The Housing Bubble

It’s Friday desk clearing time for this blogger. “Home sales and prices continued to climb in May, raising the prospect of a new housing bubble unless there is a significant increase in home building. ‘The home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth,’ said Lawrence Yun, the chief economist for the National Association of Realtors. The warnings about prices rising too fast were a stark change from the Realtors’ position during the heyday of the housing bubble, when the statement from officials generally cheered the steady rise in prices.”

“Colorado’s hot real estate market has put some buyers in the prickly position of having to decide just how much they’re willing to pay for a property — even if it means paying more than it’s currently worth. That leaves some wondering whether a new mini-bubble is inadvertently being created, putting extra pressure on appraisers who’ve already been beaten down with part of the blame for the prior housing bubble.”

“‘One seller had a buyer who literally wrote an escalation clause into their offer, beating any other offer up to $30,000 over the list price,’ said Jolon Ruch, president-elect of the Colorado Association of Realtors.”

“Leslie and Scott Tyree backed out of a contract in 2011 to buy a weekend place in Hilton Head, South Carolina, fearing they’d be anchored to a sinking market for second homes. This year, the West Virginia couple pounced on a listing in the same resort town without visiting the property. They bought the two-bedroom condominium in an oceanfront golf resort for $429,000 in April. ‘We knew several other people were looking at it and it wouldn’t last long,’ said Leslie Tyree.”

“Can real estate investors flip homes successfully through the second half of 2013 without flipping out of business, or are the evolving markets on both the southeast and southwest coasts increasingly perilous for quick-buck ambition? Although the process came to symbolize poor judgment and greedy excess during the recessionary years between 2006 and 2009, that’s changed significantly. ‘First off,’ says Rick Shaffner, a partner in a consortium of five investors who own about 300 rental properties on the southwest coast, ‘I wouldn’t call it ‘flipping’ — that’s a derogatory term.’”

“In 2009 they started out paying about $35 a square foot for homes in Lehigh Acres and Cape Coral. Now they’re paying about $55, and their bet is that values will go up to about $75 per square foot. And that’s when they might sell significant numbers of their 300-plus rental properties, he says. ‘I don’t have somebody else giving me a paycheck. So I wake up every morning unemployed, and figure out a way to create income,’ he said.”

“It’s no secret that the rich investor class is buying up properties in cities around the world, including Vancouver. But if we look at the numbers we do have, things just don’t add up. For example, we have the highest average house price in the country, and yet average income is lower than most major Canadian centres. If you look at the numbers, Vancouverites are simply too poor to afford real estate. In some areas, it’s astonishing that we even try.”

“The average income in Metro Vancouver in 2009, was only $41,176, according to Canada Revenue Agency statistics. In Vancouver proper, we are getting by on $43,911. With the average selling price of a detached house in Vancouver at $1.116-million, the incomes do not jibe. ‘It doesn’t make sense when you look at income numbers,’ says researcher Andy Yan. ‘We are not a wealthy city.’”

“A survey did by the Beijing Police last year showed the city has 13.2 million units of houses, of which 3.8 million are confirmed vacant, putting its housing vacancy rate at 28.9%, leaving the public in shock and disbelief. Meanwhile, vacancy rates of newly-built houses are generally higher than 33.3%, said the survey. High vacancy rate in newly-built houses is also believed to be a major force behind rising house prices despite the Chinese government’s repeated cooling measures including purchase restraints to curb price hikes.”

“Beijing’s largest district Chaoyang in 2010 released figures showing that a total of 1.33 million square meters of residential space are vacant and 54.9% of homes have been empty for at least three years.”

“The average asking price of a property in London has increased by more than £30,000 since the start of 2013, according to figures from property website Rightmove, and is now comfortably through the half-a-million pound mark, at £515,243. It sounds a lot, but in some parts of the capital it is small change. The property boom i Mayfair, Knightsbridge, the West End, Kensington & Chelsea, and Holland Park – has been extraordinary. The average price of a PCL home is now £1.53m.”

“It may seem that the only way is up, but politicians, retailers and even estate agents are warning that expensive homes are creating soaring rents, an exodus of small shops and a ghost town atmosphere, and that the market could turn out to be a bubble. ‘More and more stats and anecdotes indicate that ‘Fortress Central London’ is emptying of residents,’ says Ed Mead of Douglas & Gordon, an estate agency with 11 branches across the capital. Parts of PCL fail the neighbourhood test of having milk and newspapers on sale within a short walk of where people live. ‘Why should owners care? They’re never here to need them,’ Mead says.”

“One of the reasons so many homes lie empty is that house prices have been rising rapidly, meaning capital appreciation is so high there is little incentive for some investors to let their property. ‘Take a flat worth about £850,000 a year ago. That’s worth £950,000 now,’ Mead says. ‘The capital growth alone is equivalent to almost £2,000 a week and there’s no wear and tear.’ He believes some investors purchase new-build apartments only to ‘bubble wrap and sell in pristine condition at some point in the future.’”

“Auckland’s property-market circus is a golden opportunity for speculators as home buyers feel the squeeze. So with immigrants and investors swarming to Auckland from parts of the world where property speculation is rife, the recipe is set for a party. Apparently Asians are 40 per cent of buyers in Auckland and all buying three or more houses. Sometimes we gear-up but our appetite for multiple houses isn’t fully dependent on the supply of credit - not as much as it is for those desperate to start on the property-owning path.”

“And so long as those desperadoes are in the market, forced to Auckland because of the job market and desperate and able to buy, courtesy of large dollops of credit courtesy of their banks, then it’s like babies to the slaughter. I’ll have five houses please - it’s a certainty prices will rise, profits are all tax free, gearing available to amplify my gains - oh it’s all too much, why bother with the day job. And the more the merrier, this bubble is so much fun.”

“Residential rentals in posh areas of Mumbai, Delhi and Bangalore have dropped by around 25 percent. Demand for rented homes in Mumbai’s popular localities are also down by half in the last one year, according to a report in the Economic Times. When rental yields do not appreciate in proportion to the capital value, it means the property is overvalued. Pankaj Kapoor, MD at real estate research firm Liasas Foras, cites the example of Napean Sea Road, one of South Mumbai’s posh localities, where properties are being sold at Rs 50,000 a square foot in the secondary market from its peak of Rs 80,000 last year!”

“Another reason for lower rentals is the sudden influx of new supply in the luxury market. ‘Seeing dollars in luxury housing, several builders adopted the ‘me too’ approach, but only a handful are flourishing, while others are struggling to survive,’ adds Kapoor. Little wonder that investors who bought these projects are now willing to offer discounts on rentals, as there are no buyers for these projects anymore.”

“We’ve heard that the housing market is getting better, but underwater homes are still a big problem here in the valley. Those homeowners remain stuck with few, if any, options. For the Picazos, home ownership has led to stress, frustration and desperation. ‘We had no idea about the bubble,’ says Mike Picazo.”

“The housing bubble popped soon after the couple bought a modest 3-bedroom home in west Phoenix in 2005. They’ve been underwater for the last several years. Today the Picazos’ 3-bedroom home appraises for about $66,000. Back in 2005, the couple paid $165,000. ‘We’re tired. It’s taken a toll. Our family, its stressful, it is stressful,’ he said. ‘With it being $100,000 upside down, I was pretty upset, pretty upset,’ says Beatriz Picazo.”

“Despite the comeback in home values over the last year, the Business Journal reports that nearly one-third of all mortgages in the state remain underwater. ‘One of three homeowners that have a mortgage are upside down, and they’re getting that feeling that they’re alone again, because they’re hearing its good news week, and they’re 50, 70, 100 thousand dollars upside down,’ says Marge Peck of Peck Team Realty.”