January 1, 2017

What’s Behind The Property Fever?

A weekend topic on two papers, the first by Graeme O’Meara at the Economic and Social Review. “Abstract: This study contributes to the ongoing debate over the causes of housing bubbles. The argument that excessively low interest rates were responsible for the rapid increase in house prices over the last decade has received considerable attention in the literature. However, few papers have attempted to quantify the extent of house price overvaluation in countries that have seen housing booms and busts, in addition to quantifying the looseness of monetary policy. For a sample of 10 OECD countries, we estimate fundamental house prices using demand and supply side characteristics of the housing market. This is supplemented with analysis of price to rent ratios and fundamental price to rent ratios.”

“Loose monetary policy is defined as the deviation of the short term interest rate from the rate which the Taylor rule would prescribe. The empirical results suggest that for some countries deviations from the Taylor rule played a role in the surge in house prices and that a monetary policy stance less discretionary and more closely aligned with a Taylor rule could curtail some of the imbalance in the housing market.”

The full PDF is available at the link.

The second is by Dee Woo, the chief economist of Beijing Zhonghua Yuan Financial Institute. Titled:

China’s Insane Housing Market Will Tumble And Crash In 2017


What’s behind the property fever in China?

The financial truth of the destocking of China’s property market.

Use quantitative analysis to predict when the bubbles of China’s housing market will burst.”

The Bursting Of A Rental Market Bubble

A report from the Banker & Tradesman in Massachusetts. “The real estate market in Greater Boston may be on a record roll when it comes to home and condominium prices, but there’s trouble brewing on the horizon. And as we move into 2017, until now, simply irksome issues – the flood of new luxury apartments hitting the market, rising mortgage rates and, at the other end of the market, a dearth of single-family homes for sale – are poised to take on greater significance. In the case of the increasingly glutted luxury apartment market, we could very well start to see the bursting of a rental market bubble as developers and bankers alike start to pull back.”

“How many of these, overpriced, cookie-cutter high-rises and boxes do we need? Banks were skittish about lending on new condo projects coming out of the recession but, for a few years anyway, were more than happy to finance less risky apartment projects. Developers rushed in with the belief that just about every street corner needs hundreds of new $3,000 and $4,000 a month apartments.”

“Now, five years and thousands of new apartments later, the luxury rental boom is poised to go bust. Worrisome signs are coming out of previously red hot markets like Miami and New York, where there has been epic overbuilding of both deluxe apartments and condos. Sales of co-op apartments in New York worth $4 million and up recently plunged 25 percent amid fierce competition from new units, while Miami has its own growing luxury apartment and condo glut.”

“Meanwhile, construction starts on new apartment projects have also started to drop in the Boston area, another sign that developers may be starting to get cold feet. Bankers have been growing wary as well for more than a year now. Add to that all sorts of freebies being used by developers to fill up these empty towers, from ‘free rent’ to gift cards, and you get the picture. Yes, we desperately need more housing, especially the kind middle and working class families can afford, not more outrageously priced apartments.”

The Star Tribune in Minnesota. “With apartment developers hammering their way into a new year, the rental market in the Twin Cities is about to shift. Construction this year will outpace 2016, but it will move from the cities to the suburbs. While the vacancy rate is still below average, there are places where it’s becoming a renter’s market. ‘I’m pushing rents this year,’ said Mark Jensen, president of Steven Scott Management, which operates rental properties throughout the metro area. ‘But there are pockets where there’s too much supply.’”

“The coming shift in the market is also expected to have an impact on investors in the Twin Cities. For three years in a row, apartment building buyers — mostly institutional investors from out of state — have paid record prices for Twin Cities properties, but some brokers expect transaction volume to fall this year. ‘We will continue to see increased demand,’ said Gina Dingman, president of NAI Everest, a commercial real estate brokerage. ‘But increased interest rates and overall transaction costs will cause buyers to offer less for the same property they may have paid more for a year earlier.’”

The Seattle Times in Washington. “Seattle is set to see almost 10,000 new market-rate apartments open in 2017, nearly twice as many as in any other year in the city’s history. The magnitude of the construction is remarkable. The city is on pace to see more apartments built this decade than in the previous 50 years combined — and the vast majority of the new units haven’t opened yet, according to the Dupre + Scott research firm.”

“The suburbs aren’t far behind in the building spree: The entire Puget Sound region, from Tacoma to Snohomish County, is slated in 2017 to have its second-busiest year in history for apartment construction, just shy of a suburban building boom in the late 1980s. Those who build and bankroll apartments remain concerned about a possible oversupply bubble, especially for luxury units.”

“Tom Parsons, executive managing director of apartment developer Holland Partner Group, notes that costs for building apartments have surged 35 percent in the last half-decade, lowering profits and making Seattle less attractive for big investors. ‘Given the increase in the overall cost of housing over the past five years, we believe that capital has reached the tipping point and many of the projects being planned will be unable to be financed,’ Parsons said. That last happened when the market tanked during the recession and barely anything got built.”

The Washington Post. “The Bartlett, a 22-story apartment tower in Arlington’s Pentagon City, will start daily rentals for 50 units Jan. 13, just in time for the inauguration. There have been 39,000 new apartments placed on the market in the Washington region since 2014, and an additional 25,000 are being built, said Max Peker, a market analyst with CoStar, which studies the commercial real estate market. Apartment demand has been resilient because of strong job and population growth, but the rise in competing properties means landlords have limited opportunities to raise rents.”

“Erik Gutshall, the planning commission’s vice chair, said the hotel-style usage will benefit the county by generating tax revenue and enlivening the streetscape in Pentagon City. ‘We need to keep innovating,’ he said. ‘And we can’t get hung up on zoning laws built for the 1950s.’”

The Dallas Morning News in Texas. “With over 55,000 apartments under construction in North Texas, Axiometrics and other apartment market watchers are predicting a slowdown in rent growth. ‘D-FW has been one of the few markets to maintain its strength in the past year as moderation hit the nation as a whole,’ Axiometric’s Jay Denton said in the report. ‘But new supply is expected to reach its peak for this cycle in 2017 while demand in terms of job growth will remain steady. It’s that influx of new construction that could cause rent growth to decrease.’”

“More than 29,000 apartments being built now are scheduled to open next year. Nationwide apartment rent growth is already slowing. ‘Though the market has moderated, it’s important to stress that we’ve seen a very strong market for more than six years,’ Denton said. ‘Axiometrics had predicted this moderation, since the market could not sustain the peak of 2014 and 2015.’”

The Press Democrat in California. “For renters, the search for housing this year was hindered once more by a lack of available units. Two private companies that track county apartment data put the vacancy rate this fall at less than 3 percent. The rent for the average two-bedroom, two-bath apartment in the county has increased 49 percent in five years to $2,122 a month, according to Real Answers, a Novato company that tracks data from large rental complexes.”

“Looking ahead, Scott Gerber, managing director of Bradley Commercial Real Estate in San Rafael, predicted the county will get some relief in the coming year because of an apparent oversupply of new rentals coming on the market in San Francisco, the Peninsula and Silicon Valley. In time, some county residents will move south to take advantage of that housing and landlords will seek more modest rent increases. ‘The rental market is certainly settling down,’ he said.”