The Housing Bubble

A report from the Sunday Telegraph. “Australian families are being priced out of the property market by record numbers of highly paid skilled workers arriving from overseas. Research by The Sunday Telegraph has revealed for the first time how skilled immigrants - predominantly from Britain, India and China - are forcing house prices to some of the highest levels in the world when compared with average incomes. The median Australian property now costs 5.5 times the average household income, and about eight times income in Sydney. That compares with a ratio of 2.5 times household income in the US and five times income in Britain.”

“Property prices in the US and Britain have collapsed, but neither country approached Australia’s peak of six times income even before their markets crashed. Mark Taylor arrived from Britain on a skilled visa in 2003. The engineer-turned-management consultant…soon became obsessed with buying property. He now owns four houses around the country and is scouting for a property in Sydney. ‘The tax breaks are just fantastic,’ the 37-year-old from Maroubra said. ‘You can offset losses on rental income against your tax, which you can’t do in Britain, and that makes it such an attractive market.’”

“‘Sydney is set to be the best-performing city in the country this year, so I’m looking to buy in the north-west, maybe at Ryde, or somewhere in the inner west. There is such a shortage of supply, I think prices will shoot up this year and I want to take advantage,’ he said.”

“Other economists say the shortage of housing supply is only partly to blame. ‘The fact there is a shortage of property doesn’t necessarily mean prices have to keep rising,’ Steve Keen, professor of economics at the University of NSW, said. ‘There was still a shortage of property in the UK when its housing prices crashed.’”

The New Zealand Herald. “Leading executives in commercial property agencies remain guardedly upbeat about investment and leasing opportunities in several sectors of the market for this coming year while warning about the ongoing impact of restricted credit and high vacancy rates. Chris Bayley, general manager, commercial and industrial, for Bayleys Real Estate, says ‘It is likely the current insatiable demand for retail property, underpinned by a strong local Asian component to the market, will continue unabated in 2010, particularly as the economy picks up again.’”

“Mark Synnott, managing director of Colliers International…says land will never be cheaper and neither will construction costs.”

The Dargaville News. “A leading economist believes New Zealand has an over-abundance of land and says prices will have to come down in the near future. ANZ chief economist Cameron Bagrie warned ‘prices are going to have to adjust and this will be the story of 2010.’”

“Bagrie says there is an over-abundance of land and prices are over inflated. Currently the value of properties was concentrated in the land and there is no shortage of it in most regions, except for the big centres like Auckland, he said. Bagrie pointed out Northland as an example of somewhere that could be hard hit given ‘there is a real surplus in that region.’ ‘If you look at house prices compared to incomes in New Zealand, I would suggest they are overvalued.’”

“Massey University Lecturer Bob Hargreaves says the reason why property prices haven’t come down that much comes down two key factors. ‘It’s a psychological thing, people that brought their properties at the height of the property boom don’t really want to sell at a loss, so you’ve got people just sitting there holding onto their properties.’”

From Viet Nam News. “Foreign investors will start to shift investment from HCM City to Ha Noi this year, according to Marc Townsend, managing director of Property services and consulting firm CB Richard Ellis Viet Nam Co. He said foreign investors, as well as the Government, had been active in the market. ‘Investors from Malaysia and Singapore eye the city as a promising market,’ he said.”

“Townsend said demand for tenement apartments would increase because the cost of a villa was beyond most Vietnamese people’s budget. CBRE also said that more Vietnamese were looking for second homes and that…the residential segment in HCM City would face fierce competition due to oversupply in and around the city. Townsend cited the backlog of apartments from 2008 and 2009 as one reason for the market glut.”

“Launches expected this year would add an additional 30,000 units, triple the amount in 2008 or 2009, and contribute further to the competition, Townsend said. The super-deluxe segment would also emerge and attract serious attention, he said. Condos priced at US$10,000 per square meter and villas costing US$3 million will be offered in this segment.”

From Xinhua. “China’s southern island province of Hainan will suspend land leasing and development approval in a move to curb property speculation, the province’s Party chief has said. Following a tourism promotion policy document issued by the central government earlier this month, real estate developers have flocked into the island, causing new property bubble concerns, WeiLiucheng, secretary of the Communist Party of China Hainan provincial committee, said at a meeting in Haikou Friday.”

“Housing prices in Hainan has surged after the release of the tourism-boosting plan, with some programs hitting 70,000 yuan (10,249 U.S. dollars) per square meter, arising high alertness from the local government.”

“Property trading in Beijing in the first two weeks of this year slumped, following a string of government moves to curb soaring real estate prices. Beijing property transaction management authority said on its website Friday that sales of future delivery residential apartments during Jan. 1 to Jan. 13 were down 63.9 percent month on month to 3,031 units, compared with 8,397 units in the first half of December.”

“Those for second-hand homes also plunged 73.3 percent to 4,800 units, according to data from the website.”

The Associated Press. “Beijing took steps last week to curb the kinds of high-risk loans that can create housing bubbles, as happened in the United States. It ordered banks to set aside more reserves, and its central bank raised interest rates on one-year bills. China, which was also hit by the worldwide downturn but has bounced back fast.”

“Because Beijing can dictate lending patterns to state-controlled banks, it’s been far more successful than the U.S. government in loosening the flow of credit. Last year, under orders, Chinese banks lent $1.3 trillion in January-October — more than double the level for all of 2008. China’s action Tuesday came sooner than expected. Analysts suggested it might have been prompted by reports that Chinese banks lent 600 billion yuan, or about $88 billion, in the first week of January — nearly double the total for all of December.”

“‘This is an extremely high figure, and suggests that the banks are rushing to push loans out the door ahead of the widely anticipated tightening of monetary policy,’ said Tom Orlik, an economist in Beijing.”

“But the money flowing through the economy helped drive up real estate and stock prices. Housing prices in Beijing and Shanghai have soared since late 2008 to an average of more than 12,000 yuan ($1,700) per square meter, double the level three years ago, according to a December report by U.S. bond manager Pimco.”

The Guardian. “The Chinese authorities are well aware of the risk of a bubble, and have taken a series of steps in recent weeks, including increasing banks’ reserve requirements, to try and cool things down. ‘They’ve got very scared that they can’t control it,’ says Mark Williams, senior China economist at consultancy Capital Economics.”

“Capital controls protecting the currency from a financial exodus mean it’s hard for domestic investors to send their surplus funds abroad – so with banks directed to pump up lending, cheap cash is pushing up asset prices at home. Bank lending in December was more than 95% higher than a year earlier, according to the People’s Bank of China.”

From Time Magazine. “Much of the fault of the financial crisis has been heaped on Wall Streeters, unscrupulous mortgage lenders and weak regulators. But in a new research paper, economist Ricardo Caballero says there is another major group of contributors to America’s monetary mess who are not getting the blame they deserve: foreigners. ‘There is no doubt that the pressure on the U.S. financial system [that led to the financial crisis] came from abroad,’ says Caballero, who is the head of MIT’s economics department. ‘Foreign investors created a demand for assets that was difficult for the U.S. financial sector to produce. All they wanted were safe assets, and [their ensuing purchases] made the U.S. unsafe.’”

“‘What worries me is Congress trying to create new regulations, but not asking where the pressure was coming from to create these products,’ says Caballero. ‘In terms of formulating a solution, just looking at the U.S. financial system is not the answer.’”

“China, contending with a huge trade surplus with the U.S., bought more and more Treasury bonds, pushing down yields and making Treasuries less attractive to other foreign investors. As a result, the rising demand for higher yielding U.S. debt opened the door for Wall Street investment bankers to spin out new classes of fixed-income securities, most notably collateralized debt obligations. Much of the money raised by those investments was funneled in the mortgage market.”

From Barron’s. “All hangovers are lousy, whether you’ve overdone it on Dom Pérignon or plonk. But none is worse than a hangover caused by too much money. The mournful effects are everywhere today, in a sluggish economy, rampant unemployment and towering deficits that threaten to cripple our currency and wreck our living standards. These and other weighty topics were much on the minds of the members of the Barron’s Roundtable.”

“Are there any comparable periods in history? Felix Zulauf, owner of Zulauf Asset Management in Zug, Switzerland: ‘The only comparable in modern times is Japan, although Japan’s financial and economic crisis was worse. Japan lost three times the value of its gross domestic product as asset values deflated, while the U.S. lost only one times GDP. On the negative side, we are in the early stages of a deleveraging process, which is marked by a shift from maximizing profits to minimizing debt. It is a multiyear process.’”

“Isn’t the stimulus slated to end this year? Zulauf: ‘That’s the big question. Central bankers themselves are somewhat afraid of what they have been doing. Politicians are worried about public-sector debt. Therefore, the authorities will try to step away slowly from their stimulation efforts, because this policy isn’t sustainable.’”

“Abby Joseph Cohen, Senior investment strategist…Goldman Sachs, New York: ‘Felix is correct that the structural problems will take a while to correct, and the problem isn’t just the United States. Some make the specious argument that what happened is all the fault of the U.S. consumer. But housing markets became overpriced throughout the world. Too much credit was extended in a whole variety of places.’”

“Zulauf: ‘China is in a dangerous situation. Credit growth is the one factor that all the bubbles that burst had in common. Because China isn’t an open economy, the bubble there can probably keep inflating longer than it otherwise would have. But the Chinese can’t escape the laws of economics. If China’s bubble bursts, it would cause a second hit to the world economy.’”

“Vancouver is going to face a shortfall of apartment units following its hosting of next month’s Winter Olympics Games, said the realtor known as the city’s ‘CondoKing,.’ Bob Rennie told Xinhua in an exclusive interview that Vancouver properties would conservatively rise 4 to 4.5 percent in 2010, which would present an ideal opportunity for investors. The high-profile designer and marketer of condominium developments said with the city going through a difficult economic downturn in 2008, in Greater Vancouver alone the construction of between 4,000 to 6,000 apartments units had been put on hold.”

“‘If there was ever going to be an Olympic overhang we took care of it in 2008-2009 by canceling buildings. We are now coming into a shortfall where banks are very conservative, Canadian banking practices are always very conservative, and developers are just coming off the sidelines,’ he said.”

“Unlike China where real estate speculation is rampant, Rennie added in Vancouver it was ‘more passive speculation’ with investors buying for the long term. ‘Every market has people who want to jump in and jump out, but there is something unique about Vancouver that once people get their name on title they tend to hold and that’s what maintained prices. And a very low vacancy rate has maintained prices on property prices.’”

“With Chinese-Canadians about 300,000 of the city’s 2.2 million population Rennie said Asian investors were increasingly an important factor to the market, accounting for about 25 percent of the overall sales. ‘With the amount of money being made in China, and with the acceptance of China to Vancouver, we have to be in the top two places on the planet for China to look at, to move money to. We see it happening right now, it’s happening a lot. It used to just happen in the luxury market, now it’s happening in all the market.’”

“One of Rennie’s big projects following the Olympics and March Paralympics will be the marketing and sales of the Olympic Village which will be released May 15. To date, 265 of the 737 condo units have been sold. They range from 600,000 Canadian dollars to 10 million Canadian dollars.”

“He went as far to say that much like the World Expo that the city hosted in 1986, the Olympics would ‘ensure’ the Vancouver brand forever. ‘I’ll guarantee it won’t hurt our values. I’ll guarantee it will maintain our values. The frightening part is if values go up too much. We don’t have financial sector head office jobs, no manufacturing. If we are basing things on local incomes, how does housing keep up with local incomes if we have a shortage? We have to be very careful on the affordability side.’”

“According to Royal LePage, the median price for properties in Greater Vancouver in 2009 was 592,000 Canadian dollars, about 1,000 Canadian dollars off its 2008 peak. “