September 7, 2018

The Deflating Realization As A Painful Glut Emerges

It’s Friday desk clearing time for this blogger. “‘Housing price bubble chatter has increased this summer, but I would ignore it,’ said Carol Farrar, 2018 North San Diego County Association of Realtors president. ‘Market observers always try to predict the next residential real estate shift, but it is too early to expect a change from higher prices and lower inventory, even though the common markers that caused the last housing cool-down are present. With a growing economy, solid lending practices and the potential for improved inventory from new listing and building activity, market balance is more likely than a bubble.’”

“After seeing one of the most competitive home buying in 2017, homeowners have reported a lighter, less competitive season in 2018, according to a survey by ValueInsured. In California, which was one of the hottest housing markets last year, 54 percent of all homeowners reported lighter homebuying demand, with 56 percent homeowners in Colorado and 53 percent in New York concurring with their counterparts in the Golden State.”

“The survey said that some of the hottest markets of 2017 had seen the most significant signs of cooling down this year. In San Diego, 20 percent of all listed homes had price cuts. In Seattle, where bidding wars had become common over the past three years, home prices saw a steep decline from their median prices. It also indicated that in Dallas, 19 percent of all listed homes had seen their prices cut at least once in June. ‘While buyers have been conditioned to hurry up and make an offer, even sight-unseen, in recent years, some may now step back onto the sidelines to wait and see if – and how far – home prices could get cut before they jump back in,’ the survey said.”

“Dwight Easton, the public affairs director for the Missoula Organization of Realtors, said the number of active listings of homes for sale in the city of Missoula hit a recent high in August 2017. Anecdotally, he said, it appears that the hot seller’s market for housing in Missoula might be shifting a little bit toward the center. ‘It has been a seller’s market, and maybe that’s cooling, but this is just anecdotal,’ he said. ‘It might be economics. Where we are seeing the price of newer homes, it’s getting harder to find buyers for $400,000 homes.’”

“Artist Raphael Mazzucco has taken a total of nearly $2 million off the asking price of his Montauk home at 53 Kettle Hole Road after it landed on the market for $4.35 million back in October of 2017. In July, the home received its first $1.55 million price cut, putting it on the market for $2.8 million. Now, just two months later, another $200,000 has come off the listing and the 1-acre property is now asking $2.6 million.”

“A real estate broker north of Toronto is suing a consumer for commission even though a $900,000 home sale arranged by his company fell through. Marlene Nemeth Nemeth said she can’t understand how a real estate broker can bill her tens of thousands of dollars when the sale didn’t close and she didn’t do anything to interfere with the deal. In May 2017, she agreed to accept a $900,000 offer from Sayed Moussavi, the buyer. But on closing day, the buyer didn’t produce the funds to complete the deal, apparently because HomeLife hadn’t sold Moussavi’s home, according to Nemeth’s defence.”

“At that point, Moussavi agreed to forfeit his $40,000 deposit, plus $2500 in damages, in exchange for a mutual release from any future legal action. Nemeth said she decided to take the money and grant the release because she needed the cash. By now she had moved into her new home in East Gwillimbury and had to carry two mortgages, plus utility bills and taxes, all because the deal had fallen through. Her listing agent, Nina Bonakdar, asked Nemeth to give the buyer more time.”

“In a text message from Bonakdar to Nemeth, shown to Global News, the agent wrote: ‘I get Hans involved. As per Hans, buyer has no money. He is in max on all his financial mean (sic). But he is waiting to receive wire transfers from overseas so he will close end of November even if his house doesn’t close.’ By the time Nemeth finally sold her home on April 29, using a different real estate broker, the housing market had tumbled: The selling price was a disappointing $699,800.”

“Everyone loves a bargain and that goes for house hunters too. So when we saw these latest price reductions on property website Zoopla, we got very excited. All of these properties have been reduced in price over the last week or so and one by a tremendous £34,950. Looking at figures from Tuesday, August 28, onwards there have been some big reductions in the price of homes in a range of categories. From a one-bed flat in Lenton to a five-bed in Bramcote, they have all had pounds knocked off them.”

“When Myanmar opened up to the world after decades of military rule, hopes were high that democracy would be restored and the economy invigorated. But for players in the country’s property sector the deflating realization that they may have jumped the gun is setting in as a painful glut emerges.”

“Richard Emerson, managing director of Emerson Real Estate, says that Myanmar went ‘from a market where there was basically no built stock five years ago to a market wherein suddenly all those projects conceived in the day when everybody thought Myanmar was on a massive upward trend and was going to go on a boom, all those projects are being delivered into a market which is basically failing on several different levels.’”

“QV data this month showed nationwide house prices down 1.6 per cent over the past three months, with falls in Auckland, Queenstown, New Plymouth and Christchurch. Suburbs where there has been an oversupply of houses or ‘emotional’ buyers bidding up prices have suffered the most as Auckland’s property market cooled. Now data from shows the areas where there has been the biggest value change since the city’s April 2017 price peak. Albany Heights has seen median values drop 7.74 per cent. Lynfield is down 6.86 per cent, Pinehill 5.84 per cent, Waiatarua, 5.54 per cent and Golflands 5.53 per cent.”

“Property developer David Whitburn said there were a number of factors that drove the falls. Albany Heights and Pinehill were suffering through an oversupply of new housing. The number of buyers in the area had not increased to match it, he said. Flat Bush was another area where the properties being sold were not in line with demand, he said.”

“Lynfield and Golflands were popular with Indian and Chinese communities, Whitburn said, and owner-occupiers who wanted to purchase properties had been willing to pay more to do so during the market boom. He recalled two auctions where properties went for 20 per cent more than he thought they should have. Now, few auctions were successful in those areas, reducing the premium that was paid.”

“‘With prices falling, CVs are becoming less relevant. It is not uncommon for properties to sell for less than CV,’ said chief data scientist Tom Lintern.”

“Like thousands of other small investors, Taku Ekanayake, 30, took advantage of record low interest rates and soaring property prices to buy several investment properties during the height of the property boom. Ekanayake, who started investing in property when working as an Uber driver, spent 30 months accumulating six properties in Brisbane and Adelaide, despite not being able to afford an apartment in hometown Sydney.”

“‘I’m not nervous about rising rates at the moment but I’m going to start reviewing the funding of my portfolio,’ says Ekanayake, who transitioned from Uber driving to technology consultancy before becoming a mortgage broker. Recent rate rises mean his monthly repayments increase from $6800 to $7000. ‘Investors will get into trouble if rates keep increasing,’ he says.”

“The number of households with an investment property grew strongly during the height of the property boom in 2015/16 when cheap money and big profits drove expectations of riches. But rising interest rates, an oversupply of apartments, low auction clearance rates, falling property prices and vendor discounting are increasing pressure and smashing market sentiment.”

“Ekanayake is planning to refinance his interest-only loans, to lower monthly costs and repay principal. Louise Lucas, chief executive of The Property Education Company and a mortgage broker, says lenders are forensically scrutinising loan applicants’ spending and income. ‘It’s getting really tough,’ Lucas says.”

“Nearly 40 per cent of borrowers attempting to refinance their mortgages do not qualify for a lower rate, an eight-fold increase in the past year, according to analysis by UBS and Digital Finance Analytics.”

“It’s taken more than three years for the regulators to turn around the $1.5 trillion juggernaut that is the mortgage portfolio of Australia’s big four banks. But the real target has been about a third of that, or $530 billion, that has been lent to investors. It has become a very vicious circle for investors, according to Bruce Carr, principal of mortgage broker Loanscape. ‘The argument goes that if you remove one third of prospective buyers from the property market it will lead to a crash in housing prices,’ Mr Carr said. He has crunched the numbers on loans and conditions in the market (before the recent increases) to demonstrate how investors’ capacity to borrow has been slashed.”

“Mr Carr said multi-property investors were feeling the pain. ‘Compared with the situation in January 2015, for every $1 million in debt held by a property investor, they now require $30,000 additional annual net income to qualify for the same loan,’ he said. Carr said while APRA’s intent to take the heat out of the property market was sound, it acted too late.”

“‘We are now living with the consequences,’ he said. ‘High property prices mean many first home buyers and upgraders find the stretch to property ownership too hard or too risky. Those who purchased at the peak are seeing their equity ebb away. Many investors are feeling the pinch — their bank has raised interest rates by 25 per cent, they cannot refinance, and repayments are set to increase by a further 30 to 40 per cent when loans roll out of their interest-only phase.’”

“‘The outcome is that few people — other than the banks — are happy.’”

It’s Part Of A National Trend

A report from Bloomberg. “Seattle is known for its hip neighborhoods, soaring home prices, and being home to Amazon. So why is its rental housing market experiencing the most severe slowdown in the U.S.? It’s part of a national trend. Rents in Nashville and Portland, Oregon, have actually started falling. ‘This is something that we first started to see two years ago in New York and D.C.,’ said Aaron Terrazas, a senior economist at Zillow. ‘A year ago, it was San Francisco and most recently, Seattle and Portland. It’s spreading through what once were the fastest growing rental markets.’”

“Tenants are gaining the upper hand in urban centers across the U.S. as new amenity-rich apartment buildings, constructed in response to big rent gains in previous years, are forced to fight for customers. Rents are softening most on the high end and within city limits, Terrazas said.”

“Batik, a new 195-unit Seattle apartment building, has views of the downtown skyline and Mount Rainier, a giant rooftop deck with a garden where tenants can grow fruits and vegetables, a community barbecue and an off-leash pet area. New tenants can receive Visa gift cards worth as much as $6,000, with half paid at signing and the rest a month later.”

“‘There is tremendous competition for tenants,’ said Lori Mason Curran, spokeswoman for landlord Vulcan Real Estate, which launched Batik in March. ‘Over time, we think long-term demand is solid. But there is so much supply tamping down rent growth right now.’”

“In Seattle, another factor contributed to the glut of rentals. While the city is in the midst of a building boom — with more cranes dotting the skyline than any other in the U.S. — much of the residential multifamily construction has been apartments. Developers have shied away from condos because of state laws that allow buyers to more easily sue if there are defects in the construction.”

“U.S. multifamily apartment construction for the past few years have been at levels not seen since the 1980s and rapid rent gains have also encouraged owners of single-family homes and condos to fill them with tenants. Projects opening now were conceived by developers a few years ago when rent gains in the U.S. were peaking at an annual gain of 6.6 percent, according to Zillow data.”

The Sacramento Bee in California. “Local real estate watchers say a recent increase in new apartment construction appears to be moderating Sacramento’s rising rents, bringing them closer to normal range after several superheated years. ‘We’re definitely seeing an easing,’ said Bob Shanahan, a Sacramento-area rental market analyst for Colliers International. ‘It’s kind of a return to normal. The increases in 2016-2017 were unsustainable.’”

The Houston Chronicle. “Urban Oaks Builders, a multifamily construction company affiliated with the Houston real estate firm Hines, has filed for bankruptcy protection amid a lawsuit alleging that both companies failed to disclose construction defects to the buyer of a luxury apartment complex in Florida. Urban Oaks, which operates independently of Hines, said the voluntary Chapter 11 filing was precipitated by the lawsuit and exacerbated by a dispute with the builder’s insurance carriers over covering for the potential cost of the lawsuit’s claims.”

“The bankruptcy filing was made on Aug. 31 in U.S. Bankruptcy Court in Houston. Urban Oaks’ estimated its assets are valued at between $10 million and $50 million and its liabilities are between $50 million and $100 million. The disputes stem from a relatively new apartment complex developed by Hines and constructed by Urban Oaks in Celebration, an upscale master-planned community near Walt Disney World.”

“Hines sold the 306-unit property, then called Aviva at Celebration, to Southstar Capital Group of Palm Beach, Fla. in Sept. 2016. Southstar paid $67 million and renamed the complex Sola at Celebration.”

“Earlier this year, Southstar sued Hines, Urban Oaks and other affiliates, claiming they knowingly failed to disclose building defects when it sold the apartments. Southstar said the defects were not detectable during the inspection process and only became apparent in February 2017 when walls, breezeways, floors and balconies started showing cracks and other signs of damage.”

“On Aug. 14, 2017, the Osceola County Building Department issued notices of evacuation to all of the residents. ‘Hines knowingly sold us a property that was riddled with problems and structural issues that routine inspections could not detect,’ Gina Williams, president and chief financial officer of Southstar Capital Group, said in a recent statement. ‘Their deception and now lack of willingness to remedy these problems is wrong and must be resolved before the property falls further into disrepair. On behalf of our investors, the Town of Celebration and the uprooted residents forced to find a new place to live, we urge Hines to do the right thing.’”

From Sightline on Oregon. “As rents across the Northwest have soared over the last decade in buildings new and old, the answer to that simple, mysterious question—where exactly does rent money go?—may also be the way to start answering another question: What, if anything, could governments do to make those rent checks smaller?”

“I don’t mean the short-term price dip Portland’s higher-end renters are currently enjoying thanks to the city’s first apartment glut in twelve years. I was interested in what it’d take to get a permanent drop in the market price of newly built homes.”

“Cheaper materials and minimal common spaces: $52/month. Wood countertops. IKEA fridge. No lobby, let alone a gym or shared kitchen. It’s an obvious option. But even the most skinflint developer would struggle to shave more than 6 percent of hard construction costs—it comes to $52 a month from the final rent—by skipping every frill. That’s why so many new buildings go the other direction and splurge on small stuff: amenities that read as ‘luxury’ don’t actually cost much to add. ‘Lipstick is cheap,’ said Noel Johnson, a developer for Cairn Pacific.”