The Housing Bubble

It’s Friday desk clearing time for this blogger. “The number of foreclosures in Denver has been steadily decreasing since the height of the housing crisis and recession, but that trend reversed slightly in 2016. The city processed 720 new foreclosure cases last year, according to data from the Denver Office of the Clerk and Recorder. That’s an increase of about 4.35 percent over 2015. Clerk and Recorder Debra Johnson said it’s hard to tell if the slight bump in foreclosure numbers is indicative of a new trend. ‘We really don’t know the cause and effect of this,’ Johnson said.”

“If you’re selling a high-end condominium in Miami-Dade County, it’s time to slash that price tag. The county’s million-dollar-plus condo inventory has soared past its pre-recession peak, according to a report by Esslinger Wooten Maxwell Inc. About 2,550 units were listed for sale at the end of January compared with the previous record of 1,850 units at the end of 2006. At the current average sales pace of 47 units per month, it would take 4½ years to sell out of the current supply, which does not include the 1,215 units that were taking reservations last October. Another 14,000 units are proposed, according to Miami’s Downtown Development Authority.”

“Those who can afford a tony condo will have plenty to choose from. About 130 units priced above $1 million have hit the market over the past month. ‘Buyers that are on the sidelines right now are waiting for our pricing to meet their expectations,’ said EWM president and CEO Ron Shuffield.”

“Sellers of Hamptons mansions are having to slash prices to secure sales as the glitzy summer hot spot’s luxury housing market continues to cool. The median price for luxury homes sold in the Hamptons (the top 10% of sales) dropped almost 30% to $5.85 million in the final three months of 2016 compared with a year earlier, according to Douglas Elliman Real Estate and appraisal firm Miller Samuel. In another sign of how much sellers are struggling, the listing discount—the change from final listing price to contract price—jumped to 15.7%, from 11.7% a year earlier as some sellers in the Hamptons have been left with little choice but to reduce prices because of growing supply and less demand.”

“Listing inventory increased more than 20% to 250 amid a lot of speculative development, while sales slid 14.5% to 53, according to the report. In the $5 million-plus market, sales tumbled 40%. While many of those who sold their homes in the last quarter were willing to come down on prices, there are some ‘who still haven’t got the memo’ that the market is not as hot as it used to be, resulting in their homes languishing on the market, according to Jonathan Miller, the chief executive of Miller Samuel and author of the report.”

“Hailed four years ago as leading Canada’s hottest housing market, Calgary condominium developers are now facing the highest unsold inventory in 16 years as low oil prices sink sales in Alberta’s biggest city. And the condo inventory is rising. According to Calvin Buss, principal of Buss Marketing, three out of four condo projects that have come across his desk in recent months have been converted to rental developments. But Calgary’s slumping rental market offers scant shelter, said Shamon Kureshi, president and CEO of Hope Street Real Estate Corp., a major Calgary property management firm.”

“‘Times are hard for every single landlord with whom I’ve spoken in the past eight to 12 months. Empty rental properties abound, and no obvious solution to the province’s empty rental property phenomenon exists,’ Kureshi said. Kuershi added that his company’s research of smaller rental properties shows that 37% of Calgary’s rental units are empty, or nearly 3,000 vacant units. Landlords are getting nailed, Kureshi said. ‘These [vacant] homes show an average rental rate of $1,477, therefore private Calgary landlords [cumulatively] are losing $4,431,044 per month or $147,700 per day.’”

“House prices and rents in Abu Dhabi are set to maintain a downward trend this year as the fallout from the recent oil price drop continues to affect the market. Property broker Core Savills said that price and rent falls would be particularly marked on Reem Island where another 2,400 homes are expected to come to the market this year. ‘This glut in supply will be hard to absorb and is expected to cause a sharp drop in both rentals and sales values in Reem Island area,’ said David Godchaux, its chief executive. ‘Contractions in housing allowances and disposable incomes coupled with the growing inflation rate have led to a steep downward adjustment on the demand for both residential and commercial real estate.’”

“The Bank of Japan has seen decidedly mixed results from its negative-rate policy announced a year ago. Something of a minibubble is developing in the rental property market amid ultralow interest rates, gung-ho lenders, and tax incentives. Rental housing starts are estimated to have topped 400,000 in 2016, the highest in eight years. Nagano Prefecture saw a nearly 40% jump from 2015. But ‘a surplus of apartments is emerging due to oversupply,’ a real estate insider in the city of Nagano said. The nation’s rental property market may suddenly cool if higher vacancy rates and declining rents become the norm.”

“After giving up on transforming his fortunes in one of China’s modern cities, Zhang Zhihao has returned for good to the grimy, rural village he calls home for Lunar New Year. He is among thousands leaving the country’s major cities for the final time, as a slowing economy leaves little chance of achieving what leaders have termed the ‘Chinese Dream’. Stalling wages and the relocation of many factories abroad has raised uncertainty for many migrants, including the young carpenter who has put down his tools for the last time as he seeks farm work in the village where he was born.”

“‘I earned only 200 yuan (£24) a day at a furniture factory, and if I didn’t work on a certain day, then I got nothing,’ said Mr Zhang. ‘China’s economic problems have deeply affected people like me. Lots of companies have shut down in Beijing, so there are not many places left to work.’”

“Festinger’s 1957 theory of cognitive dissonance notes that individuals seek consistency in their cognitions (beliefs) so they tend to twist facts to remove any conflict (dissonance). REITs now seem to be suffering from ‘valuation dissonance’. You know the game is up when equity markets don’t believe property valuations any more and REITs don’t buy their own deeply discounted stock - either corporately or personally. REITs are selling the assets they can afford to in order to de-gear and are now top-slicing development risk by driving leasing volumes ahead of values.”

“Real estate pricing has become a capital market event, the Bank of England has cut economic growth rate forecasts and the lazy man’s property risk premium is there for good reason. Notwithstanding that bond markets are artificially illiquid, real estate is more macro-prudential than inflation-driven and excess liquidity has led to real estate being mispriced, with abundant capital compounding market vulnerability.”

“Foreign money will withdraw and the UK commercial real estate market is now in a parlous state, having become overly dependent on inflows of foreign capital. REITs have become used to cheap capital but conditions are reverting to normal. The scene is set for a toxic shock with falling rents and rising yields - and landlords probably won’t capture the growth embedded in their asset valuations.”

“The UK REIT sector looks cheap but isn’t good value with a prevailing 17% discount a mirage as the NAVs risk over-reporting positive evidence. Rushing into REITs now could make the Charge of the Light Brigade look like a rational military manoeuvre.”