November 25, 2016

An Unsustainable, Debt-Filled Asset Bubble

It’s Friday desk clearing time for this blogger. “A new report confirms what many have been saying for several months now: The residential real estate market is losing steam around the Bay Area. Even in the inland counties — heretofore a safety valve for buyers seeking affordability — sales were lackluster. ‘Prices can continue to skate higher for a while, but at some point you run out of people willing to pay, and prices correct,’ said Madeline Schnapp, PropertyRadar’s director of economic research.”

“In early November, FBI Director James Comey was in the headlines in Connecticut – not because of his involvement in the presidential election, but because of the price cutting he undertook on his luxury home in the Green Farms section of Westport. Comey acquired the 3.17-acre, seven-bedroom, 2005-built property for $3 million in August 2010. Nearly five years later, he put the property back on the market with a price tag of nearly $3.4 million. However, more than a year passed and the property remained on the market. In early November, Comey cut the price down to $2.5 million – his fourth reduction in a span of 16 months.”

“Comey’s situation is hardly unique. According to third quarter data released by Douglas Elliman Real Estate, Fairfield County’s luxury residential market median sales price was $1.825 million, down 14.3 percent from the $2.13 million level one year earlier, while the luxury price threshold fell 11.3 percent to $1.3 million. ‘A lot of real estate people in the luxury market are starting to bring prices down a little bit,’ observed Wayne Frankel, CEO and regional owner of Greenwich-based Exit Realty of Connecticut.”

“Condo owners in Chicago’s Trump International Hotel & Tower are fretting about property values in a Donald Trump America, and at least two sellers dropped their asking price after the election. Listings show five price drops among 16 sellers of one-bedroom condos since late summer. There have been four price drops among 12 sellers of larger units. Gail Lissner, vice president at Appraisal Research Counselors expects some concerns — like protesters — to fade. Homeowners generally drop the price ‘when they’re in a distressed situation or particularly anxious to sell,’ she says.”

“A lawsuit alleges that the Palm House condominium-hotel is at the center of a vast criminal scheme in which more than 50 foreign investors were defrauded out of $50 million. According to the suit, a web of conspirators preyed on foreign nationals by inducing them to each invest $500,000, plus a $40,000 administrative fee, into the hotel. But the hotel was ‘nothing more than a facade pursuant to which plaintiffs’ funds were stolen and distributed among the conspirators.’”

“The plaintiffs sought to leave their home countries for opportunities in the United States through the EB-5 Immigrant Investor Program, which channels money from foreign investors into construction projects on American soil. Virtually none of the EB-5 money was used to develop the property, no jobs were created, and no EB-5 visas were issued to any of the plaintiffs, the lawsuit states. ‘Accordingly, over 80 foreigners are now unable to leave their respective countries and have lost their entire life savings.’”

“The lender for the developer of a 14-home project near the Hawaii Kai Executive Golf Course in East Oahu has filed a foreclosure lawsuit against the developer for not making timely payments on its $6.3 million loan, a principal for the developer confirmed to Pacific Business News. Buff Raiders Property LLC, whose partners include Paul Shinkawa, is the developer of the Kalama Hokupaa project. Shinkawa declined to disclosed the cost to develop Kalama Hokupaa, although home prices will start at $1.5 million. ‘We’re hopeful the market will still be there,’ Shinkawa said. ‘There is always a market for homes on Oahu. We have to make sure we are providing the types of homes that the market demands.’”

“If there is a weak spot in the Canberra housing market, it’s apartments. The median price fell 1.72 per cent in the year to October, but the number of building starts rose by a whopping 34.3 per cent, indicating that bullish apartment developers have not yet caught up with the realities of the market. ‘We’ve had such strong supply of apartments over the past couple of years that it’s really put negative pressure on price,’ says Powell, ‘and there’s still a lot of new apartments to be built. When those new apartments come onto the market, there will be – dare I say it – a bit of an oversupply of units, which is going to continue to put downward pressure on price.’”

“Christchurch landlords are using cash incentives and free rent to lure tenants as intensive housing development contributes to a surplus of rental units. Deals on offer include a $1000 cash-back offer, rent-free periods and no letting fee. The $1000 deal, offered for a tenant signing a 15-month lease on a four-bedroom Riccarton unit, has not been taken up and the property remains vacant after weeks of advertising. ‘There’s such an oversupply and there are so many units now. We just thought we’d try something new,’ said the property’s leasing agent, Lois Paton, of Westside Real Estate. ‘But we’ve had nothing, no-one suitable.’”

“According to Chestertons, Dubai rentals declined in the third quarter 2016 after remaining steady in the second quarter with the lease market remaining tenant favourable. ‘Given that tenants have a wide range of options to choose from, they are more likely to negotiate with their landlord; and if their requirements are not met, they will vacate. Whilst this was noticeable in Jumeirah and Umm Suqeim, this trend has spread throughout the wider Dubai market,’ said John Stevens, managing director at Asteco. ‘With more handovers expected in the next few months, we anticipate villa rental rates could come under further pressure.’”

“The developer of the Walkie-Talkie skyscraper and Victoria’s Nova offices steeled itself for a tough post-Brexit property market today as a £260 million blow to its portfolio sent it into the red. Land Securities, the UK’s biggest listed property firm, wrote down the overall value of its £14.4 billion estate by 1.8%, racking up a £95 million pre-tax loss for the six months to September. Chief executive Rob Noel painted a gloomy picture of London’s commercial property scene, predicting falling rents and prices ahead of the start of formal negotiations to leave the European Union.”

“‘If you’re running a business, if you do not know what your trading environment is going to be, do you make hasty moves and investment decisions? You probably rein back and hold off… We are going through a period when people are pulling their horns in.’”

“When a rumor spread in June 2015 that the Beijing city government would move most of its offices– potentially 400,000 workers–to the sleepy suburb of Tongzhou, property sales there doubled within weeks. Authorities confirmed the rumor a month later and quickly moved to arrest the frenzy, limiting sales to first-time buyers and longtime residents. By October last year, activity was down from over 1,500 sales a month to 500.”

“‘Tongzhou, all of a sudden, became like the focus of the world,’ said 29-year-old Chen Liang, who grew up in Tongzhou and blogs about life there. In May, Mr. Chen pooled money from relatives to buy a one-bedroom apartment for 2.22 million yuan($320,700). The drama in Tongzhou shows how hard it is for China to confront a homebuying spree in its biggest cities and keep property prices in check–even in a place where it is promoting development. The ultimate fear is an unsustainable, debt-filled asset bubble that causes broad damage when it bursts.”

“Prices chilled again after Beijing–along with 20 other cities–imposed fresh property-buying controls in early October. Beijing raised the down-payment requirement for first- and second-home purchases. Though the number of sales in Tongzhou didn’t drop, prices fell 39% from the previous month; Beijing prices slipped 3%.”

“‘People become very unhappy with rapid increases in housing prices, so the government feels it is important to dampen the increase,’ said Li Wei, an economics professor at the Cheung Kong Graduate School of Business in Beijing. The local government had hoped to feed a real need for housing, not speculative demand, Mr. Li said. ‘If it is just empty shells there, it just doesn’t look very nice,’ he added.”

“Mr. Chen, the blogger, says he avoids posts about housing, out of fear of drawing government attention for spreading information that could drive up prices. Instead, his blog now features reports mostly on the weather, traffic accidents and lost pets.”