October 31, 2017

The Calculations Have Become Upside Down

A report from The National. “Global property has been one of the finest investments of the last decade, with the major global ’superstar cities’ spearheading the charge. New York, London, Toronto, Singapore, Hong Kong, Shanghai, Mumbai and of course Dubai are just some of the cities that have posted double-digit price rises, year after year. While the breakneck growth continues in many global favourites, fears are growing that it all could end in a housing crash. UBS Wealth Management is the latest to warn of a global city housing bubble as monetary stimulus is reversed and interest rates finally start rising. The danger is greatest in Toronto, up significantly in the last year, while Stockholm, Munich, Vancouver, Sydney, London and Hong Kong remain risky, and Amsterdam has now joined this group. Valuations are also stretched in Paris, San Francisco, Los Angeles, Zurich, Frankfurt, Munich, Tokyo and Geneva.”

“Claudio Saputelli, head of global real estate at UBS Wealth Management, says the surge in international demand, especially from China, has crowded out local buyers. ‘Average price growth of almost 20 per cent in the last three years has confirmed the expectations of even the most optimistic investors. This thesis has helped fuel overvaluation and even bubble risks.’”

From the Calgary Sun in Canada. “Calgary’s housing market is not yet in full recovery mode. That’s the conclusion of Don Campbell, senior analyst and Jennifer Hunt, vice-president, of the Real Estate Investment Network (REIN). The authors report home prices, on average, are down slightly from the same time last year. ‘However, when we look at the overall trend, we see prices took a strong move upwards in the first three quarters of 2017, indicating some confidence moving back in the housing market. This demonstrates the housing market appears to have hit a longer-term trough in real estate values. Most of these increases in prices are for detached homes, where apartments and condos seem to be doing worse compared to last year. This is no surprise, given the overbuild situation the city condo market finds itself in.’”

“To sum it up, Campbell and Hunt say ‘the economic fundamental key drivers and the market influencers indicate Calgary’s real estate market is in the middle of the slump.’”

From Al-Monitor on Turkey. “Under the Justice and Development Party’s 15-year rule, housing-dominated construction became a main pillar of the Turkish economy. The building spree is in plain sight, especially in Istanbul where countless new buildings have sprung up across the city. Like other emerging economies, Turkey enjoyed abundant flows of funds from the United States and the European Union, the result of anti-crisis liquidity expansion, which kept the dollar’s price low and encouraged borrowing. Buoyed by this climate of ‘dolce vita,’ Turkish builders — especially those active in Istanbul — rushed to grab any building plots they could find, paying little mind to the prices.”

“It is worth lending an ear to an insider, namely Ali Agaoglu, a top construction tycoon who has built a series of luxury residential complexes in Istanbul. In a newspaper interview, published Oct. 23, Agaoglu warned of impending bankruptcies in the sector. ‘The prices are falling [while] costs are on the rise,’ the outspoken tycoon said, stressing that builders who had bought overpriced plots were in deep trouble. ‘The calculations have become upside down. I personally fear that new Fi Yapi incidents could occur,’ he said, referring to the collapse of a major construction company several years ago.”

“According to Agaoglu, construction companies need to make painful sacrifices to survive. ‘To keep the wheels turning, some will have to cut off a finger; others an arm. At Cekmekoy, we cut off an arm by deducting the cost of the building land,’ he said, referring to a major price discount his company has recently made in a housing project in Istanbul.”

“In sum, Turkey’s housing sector appears headed for a harsh season. And given its central place in the country’s economy, any turmoil in the sector is likely to have a far-reaching impact on the entire economy.”

From Mmegi Online on Botswana. “The market of property, business and residential, in Francistown and surrounding villages are on a downward spiral following the closure of Tati Nickel Mine Company (TNMC) over a year ago. The residential market was affected mainly on the top end when TNMC and other related businesses handed back in excess of 100 executive and high cost houses which caused a glut in the sector with rentals falling by as much in 40% in some instances, said Asan Kunda, a property expert at WKA. ‘In general, rental and capital values across all residential sectors of the residential market have declined especially with the increase in the supply due to construction in the nearby villages of Tati Siding, Tonota and Borolong.’”

“‘The commercial property market has also been in decline with rising vacancy and default levels as most tenants struggle to meet their monthly liabilities due to reduced business as most households can only afford basics,’ he said.”

The Daily NK on North Korea. “Following an unprecedented period of growth, North Korea’s real estate market is experiencing a downturn following the adoption of international sanctions. In addition to fluctuating prices in the general markets, the value of major new apartment developments as well as smaller housing projects have seen a sizable drop in recent months. ‘The disruption in trade with China has led to market instability, which in turn has affected housing prices in the main districts of Sinuiju. While units were being sold for tens of thousands of dollars (USD) just last year, prices began to drop this past spring, and have only continued to fall since then,’ a source in North Pyongan Province informed Daily NK on October 23.”

“‘Other cities are experiencing a similar shock to their housing markets as well. The value of homes in Pyongsong and Sunchon were skyrocketing before the latest crisis, but have dropped significantly in recent months,’ a source in South Pyongan Province explained. ‘In Pyongsong, an apartment near the train station was going for $60,000 just this past January, but the value has now dropped to $50,000. Even homes outside the city that were once being sold for $5,000 are now going for around $3,200. Buyers are becoming more emboldened while sellers are losing their leverage, and prices continue to drop as a result.’”

From Fairfax Media on New Zealand. “A senior commercial property researcher is picking the looming housing slowdown to be a soft landing rather than a harsh slashing of prices, at least in Auckland. Colliers national research director Alan McMahon said slowing house sales were no indication of demand, despite pending changes to immigration policies. McMahon said his confidence was based on the large number of people who still wanted a house but couldn’t afford them at current prices. ‘People who can afford those houses will just swap them between themselves.’”

From ABC News on Australia. “Rapidly cooling house prices in Sydney and the sudden withdrawal of Chinese investors from the property market may lead the Reserve Bank to cut interest rates, according to investment bank Credit Suisse. ‘Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,’ Credit Suisse wrote. ‘Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls. This fall foreshadows weakness in NSW housing demand in the year ahead.’”

“Credit Suisse argued if its model was anything to go by, it is hard to see a meaningful recovery any time soon. ‘We believe that the RBA will need to cut rates further to deal with the housing market slowdown in train,’ it noted. ‘Without a healthy housing market, the economy does not have other growth drivers to lean on.’”

The Mumbai Mirror in India. “The realty sector in Mumbai is witnessing its worst slump ever, with market rates of properties in several areas, including south Mumbai, dipping below the ready reckoner rates. Prominent developers and industry watchers told Mumbai Mirror that never in the history of the city have they witnessed such a phenomenon, even as debt-laden builders, struggling with slow sales, unsold apartments, and delayed/stalled projects, are pulling out all stops to attract buyers.”

“Ready reckoner rates are values of properties, determined by the government for payment of stamp duty. These rates, published annually, impact the construction cost of projects, as several premiums and charges collected by the civic bodies and the government itself are linked to the ready reckoner values. The body blow to the realty sector has been unsold properties. According to the industry estimates, more than 2.67 lakh residential properties in the Mumbai Metropolitan Region (MMR) remain unsold, of which 1.05 lakh are in Mumbai itself.”

“One of the reasons behind this ‘lack of movement’ is the general sentiment that property prices will slump further. Some of the schemes offered by developers were unheard of in Mumbai’s real estate sector. ‘Times are such that builders have to give more than just membership of a club to flat buyers. Large-scale properties are lying unsold and unless incentives are high, people are not going to buy as everyone seems to think prices will fall further,’ a developer said.”