The Housing Bubble

A report from News.com.au in Australia. “The Australian mortgage market has ‘ballooned’ due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion ‘house of cards,’ a new report warns. The report by LF Economics founder Lindsay David, argues Australian banks’ use of ‘combined loan to value ratio’ — less common in other countries — makes it easy for investors to accumulate ‘multiple properties in a relatively short period of time despite high house prices relative to income.’ The report describes the system as a ‘classic mortgage Ponzi finance model’, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows. ‘Profitability is therefore predicated upon ever-rising housing prices,’ the report says.”

“LF Economics argues that while international money markets have until now provided ‘remarkably affordable funding’ enabling Australian banks to issue ‘large and risky loans’, there is a growing risk the wholesale lending community will walk away from the Australian banking system. ‘[Many] international wholesale lenders … may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,’ the report says.”

“Experts have warned that one in four mortgaged households are currently in stress, and modelling suggests if interest rates rose by just 0.5 per cent, that would jump to one in three households. Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.”

“Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. ‘Anytime you withdraw equity, you need to show income to service that new loan,’ he said. ‘Sadly, the banks don’t value rental income as highly as they once did.’”

The Daily Mirror in Sri Lanka. “The Central Bank appears to have succeeded in its efforts at curbing the ‘irrational exuberance’ of property developers, with a slowdown being now witnessed in apartment construction amid fears of a possible property bubble. ‘After the Central Bank’s warnings and that it may even limit credit to construction and property development, there has been a slowdown in construction of ongoing projects. Some have even halted construction. Our business is falling,’ a component supplier for apartment projects told Mirror Business under the condition of anonymity.”

“Chamber of Construction Industries Sri Lanka CEO Nissanka Wijeratne said that with the slowdown in demand, there are risks of small scale, relatively unknown developers not completing projects. ‘In some other countries, without access to total funds developers can’t go ahead with construction but here, a lot of people are trying to put up 5-storey buildings, trying to finance them through advances from prospective clients. If they can’t pre-sell, they get stuck. In the end the clients are left high and dry,’ he said.”

From Globes on Israel. “‘We’re pouring cold water on the red-hot real estate market. We see that they have almost completely stopped selling luxury housing for a year now. The buyers are not agreeing to pay the prices demanded of them. I think that this plan will affect the entire market, not just non-homeowners,’ Minister of Construction and Housing Yoav Galant told the annual Dun & Bradstreet Israel Real Estate Forum.”

“Galant was also asked what he thought about increasing the number of housing starts, when the measures themselves were making things go in the opposite direction. He answered, ‘The stabilizing of the real estate sector is an accomplished fact, and anyone who looks at it realizes that this is an achievement. When I said six months ago that demand was shrinking, they looked at me like I was crazy, but that is now the reality.’”

From The Telegraph on the UK. “London developer Killian Hurley is a firm believer in the importance of good design. ‘There should be encouragement for the good developers, as opposed to those who are going to knock up any old tat,’ he argues. The London property market may force such a change. There is a huge glut of new-build apartments about to come on to the market in London, particularly in the Nine Elms area, where Mount Anvil is selling the remaining homes in its Keybridge development near Vauxhall.”

“Hurley maintains that as a result of this imbalance, the quality of the property and the developer is important to buyers – especially now. ‘Two years ago you could sell anything,’ he says. ‘Inflated prices, mutton dressed as lamb, not near anything like transport, because people were desperate to get on the property ladder. That desperation has gone.’”

The Globe and Mail in Canada. “A second interest-rate increase announced Wednesday by the Bank of Canada will add further drag to Toronto’s real estate sector, which has seen home sales fall steadily for four consecutive months. The average home in the GTA sold for $732,292 in August, a 20.5-per-cent drop from the market’s peak in April, when prices for all types of homes averaged $920,791, according to the Toronto Real Estate Board.”

“The total number of homes sold fell 34.8 per cent to 6,357 in August compared with a year earlier. Real estate agent John Pasalis, president of Realosophy Realty Inc. in Toronto, said there are signs the Toronto market is becoming healthier as a glut of new listings that emerged in May and June has slowed significantly through the summer months, with many potential sellers holding off to see if prices recover this fall. ‘We’re past this rapid [price] decline phase and we’re moving towards a more balanced market.’”