The Housing Bubble

A report from AFP on China. “It was billed as China’s Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country. But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China’s growing but sometimes unbalanced economy. Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre ($2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.”

“Phoenix Island is part of Hainan, a Belgium-sized province in the South China Sea that saw the biggest property price increases in China after a 2008 government stimulus flooded the economy with credit. Eager buyers camped out in tents on city streets as prices shot up by more than 50 percent in one year. ‘I just got a call from a businessman desperate to sell,’ Sun told AFP. ‘Whether it’s toys or clothes, the export market is bad… property owners need capital quickly, and want to sell their apartments right away.’”

The Economic Observer Online on China. “Yingkou is a third tier coastal city in Liaoning Province located between Shenyang and Dalian. The city’s goal is to become a large tourist city with a population of one million, but at the moment, it’s the new focus of China’s real estate bubble. A Yingkou real estate market research report obtained by the Economic Observer shows that in 2012, the potential future supply of properties from 42 major projects in the city reached 14 million square meters. If the properties are sold at the 2011 rate of 2 million square meters annually, it will take six to seven years to unload all of them. A developer said that the city has the most serious real estate bubble in Liaoning and that the six to seven year estimate is probably too conservative.”

“A worker at a real estate agency in Yingkou estimated that, even if the entire existing 500,000-person population in the downtown area all moved to the new developments, many homes in the area would still be unoccupied. Yingkou’s real estate bubble is not an isolated case. A report by E-house China ranking the real estate market risk in Chinese cities shows that the severity of Yingkou’s real estate bubble was ranked 26th among 287 cities.”

The South China Morning Post. “Just three months after Hong Kong rolled out a tough new round of property cooling measures, home prices have again climbed to record highs with demand unusually strong for new flats over the normally quiet Lunar New Year holiday break. Property prices per square foot now exceed HK$10,000 even in drab, unglamorous districts such as Taikoo Shing on Hong Kong Island, where thousands of 700 square-foot units sell for more than US$1 million apiece, more than a large cottage in Provence, France, a 2,700 square-foot bungalow in Hawaii, or a 1,300 square-foot flat on Manhattan’s Upper West Side.”

“With affordability reduced in a city with a monthly median household income of about HK$20,000 and one of the widest wealth gaps in Asia, anxiety has grown among its 7 million residents. That anxiety however, didn’t stop buyers flocking to newly built units at Sun Hung Kai Properties’ Residence 88 in a far-flung district close to the border with China, snapping up 150 of the 352 units over three days at an average price of some HK$8,000 per square foot. ‘Sun Hung Kai was testing the market,’ said property research analyst Wong Leung-sing with Centaline Property. ‘People still want to buy flats. The desire is strong. They don’t think the market will fall.’”

“‘We don’t even have enough money for food…but the government has hardly done anything to fix the market,’ said Michelle Wong, a single mother raising her baby daughter in a damp, 80 square-foot sub-divided flat with a ruptured sewage pipe that she rents for HK$3,000 per month.”

“After five previous rounds of efforts to curb prices since October 2009, including a 15 per cent property tax on foreign buyers, mortgage restrictions and quick resale taxes, the home-price juggernaut rolls on and the challenge remains enormous. ‘The overheating property market remains the biggest risk factor to the stability of the Hong Kong economy,’ said Norman Chan Tak-lam, head of the Hong Kong Monetary Authority, who also said household debt was now at 59 per cent, close to a record high of 60 per cent in 2002.”

This is Money on the UK. “Chinese, Malaysian and other Far Eastern investors are spreading their wings outside the traditional London hotspot and driving demand for new build investment properties across Britain, according to a new report. Buy-to-let specialist by Assetz says that seven years ago, there were near enough zero transactions to Chinese and Far Eastern investors, but they now account for nearly 10 per cent of its investor purchases.”

“It comes as the property market in Beijing, Shanghai and other leading Chinese cities has ‘overheated’ in recent years, according to the firm. It says a chronic oversupply of property there driving down rents with an average gross yield of just three per cent. The Chinese, for example, are allowed to move $50,000(US) ($100,000 for a couple) out of the country each year - enough to put down a deposit for a mortgage on a good quality property. The Bank of China is offering sterling mortgages to Chinese investors, usually at 60-70 per cent Loan-to-Value.”

“As a property investment firm, Assetz is obviously keen to publicise its claimed trend. But it backs its figures up by saying it handles around five per cent of all residential investment property purchases in the North and estimates there have been in the region of 2,000 buy-to-let properties sold to Far Eastern investors in the North last year.”

“Naomi Heaton, chief executive of LCP, says: ‘While yields have cooled slightly, they reflect both diminished returns across all asset classes and the low cost of borrowing, meaning that they are set to harden when interest rates rise. Whilst overseas investors may be tempted by high yields outside London, capital upside is far less likely and total returns will be considerably less, with much higher risk.’”

The Globe & Mail in Canada. “The ruse went sideways not long after the broadcasts aired. Two sisters, identified as eager home buyers, perused a downtown Vancouver condo development in news segments about a spike in sales over the Lunar New Year. If they liked the suite, the sisters said, their parents – visiting from China – would purchase it for them. What followed was a PR disaster. Observant web sleuths identified at least one of the sisters as an employee of MAC Marketing Solutions – the firm selling the condo. Confronted by media, MAC president Cameron McNeill admitted both women were employees and apologized for misleading the public.”

“It reignited a debate among real estate observers: Just how much truth is in the long-standing narrative that foreign money is driving the local market? In one case study, for example, Andrew Yan of Bing Thom Architects looked at the amount of energy consumption in a sample of downtown Vancouver condos. Working on the assumption that a condo is empty if it uses less electricity each month than it takes to power a refrigerator (75 kilowatt-hours), the urban planner and researcher concluded 5.5 per cent of the sample is empty at any given month.”

“However, even the slightest tweaks led to significantly different results: Raising the threshold to 100 kwh, for example, meant the percentage of potentially empty condos rose to 8.5 per cent; 150 kwh to 17 per cent.”

“Jeff Fitzpatrick, a realtor with Sotheby’s International Realty Canada, said influxes to certain pockets of a city can have a cascade effect. If offshore buyers scoop up the real estate in Point Grey, for example, a young professional in Vancouver who might have purchased there years ago might instead move to Main or Fraser streets. As a result, those markets are then priced up. ‘Now the janitor who was hoping to buy a house along Main Street is now buying in Burnaby,’ he said.”

“However, Mr. Fitzpatrick also notes the difference between investors and new residents: ‘The people that are buying this stuff are [often] residing there; they’re making an investment in the neighbourhood as well,’ he said. ‘They’re going to be buying milk, and buying gas and buying a car. They’re not just going to be renting these [properties] out. So does that technically qualify as a domestic purchase or a foreign purchase? It muddies the water a bit.’”

The Asia Times. “This from the Federal Reserve Bank of St Louis president James Bullard on February 21: ‘Let me just talk a minute about [Fed governor] Jeremy Stein’s speech…My main take away from the speech - he pushed back some against the ‘Bernanke doctrine.’ The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macro-economic concerns, and then we’ll use regulatory policy to try to contain financial excess. And Jeremy Stein’s speech said, in effect, ‘I’m not sure that you’re always going to be able to take care of the financial excess with the regulatory policy.’ And in a key line, he said, ‘Raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see or you might not be able to attack with the regulatory approach,’ Bullard said.”

“Bullard continues: ‘I thought this was interesting and I would certainly listen to him. This is an argument that maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years, where we’ve always said we’re going to use regulatory policies in that dimension. I thought it was a very interesting speech, but let me give a little broader context.’”

“‘The Fed has been talking about asset bubbles since the ‘irrational exuberance’ speech which was 1996. So it’s nothing new. We had a big bubble in the nineties. A big bubble in the two thousands. Those two bubbles ended very differently. The Fed’s been talking, talking, talking about this. So it’s certainly been a concern. It is a concern today. But it’s like nothing new. This has been going on for 20 years. Frankly, there aren’t good answers because we don’t have great models of financial instability,’ he said.”

“There is dissention as well as confusion at our central bank. There is broad disagreement as to impacts, benefits and costs associated with the Fed’s long-term zero rate policy, quantitative easing, the mix of asset purchases, the ongoing balance sheet expansion (and, supposedly, eventual ‘exit’), pre-committing on the future course of policy and communications more generally. While no one wants to admit as much, it’s all become one big and consequential mess.”

“By accommodating even bigger - and more systemic - bubbles, the Fed has perpetrated even bigger policy debacles. Please explain how ‘regulatory policy’ is to address the unprecedented issuance of government debt coupled with unconventional experimental reflationary monetary policy - the heart of today’s ‘global government finance bubble’? It hasn’t - and it won’t. And, clearly, I’m not alone in recognizing the obvious: the Fed has become a rather conspicuous enabler of Washington fiscal dysfunction. The Fed has become an enabler of global speculation, along with ever-mounting financial and economic imbalances.”

“Recall that Chinese officials were in the process of attempting to cool an overheated economy and a national housing Bubble before the ‘European’ crisis last year risked unwieldy downturns. Officials cautiously retreated from measured ‘tightening’ and, as bubbles tend to do in the face of timid policymaking, the Chinese economic, credit and housing market bubbles sprung right back.”

“One can see a central bank institution that’s flailing. They’ve opened the money-printing Pandora’s Box - without a doctrine, a strategy or even a consensus view for how to approach its latest experiment with ‘open-ended’ quantitative easing. In reversing last year’s potentially destabilizing global ‘risk off,’ the Fed and global central bankers incited a historic period of ‘risk on’ excess and attendant fragilities. Now they’re stuck.”

“A lot is riding on the current ‘risk on’. Six months ago, the consensus view was that monetary policy was largely out of ammunition. Today, irrational exuberance has central bankers enjoying unlimited firepower. Central banks will be there the moment markets require additional liquidity. And the more markets inflate, the more confident players are with notion that central bankers won’t dare rock the applecart. It’s increasingly clear that ‘risk on’ comes with heightened excesses and imbalances.”