December 15, 2016

A Previously Profitable Venture That Becomes Loss-Making

A report from Better Dwelling in Canada. “The Vancouver real estate party for speculators might be officially be over. The latest report from the Real Estate Board of Greater Vancouver (REBGV) showed prices dropping from peak, as well as declining sales and absorption from last year. West Vancouver saw the greatest decline in the Greater Vancouver Region (GVR), with the average sale down 6%. That means the average $3,016,600 home sold in the area is $193,500 lower than the month prior. The number of sales are plummeting, even when seasonally adjusted. Only 638 single family homes sold in November – that’s a 46.2% drop from the same time last year. The days of speculators triple flipping a home in a single year are probably long gone.”

From The Guardian in the UK. “The amount of tax owed by many buy-to-let landlords will double or even triple as a result of changes being phased in from April, it was claimed this week. Some landlords enjoying four-figure net annual profits could end up nursing losses – and if interest rates rise this will make the situation even tighter. The table below has been put together by Anna Sofat, who runs financial services boutique Addidi Wealth. If we assume the mortgage interest rate gradually rises from 3.5% to 4.5%, that would also result in a thumping loss, as shown in the table.”

“‘This example provides insight into a previously profitable venture that becomes loss-making, that will need to be bailed out down the line, either by higher rental yields or large property price rises, neither of which are certain,’ says Sofat of her table.”

The Hurriyet Daily News in Turkey. “Property prices have dropped up to 20 percent in several parts of Istanbul due to a glut in the housing sector after large-scale urban transformation projects created an oversupply in the market. The decreasing trend in housing prices is especially prominent in terms of high-end units and in neighborhoods undergoing intense urban transformation activities. Ömer Faruk Çelik, the head of Turkey’s Housing Developers and Investors Organization (KONUTDER), said the supply and demand equilibrium had been destabilized. He said the same trend would follow in Ankara and the Aegean province of İzmir.”

“‘We have seen an overproduction in some hot spots on the Asian side, such as Bağdat Avenue, which hosts high-end properties, and Fikirtepe, which underwent intense urban transformation projects, without taking the supply-demand curve into account. Urban transformation projects intensified in higher-income neighborhoods. This has now led to an oversupply in these areas. Housing developers who cannot sell them have now started to slash prices… The main problem is with the nature of the model here,’ he said.”

The Times of India. “Goa’s chief town planner S T Puttaraju said on that there is no stock of houses in the state to meet the requirement of low and middle income groups, instead the units available for sale are mostly unaffordable to the average man. At an assessment of the housing scenario in Goa held by the town and country planning department recently, it had emerged that in Goa housing was being constructed at the rate of 25%, much higher than the population growth rate of 8%.”

“Speaking to TOI on the problem of vacant homes in Goa which have swollen by 62% from the 2001 to 2011 Census, Puttaraju admitted that there are around 1.25 lakh unoccupied houses in Goa. Goa has become a popular destination for investments in second homes in the country. ‘For a small state like Goa with a small population, this is a high figure. Goa doesnt require more housing statistically speaking. The question here is that we have stock which is not affordable,’ Puttaraju said.”

From Channel News Asia on China. “The industrial part of Dongguan, which lies just outside the city centre, is ground zero of China’s painful economic transformation. Under the weight of a slowing global economy, coupled with an ageing labour pool and surging wages, China’s export-oriented manufacturing industry is losing its competitiveness, hitting Dongguan hard. Advertisements to rent or lease space can be seen everywhere, while the remaining businesses are just hanging on.”

“The owner of a textile firm who declined to be named said: ‘The biggest problem now is that our orders are very unstable, we don’t have any big orders now, and also, the workers are unstable so it’s tricky. They’re very mobile because we can’t guarantee them an ideal wage if our orders are not big or good enough.’”

“Elsewhere, businesses are lamenting Dongguan’s dwindling fortunes. Zhai Jinhuan, the owner of a grocery shop, said: ‘There aren’t many people in the factories now. In the past, each factory had thousands of workers; now you can’t find any. At most, they have a few hundred.’”

“According to local media reports, the manufacturing hub has suffered a spike in factory shutdowns since 2014 due to the economic downturn. The Beijing News, for instance, said that in 2015 alone, more than 4,000 companies, mostly in the electronics industry, shut down in Dongguan. Professor Lin Jiang from Guangzhou’s Sun Yat-sen University said: ‘In 2015, the labour costs went up by 5 to 6 times as compared to 2005. Of course this is not restricted to Dongguan alone, but across the country. Another reason is the changing market environment, especially the fact that many export orders have shifted to Southeast Asia.’”