December 5, 2016

What Was Profitable Is Now Borderline

A report from the Guardian on Australia. “Despite early indications that some housing markets in the mining states will hit the skids, the Australian mortgage-financed housing bubble continues to grow. The Reserve Bank of Australia is pushing to find a scapegoat to lay blame for economic challenges that may arise within the Australian economy. That scapegoat is the US president-elect, Donald Trump. Today’s reality indicates the housing bubble is a serious issue, amplified by the RBA cutting the cash rate too low. This, combined with evidence of our financial system’s poor and highly questionable lending standards to homeowners and property investors, which regulators and government refuse to acknowledge, is a financial disaster in the making.”

“The post-Trump election bounce in US bond yields has already fed into an increase in borrowing costs in Australia. At the same time, wage growth languishes in its lowest spell since the second world war and households are struggling under a gigantic debt burden of more than $2tn dollars.”

“The Australian bubble was not orchestrated by Trump but by a team of highly paid central bankers who have assisted in turning our housing market and futures into a leveraged casino seemingly for the benefit of banks (whom without public debate the RBA has committed $300bn for a bank bailout facility), property developers, and landowners. If the Australian economy ends up like that of the US or Ireland after the GFC, RBA chiefs have no one to blame but themselves and will not be able to use the oft-employed excuse: ‘We didn’t see it coming.’”

From Bloomberg. “Apartment prices in Melbourne fell at the fastest pace in more than two years in November, reinforcing concerns about a looming oversupply of units in Australia’s second-largest city. The 3.2 percent month-on-month drop is the largest such decline since May 2014, according to CoreLogic Inc. The overall rate of price increases has cooled compared to previous months, said Tim Lawless, CoreLogic’s head of research.”

“‘Affordability constraints are creating high barriers to entry, particularly in Sydney, and lenders are becoming more cautious in their lending practices,’ he said. ‘The supply pipeline is substantial for inner city units, which is likely to dampen value growth in these precincts as well as dent buyer confidence and push vacancy rates higher.’”

The Australian Financial Review. “Developers are being forced to offer rental guarantees and extend settlement deadlines for newly built apartments, as lending restrictions on foreign buyers and a supply glut in Melbourne and Brisbane begin to bite. In what has been described as a ‘managed crisis,’ one Beijing-based real estate executive estimates about 10,000 Chinese buyers may struggle to complete apartment purchases.”

“Joseph Chahin, the managing director of property developer Peregrine Projects, said the issue had been kept largely under wraps by the industry, as developers seek to negotiate their way out of trouble. ‘It is a managed crisis,’ he said. ‘This has smashed many developers’ return on investment. What was profitable is now borderline.’”

“David Wang, the vice-general manager for international sales at 5i5j, estimated Chinese buyers of Australian apartments had fallen 50 per cent in the second half of the year. He said the inability of offshore buyers to obtain finance in Australia, meant about 10,000 apartments or 30 per cent of all off-the-plan purchases by Chinese buyers over recent years could have trouble settling. Mr Wang estimated the other two thirds could either pay cash for their property or had the necessary tax receipts to get money out of China.”

“Apartment developments are typically sold at least two years before completion and it is only at the time of settlement that buyers arrange finance. Australian banks had been happy to finance up to 80 per cent of apartment purchases by Chinese buyers, but halted lending earlier in the year.”

The Australian. “Metro Property Group off-loaded two Brisbane apartment sites for an $11 million loss, contributing to an overall net loss after tax of $9.88m last financial year as it grows nationally. Metro reported a loss before tax of $15.12m, compared with the previous year’s profit of $42.78m. ‘One-off extraordinary losses of $11.2m incurred upon divesting the apartment segment land bank in Queensland, significantly reducing the group’s exposure to any actual or perceived downturn in this market segment,’ the report said.”

“Metro’s accounts were also affected by $3.8m in rental guarantee provisions for next year for ‘estimated exposure on apartments which are yet to settle.’ Chief executive officer Luke Hartman said rental guarantees were offered on a case-by-case and project-by-project basis, saying the provision across the apartment pool was ‘basically less than $1000 (per unit) — pretty small.’”

“He said the ‘fall over’ rate for settlements was 1-3 per cent. ‘It’s no different to traditional fall-overs,’ he said. ‘It’s taking a little bit longer — probably an extra two to four weeks to settle out apartments, but certainly they are settling. We’ve seen no evidence anywhere of defaults.’”

The Warwick Daily News. “As 2016 draws to a close property valuers Herron Todd White still say there is room to move at the bottom of the property market in Gladstone. But Gladstone’s Ray White principle Andrew Allen said it was always difficult to tell when the market had hit the bottom, adding that his information from the ‘coal face’ indicated that things were improving. As property prices plummeted throughout 2016 real estate agents in Gladstone consistently said the market had hit the bottom.”

“But perhaps this speculation was all in vain because in its end of year report property valuers Herron Todd White said the Gladstone property market continued to fall. Giving themselves a pat on the back, Herron Todd White said its predictions for Gladstone for 2016 had been ‘pretty much spot on given that values and rents have continued to fall. ‘Values have fallen approximately 10% in most property sectors since the beginning of 2016,’ the report said. ‘Mortgage in possession activity also increased significantly in 2016. Until such time that mortgage in possession activity slows and the vacancy rate drops considerably, it is difficult to predict when we will reach the bottom of the market.’”

“Since the peak of the market in 2011 and 2012 housing had dropped 50%, with units and townhouses dropping by as much as 80%, the report found.”

Among Those Worried About What Happens Next

A report from Bloomberg on Washington. “Just a few days after Vancouver announced a tax on foreign property investors, Seattle real estate broker Lili Shang received a WeChat message from a wealthy Chinese businessman who wanted to sell a home in Canada and buy in her area. After a week of showings, he purchased a $1 million property in Bellevue, across Lake Washington from Seattle. He soon returned to buy two more, including a $2.2 million house in Clyde Hill paid for with a single cashier’s check. Shang says she’s been inundated with similar requests from China and Hong Kong. ‘The tax was the trigger of this new wave of investment now coming to Seattle,’ Shang said. ‘Why pay more for the same thing?’”

“‘The key point for Chinese investors is still, ‘Let’s move that money out of China, you never know what will happen to it,’ said Gordon Houlden, director of the China Institute at the University of Alberta. ‘So they’ll go to Seattle or Toronto.’”

The Plano Star Courier in Texas. “Realtors across the Collin County and D-FW are researching the ballooning in housing prices. According to the Texas A&M University Real Estate Center, housing prices have ballooned to $200,00 - $310,000 and more. In September, median prices were $289,995. Low level affordable homes have all but disappeared. ‘The lower priced homes, the ones that are under $300,000, those prices have been increasing like crazy,’ said Rochelle Mortensen, public relations specialist with Metrotex Association Realtors. ‘A few years ago, what would’ve sold for $50,000, you’re lucky to get under $200,000 now.’”

“Across Dallas-Fort Worth, the median price of housing is $245,000, so ‘you need to have an income of $55,000 and that is not the median income of the families that live here,’ she said.”

The Sun Sentinel in Florida. “Delinquent South Florida homeowners could be getting long-delayed foreclosure notices after a court ruling cleared the way for lenders to revive cases that have stalled for years. The Florida Supreme Court ruled last month that lenders can refile foreclosure cases against owners still in default, even if the cases started more than five years ago, beyond the statute of limitations. Among those worried about what happens next is Adam Broder, who paid $386,000 for a two-bedroom condominium in Delray Beach in April 2005, just before the housing market collapsed.”

“He stopped making payments in 2009, he said, and hoped to get a mortgage modification. Instead, his lender, BAC Home Loans Servicing, filed a foreclosure action that BAC later dismissed voluntarily, records show. The case has been in limbo for seven years. ‘I just want to settle at this point and get on with my life,’ said Broder, 36. ‘But the ruling gives [BAC] as much room as they want to start all over again.’”

“Attorneys and industry analysts say they expect the Bartram ruling will lead to hundreds or thousands of refiled cases that were on hold until the Florida Supreme Court ruling. ‘Banks have been keeping a bunch of cases in their back pockets,’ said Thomas Ice, a real estate attorney in Royal Palm Beach. ‘They’re saying, ‘Let’s wait and see what happens in Bartram before we start spinning our wheels.’”

From Quartz. “Scott Shatford didn’t bargain for criminal charges. The official complaint arrived at his front door in May, more than a year after Santa Monica, California, voted to ban the short-term home rentals flooding its small beachside community. Shatford knew the rules but had chosen to ignore them, continuing to list two properties for short stays on Airbnb. He found the city’s ban ridiculous and assumed it would be difficult to enforce. Even if he did get caught, Shatford figured a few fines would be a small price to pay for properties earning him around $60,000 a year.”

“But Santa Monica came down hard. After Shatford failed to respond to multiple warnings and fine notices—sent to rental property mailboxes he never checked—the city filed a criminal complaint against him. Local officials called Shatford an ‘egregious’ violator who repeatedly defied citations and ‘boasted publicly’ that Santa Monica would be unable to enforce its own law.”

“In July, Shatford became one of the first Airbnb hosts in the US to be convicted for renting out units illegally. He agreed in a plea deal to stop listing apartments, pay the city about $3,500 in penalties, and be placed on two years’ probation. That same month, Shatford closed down his rental operation and moved to Denver. ‘I expected fines,’ he says. ‘I really wasn’t expecting them to start to make criminals out of people that were just trying to make a living.’ On Sept. 2, Airbnb sued Santa Monica over its ban in federal court.”

“What happened in Santa Monica wasn’t an isolated incident. Airbnb’s peer-to-peer rentals are being scrutinized in Los Angeles; Miami Beach, Florida; Portland, Oregon; Toronto; Barcelona; and Berlin. In its hometown of San Francisco, a federal judge on Nov. 8 upheld rules that levy hefty fines on hosts. In New York, the company’s largest US market, governor Andrew Cuomo in October signed into law some of the toughest limits on short-term apartment rentals in the country.”