The Housing Bubble

A report from Bloomberg on China. “China watchers are starting to put a price tag on what any collapse in the nation’s red-hot property market could cost banks. A drop of 30 percent in housing prices could cause 4 percent of total loans worth 4.1 trillion yuan ($615 billion) to sour, according to DBS Vickers Hong Kong Ltd. ‘The amount of increase in housing prices in China that we have seen in recent years, especially this year, is concerning,’ said Roland Mieth, portfolio manager for emerging markets in Singapore at Pimco, which doesn’t have a real estate NPL estimate. ‘Those increases in price year on year at 30 percent or more tend to suggest a bubble-like phenomenon.’”

“As delinquencies made banks reluctant to lend to companies, the amount of outstanding mortgages in China jumped 31 percent in the first half, three times more than the increase in overall lending. Loans to households soared to 71 percent of total new lending in August, from 24 percent in January. ‘Chinese banks are extending mortgage loans very aggressively,’ said Christine Kuo, a Hong Kong-based senior VP at Moody’s Investors Service. ‘Those loans are becoming riskier because housing prices are at a frothy level.’”

The South China Morning Post. “Hundreds of investors and retirees from Shanghai swamped China Evergrande Group’s sales office on Chongming Island as the developer launched a new batch of homes at its Sea Venice project on Thursday for as little as 350,000 yuan. Zhang Fan, who runs a small restaurant in Shanghai, bought a 60 sq metre property in Sea Venice for about 400,000 yuan, which he intends to use as a holiday home before selling it on for a profit when a proposed high-speed train commences services to Chongming.”

“Prices at the project have already increased rapidly. Fan said his friend bought a similar sized property - part of a previous batch released for sale - for 300,000 yuan earlier this year. ‘For this amount you cannot buy four square metres in Shanghai city centre, where it costs 100,000 yuan per square metre,’ he said.”

The North Shore News in Canada. “Real estate industry insiders say it’ll be a few months before they know if the once white-hot North Shore real estate market is heading into the deep freeze. But the trend is definitely cooler, especially at the high end of the market, where teardowns were selling for multiple millions just six months ago. Bidding wars have largely vanished, said Brent Eilers, a Realtor with Remax Masters Realty. ‘We haven’t had a British Properties home sell for over $6 million since May 27,’ he said. ‘The West Van market is really struggling.’”

“North Vancouver Realtor Satnam Sidhu said he’s seen the same trend. With the imposition of a 15 per cent foreign buyers tax in August, luxury tax on properties worth more than $2 million and tightening of the rules around contract assignments, ‘the higher end of the properties have been hit,’ said Sidhu. ‘Last year there were twice as many properties over $2 million sold in September as there were this year.’”

“Builders have backed off snapping up expensive lots, he said. ‘They don’t know where the market’s going to be 10 months down the road.’ Sidhu said he’s still seeing market activity in the lower end of the market, dominated by local residents. But many people are adopting a wait-and-see approach. ‘There was a time everyone thought ‘buy today’ because prices are going to be higher tomorrow,’ he said. ‘That isn’t the case anymore.’”

“Eilers said he’s started to see selling prices inching down, though that may take some time as sellers begin to realize they can’t sell their house for what their neighbours got six months ago. ‘When the pendulum swings from the sellers’ side to the buyers’ side it doesn’t matter what the seller wants. … I think we are in the process of the slowdown.’”

“Sidhu said buyers will certainly qualify for less expensive homes under the new regulations, but said he understands Ottawa’s desire to prevent home buyers from courting disaster when interest rates begin to rise. Sidhu said back when he started in the real estate business almost 40 years ago ‘these (interest) rates were simply unheard of. … People have over-extended themselves.’”

The Online Citizen on Australia. “During our recent vacation in Perth, we dropped by to visit our relative’s family who had been staying there for longer than a decade. The built-in area of my relative’s house was approximately 3,000 sq ft. It’s spacious, bright and cozy. They bought it at over $300,000 and market value has since increased to $650,000. ‘Our house is old and nothing to see. Let me show you the brand new ones. It’s just five minutes’ drive away.’”

“In this new residential area, there were six to eight streets full of display homes (Australian show houses). Each house was built by a different developer with totally different look-and-feel. Although we saw parked cars on both sides of the streets, there were not many buyers on a Sunday afternoon. Most of them were young couples or families with small children.”

“Compared with my relative’s suburb, these new single or double-storey detached houses were built much closer to each other. There were so many houses that it could take a few days to view all of them. We were at a loss where to start and had to rely on our relative to help us pick a few. ‘Go inside and take a look. You can change the design, layout, materials and landscaping. Everything, including the asking price, is negotiable.’”

“Single-storey basic houses were selling from $148,000 while high-end double-storey houses were asking for slightly above $400,000. Prices already include the cost of land. ‘Last year my sister bought a similar one at $600,000. That’s crazy! Now prices have come down to $400,000. SGD and AUD conversion is now almost 1:1 right? Why don’t you also buy one and you two can be neighbors?’”

“With the declining commodity prices, there is a recession going on in Perth since 2015. In the CBD and inner-city district of Perth, ‘for lease’ signs on the windows of empty offices and shops are everywhere. Unemployment rate now stands at 5.7 percent. It can go up to 25 percent in suburbs with mining as a major industry. More than 20 percent of Uber drivers used to work in mining.”

“Perth’s vacancy rate for rental properties reached a 20-year high last year. It is now 5 percent and at its highest since December 1995. Rental rates have dropped 13 percent. Rent in Western Australia’s most expensive suburb Peppermint Grove has declined 24 percent from $2,000 to $1,525 a week. The median weekly rent in Perth is $420 for houses and $395 for units. It is a tenant’s market. Tenants keep breaking leases to move to better places. Landlords lament that it is difficult to get tenants for viewing. Sounds familiar for Singapore landlords?”

“In Perth, there are more home sellers than buyers. Many are moving away from Western Australia to other parts of the country or back to where they come from. Last quarter, 17.9 percent of houses and 30.2 percent of units are selling at a loss – the highest level since September 1996 for houses and since 1994 for units. It’s because the Australian economy didn’t really hit by the 2007 financial crisis.”

“If you are going after properties in Australia, better do your sums and make sure that you have the holding power even under the worst scenario. Do you have the guts?”