June 30, 2017

The Question About The Users Of Real Estate

It’s Friday desk clearing time for this blogger. “Metro Denver home prices are about 18.3 percent higher than what income gains can explain and justify, according to a first quarter update from Arch MI. That’s on the high side among metro areas and above the excess appreciation rates seen a decade ago during the housing boom. In fact, they haven’t been so high in Denver since the oil boom days of the early 1980s. But the odds that metro Denver will suffer a home price decline over the next two years remains at a low 2 percent due to a strong economy and the region’s continued popularity among those relocating, according to the Housing and Mortgage Market Review from Arch MI.”

“Arch MI, which is based in Walnut Creek, Calif., provides mortgage insurance, giving it a motivation to stay on top of home price trends. ‘Don’t expect Denver home prices to go down. Everybody wants in. It isn’t a bubble and it will continue to be like this,’ predicted Ralph DeFranco, global chief economist with Arch MI.”

“You don’t have to be an industry insider to know that Central Ohio real estate is on fire. You’ve surely seen reference to the skyrocketing home prices in Columbus. Neighborhoods like Upper Arlington, Bexley, Clintonville and Grandview have risen nearly 50 percent since the economic recovery began in 2012. But it’s not just those pricey neighborhoods, where median home values are now exceeding $300,000, that are hot.”

“Jim Hilz, executive director of Building Industry Association of Central Ohio says, ‘We’re not building what the consumers want.’ He says the average sale price of an existing home in Central Ohio in 2016 was $202,000, while the average cost of a new home was $333,000, ‘and on the north part of town, that average new home price goes well over $420,000.’”

“It is no secret Bay Area housing prices are expensive. Recent data revealed three counties now have average housing prices above $1M. While USC Lusk Center for Real Estate Director Richard Green said he does not think there is a housing bubble, he is concerned about tech companies that do not technically make any money, like Uber. The Bay Area is filled with tech companies that are doing good things, but the industry does not know what they are actually worth. ‘The question about a bubble is not about the real estate itself, but about the users of real estate,’ Green said. ‘How solid are they? How long are they going to be around?’”

“Home sales in the Greater Toronto Area plunged more than 56 per cent during the first two weeks of June, compared with a year ago, according to the latest numbers from the Toronto Real Estate Board. Meanwhile, the number of new listings rose to 9,988, which represents a 22 per cent increase. Juliette Fergus, of Keller Williams Referred Urban Realty, told CTV News Toronto it’s too hard to say whether these listings are truly new listings or ones being relisted.”

“‘We’re seeing homes that are listed for multiple offers…. They stay on the market for a week, they don’t sell, they’re being pulled and relisted,’ she said. ‘Homes are now being listed at what the actual price is.’”

“Rental prices have significantly dropped in the UAE capital within the last year. However, property experts predict that prices will slide further, suggesting that supply is increasing while demand is decreasing. Jalal Mamdouh, leasing coordinator at Prime Capital, said that landlords are finding it difficult to compete with one another, adding: ‘They are desperate to lease their apartments,’ particularly those who have bank loans. Today, a one bedroom apartment in the Gate Towers has an average of Dh75,000, decreased by approximately Dh15,000.”

“‘You can find brand new apartments for Dh70,000 now, which has not happened in the previous years,’ he said. ‘Landlords listing their one bedroom apartments for Dh90,000 and above will never have them rented out.’”

“The differential between the listing price and selling price of homes in the current market can be as much as 30%, according to Cameron Jansen, Manager of RE/MAX Central, whose office services the central Gauteng region. ‘Buyers are aware that market conditions are in their favour and as such, are looking for a bargain where possible, often putting in offers that are 25%-30% below the seller’s listing price,’ says Jansen.”

“He adds that this is not something that is unique to any particular price range, but is a phenomenon that is across the board. ‘It is not that we just see the trend developing in one sector of the market – it is from one end of the market to the other, from the affordable housing sector right up to the luxury market,’ says Jansen.”

“Thailand might encounter a repeated economic crisis like the one which occurred two decades ago, said a former governor of the Bank of Thailand. According to Prasarn Trairatvorakul, Thailand’s property sector has been growing so fast and widespread that it is apparently oversupplying the consumer market. Such oversupply might possibly trigger a new economic crisis, following the one unofficially called Tomyum Kung crisis (hot soup with shrimps) in 1997.”

“The Tomkun Kung crisis prompted the country’s economic bubble to burst, causing property developers and their customers as well as banks, financial firms and their clients to suffer enormous losses. ‘Nobody can assure that the Tomyum Kung crisis will not be repeated but certain measures may be taken to prevent it,’ he said.”

“Australia’s looming apartment glut has prompted panicked developers to offer potential buyers significant incentives, including discounts with rental guarantees, free furniture and appliances, upgrades to fixtures, and significant stamp duty concessions. An estimated 25,500 apartments will be completed in Sydney this calendar year, with a further 17,090 in Melbourne and 10,300 in Brisbane, according to property advisory firm Charter Keck Cramer.”

“A plethora of banking, regulatory, and additional factors are turning the tide for property developers. This has lead to panicky developers resorting to offering incentives to try and get apartments moving. Regulatory measures, combined with the Chinese government’s curbs on its citizens buying property overseas, has caused a dramatic slowdown in off-the-plan selling, according to developers.”

“Feedback from our Australian Property Conference and mystery shopping highlight a clear change in the apartment market, particularly so in Perth, Brisbane and to a greater extent in Melbourne,’ said Citi analysts David Lloyd, Adrian Dark, and Suraj Nebhani.”

June 29, 2017

A Simple Way To Launder A Lot Of Money

A report from the Village Voice on New York. “Next month, New York’s mega-priced apartment buyers will get a chance to bid on what’s probably the biggest the biggest luxury apartment foreclosure in the city as a Nigerian energy mogul’s $51 million dollar apartment goes on the block. Kolawol Aluko defaulted on a $35 million mortgage. It’s the second giant foreclosure at One57, the 57th Street tower finished in 2014 . The building itself was funded partly by a subsidiary of an Abu Dhabi company linked to a global money-laundering investigation. Aluko’s full floor apartment was held by a shell company, as are many of New York’s highest-priced condos. Eight figure properties held by LLCs with opaque names–until, as in this case, things blow up.”

“Thanks to permissive laws on shell companies, the United States — and New York in particular — has quietly become one of the world’s money shielding havens. Carolyn Maloney, New York representative, has introduced bills to change this five times, according to Quartz. ‘There are no requirements for anyone involved in real estate, apart from banks, to actually do any anti-money laundering controls or background checks,’ says Heather Lowe, the legal counsel and director of government affairs at Global Financial Integrity, a non-profit that tracks and studies the illicit flow of money around the world. She called the available real estate in places like Manhattan’s Billionaires’ Row ‘a simple way to launder a lot of money at once.’”

From Metro News in Canada. “Vancouver city council remained firm on not exempting owners of second homes from a vacancy tax that went into effect this year, despite a renewal of pleas from people who split their time between Vancouver and other cities. Michael Geller, an architect and city planner who opposes the tax, acknowledged the idea of second home owners crying poor draws ’snickers.’ Tom Davidoff, a University of British Columbia economist who supports the tax, pointed out that Vancouver properties, including condos, have had enormous capital gains over the past few years.”

“‘We’re talking about 50, 60, 80 per cent capital gains, and the number here is like 15-20 per cent after it’s done accruing, so the estate’s going to do just fine,’ he said.”

From The Sun in the UK. “Iain Duncan Smith today called for an end to the building of tower blocks in Britain in the wake of the Grenfell Tower disaster. The ex-minister also suggested slapping extra taxes on foreign investors who buy up properties and leave them empty, in a bid to solve the country’s housing crisis. Discussing the problem of luxury homes which are bought by millionaires from China and Russia who then never use them, he said: ‘Deal with that by taxing them, New York does – I would slap a tax on houses left unoccupied.’”

From Property Guru on Malaysia. “Despite the link between banking collapse and housing bubble, the National House Buyers Association (HBA) has urged the government not to relax guidelines on foreign property buying in Malaysia, reported Free Malaysia Today. The call comes after veteran property expert Ernest Cheong expressed concern that the luxury home glut may ruin banks and eventually lead to a financial crisis. Since most of such homes are owned by developers or speculators, the failure to sell them could result to banks being unable to recover loans taken on such properties, said Cheong.”

“With this, he urged the government to introduce measures aimed at encouraging foreigners to acquire luxury homes within the secondary market, since majority of locals cannot afford such homes. HBA honorary secretary-general Chang Kim Loong said relaxing guidelines on foreign property buying is not the right way to go. This is because the type of properties that usually cause a property bubble to burst are those targeted at lower- to mid-income groups.’There has always been a direct correlation between a housing bubble leading to a banking collapse, which further leads to collapse of the overall economy, which ultimately leads to a recession,’ said Chang.”

The Property Report on Myanmar. “If retail is thriving – and evolving – it is a very different situation when it comes to residential developments. In the little more than 12 months since Myanmar’s first civilian government in five decades finally took up the reins of parliament, the initial rays of promise for the residential market have been obscured by clouds of uncertainty and disillusionment. The current situation is ‘challenging’ at best, according to Richard Emerson, managing director of Yangon-based property consultancy Emerson Real Estate. ‘Things are difficult,’ he says. ‘The residential market is effectively at a standstill because of a range of fundamental issues.’”

“A glut of high-end properties now sit either unfinished or empty as the envisioned influx of wealthy foreigners expected to rent them has failed to materialise due to ongoing concerns about the wider economy and a lack of effective investment legislation. The Colliers report notes that the total completed condominium stock is estimated to have exceeded 6,000 units at the end of 2016 with more than 10,000 units in the pipeline. ‘The reality is that Myanmar requires foreign investment on all fronts – including real estate – in order to get the economy going again,’ adds Dan Davies, managing director of Colliers International Myanmar.”

“The reduction in rental fees will bring long-term benefits to the city and help drive down the cost of living, making it a more attractive base for foreign residents, according to David Ney, managing partner at York Road Realty in Yangon. ‘If you have more inexpensive property on the market, more international companies will see opportunities because they can get more for their dollar and as more open up the overall the cost of living will go down, and that is good,’ he says, adding that high-end rents have fallen by around a third. ‘Properties that were renting for USD5,000 per month are now going for USD3,000 or even USD2,000.’”

The Daily Trust on Nigeria. “Alhaji Murtala Aliyu, Mutawallen Gombe, a former Minister for State, Federal Ministry of Power and Mines, is the newly elected President of the Quantity Surveyors Registration Board. Q: There are many vacant houses across Abuja, is there still need for government to embark on mass housing to cope with the housing needs in Abuja?”

“A: The solution is for government to grow the economy and make it an economic issue as some of the houses unfortunately are built with laundered money. I think for some time we will continue to have houses that are empty. As long as we are still fighting corruption, but when things stabilize and when houses become economic ventures where people need to earn from those houses, there will not be empty houses. They will make sure that they bring them to affordable level for people to occupy them.”

“Q: How can Nigeria’s housing need be met with the rising population and rural urban migration?”

“A: Grow the economy mainly by commoditizing housing. Housing is more a personal and traditional thing as you hardly find housing in towns now where you will hardly go. There are places where you have houses and nobody is occupying them, they are just for occasions. This is where the people are in need of houses and the houses are not there or they are not available despite the increasing demand for shelter. Houses should be commoditized for a buyer can buy a house and if he thinks he wants change, he can sell it and buy another one, if he is moving from one place to another or if he is moving out of town, he can dispose of it and use the money to buy another and to do that, you need to develop the economy.”

June 28, 2017

What The Lenders Are Thinking Makes No Sense

A report from the Atlanta Journal Constitution in Georgia. “Just as home prices are rising, demand is outpacing supply and experts are starting to wonder if there’s a housing bubble, lenders are looking to make it easier to buy. Lenders say they plan to ease standards to make it easier for buyers to quality for mortgage loans, according to a survey released Tuesday by Fannie Mae. The huge housing boom that led to a collapse in the housing market — nationally in 2006, in Atlanta a year later — was to a large extent fueled by easy money. The system — that is, the lenders and their investors and the financial interests that bet on them — were desperate to keep demand for homes growing.”

“Given what happened a decade ago, it might seem the wrong, or just an unnecessary time to make it easier to borrow. After all, demand now already outpaces supply of homes for sale. The imbalance and the increase in prices is enough to make at least some experts use the ‘B’ word that described the pre-2006 market.”

“‘As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?’ says David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, which includes the Case-Shiller housing index. ‘Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up.’”

From Dow Jones Newswire on California. “San Francisco, once the hottest housing market in the U.S., is now one of the coolest, in a reversal that could presage a broader slowdown if more buyers decide it isn’t worth chasing rapidly rising prices. San Francisco’s apartment market also is sluggish. Economists said the weakening is being caused by a confluence of factors: slowing job growth, less demand from new buyers put off by high prices and, on the rental side, an increase in new apartment supply as developers try to cash in on a multiyear boom.”

“‘Tech is growing more slowly than the rest of the economy and tech has been the thing that has been driving the economy forward the last decade,’ said Ted Egan, chief economist for the city of San Francisco. ‘We are in the middle of a notable slowdown.’”

The Victoria Advocate in Texas. “Victoria has one of the worst housing markets in the U.S., according to a national study. Insurance company Nationwide’s health of housing market report puts Victoria at the very bottom of 400 metropolitan areas for its metropolitan statistical area rating, which is based on employment, demographics, mortgage market and house prices. Four other Texas areas are in the bottom 10 with Victoria, including Texarkana, Longview, Dallas-Plano-Irving and Sherman-Denison. The majority of the bottom 10 are located in energy-dependent states, including North Dakota, Texas, Louisiana and Alaska.”

“The market for houses priced above $400,000 is soft, and a large number of the homes in the area fall in that range. “What’s selling is below $200,000, which is causing the median price and the average price of existing home sales to decline,’ said Lee Swearingen, Coldwell Banker The Ron Brown Company president.”

The Real Deal on New York. “In hindsight, the unpaid common charges were a red flag. In December, the condo board at One57, the ultra-luxury skyscraper on Billionaires’ Row, slapped the owner of a $50.9 million unit with a $64,331 bill for unpaid building fees. Six months later, the owner, Nigerian oil magnate Kola Aluko, was under investigation for alleged money laundering. In a rare move for a Manhattan condo, his lender moved to foreclose on the property.”

“Coupled with a series of unprofitable resales, the impending foreclosure — the second at One57 in as many months — has cast a shadow over the onetime poster child of the luxury residential boom. And it raises further questions about the health of Billionaires’ Row at a time when the tower’s developer, Gary Barnett, is planning an even more ambitious undertaking.”

“‘It’s an isolated incident, but symptomatic of a bigger story,’ said Leonard Steinberg, president of Compass. ‘Foreclosures used to be the domain of people who were barely scraping by. This shows it can apply as equally to the very wealthy. On the very high end of the market, where pricing has been knocked up again and again to the extreme, certain people will break.’”

“‘You have a nearby development from the same developer with a similar price point that’s got twice the number of units,’ said Jonathan Miller, CEO of appraisal firm Miller Samuel. ‘The first building has a lot of units to sell and Billionaires’ Row is very quiet right now. Maybe that will change. But the scale of this and the fact that it took so long to shore up financing, it’s confusing to me what the lenders are thinking. It makes no sense.’”

“As the market began to soften, One57 became one of its most glaring casualties. Some buyers looking for a quick profit instead took a beating. One investor paid $32 million, or north of $7,000 a foot, for a 32nd-floor pad, and right after closing on the unit relisted it for nearly $10 million more. After numerous price cuts and over a year on the market, it finally sold for $21.4 million, or less than $5,000 a foot.”

“Both Aluko and the owner of the other unit facing foreclosure, Sheri Izadpanah, had heavily leveraged their purchases. ‘It’s like getting an awful stain on a gorgeous wedding dress,’ Tyler Whitman, an agent at Triplemint, said of the situation with Aluko’s apartment. ‘Foreclosures happen — people fall on hard times and things go south. But for it to happen in a building like this is surprising. It’s become abundantly clear than One57 did not turn out to be the investment everyone wanted it to be.’”

“‘We’re all surprised that there’s so much construction going on when the market has changed,’ said Douglas Elliman’s Richard Steinberg. ‘It’s not a reflection on the developer, but it doesn’t bode well for the Billionaires’ Row marketplace to have foreclosures,’ said Douglas Elliman’s Frances Katzen. ‘It freaks people out and sends a message that there’s a bit less liquidity out there than everyone imagines.’”

June 26, 2017

It’s A Long Time Coming

A report from D Magazine in Texas. “‘Everyone’s talking about real estate right now,’ says Brady Moore, the founder of Laguna Residential, a realty firm that represents buyers and sellers of high-end properties in central Dallas. ‘This market has been so extraordinary that you can’t go to any kind of social event where someone isn’t asking what their neighbor’s house sold for. And everyone wants to know where prices are going to go next.’”

“But keep looking at the data, and a curious picture emerges. The number of houses changing hands is only slightly up overall from 2016. Plus, sales were actually down in the early part of this year in several previously hot places, including Southlake and East Dallas. In once-white-hot North Oak Cliff, prices declined 3 percent through April. Take homes in the 75214 ZIP code as one example. As of this spring, there were 10 percent more houses on the market in that area than there were at the same time a year ago.”

“While the increased supply is a nice change for buyers, for sellers it’s not yet working out. This spring, sales were down 27 percent on the year for the whole area, across all prices. Supply was up. Demand was down. And yet, that’s the scenario playing out in any number of neighborhoods and suburban cities across the area. ‘You can’t expect your house to sell in three days anymore,’ says agent Brady Moore. ‘That’s still happening, but we have more inventory now, and that’s not been great for my sellers, but it has been good for my buyers. And after these past few years, any sense of balance in this market is really appreciated.’”

The San Francisco Chronicle in California. “We’ve visited and revisited the De Guigne estate over the years, watching its drama unfold. Now, finally, the 16,000-square-foot mansion in Hillsborough has sold for $29.85 million, and at such a dramatic discount from its original list price of $100 million that this story’s end makes for good real-estate gossip.”

“De Guigne’s proposal ‘to subdivide the property into 25 single-family homes’ collapsed under pressure of the poor 2009 economy and vociferous opposition from neighbors and environmental groups. So, though the MLS write up for this now sold property boasts ‘potential to subdivide,’ it’s hard to know if new owners can actually do so. But then again, maybe new owners plan to keep all 47-plus acres and 16,000-square-feet of luxe to themselves.”

From Silicon Beat in California. “You’ve probably been reading about the latest round of record home prices in the Bay Area. A survey by the Pacific Union real estate company showed that all homes across the region rose in May to a median price of $860,000, up 7 percent year-over-year. What caught our eye about the Pacific Union survey was that it got down into the weeds in an unusual way. Specifically, it showed that certain ZIP codes throughout the region seemed to be defying the relentless upward rise in prices — in fact, homes in these ZIP codes had depreciated in value over the last year.”

“Selma Hepp, Pacific Union’s chief economist, had no trouble isolating 10 ZIP codes in those counties where single-family home values had actually dipped year-over-year, appreciably in some cases. Values tanked 20 percent in Santa Clara’s 95054 ZIP code, while Berkeley’s 94705 dropped 18 percent and Los Gatos’s 95030 fell 11 percent. Even in super-wealthy Atherton, values fell 2.0 percent in the exclusive 94027 ZIP.”

“But the more Hepp zoomed in with her microscope, the more it seemed as if these downward blips were anomalies, caused by month-to-month changes in the housing mix and hard-to-pin-down whims of the market. These suspicions were bolstered by conversations with several agents in the field. And underlying the overall discussion of depreciating ZIPs was this message: One month does not make a trend.”

From The Real Deal on New York. “For Hans Futterman, it was a dream defaulted. The developer assembled a vacant plot of land at Frederick Douglass Boulevard and West 122nd Street in Harlem over roughly four years, from 2011 to 2015. He then secured approvals to construct a 12-story, 127-unit residential building on the site, which offers 205,000 buildable square feet.”

“But in June of last year, Futterman, who declined to comment for this story, defaulted on a $36 million loan from RWN Real Estate Partners, and five months later his development firm filed for Chapter 11 bankruptcy protection. The bankruptcy auction is now set for June 21. A source said Futterman pumped ‘his life savings’ into the project — and that he is still holding out hope to develop it himself. ‘This is the reality of the market today,’ said Cushman & Wakefield’s Bob Knakal, who is handling the bankruptcy auction with colleague Adam Spies. ‘Transactions are not going the way owners want.’”

“Indeed, the first signs of distress have emerged in several pockets of New York City’s commercial real estate market in recent months. Retail vacancies, declining hotel revenues and foreclosures on Park Avenue are among a flurry of indications that the market is inching closer to the brink of financial trouble. ‘There’s a lot more stress in the system than most people probably realize,’ said Iron Hound Management’s Robert Verrone, who added that his mortgage brokerage is handling more workouts nationally than ever before.”

“The influx of troubled loans is a product of the 2007 lending boom, and $90 billion in commercial mortgage backed-securities backed by properties across the country are set to mature this year. Sean Barrie of Trepp, which tracks CMBS, noted that the massive batch of loans was ‘underwritten pretty liberally,’ and now, many of those sponsors may face difficulty refinancing their over-leveraged assets.”

“Attorney Ray Hannigan, of Herrick Feinstein, who specializes in foreclosures and workouts, said the tri-state area is already seeing a substantial influx of those maturity defaults. There are more telling signs of distress in multifamily than landlords caving to concessions to fight vacancies. In the CMBS space, industry players are seeing loan defaults on multifamily properties, according to Hannigan. ‘You’ll see a lot of special servicers pursuing foreclosure and workouts of apartment complexes, and other types of properties, across the board,’ he said. ‘It’s a long time coming. The market needs to work through this latest cycle and weed out the good and the bad.’”

The Mat-Su Valley Frontiersman in Alaska. “It’s been nearly two months since I quit my last job – a great deal of which entailed covering the state legislature. As divided as our politics are, as lawmakers adopt the broken down car model that is Washington D.C., they were united back then in one refrain. Members of leadership from both caucuses in both chambers would assure me: ‘I’m absolutely confident we’ll figure out the budget within the 90-day time limit.’ I always chuckled privately. Every reporter knew it was either feigned optimism or delusion. The writing was on the wall.”

“As I passed Cheney Lake in East Anchorage, I noted how it was now day 152 of the 2017 legislative session. Day 62 passed that promised ‘come to Jesus’ moment where ideology gave way to stability and, you know, responsibility. I passed a few real estate signs. Then more. Then a moving truck. Then a staggering collection of both spanning the entire Anchorage Bowl. One after another. Sometimes, clusters of ‘for sale’ signs hung together at entryways to housing divisions.”

“This wasn’t the normal summer population turnover, when people rush to sell their houses and cars and pack their bags before the termination dust begins appearing on the Chugach Mountains. The vacancy rate in Anchorage has ballooned from a low of 1.8 percent in 2010 to 5.1 percent this year. Statewide, those numbers are 3.9 percent and 7.3 percent, respectively. A big, bad change is happening.”

“In Fairview, I rolled past more homes for sale. I saw another moving truck. I grunted to myself in frustration, remembering all the assurances I had been given, and knowing that the problem remains the income tax.”

“Seeing announcements posted to Facebook by friends and acquaintances accepting new jobs out of state have become a daily exercise. As frequent as similar posts documenting concern and panic after being notified that their jobs were in jeopardy. Do they put the house on the market now? How are they going to make their mortgage payments? Meanwhile, the signs keep going up and the trucks keep getting filled. The future is not looking good.”

A Disappointing Price Might Be A Great Escape

A report from the Financial Post in Canada. “Internal mid-month statistics for June from the Toronto Real Estate Board show average prices in the Greater Toronto Area shed almost 6.4 per cent in just two weeks with sales down about 50 per cent from a year ago. The average home sold for $808,847 from June 1 to 14 — a sharp drop from the average of $863,910 for May. The peak of the market in Canada’s largest city now appears to be in April when the average price soared to $920,791, the same month that Ontario brought in its 16-point Fair Housing Plan, which included a 15 per cent non-resident speculation tax. Average prices have now declined just over 12 per cent from the peak but Craig Alexander, chief economist of the Conference Board of Canada, said it might not be the measures themselves that have cooled the market as much as the perception of their impact.”

“‘I don’t think that many buyers have been pushed out of the market,’ said the economist. ‘One of the biggest effects of tighter government regulations is that it creates a psychological response by potential sellers and potential buyers. It ends up like a wait and see approach. If everybody waits and sees what happens, you get a significant pullback.’”

From First on Ultra on India. “With IT sector witnessing subdued sentiment amidst pressure on hiring and annual pay rise for employees, the country’s software and services hubs such as Bengaluru, Hyderabad, Chennai, Pune and Noida-Gurgaon in NCR are expected to see 10-20 per cent reduction in the housing rents over the next three quarters, according to an ASSOCHAM paper. ‘The IT and other services like financials are among the sectors which pay well. Besides, the age profile of these employees is quite tempting for the marketers. They are good spenders and want good life. These factors kept the markets for rentals pushing up, especially in gated and well-equipped housing complexes and societies in Bengaluru, Gurgaon, and Hyderabad. There is certainly a pause visible,’ ASSOCHAM Secretary General Mr D S Rawat said.”

“In any case, the markets for real estate has gone down in major micro markets owing to a combination of factors. With a large inventory of even ready flats which would be available for use in the next few months, the supply for the rental markets would further improve.”

The China Economic Review. “Chinese real estate developers find themselves squeezed by government curbs on bank lending that aim to deflate the housing bubble, as well as a regulatory campaign to force the financial sector to deleverage and improve risk controls. According to Caixin, one by one, regulators have restricted the sources of funding available to builders. Now, with even the costliest and riskiest form of borrowing - via trust companies - under scrutiny, companies are running out of options.”

“The government began to restrict the flow barely a year after it opened the spigot in the second half of 2015, when it was making an effort to revive investment in property development following its collapse during the previous round of tightening. But issuances collapsed again this year - with just 152 billion yuan of bond sales as of June 15, down from 614 billion yuan over the same period last year, Wind data show.”

From Asia Times on China. “Employees in loans divisions in China’s banking industry are facing increased pressure after interest rates were raised, making it harder for them to approve loans and make commissions on already low wages. ‘Our basic salary is only 2,000 to 3,000 yuan per month, so we have to depend on commissions,’ said a client manager in a commercial bank. ‘Most client managers saw a significant drop in their volume of loan operations, so it is quite common that many of us fail to maintain our previous wage levels.’”

“Banks have cut the monthly quota on housing loans and increased interest rates amid tightening credit policies. ‘If you want to make a loan, better do it now,’ said a client manager at one of the four giant state-owned banks. ‘It’s uncertain if there will be any quotas next month and the lending rate could probably see a 10% rise from the benchmark by then.’”

“The China Securities Journal reported that China Merchants Bank, Industrial and Commercial Bank of China, China Minsheng Bank and China Guangfa Bank had all raised the interest rate above the benchmark on first home loans. While some branches of Ping An Bank and Industrial Bank have stopped issuing housing loans.”

From Your Property Investment in Australia. “Housing finance and credit data released earlier this month by the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA) make it clear that investor interest in the housing market is starting to decline. Philippe Brach, CEO at Multifocus Properties & Finance, believes it’s the current climate of uncertainty that is causing many property investors to hold back and wait for the market to stabilise.”

“‘I believe it’s the uncertainty that has been created with the banks changing their lending policies every five minutes. It’s pretty much on a daily basis,’ he said. ‘You almost need a full-time guy in your mortgage broking office to keep up with all the changes that the banks are putting together. Every day, we get three to four press releases outlining the latest changes. Banks are raising interest rates and some are changing their assessment standards. This is causing investors to hold back.’”

From Domain News in Australia. “Sydney’s housing market has reached a turning point, with buyers no longer willing to match sellers’ expectations, according to a leading sales agency. The ’seasonal impact’ of winter and higher interest rates for investors were having a ‘double whammy effect’ on auction clearance rates, said Domain Group chief economist Andrew Wilson. This was then being compounded by ‘extraordinary numbers’ of sellers going to auction. ‘We have never seen auction numbers at this height – was a record May and it will be a record June. It will have an impact,’ he said.”

“In a note to sales staff BresicWhitney director William Phillips said it was ‘clear that we have entered a new phase in the market.’ He said it was an ‘opportune time to sell.’ ‘What might seem like a disappointing price today might be market value or a great escape in three months’ time,’ Mr Phillips said.”

June 25, 2017

A Lemming Effect

A report from the Denver Post in Colorado. “Resort-style outdoor pools with cabanas. Yoga studios with on-demand classes. Bicycle repair stations and dog spas. Movie theaters and game rooms. Amenities like these have all but come to be expected when a new apartment building opens in Denver. Some real estate experts warn that developers are creating a glut of luxury properties. ‘The market is overbuilt,’ said Jay Rollins, managing principal of JCR Capital, a Denver-based real estate private equity firm that’s active in the apartment realm. ‘The most important thing to remember in the luxury market is the deals that are coming out of the ground, those were born two years ago,’ he said. ‘It was something of a lemming effect. Denver got really hot nationally very quickly and then everyone jumped in and tried to buy every piece of land and build a luxury apartment property.’”

“Downtown apartment vacancy rates have practically doubled over the past few years, said Cary Bruteig, principal at Apartment Appraisers & Consultants in Denver. In the first quarter, vacancy was about 8 percent, up from 4.34 percent at the end of 2014. ‘We are building them a little faster than we can fill them up,’ Bruteig said.”

From The Oklahoman. “Brookwood Village, Oklahoma’s largest apartment complex, fetched a high price — $60.5 million, or $53,635 per unit — even with rent concessions peppering the Oklahoma City apartment market, signaling weakness. However, any weakness in the metro-area market is limited to pockets of oversupply that are beginning to stabilize, said Tim McKay, who handled the sale. Further, he said, federal incentives supporting workforce housing make it easier for multifamily investors to borrow money, and at easier terms, than for other kinds of investment property.”

“‘Brookwood’s location — and the fact that it is quality, workforce housing — drove investor demand, particularly with the opportunity for its value-add potential and upside in rents,’ McKay said.”

“Construction needs to pause in the especially active areas for the market to return to balance, said broker Mike Buhl of Norman-based Commercial Realty Resources Co., who tracks the south side especially closely. ‘While it comes down to what is being built and where it is being built, speculation remains that developers will keep building product and adding inventory,’ Buhl said. ‘The amount of new construction coming to the market without some kind of slowdown does seem a bit aggressive in my opinion.’”

The Associated Press. “State budget cuts are putting stress on public universities, some of which are resorting to renting out empty dorm rooms to earn cash amid tight financial circumstances. The University of Missouri, one of the biggest football schools in the state, will rent out dorms this fall for visitors who want to stay to see the team play. The starting rate for a ‘furnished two-bedroom suite with four single beds’ is $120 per night plus tax, according to the school’s website. The plea for extra cash at the University of Missouri comes amid declining enrollment and a decrease in finances.”

“Missouri is not the only state where universities are tightening their belts. In Illinois, where Moody’s downgraded the credit ratings of five public universities to junk level amid an ongoing two-year budget impasse, the University of Illinois at Chicago offers guest housing in residences ‘intended for short-term stays by those other than UIC students’ for rates as low as $100 per night for a one bedroom apartment.”

“Other universities in the state, like SIU Carbondale, will seek to capitalize on the solar eclipse weekend in August by making dorm rooms available for rent. SIU Carbondale says it is in a remarkably good location to witness the event.”

The Real Deal on Florida. “Former Miami Heat basketball player Glen Rice sold a downtown Miami condo for less than he paid just weeks before it was scheduled to be sold at a foreclosure auction. Rice sold a two-bedroom, 27th-floor unit at the Neo Vertika condominium that he owned with his ex-wife for $310,000. He purchased the condo in 2006 for $317,000. He had lowered the asking price almost monthly since listing the condo for sale about two years ago for $460,000.”

“GossipExtra reported M&T Bank began to foreclose on a $250,000 mortgage secured by Rice’s condo, claiming that he stopped making payments. In addition, the condo owners association at Neo Vertika claimed Rice stopped paying a monthly association fee of $675.50 more than two years ago. Rice has been in poor financial condition because he has lost a fortune on bad investments and went through a costly divorce from his ex-wife Cristy, a former star on the reality TV show ‘Real Housewives of Miami.’”

From Bloomberg on New York. “Another luxury condo at Manhattan’s One57 is scheduled for a foreclosure auction — the second time in a month that a property seizure is being sought at the Billionaires’ Row tower following a mortgage default. And it might be the biggest in New York City residential history. The owner of the condo, a shell company listed in public records as One57 79 Inc., bought the 6,240-square-foot residence in December 2014 for $50.9 million, according to New York City records.”

“In September 2015, the company took out a $35.3 million mortgage from lender Banque Havilland SA, based in Luxembourg. The full payment of the loan was due one year later, according to court documents filed in connection with the foreclosure. The borrower failed to repay, and now Banque Havilland is forcing a sale to recoup the funds, plus interest.”

“Built by Extell Development Co., One57 has stood as a symbol of Manhattan’s luxury-development boom — and eventual slowdown. The tower, which broke ground in 2009, drew investors willing to pay large sums for lavish residences they rarely live in, and inspired other developers to build similar offerings, creating an effective ‘Billionaires’ Row’ along West 57th Street.”

“Last month, a June 14 auction was scheduled for a 56th-floor apartment at the same tower. The condo was purchased in July 2015 for $21.4 million. Public records have yet to reveal any transfer of ownership for that property. ‘This shows that too much leverage is probably not wise,’ Anna LaPorte, an Extell spokeswoman, said of the most recent default.”

June 24, 2017

Lost In A Keynesian Puzzle Palace

A weekend topic starting with Bloomberg. “Robert Litan and Ian Hathaway, writing in Harvard Business Review, surmised that many American entrepreneurs are no longer looking for ways to produce more useful stuff, and are instead looking for new techniques for extracting money from each other and from the government. In other words, crony capitalism may be slowly cannibalizing productive capitalism. Litan and Hathaway draw on an argument by the late economist William Baumol, who warned of the possibility that entrepreneurs could turn their energies toward useless rent-seeking.”

“As examples, Baumol cited historical cases of business people who found novel ways to sue their competitors out of existence. Litan and Hathaway, noting a slowdown in U.S. entrepreneurship, fear that something similar might be happening today. If big companies are using new and creative ways to crush the competition, it’s bad news for economic dynamism.”

“So which companies are sucking rents out of the productive economy? Litan and Hathaway don’t point fingers, but it’s easy to make an educated guess. In an influential 2014 paper, Thomas Philippon speculated that financial industry profits and salaries rose spectacularly since 1980 because banks, securities firms and fund-management companies found new methods for extracting rent.”

From David Stockman. “The American people are being brought to ruin by three institutions that are mortal threats to liberty and prosperity. To wit, the Federal Reserve, the military/industrial/surveillance complex and a sinecured Congress that is burying unborn generations in debt — even as it sanctimoniously presumes that it is doing god’s work by servicing the beltway racketeers who keep it perpetually in office.”

“On the latter score, it is worth reminding once again. An incumbent House member standing for reelection has a smaller chance of losing his seat than did a Politburo member during the heyday of the post-war Soviet Union.”

“Perhaps by the looks of today’s sea of red, the whopper told by Yellen during her presser yesterday may finally be sinking in. Our clueless Keynesian school marm not only falsely claimed ‘mission accomplished’ and that the US economy is heading for the promised land of permanent full employment and unprecedented prosperity. She also claimed that the Fed would soon begin normalizing its balance sheet to the tune of $50 billion per month of bond holdings runoff (i.e. effectively bond sales) — ultimately shrinking its holdings by more than $2 trillion — and that there would be nary a negative ripple effect thereupon.”

“As we will soon document further, the first part of Yellen’s proclamation is a risible lie. But the real whopper was her assurance that the Fed’s balance sheet normalization would be of no more moment than ‘watching paint dry’ on a wall.”

“The fact, is when there are no new breadwinner jobs, there is no gain in living standards or real prosperity. Indeed, Janet Yellen is lost in a Keynesian puzzle palace — and that is extremely bad news for the casino punters who still refuse to acknowledge the obvious.”

From Professional Adviser. “Société Générale’s bearish analyst Albert Edwards has said the ‘unelected and unaccountable’ central bankers who caused the global financial crisis will be - and ’should be’ - the next casualty of the current political landscape. Edwards said central bankers would be ’sacrificed at the altar’ as political turmoil continues to shows no sign of waning.”

“He said: ‘There is no recognition at all by central bankers that it may well be their own easy money and zero interest rate policies that are actually causing the stagnation in growth while at the same time wealth inequality surges to intolerable heights. Yellen et al will inevitably be sacrificed at the altar of political expediency as citizen rage explodes. And if I am right and it is clear for all to see that the central banks have caused yet another global financial crisis (GFC), of 2008 proportions, I personally believe central banks deserve to lose their independence.’”

“Edwards said the next financial crash as a result of another global asset bubble bursting is ‘inevitable’ and politicians will once again look for a scapegoat, like they did with the bankers in 2008. He went on to criticise central banks’ policy of quantitative easing, saying it had only created further bubbles.”

“‘The problem in creating asset bubbles to try and reflate the economy is that when the asset bubble bursts and blows up the economy, you are more likely to get the very deflation outturn that you were seeking to avoid in the first place. Even after the GFC these dudes simply have not learnt that loose money policies to blow asset price bubbles is a catastrophic policy destined to end in failure.’”

From Rupert Hargreaves. “The problem with market bubbles is they are hard to spot. Even for those investors who have experienced market booms and busts in the past, market bubbles can creep up on them as there is really no definitive way of predicting them. This collection of quotes from some of history’s greatest investors, policymakers and economists discusses market bubbles and how to prepare for them.”

“‘Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.’ — Alan Greenspan.”

“‘Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. Bubbles have quite a few things in common, but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.’ — Jeremy Grantham.”

June 23, 2017

People Knew It Wouldn’t Last Forever

It’s Friday desk clearing time for this blogger. “A hedge fund proposal for freeing Fannie Mae and Freddie Mac from U.S. control is poised to face stiff opposition from investors who say it risks wrecking the mortgage-bond market. The Moelis & Co. blueprint calls for raising tens of billions of dollars in capital for the mortgage-finance companies. The plan, released earlier this month, would also limit the amount of federal money available to offset any Fannie and Freddie losses to $150 billion. ‘I don’t think you could sell virtually any of this debt overseas if it wasn’t government-guaranteed,’ said Scott Simon, who until 2013 managed billions of dollars in mortgage-backed securities for Pacific Investment Management Co. Some of his former foreign clients would have reacted to a limited backstop by asking him to ’sell it all,’ he said.”

“Government-insured Federal Housing Administration (FHA) loans accounted for nearly 8 percent of Bay Area home purchase loans in May, down from 8.6 percent in April and from 10 percent a year ago. Low-down-payment FHA loans accounted for a substantially higher share of home purchase loans in the more affordable stretches of the Bay Area, like Solano County, which had the highest FHA share in May — at 20.8 percent. Contra Costa County was second.”

“The sharpest jump in home sales between April and May was in Napa County, where they rose more than 40 percent. The average home there sold for $622,250 in May, a drop of .4 percent compared to April. In fact, prices fell between April and May in most of the Bay Area, with Solano County’s 1 percent increase being one of only three areas where prices rose.”

“San Francisco ‘is a tale of several markets,’ Coldwell Banker agent Joel Goodrich said. While Pacific Heights, Russian Hill, Noe Valley and the Mission remain strong, ‘the big inventory of new South of Market condos’ is putting pressure on older condos. The website SocketSite highlighted a Hayes Valley condo and a high-end home in Cow Hollow that just sold for roughly the same price they fetched in 2014.”

“Although recent data indicates home sales are declining in the GTA and Greater Golden Horseshoe Area, it does appear that more inventory is hitting the market and that prices are finally coming down. ‘In March, there were 1,566 listings in Mississauga,’ says Alex Ocsai, a Broker/Owner with Royal LePage Meadowtowne Realty. ‘Now, there are 2,592 homes on the market. There are 65 per cent more listings than there were in March. Hitting the high prices in March stimulated a lot of that, people knew it wouldn’t last forever.’”

“Landlords’ confidence has fallen as investors face the prospect of higher tax costs and weakening house prices, according to Kent Reliance research. The lender’s latest Buy to Let Britain report found 41 per cent of landlords are confident about prospects for their portfolios, down from 44 per cent in the previous quarter and 67 per cent three years ago. OneSavings Bank chief executive Andy Golding says: ‘A perfect storm of weakening house prices, higher taxes and lending restrictions have knocked investors’ confidence.’”

“Hong Kong’s K&K Property is among the developers feeling the effect of softening sales. Eager buyers snapped up units in K&K’s upcoming Victoria Skye luxury residential project when the first batches of apartments were put on sale starting late last month. But the developer managed to transact only 80 out of 206 units offered in the most recent round of sales, despite some 2,300 prospective buyers registering their interest.”

“Some observers are predicting a further drop-off in sales this year, driven by an unusually large influx of new housing supply. ‘Developers will offer their projects at competitive prices in view of more than 10,000 new flats available for pre-sale in the second half,’ Louis Chan Wing-kit, vice chairman at local agency Centaline Property told the South China Morning Post.”

“In Beijing, sales of so-called serviced apartments nearly tripled last year to more than 4 million square meters (43 million square feet), accounting for a third of all residential sales, up from just 13 percent in 2015. But sales there collapsed in April, down more than 98 percent year-on-year, while unit prices fell 31 percent in May, the E-House data shows. Developers in Shanghai have suspended sales of all related developments, property agents said. ‘Some cities over-planned their office supply; by converting some of this into apartments would have helped ease the glut,’ said Stanley Ching, head of Citic Capital’s real estate group.”

“Buyer’s remorse has resulted in two house sales falling through on the same day in Melbourne’s north-west, with the buyers ‘disappearing’ overseas. The St Albans buyers chose to give up the small deposit they paid on auction day last month rather than proceed with the sales. Both contracts have been rescinded. Henderson & Ball Lawyers partner Justin Lawrence said there were cases of buyer’s remorse from time to time, but it appeared to be occurring more than in the past.”

“‘I think the market in a lot of areas is barrelling on so hard that people are really being swept along by the process, and just going ‘did I really agree to pay $2 million for that vacant block of land?’ Mr Lawrence said. ‘And they wake up Sunday morning, and they think ‘oh my goodness’ or — as we’ve seen a couple of times — they go home and they speak to their spouse, and their spouse says ‘what do you mean you paid that much?’”

“The $100 billion city rising from the sea next to Singapore has hit a roadblock: China’s capital controls. Subsidized junkets that flew in prospective buyers to development sites in the southern Malaysian state of Johor have dwindled. And some buyers who paid deposits for yet-to-be-built homes are considering canceling their purchases.”

“‘I feel I’m on the horns of a dilemma,’ said Michelle Gao, who paid about 600,000 yuan ($87,825) toward the 1.2 million yuan cost of a two-bedroom apartment at Country Garden Holdings Co.’s vast Forest City development. ‘If the project relies so much on Chinese buyers like me, how on earth are they able to sell in future? Will the construction ever finish?’”

“Few projects are likely to be affected as much as the Chinese-financed developments in Johor, some of which had relied on mainland customers for as much as 90 percent of sales. Six Chinese buyers interviewed for this story said they paid a 10 percent down-payment to Country Garden in showrooms in China by swiping debit or credit cards or using payment services like Alipay. They said the property agents are now telling them they need to go to Hong Kong, Singapore, Malaysia or Macau to swipe their cards to pay the balance of installments, or wire funds to Country Garden’s overseas accounts.”

“Many are worried that would still make them liable under China’s foreign exchange rules. This month, the Chinese government said domestic banks will have to provide daily reports of clients’ overseas transactions of more than 1,000 yuan. ‘I was told it can still be done from Hong Kong, but I’m just scared now,’ said buyer Elaine Xiao. ‘I don’t know what punishment I may get.’ A buyer whose family name is Yu said she doesn’t intend to pay the next installment on her apartment when it comes due this month. She said her agent advised her to swipe her credit card in Hong Kong to get around the rules. ‘I asked the sales agent will you take responsibility when I’m blacklisted in China?’”

“The glut of properties being built in Johor has also affected local developers, Petaling Jaya-based Tropicana Corp. is giving a 25 percent rebate. Yu, the buyer from Guangzhou, worries that the thousands of apartments still to be built at Forest City will be hard to sell without Chinese buyers. ‘My home is still in the ocean,’ Yu said. ‘Locals will not buy homes with prices double the local rate. Without enough residents from China, everything will change.’”

June 22, 2017

Everyone Talks About Oversupply

A report from the Charlotte Observer in North Carolina. “Tenants are signing leases for three new uptown apartment towers, the latest in a wave that’s flooding the market with luxury units commanding the highest rents in the city. The avalanche of apartments means developers need to find renters for hundreds of freshly built units, a new test for the ongoing apartment boom. The gleaming towers feature top-of-the-line amenities that weren’t common even in high-end condominiums before the recession: Rooftop pools, spas for washing pets, package rooms with refrigerated storage for meal-delivery services. Jim Borders, CEO of SkyHouse Uptown’s co-developer Novare Group, said the building’s first tower is nearly fully leased while the second is about 20 percent leased. He said worries about oversupply downtown have become common in many of the markets in which Novare Group is building apartments, from Denver to Nashville.”

“‘Every single one of them, everyone talks about oversupply,’ said Borders.”

From Builder Online. “NAHB Eye on Housing’s Carmel Ford reports that completions of non-subsidized, unfurnished, rental apartments in buildings with 5 or more units totaled to 73,300 in the fourth quarter of 2016, which is about 9% higher than completions in the fourth quarter of 2015 (67,300). The absorption rate (the share of apartments rented within three months after completion) was noticeably lower at 48% in the fourth quarter of 2016. In the fourth quarter of 2015, it was 55% and has not been below 50% since the fourth quarter of 2009.”

From Bisnow on Texas. “As the urban core densifies more this cycle than ever before, the submarkets surrounding Downtown Dallas become more attractive to multifamily developers. Two of those submarkets — Uptown and East Dallas — have more units under construction than any others. High-end developments are leasing well, anything from 15 to 20 units a month in both submarkets, according to CoStar. ‘But we’re starting to see higher concessions. What was one month [free rent when signing] last year is 1.5 or two months this year,’ CoStar Group Senior Market Analyst of DFW David Kahn said.”

“Meanwhile the newer Uptown submarket is making more of a luxury play. Kahn’s only concern with the healthy market is communities renting units for $3/SF. ‘Until The Taylor delivered around $2.50/SF in 2014 and Brady delivered around $3/SF in 2015, we never saw that. Now we’re basically about to quadruple the amount of high rents in this small area in a couple of years.’”

The Sacramento Bee in California. “Six out of the seven least affordable metropolitan areas across the U.S. are in California. They are Los Angeles, San Francisco, San Jose, San Diego, Riverside and Sacramento. ‘It’s getting harder and harder to live here,’ said David Shulman, a senior economist for the Anderson Forecast. ‘The state is running out of people who can afford the $3,500 per-month rents so those prices are beginning to fall…but if you look at the one-bedrooms for $1,500, those rents are continuing to go up.’”

From Bloomberg on New York. “Donald Trump’s office properties aren’t bringing in as much cash as banks that loaned him money had expected. The buildings — 40 Wall Street, Trump Tower, and 1290 Avenue of the Americas, a tower in which Trump holds a 30 percent stake — are victims of a changing New York office market, where gleaming new skyscrapers are attracting tenants and demand for space in vintage properties is falling.”

“‘We’re in the biggest development pipeline in Manhattan since the 1980s,’ said Keith DeCoster, director of real estate analytics at Savills Studley. ‘Older buildings — circa 1980s, 1990s — are having a tougher time competing.’”

The Real Deal on Florida. “When the development firm lead by condo king Jorge Pérez hit the brakes on Auberge Residences Miami, a three-tower, luxury project planned for Miami’s Arts & Entertainment District, South Florida’s real estate community took notice. When the king lays off the gas, that doesn’t usually bode well for others.”

“Q: Do you think that slow and steady is the new normal for South Florida? A: I would think that we will always be a city of bumps and highs, a little bit like a roller coaster. At heart, developers are cowboys. They like the business, and we try to control them, but I don’t have control. The good part about Miami is this huge international demand. The bad part about Miami is every time they [foreign buyers] come in, we also have developers coming in from Colombia and Argentina and they have these projects and we say, ‘Are they kidding? They don’t know the market.’”

“‘I’m not going to throw anyone under the bus, but you’re seeing some projects [where] I’m saying, ‘Even in a good market, these should not be developed. It does not make sense,’ and we’ll get some of those.’”

June 21, 2017

How Communities Became Commodities

A report from Bloomberg on Brazil. “Brazilian banks are wrestling with a growing pile of assets they’d rather not own: at least 13.8 billion reais ($4.2 billion) of cars, real estate, equipment and other collateral seized when borrowers defaulted on their loans. The total surged 42 percent in the first quarter from a year earlier at eight of the nation’s biggest lenders as fallout from the worst recession in Brazil’s history continues to weigh on banks’ finances, according to the companies’ financial statements.”

“‘With more time, banks can now hold off on selling those assets until they manage to get a better price,” Eric Barreto, a professor at Sao Paulo business schools Insper and M2M Saber, said in an interview. ‘But in the event of a liquidity crisis like we had at the end of 2008, those banks with a lot of real estate assets may face troubles.’”

From Postmedia News on Canada. “Alberta’s boom and bust economy has left Calgary with record numbers of newly built homes and condos that sit vacant as a massive stockpile of housing goes up for sale at the end of a recession. More than 2,000 new housing units were unoccupied in the Calgary area last month, the biggest inventory on record, driven largely by construction of apartment-style condos, according to the Canada Mortgage and Housing Corp.”

“Many of the residential developments causing the glut broke ground in 2014, which marked the end of a boom with a dramatic slide in oil prices, triggering a prolonged recession. Todd Hirsch, chief economist at ATB Financial, said the major housing glut shows ‘we’re not ‘quite out of the woods’ after a bruising recession.”

From CNBC on Israel. “Israel will hold a lottery starting Saturday night to sell 15,000 apartments at reduced prices under a program to help ease starters into the housing market. One prominent critic of government policy on the subject warns that such measures at a time when prices are already showing signs of falling can lead to a rout in the market.”

“‘They take steps to curb the market but if the market is starting to fall, it will exacerbate the fall,’ says Elli Kraizberg of Barl Ilan university’s Graduate School of Business Administration. ‘Now when you find that the market is starting to fall, to prevent a 30 percent fall in the market, they should take steps that are the opposite of what they’re doing.’”

From Newsday. “President Robert Mugabe has stopped renting a luxury property in an opulent United Arab Emirates suburb, a top government official confirmed. While Mugabe’s spokesperson, George Charamba told the Sunday Times that the Zanu PF leader had been renting the property, in 2015 it was reported that First Lady Grace Mugabe had bought a house in the same neighbourhood for around $1 million, according to a Dubai estate agent, who claimed to have sold her the property.”

“The estate agent, who claimed he sold the Emirates Hills house to Grace, told the Sunday Times ‘anyone with a pile of cash could buy a villa in Dubai in no time, with few questions asked.’ ‘If you’ve got money in the bank, you can do a money transfer. If the money is in cash, which means it’s not legit, we have to find other means. But it’s not a problem,’ the agent was quoted saying.”

“Other famous residents of Emirates Hills include Asif Ali Zardari, husband of assassinated former Pakistani President Benazir Bhutto, who in 2004 was jailed eight years for shady arms deals and money laundering, and former Thai Prime Minister Thaksin Shinawatra, deposed by the military in 2006 before being charged with tax evasion in absentia.”

From Open Democracy on the UK. “This isn’t a story about the Grenfell Tower disaster. The causes of that are complex, and we don’t yet know them all. But it is the story of what’s happening to the homes and lives of ordinary people in London. It’s a story about how communities became commodities. And as criminal money pumps ever more air into the London housing bubble, driving up the prices in generally expensive areas, it’s no wonder that, to some, the relative value of the lives of the ordinary people who live there seem to diminish by comparison.”

“Writer Roberto Saviano is well-known world-wide as the leading expert in the Calambrian mafia. Saviano has written about crime in Italy and about international drug money. Of all of the places he’s researched, he holds particular contempt for one. Speaking last year, Saviano said: ‘If I asked you what is the most corrupt place on Earth, you might tell me, well it’s Afghanistan, maybe Greece, Nigeria, the South of Italy and I will tell you it’s the UK.’”

The Dhaka Tribune on India. “According to a rough estimate of industry insider, on average prices of flats have seen 25% to 30% fall in the last couple of years after the bubble burst in 2012. A large reason for the drop in sales in recent years was that prices had remained artificially high in the decade and half before that because of the unregulated use of ‘black money’. Policy Research Institute of Bangladesh executive director Ahsan H Mansur said that ‘Huge black money invested in the property business was one of the reasons behind the creation of housing bubble for the last few years, and it was bound to burst sooner or later.’”

“Seeking anonymity, an economist said that a huge amount of black money is still being pump into housing sector. He argued that prices of flat remains high and beyond the reach of people only for allowing black money in the sector. According to law, untaxed money holders can legalise the money through construction or purchase of residential buildings or apartments by paying a 10% tax. Despite the criticism surrounding the opportunity to whiten black money, the Real Estate and Housing Association of Bangladesh wants investment of black money in the sector without questions being raised about its source.”

“The realtor platform claim that the number of unsold flats still remain above 10,000.”

The South China Morning Post. “The market has cooled sharply since March 17, when Beijing’s municipal authorities tightened rules such that those who had paid off previous mortgages would no longer be classified as first-time buyers. In addition, new caps on mortgage lending meant second home buyers had to put up a minimum payment of 80 per cent. A majority of prospective buyers were priced out due to the higher purchasing threshold.”

“Housing agents say transactions have slowed dramatically as sellers are reluctant to compromise much on price while buyers are sitting on the sideline waiting for bigger bargains. Meanwhile, more than 80 per cent of Beijing owners are reducing their asking prices, while just three months ago, 80 per cent were raising prices, according to property agent Homelink. In a reversal from three months ago, when home prices were rising regardless of layout, design, and building age, buyers now have a lot more negotiating power.”

From Your Investment Property on Australia. “Mainland Chinese investors are turning their backs on the Australian property market due to a series of measures designed to cool one of the world’s hottest real estate markets. This dip in foreign investment heightens the risk of a damaging correction in house prices. The federal and state governments’ latest moves targeting foreign investors mirrors similar measures imposed in other favoured destinations of Chinese investors, including Vancouver, Singapore, and Hong Kong. However, there are fears that our governments’ latest measures could push an already unstable market over the edge.”

“Sutono Pratiknya, a Sydney-based property sales consultant, said the new measures have sent a clear signal that overseas investors are no longer welcome. ‘We used to do five property tours a month, picking up a dozen investors from the airport and showing them our latest offering. Now, there’s nothing,’ Pratiknya said.”

“‘The fact is that a lot of developments hinge on foreign investment,’ said David Bare, the NSW executive director at the Housing Industry Association. ‘Applying these measures when the market is starting to cool is going to have a much greater effect than it might’ve 12 or 18 months ago.’”

June 20, 2017

Waiting For The Rescue Boat

A report from Bizwest on Colorado. “In the Boulder Valley, we are beginning to see the two largest residential market segments (in terms of price) act as two different market with two different sets of rules. On one hand, we have what I’ll call the ‘Upper Market,’ which I’m defining as homes priced at $1 million and above (which currently go up to $5,995,000). You’ll note that I’m not calling this the ‘Luxury Market,’ both because the average home in Boulder is currently over $1 million and because many of the homes in this segment would not fit the definition of ‘luxury.’ On the other hand is the ‘Lower Market,’ which is comprised of any homes below $1 million. While the Boulder Valley is generally described as being in a seller’s market, the Upper Market shows strong signs of being a buyer’s market.”

“As of the close of the first quarter, there were 11.3 months’ of inventory in the Upper Market. If you are a buyer in the Upper Market, it means you likely have a little more time to consider your options and are more likely to be able to buy a home for less than its asking price.”

From Maui Now in Hawaii. “Maui Now sat down with realtor Lee Potts of Aloha Group Maui and KW Island Living to discuss the current Maui real estate market. Maui Now: Is the current Maui market a buyers or sellers market?”

“Lee Potts: If you go to homes that are for sale over $700K, there were 48 sales last month and there’s 405 homes for sale above $700K. That’s enough inventory to last for over eight and a half months, that makes it more of a buyers market. If you jump up a little higher, which is not uncommon here on Maui, to $1.5 million there were only 15 sales but we have 215 homes for sale so that very much is a buyers market above $1.5 million.”

The Greensboro Reflector in North Carolina. “Current data indicates that the supply is dwindling in lower to mid-price ranges, good news for those sellers, but increasing as prices increase, according to data supplied by Mike Aldridge of Aldridge and Southerland Realtors. ‘There’s only a one month supply of houses between $100,000 and $150,000 and a three-month supply of houses between $155,000 and $175,000,’ Aldridge said. ‘It only reaches a balanced supply when the price reaches $250,000 to $350,000. Really, anything below $400,000 is looking really good for sellers.’ Above that price, supplies increase between 12-24 months, Aldridge’s data indicated.”

“Home prices are adjusting upward somewhat but not yet to pre-recession levels, Charles Manning, president of the Greenville-Pitt Association of Realtors acknowledged. ‘People who have been sitting on the (selling) fence now are hearing that the market is picking up and they’re beginning to feel like they’d better get their home on the market,’ Manning said. ‘A great many are still upside down (a condition where the equity value of a property is less than the outstanding loan balance) and they can’t sell. That explains some of the current financing issues some people are facing.’”

The Killeen Daily Herald in Texas. “Almost 67 percent of all new foreclosures in Bell County in 2016 were tied to the Veterans Affairs home loan, a federally guaranteed, zero percent down mortgage for qualified veterans and active-duty soldiers. Due to the favorable terms of the loans — more than 57 percent of new purchasers in the Fort Hood area market used one in 2016 — service members, often unknowingly, take on a Catch-22 loan in looking for a way to grow their wealth.”

“Brian Adams, a real-estate agent with StarPointe Realty in Killeen said the Fort Hood area market is unique due to a high number of foreclosures on Veterans Affairs home loans. ‘Because of the 100 percent financing and the fact that most buyers finance the VA funding fee into the loan, it literally means that buyers with the VA loan are underwater from Day 1, usually by a few thousand dollars,’ Adams said. ‘Many soldiers’ financial situations change, they find that they bought more house than they could keep up with, and find that they can’t sell it without bringing a lot of money to the table.’”

From Mansion Global on Florida. “Both developers and buyers are taking a wait-and-see approach to the launch of new developments in Miami. For developments that have broken ground and are moving forward, between 60% and 100% of the units have been sold, said Edgardo Defortuna, CEO of Fortune International Group, a real estate development. For Miami projects that have launched sales but not broken ground, ’sales are slow, with few exceptions,’ he said. ‘They’re waiting for the rescue boat to come in and lift them out of the water,’ Mr. Defortuna said.”

The Real Deal on New York. “On this week’s episode of ‘Million Dollar Listing New York,’ our three heroes give us an exercise in stress management. With 25 Mercer in the rearview mirror, Fredrik is reaching for new heights — literally — at 45 West 22nd Street, an 83-unit condo tower in the Flatiron District. He’s beckoned by the building’s developer, Bruce Eichner, who bestows on him $400 million in unsold listings.”

“Though it doesn’t seem like Lorber is especially ecstatic when he finds out Fredrik has agreed to Eichner’s pricing structure. Perhaps he should have said no and ran for the hills? Nevertheless, Fredrik embarks on his quest to make Papa Lorber proud. He focuses on selling the $20 million apartment before he pushes the pricier units on the higher floors. Lorber unexpectedly turns up during the sales soiree, and reminds Fredrik of all those ridiculously priced pads that he needed to sell, like yesterday. This tower may too tall for even Fredrik to climb.”

“Shortly after the first home sells, Ryan meets with David, the seller of the 17-foot-wide townhouse, to convince him lower the asking price. He uses the $9.47 million townhouse — yep, the one that ruffled David’s feathers last episode — as a comp for the neighborhood. Even if the current price is a bit high, he should’ve known this would upset David, seeing as he was bothered by Ryan talking a similar listing on the same street. But rather than budging on the asking price, David decides to take the townhouse off the market.”

“‘That’s not reducing the price — that’s the opposite,’ Ryan says. ‘Now there’s no price!’”

June 19, 2017

Thinking Of It As A Gold Mine

A report from the St Catharines Standard in Canada. “After more than a year of soaring real estate values in Niagara, ‘the feeding frenzy is slowing down,’ says St. Catharines realtor Randy Mulder. Although the region’s real estate market has yet to be hit as hard as the GTA, he said the impact of measures introduced by the provincial government to rein-in escalating house prices will eventually trickle down to Niagara. Brock University business accounting professor Feyez Elayan said home values in Niagara are catching up after decades of being undervalued, which may help protect them from fluctuations in the market.”

“‘People are starting to figure out the value of the Niagara region,’ he said, referring to amenities and events that make the region a desirable place to live. ‘We are sitting on a gold mine. The prices will come down and settle, let me put it that way. But it’s not going to go back to the previous level.’”

From News.com.au. “The picturesque city of Vancouver took inspiration from Australia by clamping down on foreign buyers purchasing existing homes in the seaside city. But unlike Australia, Canada has no restriction on foreigners buying real estate — and in a country where property taxes are very low, that was driving prices skywards. So, in August last year, Vancouver’s provincial authority, British Columbia, the equivalent of our state governments, moved. From January 2016 to January 2017 house prices in Vancouver fell 18.9 per cent.”

“While foreign investment is often demonised as contributing to Australia’s escalating house prices, the University of Sydney’s senior lecturer in urbanism, Dallas Rogers, said it has been far easier for foreigners to invest in Canada than it has in Australia, hence why the new measures in Vancouver have had such an impact. On the opposite side of the country, Toronto is now also looking at introducing similar measures.”

“In Australia, he said, the major problem is the evolution of property as a means to make money, rather than as simply a place to live. ‘It comes down to the way we think about homes and the way we are still thinking about homes,’ he said. ‘From about World War II we’ve had this changing view of a house as a place to live and to raise a family, to, increasingly, thinking of it as a source of capital.’”

The Vancouver Sun. “Massive and risky home loans are increasing in number across Metro Vancouver, while mortgage fraud cases are also on the rise, connected to the growth of so-called ’shadow banking,’ a Postmedia investigation shows. The trend of increasingly risky loans underlying Metro Vancouver’s high home prices is illustrated by Bank of Canada figures that show the rapid growth since 2014 of large mortgages made to people with relatively low incomes.”

“There is also evidence of growing links between shadow banks and traditional banks, according to the Bank of Canada’s June 2017 report, as people borrow large amounts from shadow lenders to use as down payments in order to qualify for lower-interest loans from federally regulated banks. Shadow lenders identified by Postmedia through a review of B.C. civil court filings, lending documents and regulatory filings, include mortgage investment corporations, hedge funds, and private lenders such as realtors, crowdfunding companies, real estate lawyers and mortgage brokers.”

“For Hilliard MacBeth, an Alberta-based author and wealth manager, the Bank of Canada loan risk statistics and the related growth of shadow banking in Vancouver and Toronto herald a crisis. ‘These properties in Vancouver are so expensive that you need people either laundering money or loan fraud or people borrowing such large amounts of money that should never be allowed, in order to keep it going,’ MacBeth said. ‘If everyone is reporting their incomes honestly in Vancouver, there is no way that housing prices can stay where they are.’”

“Postmedia’s review of Ficom enforcement hearings shows an increase in the number of alleged mortgage fraud cases in B.C., mostly linked to private mortgage lenders and mortgage brokers. ‘We have experienced an increase in mortgage broker complaints in the last few years,’ Chris Carter, acting registrar of mortgage brokers, confirmed. ‘About a third of our investigations relate to application fraud.’”

“As a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called ‘ghost collateral’ — meaning collateral that may not exist or is used continuously to secure loans for multiple borrowers. Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.”

“One U.S. hedge fund manager, who did not want to be identified, said: ‘We all know that the ghost collateral is a huge deal, and we all know that the shadow banking and other Chinese influence in Vancouver is profound. The issue it that the ghost collateral ends up re-hypothecated and laundered. So by the time it shows up in Vancouver, it will likely just look like a rich Chinese cash buyer with a suitcase of money.’”

From Macleans. “A year after getting married, Alex Taylor and Rachel Tuttle decided it was time to buy a home and start a family. But soon after starting the hunt in 2015, their hopes were dashed. Detached homes were averaging $1.2 million, and even though Taylor and Tuttle qualified for a mortgage, they would have faced steep monthly payments of $4,000. They adjusted their expectations and set their sights on a townhouse on the outskirts of the city. Still, the cost was too high. ‘It felt very risky to put that much of your savings into one investment,”’ says Tuttle.”

“Taylor is tired of talking about the issue. ‘I know it’s mean to say and I know it would hurt those of our friends who completely over-extended themselves,’ he says, ‘but honestly, we’re praying for a crash.’”

“He’s not the only one. In May, sales dropped 20 per cent compared to the year before in the Greater Toronto Area while active listings surged 42.9 per cent from a record low. Those are the kinds of numbers that cause indebted homeowners to sweat, but serve as a balm for those on the sidelines in Toronto: like Taylor in B.C., many now openly cheer for the market to collapse.”

“The Financial Consumer Agency of Canada found the number of households with a HELOC and a mortgage against their home has increased nearly 40 per cent since 2011, prompting commissioner Lucie Tedesco to caution this month the trend ‘may lead Canadians to use their homes as ATMs.’ Last year, Canadians withdrew $12.8 billion in home equity to fund renovations, according to Scotiabank Economics, and another $3.6 billion for ‘other’ purposes.”

“‘A lot of people have these totally unsustainable lifestyles they’re only able to pull off because, by doing nothing but sit on their ass, their net worth goes up by a few grand every month,’ says Toronto resident Phillip Mendonça-Vieira. ‘I don’t think there’s anyone who doesn’t own property who’s not secretly, like, ‘F–k you, guys. This is unsustainable.’”

From The Tyee. “You’ve heard it a million times. The reason so few of us can afford Vancouver is because there aren’t enough new homes being built. This is the version of reality that real estate industry leaders and their political allies want us to believe. But an investigation of the industry by The Tyee has revealed reality to be much more complex.”

“Over the past six months I spoke at length with financial analysts, economists, industry consultants, realtors and many others to learn the true causes of Vancouver’s housing crisis and who is profiting from it. They were in broad agreement that real estate is at the centre of a massive realignment between our society’s rich and poor — and one that few leaders in the industry seem willing to publicly acknowledge.”

“Real estate has historically been a local industry. The people who buy and sell a city’s homes tended to live in that city. Yet that all began to change a decade or so ago. And one of the major reasons for it is a big shift in our global financial system. It’s a complicated subject. But what you need to know is that the global capital investors use to invest in things is growing much faster than the actual economy. There is so much capital, investors don’t know what to do with it all.”

“Desperate for quick financial returns, many investors are pouring this capital into real estate, turning local markets into global investment opportunities. One of the results, according to trackers such as Bain & Company, is ’skyrocketing home prices.’”

“The real estate industry is aware social mobility is declining. Its leaders know there is huge demand for cheaper homes. But they prefer to profit from income inequality rather than doing anything about it. That’s one takeaway from a major real estate industry trends report produced by PwC and the Urban Land Institute. ‘The middle class has been hollowing out,’ it concluded.”

“With land prices going up in big cities, the industry is increasingly focused on building luxury homes for wealthy people. Not everyone thinks it’s a wise strategy. ‘Time will tell if that’s going to come back to haunt us,’ said one CEO. ‘Not everybody makes $75,000 to $100,000 a year.’”