The Housing Bubble

A weekend topic starting with the Daily Nation in Kenya. “The real estate sector, which accounts for about 9 per cent of Kenya’s GDP, has consistently outperformed other asset classes in the past decade, incurring minimal losses while consistently generating returns of between 25 per cent and 30 per cent, according to a 2016 report released by investment firm Cytonn. The sharp increase in returns has attracted both speculators and long-term investors to the local property scene. However, some skeptics and investment analysts have intimated that the huge increases in property prices might be the signs of a bubble that is likely to burst.”

“Mr Johnson Denge, the senior manager for regional markets at Cytonn Investments, strongly rejects reports that there is a real estate bubble in the country. He says those who believe that there is a bubble in the sector have not conducted any research and, therefore, have no facts. ‘Fifty to 60 per cent of our portfolio, which amounts to billions of shillings, goes to real estate investments. We have immense faith in the property scene because, over the years, our firm has been seeing returns of up to 50 per cent from such investments. We wouldn’t be doing all this if our data indicated that the property market is just but a bubble headed for doom,’ the senior manager says.”

“So, what is a bubble? A bubble, Mr Denge explains, is a phenomenon that occurs when there is a rapid rise in the price of an asset class above the product’s intrinsic value. In real estate, this means that a bubble would occur if there were a rapid rise in land and housing prices, to the extent that the properties retail at several times their worth.”

“A real estate bubble, the expert explains, usually unfolds in five stages: Displacement. For a real estate bubble to occur, there has to be an external factor that causes a great disruption in the market by changing the behaviour of investors. After the displacement, many people will decide to cash in on the property scene because of its perceived high returns. Here, the prices of real estate will rise at a higher-than-normal rate as more people join the craze.”

“Buoyed by the returns accrued in the boom phase, a bubble market then enters a state of euphoria. Here, all caution is thrown to the wind as investors sell other asset classes like equities and retail businesses and shift all their money to real estate. The Euphoria stage, Mr Denge expounds, is driven by over-speculation and the ‘greater fool theory.’ He explains that the greater fool theory is displayed when an individual buys a house or a piece of land without caring whether the property is overvalued. Unfortunately, this bubble will eventually burst when the greatest fool fails to get a buyer.”

“Currently, there are conversations on online platforms in which Kenyans are pointing out that rental apartments in upmarket areas such as Kileleshwa and Lavington have many vacant units. Do the high vacancy rates prove that the bubble — if there was one in the first place — has already burst? Mr Denge says it doesn’t, adding that what we are experiencing are not symptoms of a real estate bubble burst but simply a phenomenon known as market correction.”

From the San Francisco Chronicle in California. “When real estate agent Josie George arrived to show a rustic cabin in the Berkeley Hills for an open house, people were already gathered outside. For two straight hours, Ratoosh answered questions from eager prospective buyers. At first they formed a line behind her, waiting for a turn, but eventually George just stood on the deck and addressed the group as if she were giving a speech.”

“George says more than 200 people came to look at the 640-square-foot cottage at 2794 Shasta Rd. listed for $479,000 —and this was on the same day as the Super Bowl. ‘I’ve never been at an open house that’s so busy,’ she says.”

“In the San Francisco Bay Area where real estate has boomed for nearly 10 years, stories of mobbed open houses aren’t unusual. Well-priced properties with curb appeal or potential receive dozens of offers and go for hundreds of thousands of dollars over asking price. The University town of Berkeley draws hungry homebuyers. The median sales price in September 2012 was $648,00 and nearly six years later that figure has nearly doubled to $1.225 million, according to Trulia. Seven months ago, two-bedroom bungalow with a pretty garden was listed for $725,000 and sold for 53 percent over asking at $1.111 million.”

“But 2794 Shasta Rd. might be a little different from the typical listing that causes a frenzy as it’s the size of a master suite in a typical new suburban home and it’s simple cabin design has never been updated.”

From the Washington Post. “The notion of buying a home with no money down is understandably alluring. But what looks sexy in a lender’s advertisement does not always translate into what is best for your financial well-being. What is a zero-down loan? Also known as 100 percent financing, zero-down loans require no down payment to purchase a home. For those with little to no cash in savings, these loans are touted as a windfall for those who could only dream of owning a home.”

“As a real estate agent, buyers who lost their homes during the crash have been asking me for the past eight years whether they will ever be able to purchase a home again. Today, I can finally say yes. We are at 360 degrees in the cycle. Underwriting requirements to qualify for a loan have eased. I have also recently seen an increase in advertisements from lenders pitching creative loan programs, such as zero down.”

“Some of these creative loans include (1) zero-down payment, with extra fees for this privilege wrapped into the loan, and high interest rates; (2) piggyback loans, which consist of a first mortgage at market rate plus a second mortgage at a much higher rate (the funds provided by the second mortgage are used as the down payment); and (3) grants.”

“‘These programs are wonderful for those who can’t afford to buy,’ said Michael Chelst, branch manager of Norcom Mortgage’s office in Greenbelt, Md. ‘More people can buy homes now.’”

“‘I get lots of leads from buyers on Zillow and Trulia,’ said Juan Umanzor, a real estate agent based in Bethesda, with a high percentage of his clientele in Prince George’s County, which experienced a high foreclosure rate during the recession. ‘Most of them ask about zero-down financing.’ Umanzor encourages his clients to buy now. ‘Interest rates are low and values continue to go up.’”

From the Australian Financial Review. “For years the Reserve Bank of Australia dismissed our warnings that excessively stimulatory interest rate cuts – which bequeathed borrowers with never-before-seen 3.4 per cent mortgage rates that fuelled double-digit house price inflation – had blown a bubble that presented genuine financial stability risks. This manifested via record increases in speculative investor activity, interest-only loans and, more broadly, Australia’s household debt-to-income and house price-to-income ratios, which leapt into unchartered territory (notably above pre-global financial crisis peaks).”

“The RBA narrative was very different. ‘Our concern was not that developments in household balance sheets posed a risk to the stability of the banking system,’ governor Philip Lowe recently explained. ‘Rather, it was more that…the day might come, when faced with bad economic news, households feel they have borrowed too much and respond by cutting their spending sharply, damaging the overall economy.’ Nothing to see here when it comes to financial stability, if you believe the weasel words.”

“It turns out Lowe was privately ‘packing his dacks’ after unleashing the mother-of-all-booms powered by the cheapest credit in history. After the sudden deceleration in national house price growth – as documented here – from an 11.5 per cent annualised rate in May 2017 to just 1.9 per cent today, the governor revealed to parliamentarians that he’s now ‘much more comfortable…than I have been in recent years when I have been appearing before this committee, when I was quite worried.’ That’s central speak for petrified.”

“Lowe conceded that ‘housing prices were rising very, very quickly – much faster than people’s income – and the level of debt was rising much faster than people’s income’. (We forecast that would occur back in 2013.) Yet according to the RBA’s interpretation, the 50 per cent explosion in house prices between 2012 and 2018 was propelled not by the 11 interest rate cuts it bestowed on borrowers over the same period, but by a lack of new housing supply. You have to ignore the record building boom to believe this BS.”

“Along these lines, Lowe now claims that the bursting of the bubble in September 2017 (when national prices started falling gradually) was not really attributable to the 40 basis point increase in investment loan rates – and chunkier hikes for the 40 per cent of borrowers with interest-only loans –that flowed from APRA’s decision to crush speculative activity. ‘I don’t think the tightening of lending standards is the primary thing that has changed the dynamics of the Sydney housing market,’ Lowe says. ‘It’s the full supply, less foreign demand, [and] better transport.’”

“It is precisely this policymaking hubris that sowed the seeds of the last crisis, and gives one pause when considering whether Australia is prepared to deal with the next one.”

From the Globe and Mail in Canada. “Hot housing markets – and how to cool them – are challenging many governments. Australia, New Zealand and Hong Kong generally face the same issues as some Canadian cities. The story in Australia, particularly in Sydney and Melbourne, is similar to that of Vancouver: a housing price boom fuelled by factors that include a strong economy and overseas buyers.”

‘Last spring, the country’s banking regulator, the Australian Prudential Regulation Authority, made what looked like a small move, putting a cap on interest-only lending to 30 per cent of all new loans, down from about 40 per cent before. Australia’s Treasurer, Scott Morrison, in December called the move a ’scalpel-like change.’”

“Prices did not immediately fall but appear to have peaked. In Sydney, prices had surged about 75 per cent in five years – similar to Vancouver – but in the final three months of 2017 fell by 2 per cent, which is similar to what has happened to prices of detached homes in Greater Vancouver since last summer.”

“‘The market for housing in New Zealand is completely broken,’ Grant Robertson, the new Finance Minister, has said. The country has banned foreigners from buying existing homes. More measures are planned. Westpac, the country’s largest mortgage lender, predicts housing prices will fall 5 per cent in New Zealand, with a slightly larger decline in Auckland, over the next four years.”

From Think Pol in Canada. “Asking prices for homes in Metro Vancouver are falling ‒ in one case by as much as 73% ‒ suggesting that budget measures announced by the NDP government to promote affordable housing by tackling rampant crime, corruption and speculation in the real estate market is beginning to work even before they come into force.”

“For example, the asking price for a home on the 10000 block of Seaword Court in Richmond’s Ironwood neighbourhood has dropped from the original listing price of $5,880,000 on February 14 to $1,588,000 today, data sent to ThinkPol by an industry insider show. ‘This is just the tip of the iceberg,’ the industry insider who sent ThinkPol the data said. ‘Many sellers are delisting and relisting to hide price falls and reset days on the market counter.’”

“The asking price for a property on 11000 block of Blundell Road in Richmond’s McLennan neighbourhood, originally listed for $4,680,000, has dropped by almost half to $2,380,000, the data show. The third largest drop we found was in Burnaby’s Brentwood Park neighbourhood, where a property on 4000 block of Alpha Drive has seen its asking price slashed by a third from $2,980,000 to $1,998,000.”

“The industry insider warned that the industry reaction will go well beyond mere press releases expressing concern. ‘The industry is fighting tooth and nail to water down the budget measures,’ the whistleblower added. ‘They’ve hired troll farms to infiltrate social media platforms and push the real estate industry narrative that NDP is ‘punishing’ homeowners.’”

“The whistleblower is confident that Premier John Horgan’s government will prevail despite industry push back. ‘But I don’t believe any amount of narrative control is going to help the industry,’ the insider said. ‘The only reason the bubble kept going for so long was the fact the the BC Liberals turned a blind eye to crime and corruption in our fentanyl-fuelled industry.’”

“‘The criminals know that [Attorney General] David Eby means business,’ the whistleblower concluded. ‘They’re now cutting their losses and fleeing, and the market will correct itself to align with fundamentals.’”