It Is Quite Obvious There Is Going To Be A Problem
A report from the Australian Financial Review. “Apartments in Melbourne’s Docklands, CBD and Southbank are being resold up to 24 per cent below their previous off-the-plan purchase price, catching out vendors, many of whom bought them from investment companies or spruikers. AFR Weekend has found numerous examples of such apartments, most of which are small studio or one-bedders, acquired after the global financial crisis. The revelations come as concerns build about an oversupply of apartments, as a record number of completions loom, and following Macquarie Bank tightening its lending to high-rise apartment postcodes, including in Docklands, the CBD and Southbank.”
“In one example, a one-bedroom apartment measuring 56 square metres in the Site One Complex at 757 Bourke Street has an asking price of $290,000 to $319,000, having been bought off-the-plan for $380,000 in 2009.”
“Evidence of falling apartment values was identified broadly by valuation firm WBP Property Group last year. The study found that half of all off-the-plan properties were valued at a minimum of $1000 less than the purchase price with the average loss being $40,000 or 9.4 per cent. In Central Melbourne, the fall was greater at 11.5 per cent. In one extreme example, a two-bedroom apartment in Abbotsford suffered a loss of $623,000, a decline of 46 per cent. ‘In real terms, this loss equates to the cost of a typical deposit, which most people take several years to save,’ said WBP Property Group chairman Greville Pabst.”
The Canberra Times. “Real Estate Institute of the ACT board member Michael Kumm, speaking personally, said Canberrans were conservative borrowers who posed no risks to banks, but there was a clear oversupply of units in the city and the government should be told it was releasing too many. ‘On Allhomes now 70 per cent of properties [for sale] are units, and some of those might represent a development so we could be getting up to 80 per cent units,’ he said. ‘We don’t have to hit the panic button, but the warning signs are there that they want to give it some consideration. The units are selling, the sellers just have to meet the market.’”
The Daily Mail. “Developers are reportedly getting cold feet on Australia’s once booming property industry as the value of projects taken off the table nears $5billion. Property construction is slowing across the country as the cost of labour rises and an oversupply of apartments means there is less money to be made in new building projects. In Sydney, the Brookfield Multiplex construction company has reportedly withdrawn from its contract to build the Greenland City Centre, billed as the tallest apartment block in the city. Almost all the apartments in the $700m tower have already been sold off the blueprints, but Brookfield reportedly could not see a way to make money from the project.”
“In Brisbane, the construction of a $1bn apartment tower at 545 Queen Street has reportedly slowed as developers keep an eye on property forecasts which predict a glut of apartments in the city. On Tuesday developer Mirvac reportedly ceased an agreement to build the $3bn Perth City Link, which would have seen 1,200 apartments built in the city centre. And in Melbourne cost comparisons show drastic falls in the asking price of luxury city apartments as the supply of property outstrips demand.”
“On Friday property lender Firstmac reportedly announced it was cutting the amount it was prepared to lend to city apartment builders. The same day Westpac Bank announced it was stopping all lending to foreign property buyers looking to build apartments. Firstmac chief executive Kim Cannon said: ‘It is quite obvious there is going to be a problem in the future.’”
The Australian. “Up to 30 per cent of foreign-owned city apartments are likely to be left empty after a splurge by mainly Chinese investors, says National Australia Bank chief economist Alan Oster. Mr Oster estimates more than 60 per cent of off-the-plan apartment purchases in the Melbourne CBD and half in Sydney are being financed outside the big four banks, likely through offshore institutions and cash.”
“The offshore buying spree — which is compromising the banking regulator’s tough standards on risky investor lending — has led to the Melbourne CBD apartment market being three times oversupplied, while Sydney is two times overbuilt. Offshore investors are increasingly using alternative funding because the major banks are limiting lending in inner-city apartment markets due to fears of overheating.”
“‘With up to 60 or 70 per cent of the apartments in Melbourne (CBD) we do not know who is financing them,’ Mr Oster told The Weekend Australian. ‘We just don’t know if they are going to use cash, whether they have got a foreign bank account somewhere within China, if they have an account somewhere in Hong Kong or somewhere else.’”
“Melbourne-based Jerry Pan co-owns a Chinese-backed development and apartment sales company, Monolith International, which sells units locally and to Chinese investors. Mr Pan said many Chinese investors were forced to delay settlement of their apartments as they could not get funding from stringent Australian banks.”
The Daily Telegraph. “Let’s not beat around the bush. Broken Hill has the cheapest real estate in NSW with houses going for the price of a car. The mining boom turned house prices to gold but its end has seen them turn to dust. Investors who snapped up properties at the start of the mining boom more than a decade ago are now offloading houses for rock-bottom prices. For the price of a standard car, homebuyers can purchase a two-bedroom house. Just $35,000 will get the house and, for an extra $6000, you get the land next door.”
“Broken Hill Real Estate director Cliff Wren, who has been in business for 20 years and has the cheapest properties in NSW, said investors flocked to the outback town in 2003 because they could get a great rental return of $180 every week. But now, with mining in a slump, he said investors running for the hills were flooding the market. ‘We are used to that cycle every seven years and what goes down must come up again,’ Mr Wren said.”
‘In Sydney, the Brookfield Multiplex construction company has reportedly withdrawn from its contract to build the Greenland City Centre, billed as the tallest apartment block in the city. Almost all the apartments in the $700m tower have already been sold off the blueprints, but Brookfield reportedly could not see a way to make money from the project.’
This is from a couple weeks ago:
‘Apartment block development approvals are now at record highs and as a result, construction is booming in many metropolitan areas. But are there enough buyers for all these glossy new units? CoreLogic research analysts Tim Lawless and Cameron Kusher have released a New Settlement Risk Report which takes a look at the number of units due to settle over the next six, 12, 18 and 24 months.’
‘The report identified that across the combined capital cities, there are 92,102 new units set for completion over the next 12 months with that figure expected to rise to a whopping 231,129 during the next two years.’
‘Unsurprisingly, the most construction action across our capitals is happening in our two biggest cities, Sydney and Melbourne. But when comparing the volume of units that are due to settle over the next year, or two years, to the average number of annual unit sales over the past five years, Mr Kusher said there was “a big disconnect”, particularly in the four largest capital cities.’
“The large volume of new stock, coupled with an ever-growing supply of existing stock means that historic high levels of unit settlements are due to occur over the next two years in most cities. In fact, even a recurrence of the peak year for sales in Melbourne and Brisbane over the next two years wouldn’t represent enough demand to cater for all of the new units set to settle over the coming 24 months,” he said.’
‘Greville Pabst, executive chairman and co-founder of WBP Property Group told news.com.au that the data was concerning. “The figures paint an alarming picture for the new apartment market in the coming 12 to 24 months, particularly in Sydney, Melbourne and Brisbane where unit settlements are virtually double, or more, the average number of sales seen over the last five years. Put simply, this means there will be a significant oversupply of new apartments, not to mention a growing volume of existing high-density apartments,” he said.’
‘However, he said the volume of new apartments wasn’t the only problem. “The concentration of new apartments in terms of geographical distribution is also an issue for the long-term performance of these properties, with current projected volumes expected to outweigh demand for the next several years, with obvious implications for stock absorption.”
“Couple this with increasing pressure from banks on both local and international investors, who represent a large proportion of off-the-plan buyers, and settlement risk is not only possible, but increasingly likely in many capital city markets,” he said.’
Three Questions on single family homes:
1. Is locking up low interest rates today on a 30 year mortgage worth the ‘risk’? Looking at homes on Zillow it looks like many have a long way to go up in Palm Beach County before they reach the peaks that were hit in the last bubble. And even if they decline to the levels hit when the last bubble burst…won’t they still go back up? So, how much risk do the attractive 3% interest rates of today ‘negate’.
2. And here’s a bigger question: What will the rates be after the bubble bursts and the politicians get their rate much higher. If we are looking at 5%-6% isn’t buying today still a good deal?
3. And still one more question: today I can buy with 5% down. What will I be paying after the bubble bursts? Are we going back to 25% down? That is a lot of cash that can be used to buy more homes or other investments.
So, why wait to buy if you are in Florida?
“So, how much risk do the attractive 3% interest rates of today ‘negate’.”
The 3% interest rate will support some hefty prices that a higher rate won’t. If rates go up then one should expect prices to come down.
“And still one more question: today I can buy with 5% down.”
And so can everyone else. And prices will reflect this.
One more thing, if prices have been going up then this will attract into the market people who are willing to buy at higher prices because they expect prices to keep on going up. These are the people you will be competing against.
“So, why wait to buy if you are in Florida?”
Why?
Miami Beach, FL Housing Prices Crater 9% YoY
http://www.zillow.com/miami-beach-fl/home-values/
‘Hey Malcolm, listen up. On radio you admitted houses in Australia are ridiculously unaffordable. But instead of trying to change it, you cracked a joke. That makes me, a 24-year-old with a full-time job and no hope of affording a home by myself, furious.’
‘On Wednesday, you told “wealthy” ABC radio host Jon Faine he should “shell out” if his children struggled to afford houses. You’re right, Malcolm. It’s true many of us can’t afford a house without our parents help – and even then, only if they are rich. That you refuse to do anything to fix this problem makes me so angry.’
‘Australian homes are the second-most expensive in the world, according to Demographia. The average Australian home costs 5.6 times our median household income. In Sydney it’s 12.1 and in Melbourne 9.7. Demographia considers a house price-to-household income ratio of 5.1 or more “severely unaffordable”.
‘That’s not something to joke about, Malcolm. That’s something we want you to change. Not all of us have rich families who can give us a leg up. Clearly your daughter, a history teacher, who allegedly sold her exclusive Sydney apartment for over $3 million in 2013, is one of the lucky ones.’
‘The gaffes prove you accept homes are too expensive for young Australians to afford on their own. We already know you agree. In August 2005 you wrote: “Australia’s rules on negative gearing are very generous compared to many other countries” and in September 2005 you called it “tax avoidance”. Yet you do nothing.’
‘Perhaps you’ve forgotten what we’re going through. Perhaps you never knew. For older Australians like you, houses were once a lot cheaper. In 1960 a house cost 1.6 times a household’s average income and in 1985 it was only 2.25, as noted by The Project.’
‘Property prices skyrocketed in 1999 when then-PM John Howard created the CGT discount for investment properties. The Grattan Institute, the Labor Party and prominent economists want these benefits slashed to make houses more affordable. You should listen to them, Malcolm. But you won’t, because you are just as out of touch as Tony Abbott and Joe Hockey.’
‘Mr Hockey said the way for young Australians to afford a house was to “get a good job that pays good money”. And Tony Abbott stubbornly refused to even contemplate it during his short-lived push for tax reform. Don’t pull a Tony, Malcolm. Our parents have helped us enough.’
This is April 19, 2016:
‘The average home loan in NSW has dropped almost $50,000 in three months as the Sydney market shows signs of weakness, official data shows. Home loans dropped in size by 10.15 per cent across the state, or $45,500, over the quarter to February 2016, according to an analysis of Australian Bureau of Statistics data.’
‘The NSW drop, which was the largest on record, pulled down the national average home loan by the most in 15 years, down $29,100 to an average $357,300 – a 7.71 per cent decline. This national decline was the largest since 2000.’
‘Smartline mortgage broker Kevin Lee said the decline comes as the Sydney market moves from “a seller’s market to a buyer’s market”. “The market has changed dramatically in the last eight to nine months … valuations are definitely coming in lower,” Mr Lee said.’
‘Clients had become more cautious about taking on debt, he said, while some banks had tightened their requirements relating to income, accepting only 80 per cent of over time pay and bonuses in their calculations. “There has never been a better time to pay down debt, but not to take on more debt,” he said.’
‘Finder.com.au money expert Bessie Hassan said the tougher impact of bank lending policies introduced in mid-2015 were the cause of some of the drop. “A cooling property market has led to shrinking maximum loan sizes following the Australian Prudential Regulatory Authority’s changes to investment lending,” Ms Hassan said. “Banks are scrutinising new loan applications more closely, taking a tougher line when assessing borrowers income.”
’said investors flocked to the outback town in 2003 because they could get a great rental return of $180 every week. But now, with mining in a slump, he said investors running for the hills were flooding the market. ‘We are used to that cycle every seven years and what goes down must come up again’
Here’s the thing Cliff. It’s 2016. That’s not 7 years, it’s 13. You guys did a double cycle. Some might even call it a bubble. Just a couple of months ago it was reported that half of Australia’s housing loans were interest only. You live in a one wagon economy and China just pulled that wagon in a historic way that might never be repeated.
‘Apartments in Melbourne’s Docklands, CBD and Southbank are being resold up to 24 per cent below their previous off-the-plan purchase price, catching out vendors, many of whom bought them from investment companies or spruikers. AFR Weekend has found numerous examples of such apartments, most of which are small studio or one-bedders, acquired after the global financial crisis.’
Like Canada, Australia conventional wisdom is they never had a bubble. When prices fell back then it was because the US had a housing bubble which infected the credit markets. China printed up several trillion pesos (every major central bank did), went on a commodity spree and their markets took off again. Then:
‘The mining boom turned house prices to gold but its end has seen them turn to dust. Investors who snapped up properties at the start of the mining boom more than a decade ago are now offloading houses for rock-bottom prices. For the price of a standard car, homebuyers can purchase a two-bedroom house. Just $35,000 will get the house and, for an extra $6000, you get the land next door.’
‘Having become the biggest group of foreign buyers a year earlier, Chinese doubled their investment in Australia’s real estate market in 2014-2015. The beneficiaries of China’s rapid economic rise poured A$24.3 billion (US $17.4 billion) into property. But Chinese buyers may now be wondering if their money is still welcome, thanks to a raft of new restrictions on foreign property purchases.’
“What it does is redirect capital,” Tony Crabb, the national head of research and consultancy at Savills Australia, told the Asia Times. “So if capital were coming to Australia, it’s charged more for perhaps the same opportunity as you’ll get elsewhere, so the money is going to go elsewhere.”
‘A report by the Asia Society and Rosen Consulting Group found that a massive uptick in Chinese investment in U.S. property was partly the result of the more hostile environment in Australia. “What we’ve seen in the first quarter of this year is extraordinary capital inflows into the United States,” said Crabb. “So it’s not that there isn’t money around, it’s just that it is being redirected into where the best opportunities are.”
‘The perils of buying off the plan’
‘To illustrate, a buyer agrees to pay $500,000 for an off the plan property, contributing a 10% deposit now, plus any associated transactional costs along the way. From the outset, the lender agreed to lend 90% of the total value of the property. After assessing the property, the valuer returns an estimated market value of $450,000. This means, instead of agreeing to lend the buyer the initial $450,000 required to settle the property, they’ll now only lend $405,000, which is 90% of current market value but a $45,000 shortfall. That means, the buyer now has to bridge the funding differential of $45,000 in order to settle the sale.’
‘This is where things get tricky. For most buyers, raising an additional $45,000 can be difficult. If a buyer has already lent the maximum amount then the bank can’t help. There’s always savings, but most people don’t have $45,000 sitting around for a rainy day. The issue now facing the buyer is they’ve signed a contract and cannot fulfil their obligation. The ramifications can be as little as a loss of deposit, which could be tens of thousands of dollars, through to legal action on behalf of the developer.’
‘Forget about the buyer trying to bridge the funding differential just to dispose of the new, but now second-hand, off-the-plan property in a few months’ time. They are now not only selling a second-hand asset without all of the one-time bells and whistles offered by the developer, but also selling into a market of potentially thousands of other similar properties.’
‘But, all property increases in value eventually, right? Well, yes, but that’s after first recovering any initial loss from overpaying and then maybe growing just a few percent in a decade, if you’re lucky. In many cases, buyers would be better off keeping their money in the bank.
‘What seemed like such a good idea at the time has come full circle to hit the buyer in the face. Despite the hypotheticals, this situation is all too common for thousands of Australians at present.’
Lesson Of The Week: Theres A Crater Under Every Bubble
And the bigger the bubble, the deeper the crater.
http://thehousingbubbleblog.com/?p=9646
Finally, some bankers jailed…oops wrong country:
http://www.thanhniennews.com/society/slew-of-agribank-officials-jailed-arrested-in-multiple-cases-62747.html