February 15, 2017

Driven By Unpredictable Investor Mania

A report from the Business News Network in Canada. “After months, if not years of hand-wringing about Canada’s hot housing markets, BMO is calling it: Toronto’s housing market is in a bubble. ‘Let’s drop the pretence. The Toronto housing market — and the many cities surrounding it — are in a housing bubble,’ BMO Chief Economist Doug Porter wrote in a note to clients. Housing prices in Toronto and the surrounding area have become ‘dangerously detached’ from economic fundamentals and are rising simply on the belief that prices will continue to soar higher, according to Porter.”

“‘Prices in Greater Toronto are now up a fiery 22.6 per cent from a year ago, the fastest increase since the late 1980s—a period pretty much everyone can agree was a true bubble — and a cool 21 percentage points faster than inflation and/or wage growth,’ he wrote.”

“The often-cited mantra that Toronto’s real estate market is being driven largely by a lack of supply is wearing thin, he argues. Housing starts in Toronto and Vancouver recently hit an all-time high of 70,000 units per year and overall Canadian starts are above demographic demand at 200,000 units in the past year, according to BMO.”

“Meanwhile, Toronto condo prices are posting double-digit gains despite plenty of supply, according to Porter. ‘No, the massive price gains are being driven first and foremost by sizzling hot demand, whether from ultra-low interest rates (negative in real terms), robust population growth, or non-resident investor demand,’ he said.”

The Financial Post. “Those booming housing markets may make some homeowners rich and provide a short-term boost to the economy, but a Canadian economist is warning about the long-term impact on the country. David Madani, of Capital Economics, said in a report that while the housing boom supported the economy through the oil shock in 2016, a further deterioration in housing affordability will cost the economy over time.”

“‘The abrupt slowdown in Vancouver’s housing market serves as a warning shot. As things stand now, the performance of the economy this year could hinge on the direction of the much larger overheated Toronto housing market,’ Madani writes. ‘The new foreign buyer tax announced by British Columbia’s government in July doesn’t tell the full story either. We simply think the housing bubble has burst. Housing bubbles are, of course, inherently unstable because they are largely driven by unpredictable investor mania.’”

From MetroNews. “The number of empty homes in Metro Vancouver continues to rise, according to population growth data from the 2016 Census. Between 2011 and 2016, the percentage of homes left vacant or not permanently lived in in the City of Vancouver rose from 7.7 per cent to 8.2 per cent, according to an analyses of Census data by Andy Yan, an urban planner and director of Simon Fraser University’s City Program.”

“During the same period the number of such properties jumped by 15 per cent, from 22,169 to 25,502, in Vancouver. Coal Harbour continues to have a high percentage of empty units, at 22 per cent. But Joyce-Collingwood in East Vancouver has now overtaken Coal Harbour, with 24 per cent of homes unoccupied. Some of those may be land-assembled single family homes awaiting development, Yan said, or units purchased by investors in new condo developments in the neighbourhood.”

From Bloomberg. “Vancouver’s multimillion-dollar homes are increasingly out of reach for Vancouverites. And nothing speaks to the Canadian city’s affordability crisis more than its empty houses. Vacant or temporarily occupied dwellings have more than doubled since 2001 to 66,719 last year as neighborhoods are hollowing out, said Andy Yan, director of Simon Fraser University’s City Program.”

“Vancouver introduced a new tax on empty homes last month aimed at boosting the supply of rentals in a city facing a near-zero vacancy rate. The province also imposed a 15 percent tax on foreign buyers last August after discovering more than C$1 billion ($761 million) of global cash had flowed into local properties over a five-week period. ‘It’s unacceptable for so much housing to be treated as a commodity,’ Vancouver Mayor Gregor Robertson said in a statement.”

The North Shore News. “Sales of single-family homes continued to tumble throughout Metro Vancouver last month, with January sales below long-term averages, according to the Real Estate Board of Greater Vancouver. On the North Shore, those trends were even more pronounced. Only 20 detached homes sold in West Vancouver in January, bringing its sales-to-listings ratio down to 12 per cent. Sales of detached homes between November and January are down 67 per cent over the same time last year.”

“West Vancouver Realtor Allan Angell, who specializes in the high-end luxury market, calls the situation in that market ‘almost tied for the worst of all time.’ Realtor Brent Eilers of Remax Masters Realty in West Vancouver, has examined statistics dating back over the past three decades, and shares that assessment. ‘It’s one of the most significant slowdowns we’ve had,’ he said.”

“Prices are also beginning to fall. The real estate board put the ‘benchmark’ price of a West Vancouver house at $2.9 million in January – down 13 per cent from six months ago. But Eilers said median prices of homes sold are down farther than that and ‘many have had to go through multiple price reductions to get sold.’”

The CTV News. “At the peak of the last oil boom, there were so many people living in the southeastern Saskatchewan city of Estevan that there was nowhere to stay. ‘We had people sleeping in trailers — sleeping in vehicles, if you can believe that,’ recalled Estevan Mayor Roy Ludwig.”

“Then oil prices fell, drilling activity slowed to a crawl and Ludwig figures the community lost about 2,000 people, mostly transient workers. By last fall, Estevan had a vacancy rate of 27.6 per cent, according to the Canada Mortgage and Housing Corporation. It’s much the same situation in Alberta, where big-city vacancy rates were in the single digits five years ago. These days, about 37 per cent of rental houses and condominiums are sitting empty in Calgary, and the comparable rate in Edmonton is about 27 per cent, said Shamon Kureshi, CEO of Calgary-based Hope Street Real Estate Corp.”

“And what to make of those towering vacancy rates? It’s probably got more to do with all the extra housing capacity that was built when the good times were at their peak. ‘There’s been a huge building boom — particularly in Saskatchewan, but in Western Canada in general — and these builders are working on all eight cylinders or all 12 cylinders,’ said Kureshi. ‘But one of the things that’s happening and causing this sort of tidal wave of rental property, is that the new homes and the new condos and the highrises that these builders are constructing, aren’t selling because there’s just no money and no people to take them.’”

A Sense Of A Bubble

A report from the Chicago Tribune in Illinois. “The massive apartment construction boom in downtown Chicago is starting to show signs of saturation, and rents will likely start to decline by fall, Appraisal Research Counselors reported Tuesday. Rents fell about 14.7 percent during the fourth quarter to $2.89 a square foot for the top-quality, or Class A, apartments and to $2.52 for the Class B apartments that are considered to be the next rung down. So far developers have been reluctant to lower rents for new apartments even though the number of empty units has increased slightly, but ‘record supply and occupancy have tamped rents down a little,’ said Ron DeVries, vice present of Appraisal Research.

“DeVries said 2018 could represent a peak in Chicago’s apartment market, however. The supply of rental units ‘will exceed demand and keep rents in check,’ he said. By the first quarter of 2018, DeVries expects ‘a lot of angst in the market’ as there is a sense of ‘a bubble.’”

“As the opportunity to fill new rentals declines, developers will consider whether it will be best to build more rentals or condominiums. That analysis already is occurring, although few developers have been able to find ways to make new condo construction profitable enough because of skyrocketing construction costs, taxes, limited available land and lenders often requiring developers to pre-sell many units — frequently 50 percent — before being willing to provide construction loans, according to the report. ‘When the easy money stopped, condo construction went away,’ said Steve Fifield, chief executive of Fifield Cos.”

From Richmond Biz Sense in Virginia. “After nine months and no presales, a high-end condo tower envisioned for the end of Tobacco Row has been scrapped. Developers David Johannas, Jerry Peters and Howard Kellman have pulled the plug on One Shiplock, an 11-story, 15-unit building planned at 2723 E. Cary St. The project, which was valued at $10 million, did not secure one buyer since floor plans hit the market last June. The highest-priced units were listed at $1.55 million.”

“Peters, a veteran Richmond developer, said they were surprised by the lack of interest. The project had received a special-use permit from the city and had the support of the Shockoe Bottom and Church Hill neighborhood associations. ‘It’s really surprising to us, and very disappointing, obviously,’ Peters said. ‘There’s just no market that materialized.’”

The Real Deal on Florida. “Home buyers in Miami have the upper hand, and now a new report from Zillow backs that up. Miami ranked as the second best buyer’s market in the country behind Baltimore, according to the report. Sellers are longing for the days of bidding wars in Miami, where 11.5 percent of listings now have a price cut. South Florida homes also spent about 108 days on the market before selling.”

“Last year, Zillow released a report that nearly half of Miami’s home shoppers were looking outside the city for a new house, citing affordable concerns. Recent studies show a growing divide between stagnant salaries and rising home prices in South Florida. After Baltimore and Miami, Philadelphia, Chicago and Houston were also top markets for home buyers.”

The Philadelphia Inquirer in Pennsylvania. “Throughout most of last year, it seemed as if Philadelphia’s median home-sale price could move in one direction only: up. After three consecutive quarters of consistent — and record-breaking — growth in 2016, however, Philadelphia’s housing market finally cooled off a bit in the fourth quarter. For the first time in a year, the median sale price for single-family homes — that is, excluding condo sales — within the city limits declined in the October-through-December period, dropping 6 percent to $140,000, from $149,000 in third-quarter 2016.”

“Combined with a dramatic decline in the number of home sales — only 3,835 homes changed hands from independent owner to independent owner (so-called arm’s length transactions) in the fourth quarter, a 28 percent plunge from the previous quarter — the pause in price appreciation reflected by his index could indicate that buyers have begun to say no, said Kevin Gillen, senior research fellow at Drexel University’s Lindy Institute for Urban Innovation.”

“For the city, the double-digit jump in home appreciation in the last year underscores just how complex changes in the real estate market can be. On one hand, the significant growth in value indicates the increasing attractiveness of Philadelphia as a place to work and live, Gillen said. But at the same time, that same rapid growth also introduces concerns of affordability in the poorest big city in America. ‘This is falling especially hard on young, first-time home buyers. … The spread between city house prices and city incomes is currently close to an all-time high,’ he said.”

From KXAN in Texas. “As the housing market continues to flourish in Central Texas, the number of families willing to spend hundreds of thousands of dollars to custom-build their dream home is rising. Joel and Tracey Lackovich had been saving for years to build their dream home for their growing family of six. What was supposed to become their dream quickly became the couple’s personal nightmare of an experience when they signed a contract with Bella Vita Custom Homes, LLC to build their home in the private, gated community of Spanish Oaks in Lakeway. As KXAN started looking into the couple’s story, it became apparent that their experience wasn’t an isolated incident.”

“It wasn’t until the couple was sued by a subcontractor, alongside Bella Vita Custom Homes as defendants, for failing to make payments for services provided on their home, that the Lackovichs’ say they realized the extent of the issue. The Lackovichs’ say the company was taking their money, but failed to pay their subcontractors.”

“‘Things that we’ve paid for—that we paid Bella Vita to pay—they never paid,’ the couple said. ‘We gave Bella Vita $300,000 and we didn’t have $300,000 worth of work done.’”

“Lisa Brankin’s story is one of an investor. ‘When it started we were really excited because it seemed like such a win-win,’ Brankin explained of her Spanish Oaks home. ‘They were supposed to build us a house at ‘their cost’ and then we signed a profit agreement with them that basically said they would build us a house at a set price and once the house was finished, we would split any profits 50/50.’”

“Brankin says that’s not how it ended. ‘Now, we have a house that’s sitting, not quite totally framed, and we’re looking at having to undo a bunch of things to fix it because it’s been sitting in the weather for five or six months.’ While Brankin has not filed suit against Bella Vita, she says it’s with good reason. ‘It not only keeps costing money with attorneys, [and] our house isn’t finished. So now we have to pre-qualify for another loan. We have to get another $330,000 to finish the house.’”