The Housing Bubble

A report from CBC News in Canada. “New buyers can expect home ownership to become even less affordable next year as mortgage costs rise, while current owners will be largely insulated from higher rates. That’s one of the main takeaways of a new outlook from Scotiabank, which forecasts mortgage carrying costs to increase by about eight per cent next year because of rate increases and tougher mortgage rules. That’s almost three times more than the 2.5 per cent the bank expects household incomes to rise. Rival Royal Bank recently forecast in its own report that affordability has worsened for eight quarters in a row, and across the country is now at its lowest level since 1990. ‘The days of ultra low interest rates in Canada are over,’ Royal Bank said. ‘These increases are just the beginning of a hiking campaign.’”

From The Guardian in the UK. “Rents in Britain dropped in the final summer months for the first time in at least five years, according to Rightmove. It was the first fall at this time of year since Rightmove started tracking rents in late 2011. The decline comes as landlords flood the south-east of England with newly available rental properties, distorting the national picture, as they turn away from a stuttering London property market.”

From Thompson Reuters on Dubai. “Rents in some of Dubai’s busiest residential clusters are under intense pressure, with some landlords willing to cut their demand by 5-7 per cent. For tenants, the best way to access lower rents is seek out locations that have seen more new supply getting delivered or buildings with higher than average vacancy levels. ‘Anecdotal evidence suggests that numerous residential buildings - even within the prime areas such as Downtown and Marina - are seeing increased vacancies, and as such, tenants have been able to renegotiate their rents downwards,’ states the latest Dubai real estate update from JLL.”

“Up to 80,000 units could be delivered before the end of 2019, going by all the timelines set by ongoing projects and those launched recently. ‘This renewed sentiment does however raise the prospect of a potential over supply on the back of sales achieved through more attractive payment terms,’ said Craig Plumb, Head of Research - MENA at JLL.”

From Business Today in India. “The recent slump in the real estate industry means several major builders are unable to complete their housing projects and hand over possession to their customers, leaving them in the lurch. As is the usual practice, many of these customers have taken home loans, and they have to continue paying EMIs on their loans with no delivery date in sight. It has caused a lot of confusion and put many of them in dire straits financially.”

“For thousands of distressed homebuyers, the government is the last line of hope for some compensation. In the case of Amrapali, Uttar Pradesh Urban Housing Minister Suresh Khanna said, ‘There are nearly 40,000 homebuyers whose investments are stuck in various Amrapali housing projects. We have decided to give them relief. They will pay the remaining amount only when the builder readies the project for possession.’”

From Domain News in Australia. “Three out of 10 auction properties in Sydney failed to find a buyer at the weekend as real estate agents neglected to report the results of almost one-third of 679 scheduled auctions. The under-reporting of sales results is a tell-tale sign of a levelling market. Real Estate Institute of NSW president John Cunningham said unreasonably high asking prices were dampening activity.”

“‘The market has been changing all year,’ he said. ‘We are not getting the cream on the top of all those record prices that were occurring. If vendors are basing their price expectations on what happened six months ago, they are going to be disappointed. The market is not what it was six months ago.’”

“According to data from Domain Group, stock levels in Sydney at the moment are up 30 per cent on last year’s listings. ‘This is all part of the normal post-boom cycle,’ Mr Cunningham noted. ‘One of the reasons that you have a boom is because supply is extremely low and demand is high. You have a low interest rate environment which fuels that, but when the market goes through its transition period, changing from those boom conditions to what we call a normal market, there is actually more stock available.’”

The New Zealand Herald. “Reigning in bank borrowing, rather than building more homes, may be the answer to Auckland’s housing crisis, an Auckland property expert believes. Dr Michael Rehm, a senior lecturer in property at the University of Auckland Business School says lowering lending to more manageable debt-to-income ratios is likely to lead to a drop in house prices ‘overnight.’”

“‘But if this happens, it would mean up to 60 per cent of sales couldn’t happen,’ he says. ‘Many mortgages are astronomical; they are ‘off the wall’ and there is going to be a massive amount of pain to get to where we need to be. But if something doesn’t happen it is only going to end in tears.’”

“Rehm says debt-to-income ratios in New Zealand are in the stratosphere. A recent KPMG Financial Institutions Performance Survey (FIP) suggested most mortgages are sitting between nine and 12 times borrower income (this equates to a household with an income of $70,000 taking on a mortgage between $630,000 and $840,000). ‘This should be much lower - somewhere between three and five times income,’ he says.”

“Rehm says building more houses is not necessarily a silver bullet and may even drive prices up. ‘In Dublin, a city about the same size as Auckland, between 2002 and 2007 almost 100,000 new dwellings were built; but this only succeeded in fueling a speculative housing bubble and driving prices up by 85 per cent,’ he says.”

“Rehm lays the blame on ‘unbridled’ bank lending. ‘All roads eventually lead back to the banks,’ he says. ‘It is scary so many young people cannot afford housing. I believe the fastest way to turn it around is by restricting lending and if they pull back on credit, that alone I think will help draw prices back. Banks are looking to maximise their profits and compete against each other; to do this they need to grow their mortgage portfolios.’”

“Rehm says in 2016, 52 per cent of bank lending went on housing compared to just 14 per cent in 1984. ‘The tragedy is the debt saddled on Kiwi homeowners generates interest, a large chunk of which goes to shareholders off-shore,’ he says. ‘Anyone taking out high debt is taking real risk and if prices start dropping they are sitting ducks.’”

From the Otago Daily Times in New Zealand. “The slowdown in the housing market is causing sellers to take bigger losses on house sales. The quarterly Pain and Gain report from CoreLogic showed that while the number of people taking a loss is trending down, the amount they lose has increased. The median loss in Tauranga was the most pronounced, with people who sold at a loss losing a median of $55,000, up from $25,000 in the previous quarter. Dunedin also showed a sharp increase in loss up to $19,000 from $3000 in the previous quarter.”

“Christchurch was the worst affected city centre with the 7.9% of people who took a hit losing a median of $36,500. The 1.8% of Auckland sellers who took a loss were out-of-pocket by a median of $26,000. Nationwide, the median loss per loss-making sale is around $20,000. Investors were worse off than owner occupiers, losing $44,500 per sale.”

“Another trend revealed in the report was that the median hold period for loss-making properties had decreased from eight years in the previous quarter to just under seven. The hold period in Auckland dropped to just one year in the June quarter, down from 2.3 years in the previous quarter. ‘This means half of all Auckland properties selling at a loss were owned for less than a year,’ CoreLogic head of research Nick Goodall said.”