November 30, 2017

For Sellers, It Can Be Frustrating

A report from the Orlando Sentinel in Florida. “Jonathan Barr thought living at the Paramount on Lake Eola would be a dream come true. He estimates spending about $200,000 in custom cabinets, lighting, flooring and other treatments for the downtown Orlando home he bought in 2006. But this past July, Barr was forced to sell because a majority owner is converting the entire building into apartments. Such a move, called a condo termination, has prompted a lot of anger since it became permissible in 2007 under a Florida law that has been tweaked several times in an effort to make it more fair.”

“Things could have been worse for Barr. Because he lived in the unit, he was guaranteed to receive at least what he paid for it, which was $500,000 at the peak of the housing market in 2006. But people who owned units at the Paramount as an investor or a landlord, such as Javier Camacho of Miami, didn’t have that guarantee. He had purchased the unit in 2008 for $449,857. But the value of the unit had plummeted, not just because of the recession, but also because the building went into foreclosure and became mostly apartments.”

“Camacho sold his unit for $309,000, a loss of $140,000, to Northland soon after it bought the building in May. Despite the lower price, Camacho said he understands the situation. ‘On my end, I think was treated well. It was the market forces that determined the sale price,’ Camacho said.”

From the Coloradoan. “New apartments appear to be easing vacancy rates, particularly in northwest Fort Collins, but the city is not out of its tight rental market just yet. The city’s overall multifamily vacancy rate improved to 3.7 percent in the third quarter of 2017. It’s the highest percentage of vacant rental units the city has seen in four years. Increasing apartment rents, a slowdown in the single-family rental market, and newly available options are pushing renters out of apartments and into townhomes, condos and single-family homes, said Greg Roeder, owner of Waypoint, a Fort Collins brokerage and property management company.”

“As rents for single-family homes start to decline, renting a home looks like a better deal than an apartment. ‘The three- to four-bedroom house that was getting $2,100 a month might now be getting $1,700,’ Roeder said.”

The Houston Chronicle in Texas. “Camden Property Trust’s stock has fluctuated in recent years, at times taking a hit from investor perceptions that Houston, where the company owns thousands of apartments, isn’t the best place to live compared with high-flying coastal cities. The latest energy bust didn’t help either. Then Hurricanes Harvey and Irma hit. ‘The stock shot up like a rocket,’ CEO Ric Campo said, noting that Camden’s local apartment portfolio saw occupancy jump nearly 5 percentage points after the storm.”

“Campo made a last-minute decision to issue new shares and the company raised $500 million in equity. ‘Folks in New York, Boston and elsewhere bought the stock.’ The company sold $1.2 billion worth of properties in the last year as historically low interest rates drove up prices. Camden is reinvesting some of the proceeds in new development, but it’s also making sure it has a financial cushion. ‘I’m not projecting a crisis or a crash,’ Campo said. ‘I’ve just been around long enough to know that the cycle changes when the cycle changes. When prices are at peak levels you sell and put cash on your balance sheet.’”

The News Journal in Delaware. “Delaware’s housing market, for buyers, is promising. For sellers, it can be frustrating. The slow growth has been driven by a large number of homes that are in foreclosure or otherwise being sold in distress at fire-sale prices, said Bruce Plummer, president of the Delaware Association of Realtors.”

“‘It is a problem that is statewide,’ he said. Delaware has been slower to rid itself of a large proportion of bank-owned homes, said Plummer, who also is a practicing real estate broker for Coldwell Banker in Rehoboth Beach. ‘For some reason, the problem is lingering in Delaware more than I expected,’ he said. ‘We have $800,000 homes that are in foreclosure at the beach.’”

From Mansion Global on New York. “Thanksgiving put a cramp in New York’s luxury market last week with only 15 homes finding buyers, according to a report by Olshan Realty. The deals cut on homes last week were worthy of Black Friday, as the average discount was a whopping 19%. For instance, the No. 1 contract last week was a four-bedroom condo at 15 Central Park West, asking $25 million—a 24% discount from the $33 million the owners originally wanted when it was first listed in June.”

“The price cut on last week’s No. 2 transaction was even greater. The triplex condo at 53 Leonard St. in Tribeca went into contract, asking just under $9 million, a 50% price cut from the $18 million price tag it had when it when it went on the market in May 2016.”

November 29, 2017

The Nature Of The Adjustment To Come

A report from Wharton. “St. Louis Federal Reserve Bank president James Bullard joined Wharton finance professor Jeremy Siegel recently, along with Jeremy Schwartz, research director at WisdomTree, for a wide-ranging conversation about the future of interest rates, inflation, the state of the economy, overall monetary policy, the possible over-valuation of stock prices — and more.”

“Siegel: You mentioned Fed staff, and there are some very, very good people there. Then again, of course you could say virtually no one really foresaw the financial crisis. There are a number of people who said, ‘Are they the people you always want to listen to? Or do you want to have some independence and hear some other voices that might think differently in terms of what’s going to happen to the economy?’ How do you feel about that? I mean, would it be more captive than someone like Bernanke to the Fed staff?”

“Bullard: I’ll just give you my own take on the monetary policy debate. I say it’s a global debate that goes on 24 hours a day, 365 days a year. And so you’re getting input from all kinds of corners of the globe, and certainly from financial markets, the committee itself, the staff itself. But it’s not like it’s in a closed room where you’re not listening to the rest of the world.”

“You don’t really have to have a perfect alignment of backgrounds in order to get all of that input from all around the world. And I think we do that in some respects. So if you think about the run up to the financial crisis, it’s true that we did not predict the financial crisis, but I think there is some revisionist history that goes on because the housing bubble was a big topic of discussion for several years before it actually came to an abrupt end. And many people were talking about it, both inside and outside financial markets, and in academia.”

From the Australian Financial Review. “The Reserve Bank of Australia should get ahead of the US Federal Reserve, widely expected to increase rates next month for the third time this year, and normalise official interest rates before the pain of adjustment becomes worse, says former board member Warwick McKibbin.”

“Likening ongoing delays in raising the official cash rate from its emergency lows with postponing the closure of a doomed steel mill or car factory – the longer you wait the more it hurts younger workers when it does happen – Professor McKibbin says the central bank should clearly explain to business and households why 1.5 per cent is no longer appropriate.”

“Anticipating critics of normalisation – which may see the cash rate pushed towards 3.5 per cent – and who argue rate hikes will crunch heavily indebted households and cause an economic slump, Professor McKibbin said: ‘If we have become that vulnerable, do it now, not in a year when it’ll be much bigger. Let’s have a mild bump now rather than a big one later,’ he said, though he concedes the housing debt bubble is now so advanced that it is already too late for some households that have over-borrowed.”

“‘Given the long era of low interest rates since 2012 a greater concern should be on “overall macro-economic stability and asset prices,’ Professor McKibbin said. ‘I would make it clear what the view of the bank is on the nature of the adjustment to come and that it’s time for rates to move to a more normal level. It’s better to precede the Fed than follow the Fed. The worst place for a central bank is to appear to be in a state of complete chaos; where rates might go up or down. You don’t want that percolating out.’”

From the Siuslaw News in Oregon. “Florence’s current rental crisis began in earnest in the mid-2000s, though nobody seemed to notice. In fact, it was celebrated. This was the era of housing as quick investment. House flipping was the buzz phrase, with cable TV chock full of shows extolling the opportunities from the practice. Housing was always a safe bet.”

“‘You could buy a home in Florence for $120,000,’ Coastal Property Management co-owner Barry Nivilinszky said. ‘They were selling for $180,000. For investment purposes, the value would increase by 15 percent within a year. So, people were buying on the premise of letting it grow and reselling. And so, all of these homes were bought at top dollar.’”

“Nivilinszky started his business in 2004, right in the middle of that boom. He’s seen the rise, fall and rise again of the rental industry in Florence. Now he’s anticipating another fall. ‘We’re in the next housing bubble,’ he said. ‘But the bubble is not working for us today.’”

“Why the bubble is not working for Florence is a complicated story, and many financial experts believe it’s a global problem. One-bedroom homes in Australia are selling for $3 million while dilapidated houses in California run for $600,000 or more. As the prices go up, the working poor struggle to find affordable housing, with some workers in Florence resorting to living in their cars. ‘Houses here have finally started appreciating considerably,’ Nivilinszky said. ‘Owners are going, ‘Huh, I can finally get my money back and be done with it.’ That’s the attitude.’”

“Florence, along with the rest of the world, is experiencing a housing bubble. ‘They’re getting into the $250,000 range,’ said Dana Rodet, owner of Rodet Construction Co., Inc. ‘And they’re selling. I just had a friend put their home up for sale and the same day they had four offers. They sold it with a 15-day turnaround, paid with cash. There was another person who sold in a week. Unless something is so overpriced that it sits on the market for a while, homes are going pretty damn quick.’”

“Because current homes are selling so rapidly, retirees are turning to building their own homes. ‘Everybody is busy,’ Rodet said about the current state of construction. ‘You could be a lousy contractor and still be busy. There are a lot of new homes being built.’”

“Retirees are able to afford building homes because of another aspect of the current housing bubble. ‘People are moving here from out of state or out of town. We still have good prices for real estate for those who are coming in from California. I don’t know when the last time you visited California, but I don’t know if you can find a place for less than $650,000,’ Rodet said.”

“He said that a family member recently purchased a home in Costa Mesa that was built in the 1950s and hadn’t been upgraded since. ‘There was nothing new in there, and they paid $625,000,’ Rodet said.”

“People flip their house in California, take the cash, and buy or build a home to their liking in Florence. Building is where Dan Lofy of Lofy Construction comes in. He’s been in the thick of building new homes for out-of-towners, and the homes he’s building are expensive. ‘In 2008, the standard figure to build a home was about $135,000 to $155,000,’ he said. ‘The lowest you can get now is around $175,000, and that would be a terrible house.’”

“While the debate goes on in the U.S., globally countries are officially calling this a bubble — and there are signs that it’s bursting. In Australia, the housing market had seen extreme rises in prices. In two separate articles this month, the Daily Mail reported a ‘tiny’ one bedroom home in Melbourne hit the market for a ‘whopping’ $2.2 million, after the owners bought it for $875,000. The Daily Mail also reported that, ‘Australia’s ‘golden housing years’ are officially over with a full-blown crash expected if rates increase too quickly or not enough. In the U.S., the housing crisis is spreading coast to coast.”

November 28, 2017

A Lot Of Half-Truths Told During The Boom

A report from Inman News. “When sellers get multiple offers on their home, my practice is to email every offer to the seller as it comes in, and then I prepare a multiple offer spreadsheet so that they can compare offers side-by-side. I recently met with sellers to go over multiple offers and came to a new realization: sellers are doing their homework on a whole other level. They were discussing each prospective buyer in great detail, in fact. Puzzled, I asked how they know so much about each buyer. ‘That’s easy,’ they said. ‘We checked out each one online as the offers came in.’”

“With an extreme shortage of inventory plaguing many housing markets, some sellers are looking to the internet to increase their control over exactly who will purchase their home. Confronted with similar multiple offers, sellers want more than just an awesome price and great terms. ‘If more than one of these offers meets our goals,’ they reason, ‘Then we are going to select the winning buyer based not on the terms, but on who we want living in our property after we leave.’”

“After my first encounter with sellers vetting prospective buyers online, I began hearing of similar practices from others. Although many buyer wannabes submit biographical letters with their offers, the level of information desired by the many sellers is on the rise. Emulating practices prospective employers have utilized for years, some sellers are now performing extensive online searches for buyers submitting offers for their property.”

“Some sellers are even upping the ante by paying for information. Disturbing? Get over it. It’s the new reality. This genie is out of the bottle and will not be returning any time soon.”

From Reuters on Canada. “A drop in Canadian home prices has put some recent buyers under water, particularly in Toronto, the nation’s largest market, just as rising interest rates and record levels of household debt have put the squeeze on borrowers. With homeowners’ equity falling in tandem with a 15 per cent drop in the average Toronto house price since April, and lenders tightening credit in response to tougher regulation, the ability of people to borrow against the value of their home is shrinking. Toronto debt adviser Scott Terrio said a 40 per cent surge in home equity lines of credit since 2011 has helped mask a credit crisis created by consumers who tap their home equity to pay their bills.”

“‘The insolvency business is cyclical, and the last five-year peak was in 2009,’ said Terrio. ‘We’re now into the eighth year of a 5-year cycle because of people’s equity in their homes and low interest rates.’ ‘I think 2018 is going to be a scary year,’ said Douglas Hoyes, an insolvency trustee in Toronto.”

“Terrio and Hoyes both said they have seen a chill in recent months from banks and other lenders looking to cut the riskiest clients from their balance sheets before a crisis hits. Hoyes said many lenders check credit scores quarterly to see which clients are overextended – and then raise interest rates or deny a request for more HELOC money in a bid to drive the riskiest clients elsewhere. ‘That’s how lenders de-risk themselves … they don’t want to tip you over the edge but would kind of like to get rid of you as a client,’ said Hoyes.”

From The New Daily in Australia. “Economists have long argued that ‘perfect information’ is a prerequisite for an efficient market, but there seems to be precious little of that at present in the rental market. Landlords and renters have been told there is a housing shortage one minute and a surplus of dwellings the next. After years of ‘housing shortage’, researchers now argue Australia has too many dwellings. ANU researchers Ben Phillips and Cukkoo Joseph have published a study that compares data on the composition of Australian households with construction data on the number and type of dwellings built over the past 16 years.”

“The difficulty for landlords and renters is they tend to rely on their real estate agent to tell them whether an area is in over- or under-supply. For instance, a landlord contacted me last week to point this out in relation to two dwellings he owned within a few hundred metres of each other – one tenanted, and one vacant. His agent first wrote to him saying the rent on the tenanted unit was too low and he agreed to increase it – only to receive notice the following week that his tenants were moving on.”

“That takes a chunk out of his cash-flow, but allows the agent to re-let the property and collect a letting fee. He was then advised to cut the asking rent on the second, already vacant property. The landlord in question told me: ‘The agent makes these decisions without consulting either tenant or landlord, so it could be a situation where both would be happy with things are they are. In retrospect I think my agent was trying to maximise their letting fees and commission rather than keep the properties tenanted.’”

“Agents have been become expert during the property-boom years at creating a sense of urgency and competition between home hunters. But if they tell you there’s a ‘shortage of properties’ and ‘rents are rising’ they could be using national or city-based averages to talk up an oversupplied area. ‘If you’re talking about renting an apartment in the Melbourne, Sydney or Brisbane CBDs, those would be ridiculous statements,’ Mr Phillips told me.”

“There have been a lot of half-truths told during Australia’s extraordinary two-decades-long housing boom. But as the market swings to oversupply, it’s more important than ever for renters – and landlords – to get the deal that they want, rather than letting the price be set by a stressed, commission-starved agent.”

From Voxy New Zealand. “Property Institute of New Zealand Chief Executive Ashley Church says that the time has come to dump Loan-to-Value lending restrictions (LVRs) following a dramatic drop in house price growth expectations throughout the country. His comments, which parallel similar comments made by the Finance Minister earlier today, are backed up by the latest Property Institute poll of public perceptions which shows that most people are no longer expecting big capital gains from housing - and he says that should signal a relaxation in Loan to Value Ratio restrictions.”

“‘We’ve been running this poll for a year now and since last November there’s been a massive swing away from people expecting price rises, with almost 50% picking prices to stay the same and another 25% expecting prices to decrease.’”

“Mr Church says that In November last year 56% of those polled were expecting prices to rise in the next six months. In November 2017 that figure had dropped to 18%. ‘This has been the trend for sometime now, and it’s clearly a reflection of these artificial lending restrictions - so the Reserve Bank should be taking steps sooner rather than later to relax its loan-to-value ratios to ensure the engineered slowdown in the housing market doesn’t turn into an out-of-control slump.’”

November 27, 2017

Is This Just Seasonal, Or Is This Something Else?

A report from the Daily Journal in California. “Cold weather brings a cooling effect to a local rental market which real estate experts believe will remain considerably less expensive than the astronomical rates reached in recent years. Rent for a one-bedroom unit in San Mateo last month floated near $2,500, according to Zumper, down from the yearly peak of nearly $2,600 in June. Last year, prices for similar units were reported as expensive as $3,100. There seems to be consensus on a general market softening. ‘It appears San Mateo County has reached its peak and the county is in a downward trend. In the past two years, rent growth has slowed down and vacancies have increased,’ Rhovy Lyn Antonio, the apartment association’s vice president of public affairs, said.”

“Michael Pierce, a local landlord for more than 30 years, said his stock of older units exposes him to a much less expensive rental market as well. ‘It’s really different,’ he said. ‘It’s not that pie-in-the-sky number that those new buildings are getting.’”

“But even with less expensive offerings than some of the new developments sprouting along the Peninsula, Pierce said he too is witnessing a slowing market, resulting in lingering vacancies and occasional discounts for tenants. Another factor driving the cost drop is the crush of recent residential development becoming available, increasing supply to meet the outsize demand. ‘We are starting to see the benefits from new supply,’ said Pierce, pointing to ongoing construction of developments in Redwood City, San Mateo and Foster City. ‘It’s causing the market to soften a bit because we have a lot of product.’”

From the Virginia Gazette. “The Greater Williamsburg Area has plenty of options to offer home buyers as the fall comes to an end. ‘In the last three months, we’ve seen inventories increase, which indicates the market is evening out. This means the rates of new houses going on the market is outpacing closed sales. It’s a good trend,’ said Kimber Smith, president of the Williamsburg Area Association of Realtors.”

“The median sale price for single-family detached homes was up 5.8 percent to $350,200 and was down 8.1 percent to $229,400 for single-family attached properties since last October, according to the Williamsburg Area Association of Realtors.”

From Crain’s Chicago Business in Illinois. “If you’re looking for a deal on a downtown apartment right now, you shouldn’t have too much trouble finding one. Many landlords are offering prospective tenants two months’ free rent, gift cards and other goodies as they try to fill up their buildings in an overbuilt downtown market. After enduring years of rent hikes, renters are gaining leverage over landlords as the supply of apartments outstrips demand.”

“‘This is the time of year when landlords and property managers get desperate,’ says Maurice Ortiz, director of operations at the Apartment People, a Chicago brokerage. Now ‘it’s an all-out dogfight because there are so many new developments that are competing with each other, as well as the established buildings.’”

“The once-hot market is getting chillier amid an unprecedented development boom. Developers will complete a record 4,500 downtown apartments this year, 3,500 in 2018 and as many as 5,000 in 2019, Integra predicts. While demand for apartments is as strong as it’s ever been, it’s not keeping up with supply. Absorption, the change in the number of occupied units, will total about 2,900 units this year—also a record—and 3,000 in both 2018 and 2019, according to Integra. Put another way, downtown supply growth—13,000 new apartments over three years—will exceed demand by 4,100 units, or 46 percent.”

“The supply surge is making some developers and landlords nervous. That’s one reason they’re offering bigger concessions than they have in the slow leasing months of prior years. ‘The difference now is there’s more fear of the unknown. We’re getting aggressive because you don’t know,’ says Jim Letchinger, president of Chicago-based JDL Development, which opened a 250-unit tower at 640 N. Wells St. over the summer. ‘Is this just seasonal, or is this something else?’”

From Westfair Online on New York. “Housing inventory in Westchester County has reached its lowest level in 13 years, according to a recent report from Douglas Elliman, and while that record-low supply has led to frequent bidding wars in the low- to midlevel markets, the same cannot be said for luxury homes. Real estate professionals agree that a wealth of high-end properties remain for sale. ‘When you start going $1.5 (million) and north, there’s a heck of a lot of stuff on the market and practically nothing selling,’ said Mark Seiden, broker and owner of Mark Seiden Real Estate Team in Briarcliff Manor.”

“Price isn’t the only reason many luxury properties aren’t changing hands. ‘There are plenty of people in the market who I think are overpriced, but we also have plenty of stuff that I think is priced fairly reasonably,’ Seiden said. ‘It’s just that the stuff that’s selling is selling for an ‘oh my God’ low price.’”

From Mansion Global on New York. “A penthouse has been relisted with a massive price cut in a new boutique condo in Manhattan’s Carnegie Hill. The price tag for the penthouse, the largest and most expensive unit in the nine-residence building on 1110 Park Ave., was lowered to $25.95 million Tuesday, more than $18 million, or 41%, less than the asking price three years ago.”

“The penthouse was first listed for $44 million by the building’s developer Toll Brother City Living, when the condo was still under construction in October 2014. The price was dropped to $35 million in early 2015 before the construction was completed that fall. After a year, the developer signed on a brokerage and reduced the price further to $29.95 million in April 2016. In addition to the penthouse, Warburg Realty also re-listed another high-floor unit in the building for $15.95 million last week. The 5,097-square-foot residence was listed for $20 million in 2015 by the developer, Toll Brother City Living.”

“In August, former Avon CEO Andrea Jung sold her apartment in the building, which she never moved into, for $17 million, a loss compared to the $17.616 million she paid in July 2016.”

November 26, 2017

From Political Untouchables To Pariahs

A weekend topic starting with the Richmond Times Dispatch. “Hot, Hot, Hot, accurately describes the current state of the commercial real estate market. The ongoing strength in the sector can be attributed to cheap and available capital. The conduit market, which was written off for dead two years ago, is poised to complete 2017 with the second-highest annual volume since the financial meltdown in 2008 and pricing that is close to post-recession lows. The combination of falling spreads and less volatility has made conduit lending very profitable.”

“The irony is that fewer conduit players are active today than two years ago when the market was petering out. So, while volume and profits are soaring, fewer market players are sitting at the table. Admittedly, those at the table are competing fiercely for deals. In addition to more conduit money fueling deals, more money is going into agency deals than in any prior year.”

“The production for Fannie Mae and Freddie Mac in 2017 is so strong that there is rumblings of huge cutbacks for 2018. The Federal Housing Finance Agency, which is charged with overseeing agency lending, has not made any announcements for 2018, but changes are expected. Jerome Powell, nominated this month by President Donald Trump to be the new chairman of the Federal Reserve, is an outspoken advocate of reforming the two government-sponsored enterprises.”

“Powel said in a speech earlier this year that more private capital needs to be in play and that the next few years may present ‘our last best chance to finish critical reforms’ and address systemic risk presented by the dominance of Fannie Mae and Freddie Mac in housing market finance. Not that the Fed chairman has a great deal of power over the Federal Housing Finance Agency, but the agencies are on pace to provide close to 50 percent of all multifamily mortgages this year, according to industry estimates, which far surpasses their lofty goals of providing 40 percent of the multifamily mortgages.”

From Vanity Fair. “The Republican tax bill that passed the House provides plenty to be worried about. Take, for instance, the proposed elimination of the deductibility of state and local taxes. That is obviously a cynical, politically motivated ploy on Donald Trump’s part to penalize voters who didn’t vote for him (for good reason) in high-tax blue states, such as New York and California, and to give a benefit to the red-state voters who did vote for him. (I get it, elections have consequences.)”

“Worse, a Wall Street executive says, it could lead to another housing crisis, just as the last one is (or should be) still fresh in our collective memories. Here’s his thinking (which is hard to refute): Since, generally speaking, one of the largest state taxes is on property—your home—eliminating the federal tax deduction for state property taxes will inevitably cause the cost of homeownership in states with high property taxes to go up. It follows, logically, that if the annual cost of home ownership goes up, then the value of the home—which is for most people their single most-valuable asset—must go down.”

“The National Association of Realtors commissioned a recent study that predicted that the elimination of the deduction for state and local taxes could result in a decrease in home valuations of between 10 percent and 17 percent. Lower home values could also lead to problems—again—for the government-sponsored entities Fannie Mae and Freddie Mac that have guaranteed some home mortgages, which are secured by homes worth materially less.”

From A Duopsony Built Around Rent-Seeking by Edward J. Pinto and Norbert Michel. “A recent Senate Banking Committee hearing explored ‘The Status of the Housing Finance System After Nine Years of Conservatorship.’ The title pretty much says it all — Congress has done nothing substantive on housing finance reform in almost a full decade.”

“Given the spectacular failure of Fannie Mae and Freddie Mac that led to the 2008 financial crisis, the fact that these Government-Sponsored Enterprises (GSEs) remain in government conservatorship might seem surprising. After all, during the crisis, Fannie Mae and Freddie Mac transformed from political untouchables in housing finance to pariahs.”

“Rather than seize that moment to shut down the GSEs to protect taxpayers and housing finance markets, Congress succumbed to an onslaught of special interests lobbying and fear-mongering aimed at protecting the GSEs’ duopsony — a market condition where there are only two large buyers for a specific product or service.”

“In virtually the blink of an eye, groups such as the Mortgage Bankers Association and the National Association of Home Builders convinced members of Congress that the housing finance market couldn’t function without some form of government backing. The worst propaganda was that only government guarantees could prevent interest rates from skyrocketing, home values from plummeting, and long-term fixed-rate mortgages from disappearing.”

“Now that the Trump administration has indicated it wants to reinvigorate the private housing finance system, it is facing the same resistance Congress did in 2008. The Housing Lobby argues for either a continuation of the status quo with the addition of an explicit government guarantee or some close hybrid. Supporters also incorporate an ‘affordable housing cookie jar’ in an effort to get buy-in from progressive lawmakers and lobby groups.”

“But these groups ignore the three major problems with our nationalized housing finance system. Americans have more debt than ever. After 50+ years of ‘affordability’ policies, homes are more expensive than ever, and notwithstanding trillions of dollars in subsidies, the current 63.9% homeownership rate is statistically no different than the average rate of 64.3% since 1964 (excludes bubble years).”

“Homeowners and taxpayers have little to show for the federal government’s largesse, except for mountains of mortgage debt and GSE bailout IOUs. An even bigger problem with defending the status quo is that the GSEs are not currently helping Americans of modest means buy homes. Data from 2016 clearly show that the bulk of the GSE business focuses elsewhere.”

“The nearby chart shows that while the GSEs accounted for two-thirds of government agency business in 2016, only 7% of total agency activity (comprising 11% of total GSE activity) served buyers of more modest homes with moderate downpayments. The rest went to cash out and no cash out refinancings (56% of total GSE activity), second homes and investor properties (6% of total GSE activity), purchase loans with downpayments of 15% or more (20% of total GSE activity), and higher priced homes with downpayments of less than (7% of total GSE activity).”

“The housing lobby cannot hide from these figures. The bulk of GSE activity simply is not doing anything to help make moderately-priced homes more affordable.”

November 25, 2017

Yet Another Hole In That Sacred Claim

A weekend topic starting with this piece by Ben Phillips, a Principal Research Fellow at the Centre for Social Research and Methods at ANU. “One of the great mysteries in Australia is how and why did Sydney house prices get so high? A common explanation is that Sydney housing supply is just not keeping up with demand as strong population growth and a lack of land release combine to drive up house prices. We decided to test this hypothesis by comparing the underlying demand for housing in each region in Australia from the perspective of population growth and demographic change. We found that, contrary to popular belief, Australia as a whole has built more than enough houses to accommodate this growth.”

“In fact, about 164,000 dwellings more than was required since 2001. Much of this surplus of housing was found in our capital cities, particularly inner city areas and much of this surplus contained unoccupied dwellings. Sydney’s most over-supplied region is Inner Sydney with a surplus of around 6000 dwellings or 5 per cent of stock. The driver of over-supply is the new unit developments. A significant number of these dwellings are vacant. They may be for sale, a vacant rental, or left intentionally vacant by investors.”

“It may surprise that the current house price inflation in Sydney is not unprecedented. An equally strong period of house price growth was between 1999 and 2004, a time when population growth was about half current levels. During this period house prices nearly doubled in Sydney. Over the last five years house prices grew by 81 per cent.”

“If it’s true that our current record home-building levels are not balanced by a large housing shortage, then there is the risk that these current building levels and the associated economic activity will reduce in the near future. Policy makers will also need to place greater emphasis on other potential drivers of house price growth and housing affordability, such as a range of demand influences such as interest rates and housing taxation arrangements.”

From the Conversation in Australia. “As everyone supposedly knows, fixing housing unaffordability is simply a matter of boosting housing supply. But wait! With their just-published report on house-building and population growth, ANU academics Ben Phillips and Cukkoo Joseph have blown yet another hole in that sacred claim. By comparing housing demand and supply at a sub-regional level, their analysis highlights evidence that in many parts of Australia – not least inner Sydney, Melbourne and Brisbane – house-building has been running well ahead of local household growth for the past few years. Yet these are hardly areas where prices have dived.”

“Previous commentaries have highlighted the recently strong positive correlation between rapidly expanding housing supply and property inflation. But these correctives to the popular wisdom have failed to gain traction. This is partly because of the continuing seductive appeal of the common sense claim that rising prices reflect gross shortage. So, it’s reasoned, expanding house building will moderate the market.”

“As my Sydney University colleague Peter Phibbs recently observed, this ’supply mantra’ works for politicians seeking to connect with voters because ‘everyone is an economist now and more supply will bring down prices.’ More importantly, though, governments use their unqualified faith in equitable housing market solutions to get off the hook. It absolves them of the responsibility for playing an active role in managing and shaping these markets to deliver housing that meets everyone’s need for shelter. Instead, they facilitate development for speculation.”

From CTV Vancouver in Canada. “Politicians and developers have long pointed the finger at a shortage in supply as a root cause of Metro Vancouver’s skyrocketing home prices. A local academic, however, is now challenging what he calls the myth that simply adding more units will help solve the problem. John Rose, a geographer at Kwantlen Polytechnic University, studied the housing supplies in Canada’s 33 largest municipalities between 2001 and 2016. ‘The prices (in Metro Vancouver) escalated dramatically over that 15-year period. You might expect that supply might have shrunk during that period of time. In fact, the opposite is true,’ he told CTV News.”

“Rose uses figures from Statistics Canada census reports in his analysis. His number crunching found that for every 100 individuals or families who moved to the region since 2001, 119 housing units were also added to the market. According to those numbers, the professor said, the Vancouver area had the fifth largest housing supply of the 33 cities he studied.”

“‘The market has provided a lot of units, yet at the same time, we’ve seen affordability get degraded,’ Rose said. ‘We look back at this and we say, ‘If you’re trying to figure out what the cause of the housing crisis is, it doesn’t seem to be the product of adding enough units to the market.’”

“Instead, Rose contends that ’speculative investment’ has resulted in tens of thousands of empty homes and led to the region’s sky-high prices. He says as of 2016, the Metro Vancouver region had more than 60,000 vacant units. ‘We’ve got all this available supply that’s just sitting there unoccupied,’ Rose said.”

“Another study recently conducted by real estate marketing website Point2 Homes found that Vancouver is ‘in a league of its own’ as the most unaffordable housing market in North America, surpassing major U.S. cities such as New York and San Francisco. According to those findings, the average annual family income is $81,608, while the median home sale price in the City of Vancouver is more than 17 times greater at around $1.4 million.”

The Richmond News in Canada. “Kwantlen Polytechnic University human geographer Dr. John Rose has lived in Richmond for the past 20 years. It’s where the Vancouver-raised professor chose to start and raise his family. In that time, he’s seen the supply of housing soar, in the form of dozens of City Centre apartment buildings and hundreds of townhouse developments. And yet, in the past 10 years, housing prices have more than doubled. ‘It certainly seems the market has not been undersupplied,’ said Rose.”

“But, he thought, it has long been argued by the development community and politicians (most often financially backed by developers) that more housing begets lower prices. His new study pours very cold water on that supply/demand paradigm. And, at this point, further solutions to curb speculative demand, including a ban on foreign ownership of homes, should be ‘on the table.’”

“‘It doesn’t hold water the idea we have an expensive housing market because we don’t have enough supply,’ said Rose, who found that since 2001, according to census housing data, Metro Vancouver has seen 241,336 new (net) housing units built to accommodate 202,184 new households.”

“But if it’s the case we are transforming our city in such a drastic way to provide empty units for speculative investors, such costs must be questioned. ‘Supply hasn’t worked in past. Why are we assuming the continued approach will work in the future? More of the same,’ that’s what we’re being prescribed by the doctor,’ said Rose.”

“‘I think a lot of people are now coming to the realization that this (supply-oriented housing policy) isn’t working. It’s been so many years, we’ve built so many houses and yet housing costs just keep going up,’ said Justin Fung, founding member of activist group Housing Action for Local Taxpayers.”

“He refers, tongue-in-cheek, to a ‘Vancouver Real Estate Cartel,’ which ‘promotes a narrative’ that supply is the solution, at all cost. ‘The cartel is this group, the realtors, the property developers, the people who have vested interest in pushing this narrative that supply will solve everything; we just need to build more, build more. They’ve been profiting significantly from this; they’ve been profiting from land banking; they’ve been profiting from selling these units offshore to speculative investors,’ said Fung.”

“Rose said since his findings were published by media last week, he’s seen local university economists criticize it. ‘Now I’m hearing we need to accommodate investment. It’s basically accepting the idea speculation is going to happen. And that’s pretty problematic. I’ve literally heard the argument we need to pump up the supply so much that it creates a glut so that it drives down the prices,’ said Rose.”

“Rose is also concerned about a drastic market correction considering how dependent B.C.’s economy is on construction and real estate finance (housing as a commodity). ‘My concern is the situation has developed for 15 years and now we have a whole economy, or whole economic ecosystem, organized around this particular model. If there are dramatic measures taken, there would be a shock. I don’t envy policy makers to get us out of this mess.’”

November 24, 2017

The Shake-Out Of The End Of The Boom

It’s Friday desk clearing time for this blogger. “For close to a year, investors have been locked in an epic fight to hold onto their units in a 1990s Miami Beach condo-hotel, amid claims they owe $9.4 million in unpaid assessments. Between December 13, 2016 and October 9, Port Orange, Florida-based Schecher Group has filed foreclosure lawsuits against 65 individuals and companies that own units in the Sixty Sixty Resort. Schecher founder Richard Schecher Sr. has posted videos of himself on Youtube in which he claims delinquent owners owe his company $9.4 million. ‘We have a bunch of owners who sadly have buyers’ remorse,’ Schecher said.”

“A 31,000-square-foot mansion in Bel Air, Los Angeles, is the latest astronomically priced house to get a sizeable price chop, having returned to the market with an asking price of $90 million. The sprawling spec house was first listed in July for $100 million. Opus, a Beverly Hills spec home also dropped out of the $100-million-club recently. The home is now asking $85 million, $15 million less than its original asking price when it was listed in February.”

“A surprising 46 percent of California homes sell below asking price, who knew? California pending home sales shrank for the fourth consecutive month in October to post the lowest level in six months, the California Association of Realtors said. Pending home sales have declined on an annual basis for nine of the last 10 months so far this year, CAR reported. Pending home sales were down 7.3 percent from October 2016 in Southern California. Los Angeles and Orange counties registered lower annual pending sales of 4.7 percent and 4.9 percent, respectively. Double-digit, annual pending sales drops occurred in Riverside (14.0 percent), San Diego (11.4 percent), and San Bernardino (10.4 percent) counties.”

“The share of homes selling above asking price fell from 28 percent a year ago to 23 percent in October, while the share of properties selling below asking price inched up from 44 percent to 46 percent, according to CAR. The 28 percent of homes that sold below asking price sold for an average of 12 percent below asking price in October compared to 9 percent a year ago.”

“For the first time in nearly 9 years the Austin Board of Realtors says the market is changing because of new home construction — but don’t expect to see a significant drop in prices. Between Sept. 2016 and Sept. of this year, 14,263 new homes were built. That’s up almost 8-percent from the year prior when 13,229 homes were built. Come 2018, a record-breaking 15,000 new homes are expected to be constructed because of more lots becoming available and current homes already under construction.”

“For buyers this may mean they don’t have to make an offer on a new home the first day it hits the market. ‘The builders are cranking these out as fast as they can around the city and county area but because of the job influx and the quality of life we have here the price has not really dropped that significantly so buyers have more options but I don’t think it’s being reflected in the price,’ says Steve Crorey, Austin Board of Realtors 2018 President.”

“Reverse mortgage foreclosures in 2016 surged 646% compared to the previous seven years, according to California Reinvestment Coalition (CRC), citing data it obtained from the Department of Housing and Urban Development (HUD) through a Freedom of Information Act request. CRC said that HUD data revealed 32,976 foreclosures on federally insured reverse mortgages from April 2016 to December 2016. In response to an earlier FOIA request, the HUD disclosed that there were 41,237 foreclosures in the HECM program during the seven-year period from April 2009 to April 2016.”

“Riksbank Governor Stefan Ingves said growing concerns over the state of the Swedish housing market didn’t come as a surprise but underscored his belief that the economy can withstand a slowdown. A series of reports in recent weeks point to a rapidly cooling Swedish housing market, raising concerns the country could face a crash like the one it lived through in the early 1990s. The krona weakened almost 2 percent last week, and has continued to slide as investors wonder whether a property market slump is ahead.”

“The reaction in the currency market is ‘difficult to understand,’ Ingves said in an interview after a press briefing on Wednesday. ‘But I’m not surprised that there is a conversation going on outside the country about our housing market given how we for years have mismanaged our housing market. Eventually that will lead to raised eyebrows abroad.’”

“Maria Sharapova is being investigated by police in India in a cheating and criminal conspiracy case involving a real estate company that used the tennis star to endorse a luxury housing project that never took off. Real estate firm Homestead Infrastructure is accused of taking tens of millions of rupees from home buyers for a project called ‘Ballet by Maria Sharapova,’ a luxury apartment complex with its own helipad, tennis academy and other amenities.”

“Lawyer Piyush Singh said his client, Bhawana Agarwal, paid Homestead Infrastructure 5.3 million rupees ($81,678) in 2013 because she was impressed by Sharapova’s association with the project located in Gurgaon, a suburb of the Indian capital. The cost of an apartment in the swanky project was 20 million rupees ($308,000). Agarwal spent the next three years chasing the builders for updates on the property and her investment in it, but they stopped taking her calls, Singh said. On Wednesday, several calls to the numbers of the building company’s website went unanswered. ‘The project never saw the light of day,’ Singh said.”

“New valuations issued by the Auckland Council yesterday showed the average property valuation in the region increased by 46 percent since the last valuations were done three years ago. But the housing market has cooled in the six months since the valuations were set, which meant some properties may be worth less than their value on paper, Loan Market mortgage advisor Bruce Pattern said. ‘We’re already seeing scenarios where the new CV [council valuation] has come in at $2 million-plus, but the house is realistically under $2m. One client texted me yesterday to advise that his valuation had gone up 214 percent. I would struggle to believe that that would be an accurate reflection of their true value,’ he said.”

“The new valuations would not be much help to anyone wanting to borrow money from banks as most lenders recognised they were out of date and would ‘ignore them,’ Mr Patten said.”

“Banks are stepping up home seizures as thousands of West Australians fall behind in their mortgage payments, with most pain felt in outer suburbs and the south-west coastal corridor. Property repossessions have surged to their highest level since the shakedown after the global financial crisis as the mining downturn rocks the last bastion for battlers. LMW Valuers director Rod Davidson said there had been a noticeable increase in bank repossessions in the south-western first-homebuyer suburbs from Baldivis through to Rockingham.”

“‘It’s probably the financial shake-out of the end of the mining boom because many of these are FIFO workers who have now run out of options,’ he said. ‘You don’t lose your house the day you lose your job, it usually takes 12 to 24 months.’”

“An Anglicare financial counsellor based in Rockingham, Jacky Hamilton, said the mortgage problems underpinned a worrying trend of underemployment. ‘Many people who were in full-time employment might now get the odd casual job, but it’s not enough to service their cost of living,’ she said. ‘They max out the credit cards, fall behind in their payments and then the bank moves in.’”

“The party is finally winding down for Australia’s housing market. After five years of surging prices, the market value of the nation’s homes has ballooned to $7.3 trillion – or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them.”

“Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche, fuelled by record-low interest rates, generous tax breaks, banks hooked on mortgage lending, and prime-time TV shows where home renovators are lauded like sporting heroes. For many, homes morphed into cash machines to finance loans for boats, cars and investment properties. The upshot: households are now twice as indebted as China’s.”

“The increasing treatment of housing as a financial commodity has seen borrowers rush into a byzantine maze of mortgage-related products. That’s made banks very profitable, but very exposed. Aussie households have racked up record private debts and aren’t getting the pay rises to help service them. ‘Australia’s world-record housing boom is officially over,’ UBS Group AG economists declared at the start of this month. ‘The cooling may be happening a bit more quickly than even we expected.’”

November 23, 2017

The Intertemporal Structure Of Preferences

A report from the Malay Mail Online in Malaysia. “Haphazard construction of new property without regard for market forces was the reason for the existing oversupply of real estate, said an industry group. The Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS) said this when expressing support for the government’s decision to suspend approval for property valued above RM1 million. It said Bank Negara Malaysia has demonstrated that there was currently RM35 billion of unsold property of various types in the country, and that more effort must be made to ensure these are taken up before more are constructed.”

“‘PEPS views the causes of property market overhang to be developers’ indiscriminate building of properties, a lack of market studies and financial feasibility studies being carried out prior to building, no coordination on planning among local authorities and indiscriminate approvals. Other causes include the delay in gazetting of local plans that leads to uncontrolled development and higher cost as well as artificial demand created by members of the public for fear of losing out on choice properties,’ it said in a statement.”

From Free Malaysia Today. “The Consumer Association of Penang (CAP) has criticised the government for only recognising now what it had highlighted 28 years ago on the housing situation in the country.CAP president SM Mohamed Idris said it was good that the government had finally decided to freeze luxury property developments from Nov 1, 2017 due to a glut of such properties. According to reports, Second Finance Minister Johari Ghani had announced that the freeze will affect high-rise condominiums, shopping malls and commercial units.”

“‘CAP had warned of this scenario 28 years ago in our book ‘Housing for the People’. However, it fell on deaf ears till now,’ he said, adding that he had repeated the message many times since then. ‘The crux of the housing problem is that the country’s building resources were channelled not towards where people’s housing needs are, but towards where the market which could pay was.’”

“‘Such a problem has been manifested nationwide, leading to an over-production of unusable expensive properties that a large segment of the Malaysian population cannot afford. For example, the term ‘affordable housing’ is grossly misleading because it can range up to RM400,000 per unit,’ Mohamed said. ‘We have to consider that this serious housing policy flaw, resulting in a glut of unsold property units, can drive developers, the banks and the country to financial ruin.’”

From The Malaysian Insight by Carmelo Ferlito. “I read the recent article by Sheridan Mahavera, ‘No sign of housing market crash, say economists,’ in which some of the thoughts I expressed in an interview with Free Malaysia Today are reported. I need to clarify both my thoughts and what I believe to be some misunderstandings regarding the concept of crisis, crash and bubble. In particular, the first lines set the article’s tone and they open doors to misinterpretations.”

“Mahavera writes: ‘House prices are not expected to fall sharply next year, said economists who disputed speculation that the property market will crash due to a glut.’ These lines linked market crash and sharp price fall as if they were the same thing; such an approach to business cycles is misleading. From the perspective of economic theory, they are two distinct phenomena: a crash is an eventual consequence of a previous boom and its roots need to be found in the dynamic of the boom; the price fall is an eventual consequence of the crash, but its magnitude (sharp, light, …) depends on a series of factors that need to be closely analysed.”

“The appearance of an economic boom is always related to a modification in the intertemporal structure of preferences, and it is always related to a specific industry, whose expansion dynamics will drive upward the general economic system. Entrepreneurs’ mood is lifted up by positive profit expectations, usually focused on a specific industry, which recently was the property sector for the Malaysian case. It is therefore crucial to emphasize the central role of expectations as the driving force behind entrepreneurial preferences.”

“The signals an economist should look at are related in particular with the fact that the first wave of investments is always followed by a secondary wave of imitations and speculations. The pace of economic growth becomes particularly sustained when the primary wave of entrepreneurial investments is joined by a stage of secondary growth encouraged by the instincts of imitators in search of profit and driven by ‘fashion’.”

“Why are imitations inevitable? It is easy to imagine how the success of entrepreneurial initiatives is readily followed by imitators looking for success within what at first sight always seems to be a period of growth destined never to end.”

“Like the primary wave of investments, the second wave is generated by profit expectations, particularly the expectation that the current situation will not change. From a quantitative point of view, moreover, imitation (secondary) investments might even be greater than the first cycle of investments since they involve a larger number of individuals, whose expectations are ‘over-excited’ by the boom.”

“The positive sentiment, that becomes ‘incandescent’ at the end of the primary expansion stage, also plays a role in regards to the action of banks. In fact, precisely because of what happens during expansion, it is highly likely that banks make available ‘virtual funds’ that are not backed up by real savings, driven by expectations that the adaptation of consumer preferences (further saving) cannot but occur, precisely because of the enthusiasm generated by the boom.”

“It is well known that prices raise during a boom and tend to decrease during a crisis. But we do not have to mistakenly identify the crisis with the price fall itself. They are two separate phenomena, the second being a consequence of the first one.”

“A similar mistake is done by some economists when they identify overproduction as a crash, when instead it is an eventual consequence. Therefore, while we can imagine that the present dynamics in the property market in Malaysia will bring out a crisis (though a precise temporal estimation is a job for fortune tellers and not for serious economists), the potential effect on the price system cannot be precisely identified.”

“In fact, a big part of the final outcome will depend on subjective reactions by market actors. Will they expect a short and limited crisis? Or a long and widespread recession? The individual mood will play a big role in the developing of the crisis itself. People owning houses for investment might decide not to sell, expecting a positive upturn soon; or they might be caught in panic and running for liquidating their assets. These two different behaviours will have different consequences on price movements, while the crisis itself will remain as a matter of fact.”

“Finally the response from government, Bank Negara and the credit system will play another pivotal role: if these institutions will try to support the industry via credit expansions, the crisis will turn to be longer (like it is happening in Europe now) and the price fall will be hidden by centrally led inflation, setting the stage for fake recovery and a subsequent deeper crisis. On the contrary, if market forces will be let free to allow the production structure to realign itself to the new scenario, the price shock would be stronger, the crisis shorter, and the new economic fundamentals more sound and stable.”

“In conclusion, the analysis of the peculiar moment experienced by the property market in Malaysia can be successfully carried out only if supported by an understanding of the cyclic dynamics which characterize capitalistic development. Cycle stages and price movements are linked but distinct phenomena; while we can see a crisis coming, the subsequent price movements cannot be uniquely identified a-priori.”

November 22, 2017

A Wealth Of Inventory And A Lack Of Demand

A report from the D Magazine in Texas. “If you’re a Realtor, your expanding waistline has already told you there’s something going on in the apartment world. Almost any day of the week, some apartment complex is hosting lunch for Realtors and apartment referral agents. The goal isn’t Christmas cheer; it’s snagging tenants for their empty apartments. Nearly every multi-family new build in Dallas has been expensive. In the high-rise condo world, the last purpose-built mid-priced buildings were in 1998. In Uptown, the boom has largely been in apartments (for a host of national and local reasons) and, like their condo brethren, they are expensive. But I see softening beyond Realtors’ waists.”

“There has been a slowing in the higher-priced home buying market. Over the past 12 to 18 months, days on market have been creeping up and prices have pulled back. What a year ago was a slowness in homes costing more than $1 million has now been creeping into the $700,000 to $800,000 range. This is being mirrored in the apartment world, even though slightly delayed. In the Uptown market, two forces are at work. First is overall affordability. The crop has largely been creamed for twentysomethings who can afford $2.50 to $3.00 per square foot for rent. That is coupled with the realization that those rents would translate into a quite nice condo.”

From Chicago Mag in Illinois. “Is the Downtown Apartment Bubble Bursting? This month, Mayor Rahm Emanuel announced the installation of the 60th operating tower crane in 2017, as well as another post-recession record of building permits issued in a single calendar year. Downtown Chicago renters have more options than ever, and thousands of new apartment units for the city’s dense central neighborhoods are in the pipeline for 2018 and 2019. But is it too much?”

“Brokerage Luxury Living Chicago estimated that roughly 6,600 new apartments were slated to be delivered in 2017 alone. ‘We’re at a point that when we hit March 2018, we will see the highest vacancy of new downtown apartments since this development cycle,’ says Luxury Living’s CEO Aaron Galvin. ‘We’re expecting to see roughly 5,000 vacant apartments in downtown Chicago in the first quarter of 2018.’”

From LA Weekly in California. “Los Angeles’ insane rents might finally be coming down. After a glut of new apartments downtown sparked a cooling of rent increases, there’s new evidence suggesting that the sharp rise in lease rates across the county could be leveling off. A new report from RealPage found that the average rent in Los Angeles County actually decreased by $19 from September to October. ‘Lots of new apartments coming online is keeping up competitive pressure, particularly in L.A. and Orange County,’ said RealPage’s vice president for analytics, Jay Denton.”

“‘Annual rent growth in Los Angeles and most of the rest of Southern California now is cooling,’ added Greg Willett, RealPage’s chief economist. ‘This performance trend follows the pattern exhibited in most of the rest of the country in 2016.’”

From Multi-Housing News. “After several years of consistent rent hikes, San Francisco’s housing market has cooled to some degree. Investor activity has slowed down, with only $600 million in multifamily assets trading in 2017 through August. This follows a strong 2016, when transactions reached a cycle high of $3 billion. Development is robust, with more than 4,000 apartments delivered in the first three quarters and another 12,400 units under construction.”

From Builder Online on Florida. “Even one-of-a-kind properties in Miami are getting swept up in the buyer’s market that has materialized there. The Wall Street Journal reports: ‘A South Beach condominium owned by architect Zaha Hadid, who died unexpectedly last year, is relisting for $6.5 million, or 35% below its initial asking price of $10 million nine months ago. The new list price reflects the fact that ‘we are in a buyers’ market in Miami,’ said Ivan Chorney of ONE Sotheby’s International Realty, who with colleague Angelica Garcia took over the listing from another agent. ‘There is currently a four-year supply of luxury condos over $1 million, so the right price point and design features are more important than ever.’”

From Mansion Global on New York. “A wealth of inventory and a lack of demand has contributed to a 2% price drop in Manhattan’s luxury real estate prices, according to StreetEasy’s latest market report. October data showed the median resale price of luxury homes—defined as repeat sales within the top 20% of the market—in the borough dropped 2% year-over-year to $4.317 million, the lowest level since 2014, according to the report. In Brooklyn, the median resale price of luxury homes dropped 3.6% to $1.627 million, close to its lowest level since May 2016. In Queens, the median resale price for a top-tier home rose 6.9% to $1.036 million, the report said.”

“‘The onslaught of high-end development in Manhattan and Brooklyn shows no signs of slowing down,’ said StreetEasy senior economist Grant Long. ‘Sellers are having a hard time finding buyers without offering severe price cuts, often to levels below their original purchase prices. This isn’t a new phenomenon, but with too much luxury inventory already on the market and even more supply to come, this trend isn’t over.’”

“Luxury homes across the three boroughs are also taking longer to sell than in October of last year. ‘The luxury market in 2018 will continue to favor the buyer, who will likely encounter increasingly anxious sellers willing to slash prices as more new construction hits the market,’ Mr. Long said.”

“Take for example the two-unit spread at Trump International Tower that’s currently listed for $27.5 million, a 31% price cut from the $40 million wanted for the combined apartments last year. Or the Plaza Hotel apartment that listed Monday for $25 million, an almost 50% discount from its original asking price in 2014.”

November 21, 2017

A Bubble Perspective

A report from the Press Democrat in California. “The rebuilding of fire-damaged structures in the North Coast would take over 6,000 construction workers three years to accomplish, an economist told business leaders in Santa Rosa. Attracting and housing so many workers will be hard, but the county’s economy won’t keep expanding without more homes, Christopher Thornberg said. Thornberg gave an overview of the national economy that was sharply critical of both President Donald Trump and the Republican-led proposals for tax reform. He then warned civic and business leaders that the county must provide more housing for workers. ‘You have to build now,’ said Thornberg. ‘Otherwise, the economy is simply going to stop growing.’”

“When the workers needed for a three-year rebuild are added in, the county’s total construction work force would far exceed the number employed here in more than 17 years, including at the height of a national housing bubble. Much of the U.S. is experiencing a shortage of workers, Thornberg said, which is why he strongly opposes efforts to take existing protections away from millennial-age children of illegal immigrants. ‘We need them,’ he said, prompting a burst of applause from the audience.”

From Think Pol in Canada. “The BC government has promised to tackle the housing affordability crisis in Metro Vancouver by ‘aggressively’ increasing supply. A new study coming out of Princeton suggests that the NDP government may want to reconsider that strategy. In Economic Consequences of Housing Speculation, researchers link increased supply to a more severe crash when the bubble bursts. Zhenyu Gao, Michael Sockin, Wei Xiong found that ‘housing speculation, anchored, in part, on extrapolation of past housing price changes, led not only to greater price increases and more housing construction during the boom in 2004 to 2006, but also to more severe economic downturns during the subsequent bust in 2007 to 2009.’”

“‘New housing supply stimulated by speculation during the boom period could have led to a supply overhang problem during the bust, which resulted in a contraction in construction-sector activity,’ the authors state. Supply overhang can both exacerbate the subsequent housing price bust and reduce demand for new housing, leading to a large decline in construction activity during the recession,’ they add.”

“The trio’s findings are in line with research done by the US National Bureau of Economic Research. ‘Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market’ identifies ‘mechanisms driving the house price boom by emphasizing speculation among developers on the supply-side of the market.’”

“‘Many of the largest price increases occurred in cities that were able to build new houses quickly,’ Authors Charles G. Nathanson and Eric Zwick conclude. ‘This fact poses a problem for theories that stress inelastic housing supply as the sole source of house price booms. But it sits well with our theory, which instead emphasizes speculation.’”

“Housing activists have long maintained that housing affordability in the lower mainland needs to be addressed on the demand side. The housing advocating group Housing Action for Local Taxpayers (HALT) lamented that the NDP government, especially Housing Minister Selina Robinson, is focusing all energies on increasing supply without taking any action to curtail speculation-driven demand. ‘Any demand side action, on speculation, tax reforms and addressing financial crime, in real estate will have to come from Ministry of Finance and office of Attorney General,’ HALT told ThinkPol.”

From on Australia. “For years, we have been told that rising property prices are linked to one thing. But it turns out we have the whole thing wrong. Researchers from the Australian National University analysed 15 years of Census data and building approvals and found Australia had an oversupply of 164,000 dwellings. In particular inner city areas of Sydney, Melbourne and Brisbane had the most extra housing, although other areas were experiencing shortages.”

“‘The surplus is not particularly substantial, but certainly suggest that housing supply in and of itself is probably not the primary driver of house-price growth in Australia.’ Associate Professor Ben Phillips said. ‘There are other factors that are going on.’”

“If housing supply is not the issue, it has implications for how governments try to tackle the issue of affordability — and construction of extra dwellings may not be the fix it’s been touted to be. ‘The standard line of governments and industry seems to be that housing supply is a big problem in Australia,’ Professor Phillips said. ‘No doubt there are some areas where it is. But overall we don’t see the housing shortage that’s often talked about — in fact we see that there is a surplus.’”

“The results suggest quite a lot of properties must be vacant and could be owned by investors, particularly foreign investors. ‘We’ve found that we’ve built more than what population growth would require,’ Professor Phillips said.”

“As for bringing affordability down, Professor Phillips said he didn’t think anyone fully understood what was pushing house prices up. ‘I don’t think anyone fully understands what the drivers are,’ he said. ‘They don’t appear to be strongly correlated to housing supply. I think investment will continue to push up prices, taxation arrangements are an issue and low interest rates are also increasing prices.’”

“If rising house prices were due to factors other than supply, governments need to be looking at negative gearing and capital gains tax if they want to improve affordability. ‘Certainly Australians — and it’s a global phenomenon too — think of housing as much more of a financial product rather than as a shelter,’ Professor Phillips said. ‘This includes owner occupiers who see it as a store of wealth and this could be pushing up prices, rather than supply.’”

“At some point the value of housing would have to align with its fundamental value and Professor Phillips warned that continuing price increases beyond this was a ‘bubble perspective.’”

From Radio New Zealand. “In a paper published earlier this year called ‘The mess we’re in’ - a dive into the Auckland housing market from the construction industry’s point of view - AUT Professor John Tookey says one solution to the bubble and market pressures around the country is to get ahead of demand. Sounds simple. ‘What is politically difficult to accept is simple to state. Improving housing affordability equates to reducing housing values,’ Professor Tookey says.”

“By reducing values, he means your house. Not the 10,000 that officially need to be built every year to accommodate a rising population, a rising population that’s mostly Kiwis, New Zealanders returning from elsewhere, and some pesky foreigners. (Disclaimer: the writer is a migrant and GFC economic refugee.) One of the reasons for the mess is that for years policy-makers passed legislation incentivising property ownership, and ordinary Kiwis with their money locked in the one asset everyone agreed on - property - have been busily selling properties to one another, buying to let, and driving up prices and rents.”

“Restrictions on lending have been introduced and more changes are on their way under the new government. But central government and policymakers don’t have a complete picture of who owns all the property. Only a rough picture exists. We know who owns the majority - New Zealanders - but once you factor in apartments, buy to rent, family trusts, second homes, baches, businesses, overseas owners and absentee landlords, it gets, well, messy.”

“In a BNZ analysis, economist Tony Alexander says the big trend in the last year was the flattening Auckland market, less FOMO (fear of missing out) and a slowdown (although he says prices will go up) for the next five years. The rest of the country will follow in fits and starts in the next year, the report says. Alexander also says anecdotal feedback is that some real estate agents are now standing forlornly in empty houses at weekends waiting for someone to show up, and there’s worse to come.”

“On the flipside, property listings are up on Trade Me, which demonstrates how hard it is to get a clear picture. ‘The hype has gone from the housing market in Auckland and the same will occur around the rest of the country. New equilibriums will be established. Before then, look for some panicked selling from a few unsophisticated investors now feeling FOMO in the other direction,’ Alexander says.”

“Next on the horizon is the government’s proposal to ban foreigners from buying houses in New Zealand - which made headlines around the world. Removing foreign buyers here takes out only a small proportion of overall property transactions - how big a share is anyone’s guess. What’s more, owners, landlords and businesses like to leverage their equity from being a property owner to buy more residential properties. This, as population demographics reach a turning point, leads to a scarcity of supply (or a perceived scarcity of supply) and, in turn, makes more people want to buy. They’re also told it’s a good investment, hence all those property management companies, adverts, and billboards promising property-owning paradise.”

November 20, 2017

Something Has To Give

A report from Mortgage News Daily. “Housing activity in the third quarter of 2017 is described as ‘continuing its rough patch’ in Fannie Mae’s latest edition of Economic Developments. The company’s economists say that activity pulled back across the board during the quarter. Leading indicators suggest that the rough patch demonstrated by third quarter numbers may be spilling into the fourth. Pending home sales, which are generally expected to predict sales of existing homes one or two months hence, were flat in September at the lowest level since January 2016. Contract signings have declined on an annual basis in five of the past six months. In addition, average monthly purchase mortgage applications fell in October for the third time in four months.”

“They warn the census report indicates the rental market may be softening. The vacancy rate for all rental housing types rose on an annual basis for the second consecutive quarter to its highest reading in more than three years, 7.5 percent. This is partially because the supply of apartment units, especially in large metro areas and at the high end of the price scale, has increased.”

From Multi-Family Biz. “This week marks the release of the November Housing Tides Report, featuring an update to the Housing Tides Index. As we noted in June, the number of apartments under construction reached a forty-year high this summer and rental rates have been affected by the stream of completed units coming to market; the national median price for a two-bedroom unit fell year-over-year in each of the last eight months. Median monthly rents for these units have fallen by over $200 since mid-2014, from $1,750 in June 2014 to $1,545 in September 2017. Remarkably, these rent decreases have taken place at a time when much of the new multi-family construction in the U.S. has been in the high-cost luxury category.”

“Multi-family housing permits have totaled 292.9k through the first nine months of 2017, marginally higher than the same period in 2016, so we can expect the trend of moderating rent prices to continue in the short term.”

From National Real Estate Investor. “Private equity and institutional investors from the U.S. and around the world have been stepping up their pursuit of seniors housing assets, seizing an opportunity to capitalize on a pullback in acquisitions by seniors housing REITs. But REITs could encounter oversaturation of AL facilities in some markets and should strike a more even balance between AL and IL, notes seniors housing consultant Andrew Carle.”

“‘Assisted living, particularly at the very expensive high end, has been overbuilt,’ says Dr. David Friend, a physician who serves as managing director of the Center for Healthcare Excellence & Innovation at professional services firm BDO. ‘At the low price point, there’s probably a great deficiency of product, but it’s not clear any investor wants to build that product, because I’m not sure they think they can get a return.’”

The Nevada Independent. “Fernley boasts a median home price that, while up 27 percent from a year ago, still remains more than $100,000 less than what it is farther west. The Reno-Sparks Association of Realtors reported in October a median home price of $348,500 for the greater Reno area, which includes Sparks, compared with a $241,500 median price in Fernley. Mike Kazmierski, president and CEO of EDAWN, has been sounding an alarm about the region’s housing problem for more than two years. In February 2017, he submitted a piece with a more dramatic headline: ‘Reno’s housing sky is falling.’”

“‘The first thing we must do is understand that THIS IS NOT A BUBBLE!’ he wrote, noting that 20,000 jobs had been added but only 4,000 new housing units. Browse websites which feature homes for sale, and you’ll be hard-pressed to find many Reno-area listings under $300,000. Those that do fall in the $200,000 range or lower are usually older and smaller, two-bedroom houses or condominiums. ‘We don’t need any more $600,000 houses,’ Kazmierski said. ‘That’s the problem.’”

“On Friday, a bit of good news arrived in Reno Mayor Hillary Schieve’s email inbox: Construction activity had bumped up the rental vacancy rate to above 2 percent, which could curb rent increases if the trend continues. The city recently added 112 rental units and has another 3,000 units in the construction pipeline.”

The Union Tribune in California. “The 10-year, post-recession building recovery is heading for a pause and possible pullback, lending and investment experts predicted. The panel told a local Urban Land Institute forum that next year may see a slowdown in lending commitments for apartments, offices, industrial and retail projects. The profit margin has narrowed between costs and sale prices to make some deals viable, said panel moderator Connie Emmitt-Stern. ‘Something has to give on the land (price) side and that hasn’t changed yet,’she said.”

The Orange County Register in California. “Southern California — and the nation as a whole — is experiencing the biggest apartment construction boom in a quarter century. In the last 34 months alone, new apartments have been springing up from San Clemente to Sylmar, from Murrieta to Marina del Rey. More than 37,000 new apartments have been built in the region since the start of 2015, data from commercial real estate tracker CoStar show. More than 36,000 more are under construction.”

“And it’s happening across the country. U.S. developers are on track this year to complete at least 350,000 new apartments, the most since the late 1980s, according to rental data firm RealPage Inc. So, after seven years of galloping rents and low vacancies, are tenants finally going to get a break? Is there an apartment glut that will trigger a round of rent cuts?”

“In a word, experts say, no. If anything, developers still aren’t building enough. There might be some saturation in a few areas, like in downtown Los Angeles, where rent hikes have slowed. And because most of all this new construction is for luxury apartments, there’s very little that’s affordable to middle- and low-income workers. ‘We do see that the pace of rent growth is starting to slow,’ said Greg Willett, RealPage chief economist.”

“The 700-unit Eighth & Grand apartments cover almost an entire city block in downtown Los Angeles, with two-bedroom rents as high as $4,100 a month. It’s one of 42 complexes built or under construction in the 5 square miles that make up downtown Los Angeles. In all, 12,000 new units have been built or are under construction there.”

The Dallas Morning News in Texas. “Dallas-Fort Worth leads the country in new apartments opening their doors this year. More than 30,000 apartments are scheduled to open in the area through the end of the year, John Sebree with brokerage firm Marcus & Millichap. Along with D-FW, Houston, New York City and Atlanta will see the most new apartments this year. ‘Fifty percent of the total number of units being delivered in 2017 are in just 10 markets,’ Sebree said.”

“D-FW has almost 48,000 apartments under construction, down from a recent peak of almost 53,000 new units in the development pipeline. And, rent increases are slowing. ‘We are seeing a little bit of slowdown in performance relative to where we were in the past couple of years,’ said Greg Willett, chief economist with Richardson-based RealPage. ‘There is some slowing down from what had really been record levels.’”

The New York Times. “Logic, or perhaps a pleasant knowledge deficit about the mechanics of New York real estate, would tell us that to fill the vacant spaces, the remaining apartments should simply be offered to people making a lot less money. The way that these public-private partnerships are structured and underwritten, however, the revenue from more expensive units helps offset the rents of those apartments intended for lower-income tenants (some one-bedroom apartments at 535 Carlton, for example, cost as little as $589 a month). Developers can’t just lower the rents to accommodate demand and keep the projects financially viable.”

“In Brooklyn an overload of luxury rentals already exists downtown. As Adem Bunkeddeko, who is running for Congress in Brooklyn on a housing platform, put it, there is a glut of apartments for people making $80,000. As a member of Community Board 8’s housing committee, he has listened to people bemoan the structuring of 535 Carlton. ‘The main gripe is ‘this is absurd; who is this affordable for?’ he said. ‘Even the folks who came in as the first wave of gentrifiers can’t swing it.’”

November 18, 2017

A Buying Frenzy Has Been Encouraged

A weekend topic starting with a piece by Matt Barrie with Craig Tindale. “I recently watched the federal Treasurer Scott Morrison proudly proclaim that Australia was in ’surprisingly good shape.’ Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970. I was pretty shocked at the complacency, because after 26 years of economic expansion, the country has very little to show for it.”

“For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour — China. As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

“Unfortunately for Australia, that ‘lucky’ free ride is just about to end. Societe Generale’s China economist Wei Yao recently said: ‘Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses.’ Hyaman Capital’s Kyle Bass calls China a ‘$34 trillion experiment’ which is ‘exploding.’ where Chinese bank losses ‘could exceed 400 per cent of the US banking losses incurred during the subprime crisis.’”

“The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full-blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets. This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg.”

“Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016 — exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.”

“While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.”

“In April 2016, the average holding period for steel rebar and iron ore contracts was less than three hours. The Chief Executive of the London Metal Exchange, said ‘Why should steel rebar be one of the world’s most actively-traded futures contracts? I don’t think most people who trade it know what it is.’”

“Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50 per cent of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens. In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Over the last six years, the price of iron ore has fallen 60 per cent.”

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee. Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other. A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, ‘upswings’ last 13 years).”

“In 2016, 67 per cent of Australia’s GDP growth came from the cities of Sydney and Melbourne where both state and federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24 per cent of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.”

“This can only be described as completely ‘insane.’That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe ‘one of the biggest housing bubbles in history.’ ‘Australia,’ he added, ‘is the only country we know of where middle-class houses are auctioned like paintings.’ Our Federal Government has worked really hard to get us to this point.”

“The government decided to further fuel the fire by ’streamlining’ the administrative requirements so that temporary residents could purchase real estate in Australia without having to report or gain approval. It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”

“I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation — Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.”

“UBS estimates that $500 billion worth of ‘not completely factually accurate’ mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.”

“At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of ’severely unaffordable.’ Melbourne is 9.6x.”

“This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years — but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.”

The Globe and Mail. “In Vancouver, the detached house owner is often vilified. So too, is the resident who protests density. They are vilified by what one academic is calling ‘the housing supply myth,’ which is the belief that we need more housing in order to lower costs. It’s an argument commonly used by politicians, industry, and some academics and citizen activists. ‘There is an intuitive appeal to that argument,’ says Dr. John Rose, who spent the last year on education leave, researching the popular belief that Vancouver has a lack of housing supply. ‘We understand this idea of supply and demand, intuitively, even if you haven’t taken an economics course.’”

“However, he has concluded that Vancouver does not have a shortage of housing units. In fact, we have a surplus. And, as anybody in Metro Vancouver knows, prices have not plummeted as a result. ‘If we are looking back at the last 15 to 20 years, we have been providing more than enough units of housing – and it’s still unaffordable. And yet, you see this argument being thrown out there by various quarters, that we have this housing shortage.”‘

“He also looked at supply in housing markets elsewhere in Canada, the United States and Australia. ‘As a resident of Metro Vancouver and observing all this construction around me, I thought: ‘How do we have a housing shortage?’”

“And despite a surplus of housing stock, affordability has significantly worsened – a contradiction to the supply mantra. ‘We would think that if a market got less affordable, maybe that meant supply was getting tighter and tighter. But that’s baloney. That’s garbage,’ he says. ‘So my answer to the supply argument is that it’s tenuous for all the markets, because you can basically see no relationship – and this is over a 15-year period. Here we’ve had more than enough supply and yet the housing costs have gone crazy.’”

“Josh Gordon, assistant professor at Simon Fraser University’s School of Public Policy, has regularly spoken out against the more-supply argument. ‘There’s simply no evidence of a slowdown in construction or supply,’ says Dr. Gordon. ‘The construction industry in Vancouver is operating at full throttle. There are around 40,000 units under construction, which is twice the historical average for the post-2000 period. The idea that we should get more supply into the pipeline is a bit silly. The role of the supply argument is, to a large extent, to distract the public and policy makers from action on the demand side, specifically in terms of foreign capital.’”

“There are supplyists who are notoriously confrontational, particularly on social media, and Dr. Rose knows that his findings will be challenged. ‘Bring it,’ he says. ‘Here’s the data. If you want to argue against it, go ahead. It’s publicly available. And when I did this research, I had my independence. Nobody owns this. I get no sponsorship from any industry, any sector. I’m a free agent.’”

“‘I think that’s a benefit of this research. It’s not coming from a school of business that is being funded by the real estate industry, or somebody who’s passionate about densification and smart growth. I think there’s some romanticizing going on, about what the ideal city should look like, and unfortunately it gets sucked into this debate about affordability. I’m just saying look at the numbers, and we see Vancouver has plenty of supply. And can we build ourselves out of this? Not in this current model.’”

A letter to the editor in the Islington Tribune. “In the 1970s I had to travel to Portugal before I saw people begging on the streets. Now, I only have to walk down Stroud Green Road to see evidence of real housing need. But we are assured that an increase in housing supply will enable everyone to afford a home. This theory might apply to some commodities, under certain conditions, but not housing in 2017.”

“Our neoliberal governments have infected our basic need for homes with, first, their desire for a ‘property-owning democracy’ and then for us to acquire property assets to use as collateral for further debt with which to fuel the economy and keep them in power. Since the ’70s those same governments have allowed banksters to create the majority of new money, not to risk on manufacturing, agriculture or even house-building, but primarily for the purchase of existing housing.”

“In consequence, house prices have risen without the accompanying increase in productivity and the distributed incomes that would have generated genuine affordability. A buying frenzy has been encouraged, a race to get on the property-asset ladder while the bubble is still inflating. Dropping interest rates, in a misguided attempt to encourage the sort of investment that would actually increase wealth, has only served to divert the savings of ‘the haves’ into property.”

“The primary purpose of London’s housing is now to act as a treasure chest. Rather than blame the free market, government has put up a smokescreen of ‘initiatives,’ including the concept of so-called ‘affordable housing,’ that do nothing to address the underlying problem, which is their failure to manage the money supply.”