Industry Pushback And Fear-Mongering
A weekend topic starting with CNBC. “In the midst of the mad selling and explaining and quantifying and qualifying of potentially the biggest U.S. tax overhaul in decades, President Donald Trump’s chief economic advisor stood at a White House podium and made a bold declaration: ‘People don’t buy homes because of the mortgage deduction.’”
“Richard Green, director and chair of University of Southern California’s Lusk Center for Real Estate, notes that the deduction is most important to those living in states like California, which has both high tax rates and high home prices. Home prices there, he said, could drop without the deduction.”
“The National Association of Realtors, one of the most powerful lobbying organizations in Washington, vehemently opposes any change to the deduction. In response to Cohn’s statement, NAR President William Brown said, ‘There’s a reason our nation has incentivized homeownership in the tax code for over a century. It works, and helps make homeownership more affordable for middle-class families who might not otherwise be able to close the deal, while setting them on track for a strong financial future.’”
The Mercury News in California. “California’s largest group of realty agents has warned that a Republican tax-reform proposal would erode the attractiveness of buying a house in the Golden State — but economists pointed out that these effects could also cause a dip in home prices that have skyrocketed. ‘There are several variables, but it would reduce home prices,’ said Fred Foldvary, a lecturer in economics at San Jose State University. ‘Right now, home prices are propped up by implicit subsidies, such as deductions for mortgage interest, property taxes, and other tax benefits. All of these puff up the value of residential real estate.’”
“‘It’s supply and demand,’ said Annette Nellen, a professor of accounting and taxation at San Jose State University. ‘If the demand for housing drops, the prices of homes could drop.’ The negative impacts from lost tax deductions, however, would primarily affect those in higher income-tax brackets, Nellen said.”
From Bloomberg. “Shanghai restaurateur David Hu said he’s nervous about wiring money to Australia for a home purchase because of China’s crackdown on currency outflows. Instead, he plans to carry the cash in a suitcase. The 61-year-old intended to move about A$85,000 ($66,000) to Melbourne this month, the last part of his financing for a deal struck last year. ‘Buying a property abroad was and is still workable,’ said Hu, though he described the process as a ‘lot more troublesome’ nowadays.”
“Some buyers are eschewing pricey hubs like New York for less-expensive areas such as Florida and Texas, according to Eric Lam, chief executive of Shiju, the overseas broker unit of Shenzhen World Union Properties Consultancy Inc. They’re typically spending up to 3 million yuan ($450,000) for U.S. homes, and as much as 2 million yuan for U.K. properties, prices that make for manageable down payments using exchange quotas, Lam said.”
“Developers continue to count on demand for prime luxury housing from the wealthiest Chinese buyers. On Monday, a crowd gathered in a Beijing hotel as the first 16 apartments from the towering 125 Greenwich Street project in lower Manhattan, were offered up at prices from $1.2 million to $12 million. ‘It’s about how determined home buyers are to get their money out, and whether their resolve is strong enough’ to risk punishments for breaking the rules,’ said Lam. He acknowledged that growth would have been stronger without the capital curbs.”
The Urban Developer in Australia. “This week we have seen another example of shortsightedness in the banking sector with ANZ bank tightening its restrictions on lending to apartment buyers in 18 suburbs in Brisbane and seven in Perth due to ‘growing fears’ of an oversupply in Australia’s capital cities. ANZ’s red-flag comes a little over a month after Citi clamped down on lending in 90 ‘blacklisted’ suburbs around Australia. The big-four bank issued a list of 25 suburbs in which loan to value ratios will be capped at 80 per cent of the apartment’s value.”
“From the outset, it is prudent to acknowledge that there are indeed pockets of oversupply in nearly all capital city markets in the country. Anyone with an ear to the ground would have realised this 12-24 months ago when the development boom was under way and every man and his dog was launching an apartment project. But this is the reality of a self-correction and, quite frankly, a move that will clear the decks and allow for the marketplace to sensibly recalibrate.”
“Whilst it will take some time to absorb the stock that has been developed, there are several factors that suggest we won’t experience ‘blood on the streets’, as some punters would suggest. So, What’s This all Mean? Well, it means that most of us are simply getting caught up in the media hype and failing to observe the underlying data. The very smart, local developers (think major player in South Brisbane!) are actually buying sites when others are running for the hills based on yesterday’s data. They’re looking beyond their nose, despite others trying to cut it off.”
From Macleans in Canada. “Canada’s real estate market has seen a lot of changes over the past year or so. Interest rates have gone up twice. Governments in B.C. and Ontario implemented foreign buyer taxes and other measures to cool housing markets, and the Greater Toronto Area is experiencing a dramatic slowdown in sales. More stringent mortgage stress-tests were introduced for borrowers last year, too, reducing demand.”
“Now yet another change is on the horizon that the real estate industry warns will hit the housing market hard, with spill-over effects to the broader economy. Industry pushback and fear-mongering is predictable when regulations are proposed, but in this case, the housing industry isn’t exactly wrong. A proposed policy change from the country’s banking regulator threatens to reduce home sales, knock some first-buyers out of the market and push others to buy less expensive homes. That is the whole point, in fact—and it may be just what Canada needs.”
“With a decision approaching, the housing industry has amped up warnings that the changes spell trouble for the housing market, first-time buyers and the economy at large. Tim Hudak, CEO of the Ontario Real Estate Association, said the plans amount to a ‘war on first-time homebuyers’ and that the cumulative impact of tightening measures ‘risks capsizing the housing market altogether.’”
“Far from mounting an attack on homebuyers, however, regulators are trying to prevent a disaster from befalling those same homebuyers and threatening the economy. In what will come as news to no one, Canadians are heavily indebted. The household debt-to-income ratio hit another record high of 167.8 per cent in the second quarter of the year.”
“The debt service ratio, a measure of disposable income put toward loan payments, is set to increase to 16.3 per cent by 2021, according to the Parliamentary Budget Office, a level Canada has never seen. The number of households with a home equity line of credit and a mortgage against their properties has increased nearly 40 per cent since 2011. Non-mortgage debt is rising, too, including installment loans—high-interest, short-term products.”
“Bank of Canada Governor Stephen Poloz has signalled the central bank is on a tightening path, albeit a very cautious and gradual one. Still, that marks a dramatic shift after years of excessively loose monetary policy. Previously, Canadians could renew their mortgages and obtain more favourable rates. Now the odds are they’ll have to pay more come renewal time. Those who opt for variable-rate mortgages can expect the same.”
From Metro News in Canada. “Don’t be distracted by claims from the real estate industry that adding more housing supply will solve Metro Vancouver’s broken housing system, housing experts told delegates to the annual Union of B.C. Municipalities conference. ‘The supply claims are mainly about distracting us from doing things on the demand side,’ Josh Gordon told the city councillors and local government staff gathered for a conference. ‘They do not want us to tackle demand: they want to be able to build endlessly for the world’s rich.’”
“Gordon, an assistant professor at Simon Fraser University’s School of Public Policy, presented along with David Ley, a professor emeritus in the University of British Columbia’s Department of Geography, and urban planner Andy Yan, director of SFU’s City Program. All three highlighted the staggering, and widening, disconnect between local incomes and house prices. Ley highlighted a measure of affordability developed by the Demographia survey: housing is considered severely unaffordable at a rate of 5.1, and Vancouver is currently rated at 11.8.”
“Vancouver is now attempting to ‘gently’ increase density in single family neighbourhoods, but has faced criticism for not allowing denser buildings like townhouses and low-rise apartment buildings in all single family zones. ‘With supply, we always need to put an adjective in front of the word supply: it’s affordable supply. You do not need more million dollar-plus condo or townhouse units, which is typically what’s been provided,’ Ley said. ‘New supply might decrease overall affordability, by driving up land prices through speculative land assembly when land zoning is anticipated — as we see happening along many of the thoroughfares.’”
