The Housing Bubble

A report from CBC News in Canada. “A real estate agent from West Vancouver has brought housing market uncertainty into his divorce proceedings, arguing a slowdown caused by government policies has made his family’s jet-setting lifestyle unsustainable. Jason Soprovich’s realty company, of which he is the sole shareholder, has raked in more than $13 million in the last seven years, according to a B.C. Supreme Court judgment posted online last week. But as he hashes out a divorce agreement with his ex, his legal team is arguing that the future of the real estate market is so hazy, the firm’s past performance isn’t a great indicator of what he can afford to pay in spousal and child support.”

“Soprovich argued ‘that it would be devastating to him if his income for support purposes is based on an average of the realty company’s past three years’ net income,’ Master Leslie Muir wrote in the judgment. ‘He says that the real estate market slowed down from 2016 to 2017 and is likely to slow further down in 2018.’ Jason Soprovich Realty Inc. brought in $2.95 million in pre-tax net income in 2016, according to the judgment. Last year, the firm made about a third of that amount, or $1 million.”

“Soprovich was married to Monica Thiessen for 17 years before they separated in the fall, and they lived a luxurious life during those years, according to the judgment. The couple were members of the ritzy Hollyburn Club and the Capilano Golf and Country Club, and their children have always gone to private school. The family made annual visits to Hawaii, Las Vegas and L.A. But the family’s extravagant way of life will have to change, Soprovich argued.”

“‘His view is that the standard of living that the parties have enjoyed in the past was and is unsustainable,’ Muir wrote. The court agreed that the skyward trajectory that has marked the local real estate market for years appears to have ended. ‘I accept that the respondent has reason to be pessimistic about the real estate market and hence his income,’ Muir said.”

From Bloomberg on Canada. “Alternative lenders are playing a growing role in Canada’s real estate market as the industry searches for new sources of financing, risk-averse banks become more picky and investors look for yield. The march to the private market has been driven in part by a desire to reduce taxpayer exposure to housing, which has until recently, been on steroids. Federal and provincial governments have gradually been tightening the screws.”

“The moves have begun to bite. About 49 per cent of all outstanding mortgages were uninsured at the end of last year, up from 36 per cent five years ago. And the housing market in Toronto, Canada’s biggest city, has abruptly slowed, with average prices plunging 14 per cent in March from a year earlier, the biggest drop since 1991.”

“Firm Capital’s specialty is lending for terms up to 24 months, after which the borrower will ideally refinance the loan at one of the country’s big banks, or if things aren’t going well, head to another private mortgage investment corporation. Its public mortgage portfolio has an average interest rate of 8.3 per cent, compared with about 3 per cent for home loans at the big banks. ‘In this liquid market, whenever there’s a problem, somebody refinances us,’ said Eli Dadouch, chief executive officer of Toronto-based Firm Capital. ‘You never want to be the last guy on the stick. Leave enough room to get taken out.’”

“There’s no question Firm Capital would be considered a lender of last resort for a home buyer given the punitive fees that mortgage investment corporations can levy, sometimes around 20 per cent all-in, including other professional fees, said Shawn Stillman, a broker at Mortgage Outlet. Nevertheless, he’s seeing greater demand for mortgage investment corporations from his clients that have been shut out of the housing market due to the new regulation, he said. ‘Would they be the first lender I would go with? Absolutely not,’ Stillman said by phone from Toronto. ‘But if there wasn’t this demand for the money, they wouldn’t be in business.’”

From Bloomberg on China. “The next front in China’s crackdown on debt is the one closest to home. On the back of a boom in property prices, household borrowing has been climbing for ten years straight, at a pace that rivals any such run-up in major economies. At US$6.7 trillion, and a record 50% of gross domestic product, China’s private debt is now approaching developed-world levels and crimping the power of the consumer to spend.”

“Take Huang Panpan, a 33-year-old public-relations executive from Beijing. Last year, he took the plunge on a 2.9-million-yuan (US$460,000) mortgage on a 385-square-foot home and now faces monthly loan payments of about half of his take-home salary. Since then, he’s been in austerity mode: cutting travel, selling stocks, putting off a car purchase as well as a plan to start his own business. ‘I was someone who never paid much attention to the price tags when buying things or booking trips,’ Huang said. ‘I feel more pressured financially with all that debt.’”

“Much of households’ surging debt level is linked to China’s housing bubble, which has seen new home prices in Beijing and Shanghai jump more than 25% over the last two years. ‘This could undermine the authorities’ efforts to re-balance the economy towards consumption,’ wrote Fitch Ratings analysts Jack Yuan and Andrew Fennell.”

“The situation leaves borrowers exposed to the chances of a broader increase in interest rates if faster inflation materializes. That will only make Beijing resident Huang’s life harder. ‘I need to reduce consumption more, if an interest-rate hike leads to a significant increase in the mortgage that I have to repay,’ said Huang. ‘Goodbye to membership cards at restaurants and my investments in small businesses. I won’t buy things that aren’t absolutely necessary.’”

From Global Times on China. “A housing frenzy in South China’s Hainan Province ended on Sunday night not with a bang but a whimper, as tough new island-wide curbs on home purchases left property agents and developers reeling. ‘I will lose more than 80 percent of my clients… more than 80 percent of the home buyers in Hainan are from other parts of the country. That will have an unbearable impact on the company’s business,’ Chen Gaige, a senior manager of a Hainan-based property developer, told the Global Times.”

“Another property agent in Sanya who would only give his surname as Wang told the Global Times that Sunday was ‘a sleepless’ night for all 30,000 real estate industry practitioners in Hainan. ‘From now on, the only business left will be commercial properties like shopping malls and office buildings,’ Wang said. ‘Can someone please find me another job?’”

From Domain News in Australia. “Sydney house prices have taken their biggest hit since 2015, recording a 2.6 per cent drop in prices over the March quarter. The median house price in Sydney is now $1,150,357, which is $30,000 cheaper than in December, according to Domain Group’s March Quarter 2018 House Price Report. House prices peaked in June 2017 with the median at $1,198,550.”

“‘Sydney has been overexposed to investors for some years,’ Domain Group data scientist Nicola Powell said. ‘Even though investors are active in the Sydney market they are at much lower levels than they were at that peak. The boom phase of the market is fading.’”

“Several experts said the cocktail of tightened lending restrictions, first-home buyer incentives and a deluge of new apartments was to blame for the drop in house prices. In Sydney’s upper north shore, house prices dropped 2 per cent, which has been felt by Mount Colah resident Ken Donohue. Mr Donohue’s four-bedroom house has been on the market since Australia Day and, despite strong interest, he hasn’t had any offers on the property.”

“‘We have had to keep the house tidy and ready for inspection every weekend for three months. It’s very exhausting,’ said Mr Donohue. The buyer’s guide was initially set at ‘the sweet spot’ of $1.25 million, but has since been revised down to $1.1 million. His neighbour’s property has also languished on the market for a similar amount of time. ‘It’s been disheartening,’ he said.”

“Selling agent Steve Noakes, of Ray White Hornsby, said the number of days a house was typically on the market was growing. ‘There’s no urgency from buyers, investors have definitely pulled back a bit and there’s a bit of oversupply on the market,’ said Mr Noakes. The biggest fall in house prices over the quarter was in Sydney’s south, which recorded a 4 per cent drop.”

From the New Daily in Australia. “The New South Wales Labor opposition has warned that flammable cladding could slash apartment prices by a ‘whopping’ 90 per cent. Cladding was blamed for the ferociousness of a deadly fire at London’s Grenfell Tower public housing block in June last year, which killed 71 residents. A British property owner who lived in a housing complex with the same cladding last week said the asking price of her £475,000 ($871,650) flat had collapsed to just £50,000, The Guardian reported. If a similar crash was repeated in Sydney, Shadow Minister for Better Regulation Yasmin Catley said apartment prices could drop by an average of almost $700,000, based on the median price.”

“‘Losing up to 90 per cent of the value of a property would spell financial doom for home owners and investors alike,’ Ms Catley said in a statement.”