The Housing Bubble

It’s Friday desk clearing time for this blogger. “The Trump administration’s budget plan for 2018 includes cuts to federal agencies that are so large, some economists say it would drive down federal employment and make a noticeable dent in housing prices in Washington, DC, Virginia and Maryland. But President Trump’s budget director, Mick Mulvaney, told reporters that the budget wasn’t written to help prop up DC-area housing prices that have been the envy of other parts of the country for decades. ‘I can assure you that we did not write this budget with an eye toward what it would do to the value of your condo,’ he said.”

“Central Texas home sales retreated in February, with sales increasing less than 1 percent year-over-year, the latest figures show. ‘We’ve started off to what looks like will be another strong market, though not as insanely robust as years past,’ said Austin broker Eric Bramlett. ‘The result is a healthy market that’s appreciating at a normal 5 percent to 7 percent rate. Comparative to years past, this feels like a slowdown, but we’re really seeing a return to normal price appreciation that a world-class city like Austin tends to take for granted.’”

“David and Diane Charlton own the kind of home others fantasize about: a European-influenced country estate set back from major roads. A sprawling 34 acres surrounded by protected Chester County land. Yet there’s a reason that fantasy isn’t reality. Despite the amenities, the land, and a strong school district, the house can’t seem to sell. The slowdown has spelled trouble for iconic, sprawling estates. In Gladwyne, the famed Linden Hill has been on the market since 2013. But it was listed at $24.5 million four years ago. And on the market it has sat. Over time, the price has been slashed by nearly $8 million.”

“‘Linden Hill is an absolute treasure,’ said Lisa Yakulis, the Kurfiss Sotheby’s agent for the property. ‘It’s just harder to find that buyer.’”

“Miami’s luxury condo market may be soft, but it’s not quite at the point where investors are scrambling to pick up property at big discounts. Real opportunity in Miami will come ‘when the weak start yelling uncle,’ New York-based developer Richard LeFrak told Bloomberg.”

“Investors are buying fewer apartments in Israel and selling more of them, according to a report by the Finance Ministry. Sales were particularly noticeable among investors who owned three or more properties, the report said. The figures coincide with an article in the latest issue of the Economist magazine, which said that property prices in Israel soared by 82.1% between 2006 and 2016 in inflation-adjusted terms, representing the biggest increase in the world second only to Hong Kong.”

“Chinese businesses went on a global shopping frenzy last year, buying assets ranging from property to entertainment studios worth hundreds of billions of dollars. This year, however, foreign executives are unlikely to see Chinese buyers lining up at their doors. Outbound investments and projects are being called off as Beijing’s recent restrictions make it increasingly hard to transfer funds overseas.”

“Chinese companies are taking a hit. The latest involves real estate developer Country Garden, which has closed showrooms in China for its flagship $40 billion Forest City housing project in Malaysia. ‘Some people [invested offshore] blindly and were in a rush to do so,’ said Chinese central bank governor Zhou Xiaochuan. ‘Some of this outbound investment was not in line with our own policies and had no real gain for China.’”

“Confidence in the housing market has collapsed, with the number of Australians describing property as the wisest place to put their savings falling to its lowest level in more than 40 years. As recently as September 2015 more than 28 per cent of those surveyed nominated real estate as the safest place for savings - more than any other asset class. Confidence has fallen near-continuously since then to an all time low of 11.6 per cent in the latest survey.”

“Assistant Reserve Bank Governor Michele Bullock on the prospect of a big downturn in prices: Hopefully households and banks ‘can withstand that sort of thing if it happened.’ ‘We are watching it because investors can be the first ones to get out if things turn down,’ she said, warning that a rush for the doors could make a slump ‘much bigger than it would otherwise be.’ Australian Bureau of Statistics figures show investors now account for more than half of money borrowed for housing, making the market vulnerable to a sell-off should prices begin to turn down.”

“Two big banks are waving red flags about Toronto housing prices, calling them ’simply unsustainable’ and a ‘bubble’ in separate reports. The Canadian Real Estate Association said this week that average house prices across the Greater Toronto Area hit $727,300 in February, a figure that has risen by more than 23 per cent in the past year. The group said hot activity in and around Canada’s largest city is ‘without precedent.’”

“Doug Porter expanded on that notion with some hard numbers to show just how ‘other worldly’ prices have become. Porter tells the story of a hypothetical couple: successful young high-earners looking to start climbing the property ladder. Factoring in the cost of that mortgage insurance and estimating basic costs such as utilities and property taxes, Porter tabulates that the Dorights could afford a house of just over $987,000. The Dorights exemplify a sobering reality: even people near the top one per cent of all income earners in Canada ‘are at best able to afford a semi-detached home on the fringes of Toronto, or maybe a low-end detached home verging on teardown status,’ Porter said. ‘Now just imagine the predicament a more typical couple of more modest means faces in the current market environment.’”

“If you were looking for an apartment in the Bay Area 18 months ago, realtors recommended you took your checkbook to viewings and were prepared to fork out for the deposit and first month’s rent – that’s $8,000 to $10,000 for a two-bedroom place in San Francisco – on the spot. Today, rents are still expensive, but the market has plateaued after years of painful increases. It’s part of a broader trend in the Bay Area: Silicon Valley’s technology bubble has had some of its wind knocked out – not bursting, but fizzling – with VCs making fewer investments, startup valuations falling, and recruitment slowing.”

“‘We’re starting to get a lot of résumés from [software engineers at] companies where the business model isn’t working and they can’t get funding, so they are closing down or cutting back,’ said Mark Dinan, a software recruiter based in the Bay Area, who keeps track of companies’ hirings and firings. ‘Silicon Valley has not had a major success in terms of IPO before Snap for years – and Snap is in LA.’”

“How does this moment compare to the time leading up to the dotcom crash? ‘I got here in 97 and it was like it is now – incredibly packed, impossible to commute, high apartment costs,’ Dinan said. ‘We’re seeing over-valued companies, funded based on hopes and dreams and aspirations and not good business models. Companies counting users and eyeballs rather than profits. There are a lot of similarities.’”

“‘The [dotcom crash] happened very suddenly and without any warning,’ said Aswath Damodaran, a professor of finance at the Stern School of Business. ‘When it does happen everyone says they saw it coming. If you saw it coming then why didn’t you get out of it?’”