The Housing Bubble

It’s Friday desk clearing time for this blogger. “U.S. new-home construction cooled by more than expected in February on a reversal in the volatile multifamily category, while building remained on pace to contribute to economic growth this quarter, government figures showed. The report indicated a tight supply of homes is getting an influx: The number of housing units completed rose to a 1.32 million annualized rate, the highest in 10 years. Single-family home starts rose to a 902,000 rate, highest in three months, from 877,000.”

“Home sellers across the US find themselves fraught with anxiety, with their expectations unmet, according to data on the seller experience compiled by Zillow. The findings run contrary to the many stories about bidding wars in larger metropolitan areas which have resulted in the impression that sellers simply list their homes and receive stacks of offers above the asking price.”

“Almost a third of sellers said they were unsatisfied with the selling process. Among those who were selling a home for the first time, about 30% said they were unprepared for how long it took to sell their homes. Those respondents also said that they wished they had started with the selling process earlier. Additionally, the analysis found that 76% of sellers found themselves making at least one concession to close a sale. The most common compromise was lowering the price. Meanwhile, 36% of the respondents found difficulty in selling their homes within their expected price range or time frame.”

“‘Despite low inventory in many parts of the country, sellers still encounter massive pain points when trying to sell their homes,’ Zillow Group Chief Marketing Officer Jeremy Wacksman said.”

“From a penthouse apartment in the Hub, a new 610-foot rental tower in Downtown Brooklyn that is — for now — the borough’s tallest, its developer groused about timing. ‘Not early enough,’ said Doug Steiner on a recent tour, lamenting his firm’s belated decision to add a rooftop lounge that is still under construction.”

“Uncertainty hangs over the roughly 28,400 rental units expected to be built in Brooklyn over the next several years — about a thousand more than all the units built in the past decade, according to Nancy Packes Data Services, a real estate consultancy. Faced with falling prices, developers are offering concessions like a month or more of free rent, discounted broker fees and even free parking for a record share of apartments.”

“‘Developers want to maintain their listing prices, and then futz with the numbers behind the scenes,’ said Paul Johansen, an associate broker with CORE Real Estate. ‘A couple years ago, there were no concessions whatsoever.’ That hasn’t deterred builders from moving forward with thousands of new units, most of them geared toward the luxury market.”

“London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital’s most expensive areas seeing the biggest declines. Offers for homes are often more than 10 per cent below asking prices, James Gubbins, a partner at Dauntons in Pimlico, said in the poll. London’s highest-priced boroughs were the biggest losers over the past year, while the largest single drop was recorded in Wandsworth, down almost 15 per cent. The borough has seen a sharp surge in the number of expensive apartments being built there that Londoners don’t want or can’t afford.”

“Media coverage of the slowdown, including headlines about falling house prices, is making consumers nervous and holding back demand. New buyers registering with real estate agents fell for an 11th month in February, RICS said.”

“Sweden’s government wants to add supply to a housing market that’s just gone through its biggest price slump in a decade. Swedish housing prices have slumped almost 10 per cent from their peak in the summer, and international investors are starting to wonder whether the market can avoid a hard landing. The correction followed tougher mortgage rules and a decline in household sentiment, which coincided with a sudden surge in construction. Housing starts reached about 65,000 last year, more than three times the annual average since the mid-1990s, according to the Swedish central bank.”

“Four months after rejecting a broker’s advice to slash his rent demands on a new Spanish-style villa in Dubai, the homeowner was ready to accept a 20 percent cut on the still vacant property. The broker, Akbar Ladak, wasn’t surprised. More landlords are accepting that they have to lower their sights. Optimism about a recovery in 2017 has given way to quiet resignation that the slump may persist. And then there is the constantly growing supply in a city that can keep expanding into the desert. Despite attempts by developers to delay the completion of properties, the pipeline of sold apartments and villas outpaces current demand.”

“‘After a bad 2016, the hope was that the economic situation would get better,’ said Sanyalak Manibhandu, an Abu Dhabi-based equities analyst. Earnings for the city’s developers reflected the challenges and ‘they all missed estimates,’ said Manibhandu. ‘That’s because analysts were too optimistic or because the situation got worse in the latter part of the year.’”

“Al-Emran Real Estate CEO Sulaiman Al-Emran said prices of real estate started to decline when the Ministry of Housing announced several housing projects in various parts of the country. ‘The prices of land fell while the cost of owning houses rose. Investors saw that the ministry was extending assistance to Saudis to own houses, so they decided to invest in houses instead of land, thus creating an oversupply. The demand for land decreased sharply as did the demand for rental residential units,’ Al-Emran told Makkah newspaper.”

“‘A lot of investors in apartment buildings have lost money as there has been a higher demand on houses,’ Al-Khayalah Real Estate Office owner Thamer Al-Qurashi said.”

“From Utako to Jabi districts of Abuja, and Ikoyi, Lekki –Epe axis of Lagos State, abandoned real estate projects dot the landscape. Justifying reasons for abandonment of projects, First Vice President, Nigerian Institute of Building, Mr. Kunle Awobodu said: ‘It is a country of cash and carry; you don’t get mortgage support to have access to housing. You need cash to do your own project and many individuals’ projects have been suspended. People are out of jobs, many are yet to secure new employments, some companies are closed to business and there is low demand for building products.’”

“A mass apartment fire sale could be set to swamp Brisbane in the next 12 months. The inner city housing market is in the grip of an apartment glut thanks to a ‘record boom’ in high-density dwelling construction, according to economic forecaster BIS Oxford Economics. Some developers have already slashed the prices of apartments in their projects to attract buyers and get rid of remaining stock. Last year, some units in the The Hudson on the former Albion Flour Mill site were discounted by up to 25 per cent.”

“Managing director Robert Mellor said developers had since reported a notable drop-off in demand from local and foreign investors, with Queensland ‘taking a bit hit.’”

“Reed Property Group is offering the 20 remaining apartments in its Belise project in Brisbane’s Bowen Hills on a deferred settlement basis to help investors trying to navigate the difficult financial environment, according to Richard Ash, non-executive director for Reed Property Group. Regulator-mandated credit curbs for investors, and an oversupply of new units in the Brisbane CBD and inner suburbs, have softened prices and sent vacancy rates soaring.”

“‘The world has changed. There is no doubt the availability of debt for home owner-occupiers and investors has changed,’ Ash said.”

“Property demand and prices in London are languishing. The great rebalancing of our nation is taking effect. But the problem is that house prices are dangerous by nature. A drop in London values could trigger a crash nationally. Thanks to the vast amount of leverage you need to buy a home, falling house prices represent a huge amount of risk for the banking sector too.”

“But the real risk is in house price expectations. If everyone expects house prices to rise, that changes the calculations for affordability. For the buyer and the lender. When house prices rise, the borrower who can’t afford their mortgage can simply sell their home. The profit makes them wealthier. It feels risk free to own property. You just need to get on that ladder somehow. It’s more of an escalator to wealth.”

“But all this can change. What happens when people stop believing house prices inherently go up? They don’t even have to go down, just stop going up. Suddenly, the entire premise of borrowing, owning property, and lending falls apart. Borrowers no longer demand unaffordable debt because it no longer enriches them. And lenders’ collateral values no longer inherently safeguard a loan. Suddenly, the lending decision is about default risk instead of collateral risk. Far fewer people can borrow in that environment.”

“Under those circumstances, the lending business becomes a matter of risk management instead of simple lending volume. Banks stop fighting for market share and start panicking over their default rates. Without the presumption of rising house prices, the demand and supply of mortgages are not artificially influenced in a way that justifies widespread lending and buying. The incentives to buy property and lend against it disappear.”

“The demand for property and supply of credit contract. Meanwhile, people who do own property want out. You get a crash that puts the rest of the economy and the banking sector at risk.”

“Some would argue it’s all about animal spirits and bubble psychology. But that’s inadequate. There must be a reason for an asset bubble like a housing bubble to form and continue in the first place. Something must change for animal spirits to suddenly take hold in the direction of greed over fear. And then continue on beyond the market factors that would reign it in. Why does everyone suddenly become more greedy at the same time? Given the nature of the mortgage industry, a culprit is not hard to find.”

“In economics, if a price is set above or below the equilibrium of supply and demand by a government agency, you get a surplus or shortage of that good. If the central bank sets interest rates below the market equilibrium interest rate set by savings and borrowings, it creates artificial demand for debt. In this way, the central bank triggers and finances a mortgage borrowing bubble and thereby housing bubble. It increases demand by lowering the price and then increases supply by injecting loanable funds to meet that demand.”

“This artificial support to demand for property is what begins a bubble. And the bubble usually forms in property because this is the most interest rate sensitive asset. Animal spirits may indeed kick in. But in a free market the demand for more funds would increase their price — interest rates — and this would prick the bubble. But in a market run by a central bank, the price does not fluctuate according to supply and demand. They are set by the central bank.”

“But what happens to the belief that house prices could fall? Usually greed is kept in check by fear. Central bankers have this covered too. Former Federal Reserve chairman Ben Bernanke was famously asked in 2005 what would happen if house prices across the US fall. He refused to answer the question: ‘Well, I guess I don’t buy your premise.’ It had never happened before, Bernanke told lawmakers, so it would never happen.”