 percent, near the record low of 0.9 percent in August, according to data from the state-run Japan Housing Finance Agency. ‘Stagnation in wages is why we are seeing a slowdown in sales of condominiums’ in Tokyo, said Takashi Ishizawa, a senior researcher at Mizuho Securities Co. ‘If you look at interest rates, historically speaking there has never been a better time to buy, but developers without really good properties are having trouble selling.’”

“The real estate market’s boom has been one of the few bright spots for the world’s third-largest economy, and its slump could deepen the nation’s deflationary mindset. The BOJ’s move to target the yield curve last month will probably trigger higher mortgage rates and weigh on apartment prices, according to a report by Credit Suisse Group AG. The central bank’s adoption of a negative-rates policy in January misfired as the yen strengthened against the dollar, hurting corporate profits and making Japanese companies even more cautious about raising wages, according to Natixis SA.”

“‘What I think is very dangerous is the presence of negative interest rates’ in Japan, said CME Group senior economist Erik Norland in a Bloomberg Television interview. ‘Negative interest rates are meant to ease monetary policy but they seem actually to have the perverse impact of unintentionally tightening monetary policy.’”

Sooner Or Later, The Free-Wheeling Fun Cools Off

A report from Reuters. “U.S. apartment vacancy rate was unchanged at 4.4 percent in the third quarter from the second, while rent growth decelerated in a period that generally sees the strongest increase, real estate research firm Reis Inc said. ‘Developers had enjoyed healthy rent growth and significant pre-leasing just a few short years ago when the housing market was struggling to gain footing. But since then developers have been overbuilding in some markets as demand has ebbed somewhat,’ Reis economist Barbara Denham said in a statement.”

The Wall Street Journal. “Apartment rents declined in some of the country’s priciest cities during the third quarter, a dramatic reversal that could signal the end of a six-year boom for the U.S. rental market. ‘San Francisco and New York are leading the way in the downturn,’ said Ken Rosen, chairman of the Fisher Center of Real Estate and Urban Economics at the University of California at Berkeley. ‘People are going to be surprised that this is happening but they shouldn’t be. It’s been too far, too fast.’”

“The same downtown areas that drove the boom are now the deepest pockets of weakness. ‘You’re going to see red right in the middle of every market. That’s the one place where supply and demand are out of balance,’ said Jay Denton, senior vice president of analytics for Axiometrics.”

“In San Jose, buildings such as the Ascent, which opened in September 2015 with one-bedroom units starting around $ 2,500, are now offering new tenants two months of free rent. Eugene Korsunsky, president of Intempus Realty, a San Jose real-estate brokerage firm that manages apartments and single-family homes for landlords, said for the past couple of years apartments sat on the market for about a week. Now it can take him nearly a month to find a tenant, he said. ‘We’ve actually had to drop the rent on some properties, which I don’t think I’ve ever done in my career,’ he said.”

“‘We’re late year-six, early year-seven of the recovery,’ said Greg Willett, chief economist at RealPage, a property management company. ‘That’s about time for a recession by historical standards.’”

The Detroit Free Press in Michigan. “So many new housing developments are coming to greater downtown Detroit that it’s easy to lose track. Last week alone, four fresh projects with potentially 600-700 units took big steps toward becoming reality. Those four projects come on top of the 1,000 or so units already under construction around central Detroit and perhaps at least 1,000 more units in various stages of the planning pipeline.”

“I asked Arthur Jemison, director of Detroit’s Housing & Revitalization office, about how many potential renters and buyers really want to move downtown. ‘I don’t think I’m worried about overbuilding yet but I think about that a lot,’ Jemison told me, suggesting that we may be another 500 or so units away from satisfying current market demand. If that’s true, then some of the planned projects may not fill up as fast as their developers hope.”

“I’m not suggesting we’re approaching the saturation point in downtown Detroit’s housing market. But downtown right now is bringing on new housing like sailors first coming ashore. Sooner or later, the free-wheeling fun cools off. We just don’t know if that will happen tomorrow or five years from now.”

The Wichita Eagle in Kansas. “Wichita apartment rental rates, already among the lowest in American cities, fell slightly over the past year, according to the Apartment List website. The median rent is $520 for a one-bedroom and $640 for a two-bedroom unit, down 1.5 percent from a year ago. Wichita has seen a flurry of apartment development in the past two years, with hundreds of new units, which tends to mean lower rents for a time.”

Bloomberg on New York. “There are a lot more apartments available for purchase these days in Manhattan. And fewer people are buying. Sales of previously owned condominiums and co-ops fell 20 percent in the third quarter from a year earlier as potential buyers grew cautious amid more choices, according to a report Tuesday from appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. There were 5,290 resale apartments on the market at the end of September, 53 percent more than the number available in late 2013, the lowest point for listings.”

“Many sellers have yet to accept that they can no longer name any price, and the disconnect between their expectations and what buyers are willing to pay is contributing to the drop in overall sales, said Jonathan Miller, president of Miller Samuel. ‘We’re clearly seeing a slowdown,’ Miller said. ‘This era of aspirational pricing is coming to an end. Buyers get the message first.’”

The New York Times. “Financing commercial property has been local banks’ bread-and-butter business for years, but a postcrisis push for loan growth prompted regulatory warnings about lax lending standards, and small banks are now shying away from the market. A shakeout in commercial real estate is under way as some banks unwind or sell off the loans that are under regulators’ microscopes, and bankers say they are wary of making new loans.”

“Joseph J. Lebel III, chief lending officer of OceanFirst Bank in Toms River, N.J., has reviewed some of the commercial loans that other banks have put up for sale recently but decided not to buy any because they have weak loan terms and other features that point to aggressive underwriting.”