The Housing Bubble

A Saturday desk clearing post on nations outside the US. “Toronto real estate sales sometimes fall through, it’s a reality of any market. It’s often not until a few months later that we find out how many sales actually closed. Toronto Real Estate Board (TREB) data shows sales fell through at a higher rate than usual last year. In a small window where price growth reached peak, the rate of cancelled sales doubled. Why most of these buyers walked away from their sales will forever be a mystery. Some have popped up in the court system, sometimes with huge consequences. One buyer that backed out without sufficient reason was ordered to pay $470,000 to the seller.”

“On that note, we’ll leave you with the wisdom of Justice Edwards: ‘When the residential real estate market is a rising market, most people – perhaps with the exception of first time buyers, are happy homeowners and investors. When the market turns and drops, it is not for the faint of heart.’”

“Homeowners are slashing prices after a surge in the number of properties on the market last month. The number of homes with a reduced asking price is now at its highest level since October 2012, analysis has found, with reductions totalling £1.6billion. The first regional supply surge occurred in Greater London, where the total stock for sale has now climbed to the ‘glut level’ last seen in October 2010.”

“The Guardian investigation reveals that there is currently a property overhang in the market, with high number of unsold units and vacancy rates in major cities in the country. The scenario is not a surprise to property watchers as Nigerians have long been complaining about the skyrocketing property prices over the past few years. The increase in property prices is due to speculative investing as well as the surge in number of developers jumping on the bandwagon for the past few years, whereby government and bankers’ responsibility cannot be absolved.”

“The phenomenon of property glut prevalent today did not get better despite many developers’ efforts in pushing sales which include rebates and lowered down payment. In most Nigerian cities, like Lagos, Abuja, Kaduna, and Port Harcourt, the story is not different, existing vacancy rate in residential and commercial market have continued to double.”

“The glut in the property market is getting worse with banks, pension fund administrators and politicians offloading their assets into the market. Some of the property has remained in the market for several months without any buyer. As the elections draw near, experts believe that market will be saturated with many more property. Lagos NIESV Vice Chairman, Dotun Bamignola disclosed that, ‘there is clear caution in purchasing property. Property prices have not really moved northward as usually anticipated by speculators. Most of them are still locked down into their expectations,’ he said.”

“On Thursday, Annahar hosted a discussion between two experts from opposite sides of the spectrum, Daniel Azzi, former CEO of Standard Chartered Lebanon, and Abdallah Hayek, CEO of Hayek Engineering and Construction Group. The discussion revolved around the factors behind the stagnation, the fiscal and monetary measures targeting the real estate sector, and the current state of the market.”

“The surplus in the market was further aggravated by ‘non-professional developers who entered the market’ during the peak years of 2010, Abdallah says. ‘We are faced with a correction, the professionals will survive and the intruders have to figure out a way out with minimum losses.’ Both experts agreed on this notion as well, with Azzi alluding to these ‘amateur professionals who entered the market at the peak of the bubble’ with no prior experience in the real estate sector.”

“‘There is excess supply competing with Mr. Abdallah’s excess supply,’ he says, adding that ‘the problem can only be solved with major price reductions.’”

“The exodus of expatriate workers from Saudi Arabia has negatively affected the country’s real estate sector with a considerable fall in rent prices. Many property owners were forced to reduce their rents to attract clients and ensure liquidity. Market analysts expect further falls in prices in the coming months. Khaled Barasheed, former chairman of the real estate committee at Asharqia Chamber, said the fall in real estate prices in remote areas reached 25 percent while in cities the percentage was a little less. ‘People have postponed their plans to purchase houses and other properties expecting the prices to fall further,’ said Barasheed.”

“Ali Al-Jibali, former vice chairman of the real estate committee at Asharqia Chamber, said the depression in the property market was not limited to the Eastern Province alone but covered all regions of the country. He attributed the fall to a global economic downturn.”

“Tianducheng—also known as ‘Sky City’—opened its doors to the public as a luxury housing estate in 2007 with capacity to accommodate more than 10,000 residents. But it remained largely unoccupied as Chinese citizens’ rejected its bizarre theme and undesirable location. In 2013, a video surfaced showing the town’s long-empty boulevards and Eiffel Tower overgrown with weeds. The footage led to several reports deeming the design a failure and the city a ‘post-apocalyptic ghost town.’”

“Starting in the early 2000s, ‘fake’ cities and knockoff global cultural landmarks have sprung up in all corners of the country. Thames Town in the Songjiang District looks like a caricature of London’s boroughs. Anthony MacKay, the masterplanner and architect of Thames Town, told Newsweek that he was disappointed with the finished product, calling the entire village ‘comical.’”

“‘It’s not how I intended Thames Town to be. It’s doesn’t look right. I’m angry about it,’ he said. ‘They came [to England], took photographs of lots of buildings, went back and copied them… It’s like a collection of facades, there’s no depth to the buildings.’”

“The average asking price of all properties from throughout the country that were newly listed last month was $645,133, compared to $658,170 in May and $661,129 in April. The national average asking price is now down 4.2% compared to its February peak of $673,659. Average asking prices in June were down compared to May in most parts of the country. In Auckland the average asking price declined for the fourth consecutive month to $912,071 and has now lost more than $82,000 (-8.3%) since it peaked at $994,873 in February. It is now the lowest it has been since July last year.”

“In the Bay of Plenty the average asking price declined for the second month in a row to $624,207, down by $55,152 (-8.3%) compared to its April peak of $664,652. It is now at its lowest point since September last year. In the Wellington region the average asking price dropped to $593,686, the first time it has been below $600,000 this year and and down by $39,212 (-6.2%) from its March peak of $632,898.”

“Analysis by RiskWise Property Research shows unit over-supply in inner-city Brisbane has created weakness in the market leading to a high level of risk for investors and therefore lower valuations and rising defaults on settlements. It comes as Lendlease asserts the over-supply of units in the Brisbane market will peak this year. The developer is bracing for rising defaults on settlements in the short-term as buyers fail to complete purchases, according to an article in the Australian Financial Review.”

“‘The issue of oversupply is not a new problem and has been there for a few years and the continuous weakness of the unit market in inner-city Brisbane should have raised red flags for developers and lenders,’ said RiskWise CEO Doron Peleg. ‘What we are seeing now is the realisation of the risk that should have been identified at least a couple of years ago. Defaults have been rising and will continue to do so.’”

“One of the key factors was developers’ lack of foresight regarding unit oversupply as well as the impact of lending restrictions introduced in 2014. It seems there was no methodological and structured risk-management approach including identification, assessment and mitigating action plans to address those risks. Overall, it seems they were too optimistic about the projected market value, and it is highly likely that the price they paid for the land was also too high,’ he said.”

“Mr Peleg said it must also be remembered the value of off-the-plan property could decrease between the original contract date and settlement resulting in capital loss, as the equity in the home could be reduced, and this was well known in inner-city Brisbane. ‘The current valuations made by valuers are simply a reflection of the realisation of the risks and changes to unit prices, and represent the fair market values of the properties at the time. The point is that if developers and lenders put more proper risk-management practices in place, this could all be avoided,’ he said.”

“What happens to the economy of B.C., and of Metro Vancouver in particular, when the housing bubble bursts? That’s something I worry about quite a bit, of late. The air is leaking out of the housing bubble. Detached house prices are finally sinking, sales are crashing, and oversupply seems certain. So the question isn’t if or even when (it’s starting now) but how bad will it be. I’m hoping the answer is not too bad, but I very much fear the opposite will prove true.”

“The construction industry is currently the third largest employer in the province, with more than 233,000 jobs involved directly or indirectly. Real estate, rentals, and leasing made up more than 18 per cent of B.C.’s GDP last year – a larger percentage than oil and gas represents in Alberta. We’re seeing the first, earliest stages now, as it takes a bit longer every month to sell a home in Metro Vancouver. The next stages are stagnation, layoffs in construction and real estate, and an exodus of some of the younger people who had come to B.C. to work.”

“With home sales grinding to a halt, some speculators will hold on to their assets and refuse to sell – leaving homes either empty, or hopefully, available for rent. (Which should make renting more affordable for a few years, at least.) Others will be forced to sell at a loss, further driving down prices. The provincial government will take a hit to its pocketbook. Victoria has been getting a lot of money out of the property transfer tax. Prepare for deficit spending, new taxes, service cuts, or all three.”

“Municipalities will take a lesser hit, but will be left to deal with vacant lots in the middle of patchy developments, and possibly with an increase in vacant homes. We still don’t know how extreme this will be, or how long it will last. I think we’ll be lucky if B.C. gets through it without going into a recession. Frankly, I’d be very happy to be proved wrong on all of this.”