The Housing Bubble

It’s Friday desk clearing time for this blogger. “For Melissa Anderson cruising real estate web sites has become an obsession. Newly married and a native of the Pacific Northwest, the 28-year-old who works in medical sales said she and her husband are ready to grow their family, or at least add another dog, and they need more space. ‘Owning a house is a dream for me,’ Anderson said. But on Thursday, Zillow said more than 41 percent of homes for sale in Seattle are priced higher than $870,000. ‘For Seattle you’re seeing the higher end of the market and the lower end of the market are appreciating right around 15 percent annually, which that in itself is crazy,’ said Svenja Gudell, Zillow Chief Economist.”

“The San Diego County median home price soared to its highest point ever, $550,000, in March, said real estate tracker CoreLogic. San Diego County’s median home price is technically still down from the height of the housing boom. In November 2005, the median hit $517,500, which is more than $650,000 when adjusted for inflation. Are we in a housing bubble? No. Economists say today’s upswing is more sustainable, driven not by risky lending but by an improving economy, low mortgage rates and a shortage of homes for sale. Chris Thornberg, economist and founding partner of Beacon Economics said March’s peak should not be viewed as the start of a bubble, which assumes housing prices are very overvalued.”

“‘The value of real estate was never worth that value,’ he said of housing boom prices reached in the mid-2000s. ‘That was an insane number driven by crazy credit and should be viewed the same as gods of ancient Greece and other fables or myths.’”

“A wave of frenzied home buying has washed over Malibu, where sales on the beach quadrupled in the first three months of the year, according to Douglas Elliman. Los Angeles, where the main luxury product are single-family mansions, has not suffered from the overdevelopment of speculative luxury condo projects in the same way as Miami or Dubai. La La Land’s luxury market, however, still suffers from the same unrealistic overpricing as other high-end locales. The average discount off the price of luxury single family homes in the first quarter hit 10%. In Malibu Beach, despite some record deals, the average home still took a whopping 17.5% price cut.”

“How about an opportunity to own a nearly-new oceanfront estate in south La Jolla for less than half the original asking price? The home at 5490 Calumet Avenue sits just two doors north of Calumet Park in Bird Rock. The Calumet property has been plagued with problems since the original house, a 1952 ranch-style, was purchased by investors for $3,250,000 and razed in 2002. Plans were drawn for the current residence and the vacant lot was sold twice in quick succession in 2007, first for $4,950,000 and again for $5,475,000 later in the year.”

“Construction began and in February 2009 the finished, state-of-the-art Calumet mansion was listed for $24,500,000. It sat on the market for nearly a year before the listing was canceled. Immediately re-listed with a drastically reduced price tag of $16-18 million, the home still drew no buyers despite spending an additional 560 days on the market. By 2012 the price had dropped to as low as $13.5 million, but there were still no takers. Two investor-owners finally offloaded the property in 2014 for just $13 million.”

“Last year, investment executive Peter Cash Doye and local real estate broker Raquel Reid were accused of perpetuating a multimillion-dollar mortgage fraud involving several properties in La Jolla and Del Mar. Doye’s business partner Courtland Gettel, who has already pleaded guilty, signed the trust deed securing at least one of the loans that resulted in the group pulling nearly $19 million out of the house they’d paid just $13 million for. In June 2017 the primary lender, who had originally funded $13.5 million to the group and was by then owed over $18 million including unpaid interest and legal fees, acquired title to the property through a trustee’s sale. After completing updates to make the brand-new (yet 10-year-old) home appealing to luxury buyers, the property was re-listed in early April for just $11,998,000, a price that remains unchanged to date.”

“The number of homes sold to foreign buyers in Toronto has dropped steadily over the year since the province introduced a 15-per-cent tax on such purchases, falling from 7.2 per cent of sales in May, 2017, to 2.5 per cent over a three-month period ending in February. The average price of a home in the Greater Toronto Area was just more than $920,000 last April, but by March of this year had fallen to around $785,000, a decline of more than 14 per cent driven by plummeting sales.”

“The drop in sales to foreign buyers in Toronto is mirrored by a similar slump in a vast area around Toronto known as the Greater Golden Horseshoe. The Bank of Canada also hiked its benchmark interest rate twice last summer and again in January, which has led to an increase in the cost of a mortgage. ‘This isn’t a solution by any means to Toronto’s affordability issues, but it certainly helps it,’ said John Pasalis, president of Realosophy Realty Inc.”

“With all of the talk of the housing shortage in the UK, it seems incredible to talk of ghost towns springing up, filled with empty properties. Yet that appears to be what is happening, and in some of the nicest areas of the capital. Developers producing luxury high-end apartments in London appear to be having a particularly difficult time of things. Data from Molior London last month suggested that, of the 1,900 such apartments built in the capital last year, only half have actually been sold. As a result, there are now around 3,000 unsold luxury apartments in London.”

“Molior reckons that, at the current sales rate, even if no further high-end apartments are produced, it will take at least three years for all these units to sell.”

“With the exodus of expat families because of dependent’s fee, many buildings have flats lying vacant which is obvious from the ‘ijaar’ (to-let) signs put up outside most of the buildings. Abdulrahman Humeidan, a real estate investor, said that housing units which cost SR30,000 a year earlier are being offered at SR26,000 a year. But still there are no takers. He said annual profits for building owners have dropped by up to 25 percent. ‘An option is to allow tenants to pay house rent every month or every three months without an increase in the rent. Earlier, tenants requesting monthly or tri-monthly payment of rent were asked to pay a higher amount,’ said Humeidan.”

“There’s good news for homebuyers. Property prices witnessed a significant drop in the first quarter of the calendar year 2018 in nine cities: Gurgaon, Noida, Mumbai, Kolkata, Pune, Hyderabad, Bengaluru, Thane and Chennai. ‘There is a visible price correction of up to 3-5% in base price across the country. In addition, developers are offering club membership, car parking, modular kitchen and other amenities at no additional cost. So, the net price correction is about 10-15%,’ said Samantak Das, chief economist and national director-research, Knight Frank India.”

“Xi Jinping insists that the world look at him and the PRC on his terms: as a force to be reckoned with, a growing economic power not to be ignored. And yet . . . China remains a country riven by fault lines that make all of this impossible. Another reality obscured by the illusion of urban development and modernity is China’s massive rural poverty. The World Bank estimates that more than 70 million Chinese live on a dollar a day. China’s debt as a percentage of GDP has nearly doubled in ten years. The central government, local governments, companies, and households are dangerously over-leveraged. There is no obvious way to stop it.”

“This has led to over-borrowing, over-lending, and over-capacity. It is well understood, but no one really knows how to stop the cycle without creating a crash: a crash for the individual investors, for the creditors, and for the end users of the financing. Many of the same investors buying the financial products to seek higher returns are the ones borrowing the money to buy second apartments or to invest in side businesses. Local governments rely on the shadow sector to extend financing to real-estate developers and other companies, contributing to the by-now familiar story of so-called ghost cities, where empty malls and condo developments are a hallmark.”

“House prices across the country have fallen by 1.2 per cent over the March quarter, according to the Domain Group. Darwin led the charge with a 7.5 per cent drop in the quarter, followed by Sydney, where prices fell by 2.6 per cent. The downwards trajectory of Perth prices continued from its peak in December 2014, when the median price was $616,229. A house in Perth now costs $553,486. In Darwin, apartment prices also plummeted, with a 15.9 per cent drop over the quarter and 26.9 per cent over the year.”

“Mr Daley said that in Brisbane’s case, the fall in apartment prices wasn’t necessarily the result of too many apartments being built. ‘People say its over-supplied, but there’s not a lot of empty apartments in Brisbane,’ he explained. ‘Just people selling them for less than they want to.’”