November 6, 2017

Concerns About Imbalances Around Overbuilding

A report from Mansion Global on Canada. “The number of residential sales in the Greater Toronto Area (GTA) fell 26.7% year-over-year to 7,118 in October, according to the Toronto Real Estate Board, suggesting that the government’s cooling measures might have taken effect. Luxury home sales, those priced above C$1 million (US$780,000) and above, amounted to 1,317 in October, falling 31% year-over-year. For C$2 million (US$1.56 million)-and-above homes, the number of sales dropped to 208 from last year’s 325, down 36%. In October, there were 18,859 homes available for sale in the Greater Toronto Area, up 78.5% from the same period last year. The Canadian federal government is poised to implement new mortgage rules at the beginning of next year, while the city of Toronto is considering a potential tax on vacant homes.”

From CBC News in Canada. “House prices in Hamilton are continuing their decline from April’s high, according to the Realtors Association of Hamilton-Burlington. The median sale price for a residential property in October was $452,600. Compared to April’s median sale price of $535,000, that’s a 15.4-per-cent decrease. Mortgage applicants are expected to pass a stress test starting January next year. George O’Neill, CEO of Realtors Association of Hamilton-Burlington, said the market dynamics may change as a result. ‘It is going to put some people out of the market, they’re just not going to be able to afford to quality at that higher rate.’”

“He said homeowners who are on the fence now may want to think about selling. The new rules in January may affect them negatively. ‘It may take longer or they have to be more aggressive on their pricing.’”

The Canadian Press. “One of Alberta’s largest home builders has been placed in receivership by an Edmonton court. Alvarez & Marsal Canada says in a posting on its website that it was named as receiver for insolvent ReidBuilt Homes and several subsidiaries by the Court of Queen’s Bench of Alberta. The company’s failure comes as Alberta recovers from an oil price-induced slump that led to concerns about ‘imbalances around overbuilding,’ according to Richard Cho, principal of market analysis for Calgary at the Canadian Mortgage and Housing Corp.”

“Last month, Postmedia reported the company was attempting to sell its Calgary division, and had stopped construction on dozens of houses. Several media outlets reported that some contractors had not been paid.”

From the Daily Telegraph in Australia. “Sydney’s housing market may be cooling but one man is definitely feeling the chill — celebrity real estate agent John McGrath lost $3.5 million on paper yesterday because of the slumping share price of the company that carries his name. The man who made his name making multimillion-dollar sales in the boom times has seen his fortune erode since floating his real estate firm on the stockmarket in December 2015.”

“The value of McGrath’s founding stake in the company has now dropped from $78m to $19m in two years. And experts are worried investors may not have seen the worst of it, given that the property market during that same period has been strong and is only now starting to soften. The latest setback came after McGrath Limited announced a surprise 25 per cent cut in expected earnings because of lower property listings, tighter lending requirements and restrictions on foreign buyers.”

“CMC Markets chief market analyst Ric Spooner said the property company’s woes were making shareholders nervous. ‘I think the concerning thing is that to see such significant downturns (in McGrath’s share price) in what has been very early stages of any downturn in the property market listings,’ he told The Daily Telegraph. ‘It makes investors nervous about what might happen if the downturn becomes a bit more pronounced.’”

From in Australia. “Home hunters have been gifted a rare opportunity to nab units in popular lifestyle areas at cheaper prices as buyer demand continues to cool. An analysis of sales activity revealed competition for properties has been falling in the Parramatta, inner south and Homebush regions as banks restrict investors’ access to new loans. The drop in demand has coincided with rampant housing construction, which increased the supply of homes available.”

“Home sellers have had to adapt to the changed market by lowering their price expectations, creating chances for wannabe homeowners to get into the market for less, according to the Price Predictor Index. A decline in sales across an area suggested there was downward pressure on prices. The areas around Homebush, Sydney Olympic Park, the inner south and Parramatta were showing signs of being oversupplied with housing, the research revealed.”

“The increased development, coupled with a decline in buyer demand, resulted in sales volumes dropping from 300 per quarter in 2013-2014 to 190 per quarter over the recent year. It was a similar story in suburbs near the airport such as Mascot and Wolli Creek, where high-rise residential development has taken pressure off buyers to move quickly on sales or bid up prices. The long pipeline of apartment projects in Homebush and some of its surrounding areas like Homebush West and Sydney Olympic Park created another glut of properties for sale, which remains well above demand.”

“Real Estate Institute of NSW president John Cunningham said that while there are dangers involved, investing in these high supply markets could prove worthwhile. ‘Property is a long term play and you need a long-term strategy,’ he said. ‘Opportunities can exist in these markets but making a smart investment with the timing and how long you hold it is critical.’”

“However, one of the challenges of buying a property in an area where short-lived price drops were on the cards was that buyers would find it more difficult to obtain financing. Banks have traditionally demanded larger deposits in city regions they have deemed to be oversupplied with housing. Financial services company Citi recently released a list of suburbs where buyers needed a minimum 35 per cent deposit to gain access to finance to buy units. The majority of the 34 Sydney suburbs listed were centred around the Sydney Airport, Parramatta, the inner city, Chatswood and Sydney Olympic Park.”

From Domain News in Australia. “Properties in in-demand areas prompted the most combative bidding duels at auctions on the weekend as Sydney real estate agents warned of a ‘fickle’ market. Phillips Pantzer Donnelley selling agent Nick Quilkey said the $2 million to $4 million segment was an increasingly fickle market in which some properties did very well and others struggled.”

“‘It is really about pricing at the moment,’ he noted. ‘The point at which you start your guide price can be paramount in terms of the interest you get and how your auction goes. Even if the price is set just $100,000 or $200,000 too high, a property can struggle at the moment, whereas in previous years it didn’t matter. There would be a lot of interest and an auction property would pass that point anyway.’”

“It’s becoming apparent that vendors, at all price points, need to ensure that they analyse truly comparable properties and sales results when setting their asking prices. These should be properties that have sold in the last couple of months, not 12 months ago. Ric Serrao, of Raine & Horne Double Bay and Bondi Beach, handles a lot of sales in the eastern suburbs and is seeing a more patchy market across different types of properties and suburbs.”

“He said the demand for free-standing houses in Bondi Beach was continuing to grow: ‘However, if it is a semi in Bondi Beach, we have had quite a few of them come in and that market has softened slightly, albeit I think it is short-term. If we are talking Vaucluse, I personally think that because there has been more supply, that market has come off by 5 to 10 per cent.’”

The Newcastle Herald in Australia. “Rental prices across Newcastle have stagnated over the last three years, with growth at just a third of the rate recorded in the rest of New South Wales. It’s a reversal of fortunes for tenants, after a rental accommodation ‘crisis’ gripped Newcastle a decade ago. A spokesperson for Leah Jay property management specialists said there was often a misconception that because house prices were booming, there would be steep increases in rents too. ‘Rents are dictated by supply and demand, even in a seemingly hot property market,’ she said. ‘Over recent years we have seen more investors coming to the region and significant property development, this provides additional properties to the rental market.’”

“Some landlords have admitted it is dampening returns and proving increasingly difficult to find tenants. ‘It was pretty easy to let out when I first bought it,’ landlord Ryan Meredith said of his investment property at Merewether, which he purchased nine years ago. ‘There were lots of people wanting to move in there. They wanted to be near the beach and there weren’t many places up for rent. The rent was definitely a lot higher back then.’”

“But when Mr Meredith’s unit on Dent Street fell vacant earlier this year, it was a different ball game. The weeks flew by and there was little interest. ‘Every week it was on the market I was losing money,’ he said. ‘I decided to put a brand new kitchen in to get more people through it.’”

“Eventually, Mr Meredith was able to secure tenants, but only after he had dropped the weekly rent from $420 to $340. He attributed his difficulties to greater levels of supply, as low interest rates encouraged more renters to enter the housing market. ‘When I jumped online and looked at how many places were available, you could see why I was having trouble,’ he said. ‘There were 20 other units available.’”

“The Leah Jay spokesperson said a wave of new apartments coming into the mix in the next 12 months could also affect the dynamics. ‘Quality tenants have a selection of properties to choose from and those properties with all the ‘mod cons’ in desirable suburbs will always see more interest if priced correctly,’ she said.”