The Housing Bubble

A report from the North Shore News in Canada. “Sales in the top end of the North Shore real estate market are continuing to fall and prices are beginning to edge downward. The most recent statistics from the Greater Vancouver Real Estate Board point to a continuing slump in the housing market from its frenzied peak two years ago. Sales of single-family homes to the end of May were down 77 per cent in West Vancouver from the peak of the market in 2016, said Brent Eilers, a West Vancouver real estate agent with over 35 years’ experience. In North Vancouver, sales are down about 54 per cent over that two-year time frame.”

“An average West Vancouver selling price of $3.8 million at the peak of the market is now down to about $3.2 million, said Eilers. In the highest end of the luxury market, that change is even more pronounced. ‘If you talk to people who have homes worth over $4 million . . . they’re down a ton,’ said Eilers.”

The Financial Mail on the UK. “Britain’s ten biggest builders have seen the value of their shares drop by a combined £3.6 billion in the last two weeks as fears grow that the housing market is heading for a downturn. Vince Cable, the Liberal Democrat leader, said: ‘Housebuilding bosses seem to have secured excessive pay and bonus packages just before a downturn in the market – housebuyers will be furious. Shareholders will also be left wondering why these executives should be able to award themselves such obscene packages after claiming credit for a market that has been inflated by Government schemes and taxpayers’ money.’”

From The National on Dubai. “Whether it’s driving a hard bargain with your landlord or looking for a new place, prices are dropping across the board. A flood of new properties in existing suburbs and desert communities has also helped. ‘The handing over of new properties to the market has caused an oversupply of stock in Dubai, this in turn has driven the rental prices down in 2018,’ says property agent Tony McMahon from HMS Homes. All of the apartments and villas below have seen substantial drops in the asking price.”

From the South Africa Times. “Namibia’s housing market seems to be correcting itself, as prices, especially in the upper tiers, are dropping sharply. This comes after a decade during which Namibia’s property prices shot through the roof to be among the highest in the world. Sam Mwando, a lecturer in the department of land and property sciences at the Namibia University of Science and Technology, questioned then whether the latest ‘catchphrase’ in advertisements ‘selling under valuation’ meant that there had been an oversupply of overpriced properties on the market by developers. ‘Residential prices are bound to drop if the supply of property in the long-term outstrips effective demand. When that happens, then the housing bubble bursts,’ he said.”

From the South African. “Residential sales experts have noted a decrease in average gross yields for realtors, the first downward trend of its kind in seven years. Property specialists believe this is due to an oversupply of overpriced properties within the City Bowl and Atlantic Seaboard. Property sector strategist at FNB Home Finance, John Loos, explains that after outperforming the rest of South Africa for ten years, the City Bowl’s freehold property market has taken a hit: ‘A correction was expected to happen. The Atlantic Seaboard and City Bowl showed a combined growth of over 111% the past five years, which is simply exceptional.’”

The Hindu Business Line on India. “Excess leverage for land accumulation, combined with lack of sales, has taken the debt levels of real estate developers to more than ₹4 lakh crore as of December-end 2017. As developers are unable to service debt, industry experts believe a repayment crisis could be looming large. Moreover, there is a supply glut with unsold inventory levels as high as almost four years. ‘I don’t see any reason for a mid-size or small developer to differentiate and emerge a winner. They should join hands with some private individuals and recapitalise or else a stage will come when lenders will have to take a haircut, which has already started happening,’ said Amit Bhagat, CEO, ASK Property Investment Advisors.”

From Bloomberg on China. “Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30 per cent of gross domestic product. Keeping housing prices buoyant and development robust is thus an overriding imperative for China - one that is distorting policymaking and worsening its other economic imbalances.”

“Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings, rose 31 per cent to nearly US$202 per square foot. That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. Worried about these prices, and about growing indebtedness among developers, China’s State Council has hatched a plan to encourage rentals.”

“This is a thoroughly misguided way to address the problem. For one thing, rental yields in China are extremely low. In big cities, such as Beijing and Shanghai, yields are hovering around 1.5 per cent (compared to an average of about 3 per cent in the US and 4 per cent in Canada). Wages in China simply aren’t high enough to keep up with the credit fuelled rise in asset prices, and thus developers can’t earn a reasonable rate of return by renting out units. A tax break won’t fix that.”

“Worse, developers are heavily weighted down with debt, much of it short-term. Many are paying out 7 to 8 per cent bond yields, with debt-to-equity ratios of around 380 per cent. Encouraging them to rent out their housing surplus thus drives a money-losing trade: Developers rent to consumers to make a 1.5 per cent yield, while paying a combined debt-and-equity cost of capital of almost 10 per cent.”

“That 8.5 per cent negative yield multiplied by millions of units amounts to an enormous subsidy for renters, but it significantly worsens developers’ debt problems. Actively encouraging this is not exactly standard economics.”

The New Zealand Herald. “We are now well along the downward track on the real estate cycle; and if you can predict when the upturn will start, you can probably predict when interest rates will rise too. Over at Westpac, economists write: ‘In Auckland, house prices are now falling gradually on a monthly basis, are down 2 per cent since February. Average prices in the region are now back at August 2016 levels.’”

From Domain News in Australia. “Mortgage-reliant buyers struggling to get finance ratcheted up the pressure on housing prices in Sydney’s budget and mid-priced suburbs at the weekend. On Saturday, Jon Snead of The Agency-North, passed in a two-bedroom apartment at 11/52-54 Pitt Street, Redfern. The property received no genuine offers despite its sub-$1.2 million guide price. Mr Snead said several buyers who turned out to look at the flat had said they needed to get their finance sorted. ‘What’s stopping people from buying is a bit of greed from vendors who say, ‘I’m not selling for less than this,’ he said.”

“Dragging down the citywide clearance rate have been suburbs such as Cabramatta with a five-month auction success rate of just 25 per cent, Liverpool (28.1 cent), Brighton-le-sand (34.4 per cent) and Pennant Hills (36 per cent). On Saturday, a large number of properties – 74 homes – were withdrawn from their scheduled auction sale.”

From MarketWatch. “It’s hard to argue there are deep divisions between the so-called red and blue states in the U.S., but one thing seems to be bringing the country together: sky-high real-estate prices. While voters often tell pollsters they want to move to places with like-minded neighbors, home economics is starting to trump politics. ‘The way you depolarize the country isn’t with political rhetoric. It’s with a moving van,’ said Redfin CEO Glenn Kelman, who lives in Seattle. ‘I know people who’ve never met someone who voted for Trump. (They are) imaginary creatures. Anyone we imagine, we can imagine a monster. But when you meet a conservative, or you meet a liberal, you immediately moderate your views.’”

“Most of the time — by a ratio of nearly 8 to 1 — a blue-stater moved into a red state rather than the other way around during the past 12 months, Redfin said. ‘When I go to Texas or other parts of country known as conservative, there’s a real feeling that’s going to change. Nevada, Arizona, Texas, those are solid red states. Those states all (are experiencing) massive amounts of migration,’ he said. ‘San Francisco thought it had a monopoly on enlightenment and diversity, but that attitude is beginning to seem quaint. (Places like San Francisco) are increasingly a ‘no-fly zone for people with families,’ he said. ‘With anyone who is director-level and below, the conversation is, ‘We can’t afford to live here.’”