February 20, 2018

Trouble Cooking In Paradise

A report from the Globe and Mail in Canada. “The Toronto housing market’s rotten January has thrown a scare into veteran mortgage broker John Cocomile. A lot of Mr. Cocomile’s business in recent years has been mortgage refinancings. What worries Mr. Cocomile is that the latest developments in housing make it much harder to refinance. This could be the year debt gets messy. A big reason why Toronto home sales fell 22 per cent compared with January, 2017, was the introduction of new mortgage regulations designed to make the housing market more stable going forward. The rules include a stress test that applies to anyone with a mortgage that isn’t insured against default.”

“At Mr. Cocomile’s office, a lot of people are flunking the test. He’s had 10 people contact him about refinancing this year who did not end up qualifying. ‘All 10 would have qualified a year ago,’ he says. Meanwhile, debt loads are getting heavier to carry. The Bank of Canada has increased its trend-setting overnight rate three times since last summer.”

“‘People could refinance because the value was there,’ Mr. Cocomile said. ‘They call me and say, ‘My neighbour’s house just sold for $1.7-million, can I pull some equity out? I want to do a refi.’ Toronto real estate’s rotten January suggest people may be a bit disappointed in what their homes are worth now. The price of detached homes in the city fell 9 per cent on a year-over-year basis, even as condo prices rose 14.6 per cent. Mr. Cocomile finds that home appraisers are reacting to the current environment by getting more conservative with their assessments of how much homes are worth.”

From the Daily Mail on the UK. “The asking price on one the country’s most expensive houses will be slashed after it was put into receivership. Cresswell House in Chelsea, West London, will have its price almost halved as the high-end property market continues to suffer. The home - which sits in the the exclusive Boltons enclave - will be put up for £20.1million after it was originally priced at £37.5million.”

From Bloomberg on the UK. “London’s property market has moved out of its boom phase and home sellers need to be more realistic about their price demands, according to Rightmove. ‘End-of-the-boom prices normally readjust more quickly if there is an over supply,’ Miles Shipside, Rightmove director, said in the report. However, ’some would-be sellers are holding back, preventing a glut of competition from forcing prices downward,’ he said. For those who need a fast sale, Shipside’s advice is to ’sacrifice some of the substantial price gains of the last few years.’”

From Haaretz on Israel. “Finance Minister Moshe Kahlon finally got his wish in the last quarter of 2017 as home prices fell, but he was soon under attack for risking a real estate slump and endangering government tax revenues. The Central Bureau of Statistics reported that home prices fell 1.2% in the fourth quarter. In the first regional breakdown of price trends, the CBS said Jerusalem led the quarterly decline, with prices slumping 5.1% from the third quarter.”

“Isaac Herzog, the Zionist Union MK and opposition leader, warned that slumping prices could undermine economic growth and dent tax revenues. ‘From the figures we have today, 50,000 unsold homes are sitting on the shelf,’ he said. ‘Contractors aren’t selling houses because they don’t want to lower their prices.”

“But Kahlon was he was sanguine. ‘Nothing will happen if there’s a big drop in home prices,’ he said. ‘We are seeing declines in the real estate market, which could bring a slowdown, but contractors’ profit margins are so large that they can afford to cede a little income.’”

“Builders are struggling to sell higher-end homes because buyers are now focused on cheaper properties, a phenomenon evidenced in figures released by the CBS: The average price of a home fell to 1.44 million shekels ($407,000 at current exchange rates) in the fourth quarter from 1.46 million in the third and the lowest level since the end of 2015. In Tel Aviv, the average price was 2.7 million shekels in the quarter, a 2.5% decline and the lowest since the second quarter of 2016.”

From Standard Digital in Kenya. “The artistic impressions and marketing lingo used on websites and brochures of Kenya’s surging gated communities can easily be confused with what paradise is supposed to look like. But hidden behind the high walls and big gates is trouble cooking in paradise, and signs are starting to appear. On Friday, 119 houses at Kitisuru Gardens in Kiambu went under the hammer after their developer, Homex Housing, faced difficulties in completing the project. An unspecified amount of money which prospective home buyers had paid through off-plan purchase went up in smoke.”

“At Kitusuru Gardens, the houses were valued at Sh10 million when the project began in 2012. Buyers paid Sh2 million to book the units courtesy of the plans they were shown. ‘They changed the designs of the houses mid-way and moved some units from where they were originally located. Then the dates of handing over the houses kept on changing,’ one buyer told Weekend Business. ‘Furthermore, some amenities in the brochure including a swimming pool, a club house and convenience shop suddenly disappeared,’ said the buyer.”

“Those in the know say Homex Housing had over-stretched itself by doing several projects at the same time, which caused cash flow issues. But the problem is not unique to Homex. Around Nairobi, a number of developers are struggling to finish their gated community projects on time as they battle problems ranging from inadequate finances, undelivered promises and unavailable buyers. Meanwhile, completed projects are taking longer to fill, throwing developers into a public relations and credit repayment nightmare. As international magazine Quartz recently put it, ‘Nairobi built shiny new business districts but not enough tenants have shown up.’”

From ABC News in Australia. “The Reserve Bank has warned that a wave of interest-only mortgages sold when standards were more lax and due to expire in the next four years may put borrowers into financial stress. RBA assistant governor Michele Bullock said the investor loans, made before a tougher regulatory approach was imposed in the recent years, were being monitored closely to ensure they don’t impact overall financial stability.”

“‘There is still a large stock of housing debt out there, some of which probably would not meet the more conservative lending standards currently being imposed,’ Ms Bullock said. Ms Bullock said the large proportion of interest-only loans set to expire between 2018 and 2022 was of particular concern. ‘There may, however, be some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage,’ Ms Bullock said.”

“On APRA and RBA figures, by the end of 2017 roughly 40 per cent of outstanding mortgages did not require principal repayments, while the mortgage-to-debt ratio had risen to 140 per cent from 120 per cent five years earlier. ‘If housing prices were to fall substantially, therefore, such borrowers [with high LVRs] might find themselves in a position of negative equity more quickly than borrowers with an equivalent starting LVR that had paid down some principal,’ Ms Bullock noted.”

“Given investors were more likely to sell their rental properties in times of falling prices to minimise the their capital losses, Ms Bullock said this could quickly flow into the broader economy. ‘This might exacerbate the fall in prices, impacting the housing wealth of all home owners,’ she said. ‘As investors purchase more new dwellings than owner-occupiers, they might also exacerbate the housing construction cycle, making it prone to periods of oversupply and having a knock on effect to developers.’”