The Housing Bubble

A report from the San Francisco Chronicle in California. “While much of San Francisco’s housing market continues on at its usual breakneck speed, the luxury market—generally defined as listings above the $2-million mark—usually takes a substantial summer sabbatical. That means that right now sellers in that segment are rapidly slashing prices, trying to get buyers’ attention before the summer slowdown hits. In fact, 22 of the 34 price reductions between May 7 and June 7 were for homes priced above $2 million, according to Paragon Real Estate. There’s another good reason for big cuts—some up to $1 million—in the luxury market. These properties are more likely to be overpriced to begin with.”

“‘More expensive homes have always been much more subject to egregious overpricing; owners and listing agents sometimes have a hard time being realistic when pricing large, beautiful houses,’ said Paragon’s Patrick Carlisle. ‘But even in a crazy hot market, buyers won’t buy homes they consider well overpriced.’ Take a look at the gallery above for some prime examples of listings throughout the city that have taken price cuts in the hundreds of thousands of dollars in the past month.”

From Global News in Canada. “If you’re looking to purchase a home this summer- the odds are in your favour. According to the chair of the Realtors Association, housing inventory is at it’s highest peak since 2008. ‘We had a little bit more in 2008. But it’s definitely the highest since then,’ Darcy Torhjelm said. ‘There’s lots to choose from in just about every category. I’m not seeing prices dropping drastically.’”

From City AM on the UK. “The price of homes in the City and its surrounds has slumped as the London market continues to chill, according to real estate firm Your Move. The research showed that house prices in the City fell 25.9 per cent in the year to April, although this was only on a small number of sales, while prices in Southwark dropped 19.1 per cent. A number of London boroughs have also seen big falls over the last 12 months, with house prices in Wandsworth down 13.1 per cent. Overall, 24 London boroughs have seen prices fall over the year, and just nine have seen them rise.”

From Homes & Property in the UK. “London house sellers are at last getting real: average asking prices have fallen in two out of three boroughs over the past year, according to a new study. Substantial falls have been witnessed in Hackney (3.7 per cent), Hammersmith and Fulham (3.9 per cent), and Ealing (4.5 per cent). There has been a significant 16.4 per cent increase in the number of houses and flats on sale in the capital over the past 12 months.”

“‘The goal posts have just moved,’ said Miles Shipside, Rightmove director. ‘Sellers in locations that have seen larger percentage increases in the number of available properties will have to price lower than properties they are competing against, as there are few better tactics than a bargain price to tempt buyers.’”

“Tom Page, manager of Fyfe Mcdade estate agents in Shoreditch, agreed. ‘There is no space for immature pricing in today’s market,’ he said. ‘There used to be an argument for pricing a property high and trying your luck. However, there are no longer enough buyers in the market for overpriced properties to get attention.’”

From ABC News in Australia. “There are few topics more contentious amongst economists, and at barbeques, than the direction of Australian home prices. But 2018 has marked a dramatic shift in that discussion. In the years between 2012 and 2017, most of the conversation centred on how high home prices could rise. Late last year discussion heated up on whether they might fall. Now that all the major indices are showing falling prices, with leading indicators like housing finance and auction clearance rates showing no signs of a bounce, 2018 has moved on to a discussion of how far house prices will fall.”

“On Monday, those UBS analysts put out a note warning that limits on debt-to-income ratios (DTIs) would further constrain mortgage lending and, therefore, home prices. UBS said APRA is looking at limiting the proportion of loans going to borrowers who have more than six times their annual income in debts. Given that the typical Sydney home is currently nine times the median income, while Melbourne is at eight, UBS argued such a limit would almost inevitably put further downward pressure on home prices as many potential buyers would not be eligible for a loan that was large enough.”

“For those who have been warning of an Australian housing bubble (myself included) this is a clear sign we are in one. If the market was not irrationally overvalued, there would be plenty of cashed-up value investors, not to mention would-be owner-occupiers, to step in and buy as prices fell. But if the main thing holding up demand and prices for expensive homes in Sydney and Melbourne is a belief that a large price fall is not possible, then you are firmly in bubble territory.”

From Nine News in Australia. “Sydney’s housing bubble looks set to finally – if not quite burst – at least deflate somewhat over the next two years. House prices across Greater Sydney have already fallen by 3.4 percent in the past 12 months – more than any other capital city apart from Darwin (where property values are down 7.7 percent). Sydney’s inner regions have seen the biggest price drops. The median value of a Sydney property currently sits at $875,816, but this has plunged sharply in key areas.”

“In Sydney’s CBD and inner south, house prices have fallen dramatically by 13.6 percent since their peak in June last year, while Ryde and the inner west have seen falls of just over 10 percent since August and March 2017 respectively. On the city’s North Shore, property values have fallen by 8.7 percent, while the Northern Beaches didn’t fare much better, recording a 7.5 percent drop since June last year. Western Sydney properties have seen smaller property price falls, with the inner south west, Parramatta, Blacktown and the Baulkham Hills/Hawkesbury regions all recording falls of between 5.9 and 6.8 percent.”

“Macquarie Securities economist Justin Fabo said while market corrections are always worrisome he believes the regulators would be largely delighted with the orderly cooling of housing markets so far. ‘To us the real risk is on the demand side,’ he said. He said if households were to lose faith in housing markets given still-elevated prices, the demand for credit could fall more than he expects. ‘The main thing to fear for Australian housing is fear itself,’ Mr Fabo said.”

“As property prices in Australia have climbed over the past few years, thousands of Australians desperate to get a foothold on the property ladder have used interest-only loans. But the interest-only period on these loans doesn’t last forever. Over the next three years, interest-only loans worth a combined total of about $360 billion will roll over to interest plus principal — and that means borrowers will face higher repayments.”

“For Queensland farm manager Hugh Mackey, 61, the switch to interest-plus-principal repayments may prove too much. He and his wife tried to build a retirement nest egg, buying two investment properties in the coal mining town of Blackwater in 2008, financed by almost half a million dollars in interest-only loans with ANZ. ‘I’m not sure I can retire at 65 the way things are going now,’ he said.”

“The town’s rental market has slumped, the houses have halved in value, and Mr Mackey is struggling to meet his loan repayments.”

“‘At the moment, with interest only, we’re forking out I think approximately $30,000 a year of our own money, separate to the rental income, to not default on the loans.’ Mr Mackey has never missed a payment so far, but this month his loans are switching over to principal-plus-interest. That means he’ll have to find another $12,000 every year to cover the mortgages. He is yet to speak to his bank. ‘If it gets serious and ugly, I presume they can probably bankrupt me,’ he said.”

“Even if he sells both investment properties, he has zero equity and may still owe ANZ about $250,000. He says he regrets ever buying the Blackwater houses. ‘It was probably the worst decision I’ve ever made in my life,’ he says.”

“It has become harder to refinance, with banks applying greater scrutiny to people’s debts and spending habits. By 2015, interest-only loans had grown to almost 40 per cent of outstanding housing credit in Australia. In March 2017, the Australian Prudential Regulation Authority put the brakes on, limiting interest-only lending by the banks to 30 per cent of new home loans. Earlier this month, official data showed new lending to property investors had fallen to its lowest level in two years.”

“But Australia is still exposed with these types of loans when compared to overseas markets. In the UK, 17.6 per cent of home loans are interest only. In the US, where interest-only loans played a role in the global financial crisis, lenders there have only recently started offering these types of loans again, but with extra safeguards.”