The Housing Bubble

The Bull reports on Australia. “Today, the median sale price in The Hamptons, the home of Madonna and Lady Gaga, is US$780,000, which equates to $726,828 in Australian dollars. For this money, you’d be lucky to pick up a fibro cottage in Brisbane or a pokey townhouse in Newtown. Today it’s cheaper to buy a chateau in France than a luxury unit in Singapore, Hong Kong and even Mumbai, India. Property markets across China, India, Singapore and Hong Kong have soared. Australian property too has defied all odds to advance higher since the global financial crisis hit. It has been an incredible run up, but the cracks in the market are starting to appear. According to Knight Frank Prime Global Cities Index, luxury house prices are falling fastest in Asia.”

“With two-bedroom shacks in Mount Druitt, Sydney going for more than $500,000, the market is looking perilously toppy. So if you urgently need to sell your property for financial reasons, you may want to consider cutting your sale price sooner rather than later.”

The Australian. “The Reserve Bank has warned the big lenders against lowering their standards in a bid to win new mortgage customers. Luci Ellis, the head of the Reserve Bank’s financial stability department, said ‘It is always tempting to ease lending standards and dress that up as responding to competition or giving the customer a better deal,’ at a mortgage lending conference in Sydney.”

“Ms Ellis said losing the ability to repay was much more important in predicting defaults than falling house prices. Simply measuring the size of the loan against the value of the property was too simple a formula, as was comparing the loan amount to income. She said it was never the average borrower who got into trouble. ‘It is the ones who over extend themselves to get the dream home or to buy the second or the third or fourth investment property.’”

The Sydney Morning Herald in Australia. “Project engineer Emma Challands would like to be in a position to retire before 40. She already has one investment property and is looking at buying another in the middle of next year. Emma plans to sell half her portfolio of properties as she goes, to pay off debt and use the rent as a passive income stream. ‘In a nutshell, my plan over the next 10 years is to buy basically two properties every year,’ she says.”

“The principle of Smart Property Adviser, Kevin Lee, says negative gearing - whereby if the interest costs and other expenses are greater than the rent then the shortfall reduces the investor’s income on which income tax is paid - is no longer the way to go. About 1.5 million property investors across Australia record tax losses in their tax returns. Those who negatively gear hope to recover the losses by selling the property for healthy capital gains.”

”’Funding a loss on an investment property is supporting the tenants’ lifestyle,’ Lee says. ‘Negative gearing was probably created to make a poor investment look better.’”

“S&P said yesterday that the nation’s economic prospects were likely to be significantly affected by a sharp China slowdown, causing a hike in the unemployment rate and a big fall in real estate prices. A hard landing would translate into a recession for Australia. Under S&P’s revised ratings formula, the ‘economic imbalances’ score for the Australian banking sector blew out from 3, or intermediate risk, to 5: very high risk.”

MarketWatch on China. “China’s property boom began to unwind last summer said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics, and what’s playing out now is the end game for a badly distorted market, even though it’s not clear that prices will collapse further. What’s key to watch, Chovanec said, is the behavior of investors who have bought multiple apartments as a way to protect their cash against inflation and gain exposure to an asset class that until recently enjoyed uninterrupted price gains since property reforms in the late 1990s.”

“Estimates of sold but unoccupied apartments in China range between 10 million to 65 million units, representing a potentially huge supply overhang at a time when real-estate developers are already sitting on record unsold inventory. Tsinghua University’s Chovanec says any move by investors to off-load homes could turn the current property price retreat into something more serious, though it’s not clear what they will do, as relatively few are believed to have borrowed heavily to support their purchases.”

“Many owners probably wished they’d already sold but are now resigned to hang on in the belief they’d missed the window to get out, and a government rescue might not be far off, he said. ‘The big question is whether they will hit the panic button,’ Chovanec said. ‘If they paid cash, they don’t have to sell, but at some point they don’t want to see their savings evaporate either.’”

From China Daily. “At various apartment projects across the country, developers are making it possible for homebuyers to put down a 10 percent down payment for a residence rather than the usual 30 percent. Many observers said it’s a sign that cash-strapped property developers are under pressure to reduce their inventories and replenish cash flow. A salesman at an apartment project in Huizhou, Guangdong province, who only provided his surname, Zhuang, said the remaining 20 percent required for the down payment will be advanced by the developer. So long as a homebuyer pays the money back before the project is completed in March 2013, he or she will not owe interest or extra fees.”

“‘There are still a lot of first-time homebuyers looking for bargains who cannot afford a 30 percent down payment,’ said Huang Zhijian, executive director of the Shanghai-based Uwin Real Estate Research Center. ‘I do not foresee that developers will face great risks by taking part in these promotions, especially because none of the housing projects that have been advertised as having discounted down payments have been completed yet.’”

“Liu Xin, a 29-year-old company executive, finally decided to sign a contract with a real estate brokerage firm this past weekend. The price of the second-hand two-bedroom apartment Liu wanted to buy had fallen some 10 percent from three months earlier. The agent from brokerage Homelink told Liu last week that more people were showing interest in that apartment. ‘I read in the newspaper that many experts said prices would drop further this year, but who can really tell the bottom of the market accurately?’ Liu asked.”

“Liu missed the previous bottom in late 2008 and early 2009 as he waited for further declines. Most analysts and prospective buyers had a similar view at that time. Liu abandoned his home-buying plan in 2009 because of the strong price rebound in the second half of that year. This time, he didn’t want to miss the chance again, considering his imminent wedding. The news that Shanghai would allow people who have held Shanghai resident cards for more than three years to buy a second home despite their non-permanent residence status helped Liu make up his mind.”

“‘It is almost impossible to get in exactly at the bottom,’ said Grant Ji, director of the investment department at real estate services company Savills. ‘For owner-occupiers, if the price has fallen to a reasonable range, they can buy now.’”

The Vancouver Observer. “Canada’s housing markets are forecast to remain steady for another two years, according to a new report. Bill Binnie, owner and broker of Royal LePage North Shore, observed that there aren’t many investors. He said that ‘between the local investor and the foreign investor, (the difference) is never more than 20 per cent.”

“‘We’re only seeing maybe half as many Chinese buyers as we did last year thus far, but I think that will grow,’ he said. ‘I think there’s some urgency in China to buy this year because of a [government central committee] change happening there, so that will be a steady influence in the Vancouver market all year, as it was last year. I don’t see much change.’”

“‘Vancouver is very much still under the influence of offshore buyers,’ said Kim Little, a real estate agent. ‘Locally, we are seeing starter homes, which are now condos and townhouses, carry on steadily.’”

“Detached bungalows rose 14.1 per cent year-over-year to $1,017,500, largest year-over-year price increase. Prices for standard two-storey homes rose 10.9 per cent year-over-year to $1,117,250. Standard condominiums saw an increase of 10.7 per cent year-over-year to $536,500.”

The Arizona Daily Star. “Investors have been snapping up excess homes in the Phoenix area, eliminating a glut in the market for low- to moderately-priced homes, according to a new report. Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School at Arizona State University, said he believes there is no longer an oversupply of homes for sale in the price range below $300,000, creating a more balanced market.”

“He says investors have bought up and eliminated the excess inventory in that price range, though ‘ample supply’ remains in the upper price ranges less affected by foreclosures. As the supply dwindles, prices are likely to rise, he said. Fewer homes are reverting back to the banks at auction, as investors snap up what bargains are left in the Phoenix area, Orr said.”

“‘Buyers from Canada, New Zealand and Australia, in particular, are taking advantage of the exchange rates to purchase investment and vacation homes,’ Orr said in prepared remarks.”