November 24, 2017

The Shake-Out Of The End Of The Boom

It’s Friday desk clearing time for this blogger. “For close to a year, investors have been locked in an epic fight to hold onto their units in a 1990s Miami Beach condo-hotel, amid claims they owe $9.4 million in unpaid assessments. Between December 13, 2016 and October 9, Port Orange, Florida-based Schecher Group has filed foreclosure lawsuits against 65 individuals and companies that own units in the Sixty Sixty Resort. Schecher founder Richard Schecher Sr. has posted videos of himself on Youtube in which he claims delinquent owners owe his company $9.4 million. ‘We have a bunch of owners who sadly have buyers’ remorse,’ Schecher said.”

“A 31,000-square-foot mansion in Bel Air, Los Angeles, is the latest astronomically priced house to get a sizeable price chop, having returned to the market with an asking price of $90 million. The sprawling spec house was first listed in July for $100 million. Opus, a Beverly Hills spec home also dropped out of the $100-million-club recently. The home is now asking $85 million, $15 million less than its original asking price when it was listed in February.”

“A surprising 46 percent of California homes sell below asking price, who knew? California pending home sales shrank for the fourth consecutive month in October to post the lowest level in six months, the California Association of Realtors said. Pending home sales have declined on an annual basis for nine of the last 10 months so far this year, CAR reported. Pending home sales were down 7.3 percent from October 2016 in Southern California. Los Angeles and Orange counties registered lower annual pending sales of 4.7 percent and 4.9 percent, respectively. Double-digit, annual pending sales drops occurred in Riverside (14.0 percent), San Diego (11.4 percent), and San Bernardino (10.4 percent) counties.”

“The share of homes selling above asking price fell from 28 percent a year ago to 23 percent in October, while the share of properties selling below asking price inched up from 44 percent to 46 percent, according to CAR. The 28 percent of homes that sold below asking price sold for an average of 12 percent below asking price in October compared to 9 percent a year ago.”

“For the first time in nearly 9 years the Austin Board of Realtors says the market is changing because of new home construction — but don’t expect to see a significant drop in prices. Between Sept. 2016 and Sept. of this year, 14,263 new homes were built. That’s up almost 8-percent from the year prior when 13,229 homes were built. Come 2018, a record-breaking 15,000 new homes are expected to be constructed because of more lots becoming available and current homes already under construction.”

“For buyers this may mean they don’t have to make an offer on a new home the first day it hits the market. ‘The builders are cranking these out as fast as they can around the city and county area but because of the job influx and the quality of life we have here the price has not really dropped that significantly so buyers have more options but I don’t think it’s being reflected in the price,’ says Steve Crorey, Austin Board of Realtors 2018 President.”

“Reverse mortgage foreclosures in 2016 surged 646% compared to the previous seven years, according to California Reinvestment Coalition (CRC), citing data it obtained from the Department of Housing and Urban Development (HUD) through a Freedom of Information Act request. CRC said that HUD data revealed 32,976 foreclosures on federally insured reverse mortgages from April 2016 to December 2016. In response to an earlier FOIA request, the HUD disclosed that there were 41,237 foreclosures in the HECM program during the seven-year period from April 2009 to April 2016.”

“Riksbank Governor Stefan Ingves said growing concerns over the state of the Swedish housing market didn’t come as a surprise but underscored his belief that the economy can withstand a slowdown. A series of reports in recent weeks point to a rapidly cooling Swedish housing market, raising concerns the country could face a crash like the one it lived through in the early 1990s. The krona weakened almost 2 percent last week, and has continued to slide as investors wonder whether a property market slump is ahead.”

“The reaction in the currency market is ‘difficult to understand,’ Ingves said in an interview after a press briefing on Wednesday. ‘But I’m not surprised that there is a conversation going on outside the country about our housing market given how we for years have mismanaged our housing market. Eventually that will lead to raised eyebrows abroad.’”

“Maria Sharapova is being investigated by police in India in a cheating and criminal conspiracy case involving a real estate company that used the tennis star to endorse a luxury housing project that never took off. Real estate firm Homestead Infrastructure is accused of taking tens of millions of rupees from home buyers for a project called ‘Ballet by Maria Sharapova,’ a luxury apartment complex with its own helipad, tennis academy and other amenities.”

“Lawyer Piyush Singh said his client, Bhawana Agarwal, paid Homestead Infrastructure 5.3 million rupees ($81,678) in 2013 because she was impressed by Sharapova’s association with the project located in Gurgaon, a suburb of the Indian capital. The cost of an apartment in the swanky project was 20 million rupees ($308,000). Agarwal spent the next three years chasing the builders for updates on the property and her investment in it, but they stopped taking her calls, Singh said. On Wednesday, several calls to the numbers of the building company’s website went unanswered. ‘The project never saw the light of day,’ Singh said.”

“New valuations issued by the Auckland Council yesterday showed the average property valuation in the region increased by 46 percent since the last valuations were done three years ago. But the housing market has cooled in the six months since the valuations were set, which meant some properties may be worth less than their value on paper, Loan Market mortgage advisor Bruce Pattern said. ‘We’re already seeing scenarios where the new CV [council valuation] has come in at $2 million-plus, but the house is realistically under $2m. One client texted me yesterday to advise that his valuation had gone up 214 percent. I would struggle to believe that that would be an accurate reflection of their true value,’ he said.”

“The new valuations would not be much help to anyone wanting to borrow money from banks as most lenders recognised they were out of date and would ‘ignore them,’ Mr Patten said.”

“Banks are stepping up home seizures as thousands of West Australians fall behind in their mortgage payments, with most pain felt in outer suburbs and the south-west coastal corridor. Property repossessions have surged to their highest level since the shakedown after the global financial crisis as the mining downturn rocks the last bastion for battlers. LMW Valuers director Rod Davidson said there had been a noticeable increase in bank repossessions in the south-western first-homebuyer suburbs from Baldivis through to Rockingham.”

“‘It’s probably the financial shake-out of the end of the mining boom because many of these are FIFO workers who have now run out of options,’ he said. ‘You don’t lose your house the day you lose your job, it usually takes 12 to 24 months.’”

“An Anglicare financial counsellor based in Rockingham, Jacky Hamilton, said the mortgage problems underpinned a worrying trend of underemployment. ‘Many people who were in full-time employment might now get the odd casual job, but it’s not enough to service their cost of living,’ she said. ‘They max out the credit cards, fall behind in their payments and then the bank moves in.’”

“The party is finally winding down for Australia’s housing market. After five years of surging prices, the market value of the nation’s homes has ballooned to $7.3 trillion – or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them.”

“Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche, fuelled by record-low interest rates, generous tax breaks, banks hooked on mortgage lending, and prime-time TV shows where home renovators are lauded like sporting heroes. For many, homes morphed into cash machines to finance loans for boats, cars and investment properties. The upshot: households are now twice as indebted as China’s.”

“The increasing treatment of housing as a financial commodity has seen borrowers rush into a byzantine maze of mortgage-related products. That’s made banks very profitable, but very exposed. Aussie households have racked up record private debts and aren’t getting the pay rises to help service them. ‘Australia’s world-record housing boom is officially over,’ UBS Group AG economists declared at the start of this month. ‘The cooling may be happening a bit more quickly than even we expected.’”

November 23, 2017

The Intertemporal Structure Of Preferences

A report from the Malay Mail Online in Malaysia. “Haphazard construction of new property without regard for market forces was the reason for the existing oversupply of real estate, said an industry group. The Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS) said this when expressing support for the government’s decision to suspend approval for property valued above RM1 million. It said Bank Negara Malaysia has demonstrated that there was currently RM35 billion of unsold property of various types in the country, and that more effort must be made to ensure these are taken up before more are constructed.”

“‘PEPS views the causes of property market overhang to be developers’ indiscriminate building of properties, a lack of market studies and financial feasibility studies being carried out prior to building, no coordination on planning among local authorities and indiscriminate approvals. Other causes include the delay in gazetting of local plans that leads to uncontrolled development and higher cost as well as artificial demand created by members of the public for fear of losing out on choice properties,’ it said in a statement.”

From Free Malaysia Today. “The Consumer Association of Penang (CAP) has criticised the government for only recognising now what it had highlighted 28 years ago on the housing situation in the country.CAP president SM Mohamed Idris said it was good that the government had finally decided to freeze luxury property developments from Nov 1, 2017 due to a glut of such properties. According to reports, Second Finance Minister Johari Ghani had announced that the freeze will affect high-rise condominiums, shopping malls and commercial units.”

“‘CAP had warned of this scenario 28 years ago in our book ‘Housing for the People’. However, it fell on deaf ears till now,’ he said, adding that he had repeated the message many times since then. ‘The crux of the housing problem is that the country’s building resources were channelled not towards where people’s housing needs are, but towards where the market which could pay was.’”

“‘Such a problem has been manifested nationwide, leading to an over-production of unusable expensive properties that a large segment of the Malaysian population cannot afford. For example, the term ‘affordable housing’ is grossly misleading because it can range up to RM400,000 per unit,’ Mohamed said. ‘We have to consider that this serious housing policy flaw, resulting in a glut of unsold property units, can drive developers, the banks and the country to financial ruin.’”

From The Malaysian Insight by Carmelo Ferlito. “I read the recent article by Sheridan Mahavera, ‘No sign of housing market crash, say economists,’ in which some of the thoughts I expressed in an interview with Free Malaysia Today are reported. I need to clarify both my thoughts and what I believe to be some misunderstandings regarding the concept of crisis, crash and bubble. In particular, the first lines set the article’s tone and they open doors to misinterpretations.”

“Mahavera writes: ‘House prices are not expected to fall sharply next year, said economists who disputed speculation that the property market will crash due to a glut.’ These lines linked market crash and sharp price fall as if they were the same thing; such an approach to business cycles is misleading. From the perspective of economic theory, they are two distinct phenomena: a crash is an eventual consequence of a previous boom and its roots need to be found in the dynamic of the boom; the price fall is an eventual consequence of the crash, but its magnitude (sharp, light, …) depends on a series of factors that need to be closely analysed.”

“The appearance of an economic boom is always related to a modification in the intertemporal structure of preferences, and it is always related to a specific industry, whose expansion dynamics will drive upward the general economic system. Entrepreneurs’ mood is lifted up by positive profit expectations, usually focused on a specific industry, which recently was the property sector for the Malaysian case. It is therefore crucial to emphasize the central role of expectations as the driving force behind entrepreneurial preferences.”

“The signals an economist should look at are related in particular with the fact that the first wave of investments is always followed by a secondary wave of imitations and speculations. The pace of economic growth becomes particularly sustained when the primary wave of entrepreneurial investments is joined by a stage of secondary growth encouraged by the instincts of imitators in search of profit and driven by ‘fashion’.”

“Why are imitations inevitable? It is easy to imagine how the success of entrepreneurial initiatives is readily followed by imitators looking for success within what at first sight always seems to be a period of growth destined never to end.”

“Like the primary wave of investments, the second wave is generated by profit expectations, particularly the expectation that the current situation will not change. From a quantitative point of view, moreover, imitation (secondary) investments might even be greater than the first cycle of investments since they involve a larger number of individuals, whose expectations are ‘over-excited’ by the boom.”

“The positive sentiment, that becomes ‘incandescent’ at the end of the primary expansion stage, also plays a role in regards to the action of banks. In fact, precisely because of what happens during expansion, it is highly likely that banks make available ‘virtual funds’ that are not backed up by real savings, driven by expectations that the adaptation of consumer preferences (further saving) cannot but occur, precisely because of the enthusiasm generated by the boom.”

“It is well known that prices raise during a boom and tend to decrease during a crisis. But we do not have to mistakenly identify the crisis with the price fall itself. They are two separate phenomena, the second being a consequence of the first one.”

“A similar mistake is done by some economists when they identify overproduction as a crash, when instead it is an eventual consequence. Therefore, while we can imagine that the present dynamics in the property market in Malaysia will bring out a crisis (though a precise temporal estimation is a job for fortune tellers and not for serious economists), the potential effect on the price system cannot be precisely identified.”

“In fact, a big part of the final outcome will depend on subjective reactions by market actors. Will they expect a short and limited crisis? Or a long and widespread recession? The individual mood will play a big role in the developing of the crisis itself. People owning houses for investment might decide not to sell, expecting a positive upturn soon; or they might be caught in panic and running for liquidating their assets. These two different behaviours will have different consequences on price movements, while the crisis itself will remain as a matter of fact.”

“Finally the response from government, Bank Negara and the credit system will play another pivotal role: if these institutions will try to support the industry via credit expansions, the crisis will turn to be longer (like it is happening in Europe now) and the price fall will be hidden by centrally led inflation, setting the stage for fake recovery and a subsequent deeper crisis. On the contrary, if market forces will be let free to allow the production structure to realign itself to the new scenario, the price shock would be stronger, the crisis shorter, and the new economic fundamentals more sound and stable.”

“In conclusion, the analysis of the peculiar moment experienced by the property market in Malaysia can be successfully carried out only if supported by an understanding of the cyclic dynamics which characterize capitalistic development. Cycle stages and price movements are linked but distinct phenomena; while we can see a crisis coming, the subsequent price movements cannot be uniquely identified a-priori.”

November 22, 2017

A Wealth Of Inventory And A Lack Of Demand

A report from the D Magazine in Texas. “If you’re a Realtor, your expanding waistline has already told you there’s something going on in the apartment world. Almost any day of the week, some apartment complex is hosting lunch for Realtors and apartment referral agents. The goal isn’t Christmas cheer; it’s snagging tenants for their empty apartments. Nearly every multi-family new build in Dallas has been expensive. In the high-rise condo world, the last purpose-built mid-priced buildings were in 1998. In Uptown, the boom has largely been in apartments (for a host of national and local reasons) and, like their condo brethren, they are expensive. But I see softening beyond Realtors’ waists.”

“There has been a slowing in the higher-priced home buying market. Over the past 12 to 18 months, days on market have been creeping up and prices have pulled back. What a year ago was a slowness in homes costing more than $1 million has now been creeping into the $700,000 to $800,000 range. This is being mirrored in the apartment world, even though slightly delayed. In the Uptown market, two forces are at work. First is overall affordability. The crop has largely been creamed for twentysomethings who can afford $2.50 to $3.00 per square foot for rent. That is coupled with the realization that those rents would translate into a quite nice condo.”

From Chicago Mag in Illinois. “Is the Downtown Apartment Bubble Bursting? This month, Mayor Rahm Emanuel announced the installation of the 60th operating tower crane in 2017, as well as another post-recession record of building permits issued in a single calendar year. Downtown Chicago renters have more options than ever, and thousands of new apartment units for the city’s dense central neighborhoods are in the pipeline for 2018 and 2019. But is it too much?”

“Brokerage Luxury Living Chicago estimated that roughly 6,600 new apartments were slated to be delivered in 2017 alone. ‘We’re at a point that when we hit March 2018, we will see the highest vacancy of new downtown apartments since this development cycle,’ says Luxury Living’s CEO Aaron Galvin. ‘We’re expecting to see roughly 5,000 vacant apartments in downtown Chicago in the first quarter of 2018.’”

From LA Weekly in California. “Los Angeles’ insane rents might finally be coming down. After a glut of new apartments downtown sparked a cooling of rent increases, there’s new evidence suggesting that the sharp rise in lease rates across the county could be leveling off. A new report from RealPage found that the average rent in Los Angeles County actually decreased by $19 from September to October. ‘Lots of new apartments coming online is keeping up competitive pressure, particularly in L.A. and Orange County,’ said RealPage’s vice president for analytics, Jay Denton.”

“‘Annual rent growth in Los Angeles and most of the rest of Southern California now is cooling,’ added Greg Willett, RealPage’s chief economist. ‘This performance trend follows the pattern exhibited in most of the rest of the country in 2016.’”

From Multi-Housing News. “After several years of consistent rent hikes, San Francisco’s housing market has cooled to some degree. Investor activity has slowed down, with only $600 million in multifamily assets trading in 2017 through August. This follows a strong 2016, when transactions reached a cycle high of $3 billion. Development is robust, with more than 4,000 apartments delivered in the first three quarters and another 12,400 units under construction.”

From Builder Online on Florida. “Even one-of-a-kind properties in Miami are getting swept up in the buyer’s market that has materialized there. The Wall Street Journal reports: ‘A South Beach condominium owned by architect Zaha Hadid, who died unexpectedly last year, is relisting for $6.5 million, or 35% below its initial asking price of $10 million nine months ago. The new list price reflects the fact that ‘we are in a buyers’ market in Miami,’ said Ivan Chorney of ONE Sotheby’s International Realty, who with colleague Angelica Garcia took over the listing from another agent. ‘There is currently a four-year supply of luxury condos over $1 million, so the right price point and design features are more important than ever.’”

From Mansion Global on New York. “A wealth of inventory and a lack of demand has contributed to a 2% price drop in Manhattan’s luxury real estate prices, according to StreetEasy’s latest market report. October data showed the median resale price of luxury homes—defined as repeat sales within the top 20% of the market—in the borough dropped 2% year-over-year to $4.317 million, the lowest level since 2014, according to the report. In Brooklyn, the median resale price of luxury homes dropped 3.6% to $1.627 million, close to its lowest level since May 2016. In Queens, the median resale price for a top-tier home rose 6.9% to $1.036 million, the report said.”

“‘The onslaught of high-end development in Manhattan and Brooklyn shows no signs of slowing down,’ said StreetEasy senior economist Grant Long. ‘Sellers are having a hard time finding buyers without offering severe price cuts, often to levels below their original purchase prices. This isn’t a new phenomenon, but with too much luxury inventory already on the market and even more supply to come, this trend isn’t over.’”

“Luxury homes across the three boroughs are also taking longer to sell than in October of last year. ‘The luxury market in 2018 will continue to favor the buyer, who will likely encounter increasingly anxious sellers willing to slash prices as more new construction hits the market,’ Mr. Long said.”

“Take for example the two-unit spread at Trump International Tower that’s currently listed for $27.5 million, a 31% price cut from the $40 million wanted for the combined apartments last year. Or the Plaza Hotel apartment that listed Monday for $25 million, an almost 50% discount from its original asking price in 2014.”

November 21, 2017

A Bubble Perspective

A report from the Press Democrat in California. “The rebuilding of fire-damaged structures in the North Coast would take over 6,000 construction workers three years to accomplish, an economist told business leaders in Santa Rosa. Attracting and housing so many workers will be hard, but the county’s economy won’t keep expanding without more homes, Christopher Thornberg said. Thornberg gave an overview of the national economy that was sharply critical of both President Donald Trump and the Republican-led proposals for tax reform. He then warned civic and business leaders that the county must provide more housing for workers. ‘You have to build now,’ said Thornberg. ‘Otherwise, the economy is simply going to stop growing.’”

“When the workers needed for a three-year rebuild are added in, the county’s total construction work force would far exceed the number employed here in more than 17 years, including at the height of a national housing bubble. Much of the U.S. is experiencing a shortage of workers, Thornberg said, which is why he strongly opposes efforts to take existing protections away from millennial-age children of illegal immigrants. ‘We need them,’ he said, prompting a burst of applause from the audience.”

From Think Pol in Canada. “The BC government has promised to tackle the housing affordability crisis in Metro Vancouver by ‘aggressively’ increasing supply. A new study coming out of Princeton suggests that the NDP government may want to reconsider that strategy. In Economic Consequences of Housing Speculation, researchers link increased supply to a more severe crash when the bubble bursts. Zhenyu Gao, Michael Sockin, Wei Xiong found that ‘housing speculation, anchored, in part, on extrapolation of past housing price changes, led not only to greater price increases and more housing construction during the boom in 2004 to 2006, but also to more severe economic downturns during the subsequent bust in 2007 to 2009.’”

“‘New housing supply stimulated by speculation during the boom period could have led to a supply overhang problem during the bust, which resulted in a contraction in construction-sector activity,’ the authors state. Supply overhang can both exacerbate the subsequent housing price bust and reduce demand for new housing, leading to a large decline in construction activity during the recession,’ they add.”

“The trio’s findings are in line with research done by the US National Bureau of Economic Research. ‘Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market’ identifies ‘mechanisms driving the house price boom by emphasizing speculation among developers on the supply-side of the market.’”

“‘Many of the largest price increases occurred in cities that were able to build new houses quickly,’ Authors Charles G. Nathanson and Eric Zwick conclude. ‘This fact poses a problem for theories that stress inelastic housing supply as the sole source of house price booms. But it sits well with our theory, which instead emphasizes speculation.’”

“Housing activists have long maintained that housing affordability in the lower mainland needs to be addressed on the demand side. The housing advocating group Housing Action for Local Taxpayers (HALT) lamented that the NDP government, especially Housing Minister Selina Robinson, is focusing all energies on increasing supply without taking any action to curtail speculation-driven demand. ‘Any demand side action, on speculation, tax reforms and addressing financial crime, in real estate will have to come from Ministry of Finance and office of Attorney General,’ HALT told ThinkPol.”

From on Australia. “For years, we have been told that rising property prices are linked to one thing. But it turns out we have the whole thing wrong. Researchers from the Australian National University analysed 15 years of Census data and building approvals and found Australia had an oversupply of 164,000 dwellings. In particular inner city areas of Sydney, Melbourne and Brisbane had the most extra housing, although other areas were experiencing shortages.”

“‘The surplus is not particularly substantial, but certainly suggest that housing supply in and of itself is probably not the primary driver of house-price growth in Australia.’ Associate Professor Ben Phillips said. ‘There are other factors that are going on.’”

“If housing supply is not the issue, it has implications for how governments try to tackle the issue of affordability — and construction of extra dwellings may not be the fix it’s been touted to be. ‘The standard line of governments and industry seems to be that housing supply is a big problem in Australia,’ Professor Phillips said. ‘No doubt there are some areas where it is. But overall we don’t see the housing shortage that’s often talked about — in fact we see that there is a surplus.’”

“The results suggest quite a lot of properties must be vacant and could be owned by investors, particularly foreign investors. ‘We’ve found that we’ve built more than what population growth would require,’ Professor Phillips said.”

“As for bringing affordability down, Professor Phillips said he didn’t think anyone fully understood what was pushing house prices up. ‘I don’t think anyone fully understands what the drivers are,’ he said. ‘They don’t appear to be strongly correlated to housing supply. I think investment will continue to push up prices, taxation arrangements are an issue and low interest rates are also increasing prices.’”

“If rising house prices were due to factors other than supply, governments need to be looking at negative gearing and capital gains tax if they want to improve affordability. ‘Certainly Australians — and it’s a global phenomenon too — think of housing as much more of a financial product rather than as a shelter,’ Professor Phillips said. ‘This includes owner occupiers who see it as a store of wealth and this could be pushing up prices, rather than supply.’”

“At some point the value of housing would have to align with its fundamental value and Professor Phillips warned that continuing price increases beyond this was a ‘bubble perspective.’”

From Radio New Zealand. “In a paper published earlier this year called ‘The mess we’re in’ - a dive into the Auckland housing market from the construction industry’s point of view - AUT Professor John Tookey says one solution to the bubble and market pressures around the country is to get ahead of demand. Sounds simple. ‘What is politically difficult to accept is simple to state. Improving housing affordability equates to reducing housing values,’ Professor Tookey says.”

“By reducing values, he means your house. Not the 10,000 that officially need to be built every year to accommodate a rising population, a rising population that’s mostly Kiwis, New Zealanders returning from elsewhere, and some pesky foreigners. (Disclaimer: the writer is a migrant and GFC economic refugee.) One of the reasons for the mess is that for years policy-makers passed legislation incentivising property ownership, and ordinary Kiwis with their money locked in the one asset everyone agreed on - property - have been busily selling properties to one another, buying to let, and driving up prices and rents.”

“Restrictions on lending have been introduced and more changes are on their way under the new government. But central government and policymakers don’t have a complete picture of who owns all the property. Only a rough picture exists. We know who owns the majority - New Zealanders - but once you factor in apartments, buy to rent, family trusts, second homes, baches, businesses, overseas owners and absentee landlords, it gets, well, messy.”

“In a BNZ analysis, economist Tony Alexander says the big trend in the last year was the flattening Auckland market, less FOMO (fear of missing out) and a slowdown (although he says prices will go up) for the next five years. The rest of the country will follow in fits and starts in the next year, the report says. Alexander also says anecdotal feedback is that some real estate agents are now standing forlornly in empty houses at weekends waiting for someone to show up, and there’s worse to come.”

“On the flipside, property listings are up on Trade Me, which demonstrates how hard it is to get a clear picture. ‘The hype has gone from the housing market in Auckland and the same will occur around the rest of the country. New equilibriums will be established. Before then, look for some panicked selling from a few unsophisticated investors now feeling FOMO in the other direction,’ Alexander says.”

“Next on the horizon is the government’s proposal to ban foreigners from buying houses in New Zealand - which made headlines around the world. Removing foreign buyers here takes out only a small proportion of overall property transactions - how big a share is anyone’s guess. What’s more, owners, landlords and businesses like to leverage their equity from being a property owner to buy more residential properties. This, as population demographics reach a turning point, leads to a scarcity of supply (or a perceived scarcity of supply) and, in turn, makes more people want to buy. They’re also told it’s a good investment, hence all those property management companies, adverts, and billboards promising property-owning paradise.”

November 20, 2017

Something Has To Give

A report from Mortgage News Daily. “Housing activity in the third quarter of 2017 is described as ‘continuing its rough patch’ in Fannie Mae’s latest edition of Economic Developments. The company’s economists say that activity pulled back across the board during the quarter. Leading indicators suggest that the rough patch demonstrated by third quarter numbers may be spilling into the fourth. Pending home sales, which are generally expected to predict sales of existing homes one or two months hence, were flat in September at the lowest level since January 2016. Contract signings have declined on an annual basis in five of the past six months. In addition, average monthly purchase mortgage applications fell in October for the third time in four months.”

“They warn the census report indicates the rental market may be softening. The vacancy rate for all rental housing types rose on an annual basis for the second consecutive quarter to its highest reading in more than three years, 7.5 percent. This is partially because the supply of apartment units, especially in large metro areas and at the high end of the price scale, has increased.”

From Multi-Family Biz. “This week marks the release of the November Housing Tides Report, featuring an update to the Housing Tides Index. As we noted in June, the number of apartments under construction reached a forty-year high this summer and rental rates have been affected by the stream of completed units coming to market; the national median price for a two-bedroom unit fell year-over-year in each of the last eight months. Median monthly rents for these units have fallen by over $200 since mid-2014, from $1,750 in June 2014 to $1,545 in September 2017. Remarkably, these rent decreases have taken place at a time when much of the new multi-family construction in the U.S. has been in the high-cost luxury category.”

“Multi-family housing permits have totaled 292.9k through the first nine months of 2017, marginally higher than the same period in 2016, so we can expect the trend of moderating rent prices to continue in the short term.”

From National Real Estate Investor. “Private equity and institutional investors from the U.S. and around the world have been stepping up their pursuit of seniors housing assets, seizing an opportunity to capitalize on a pullback in acquisitions by seniors housing REITs. But REITs could encounter oversaturation of AL facilities in some markets and should strike a more even balance between AL and IL, notes seniors housing consultant Andrew Carle.”

“‘Assisted living, particularly at the very expensive high end, has been overbuilt,’ says Dr. David Friend, a physician who serves as managing director of the Center for Healthcare Excellence & Innovation at professional services firm BDO. ‘At the low price point, there’s probably a great deficiency of product, but it’s not clear any investor wants to build that product, because I’m not sure they think they can get a return.’”

The Nevada Independent. “Fernley boasts a median home price that, while up 27 percent from a year ago, still remains more than $100,000 less than what it is farther west. The Reno-Sparks Association of Realtors reported in October a median home price of $348,500 for the greater Reno area, which includes Sparks, compared with a $241,500 median price in Fernley. Mike Kazmierski, president and CEO of EDAWN, has been sounding an alarm about the region’s housing problem for more than two years. In February 2017, he submitted a piece with a more dramatic headline: ‘Reno’s housing sky is falling.’”

“‘The first thing we must do is understand that THIS IS NOT A BUBBLE!’ he wrote, noting that 20,000 jobs had been added but only 4,000 new housing units. Browse websites which feature homes for sale, and you’ll be hard-pressed to find many Reno-area listings under $300,000. Those that do fall in the $200,000 range or lower are usually older and smaller, two-bedroom houses or condominiums. ‘We don’t need any more $600,000 houses,’ Kazmierski said. ‘That’s the problem.’”

“On Friday, a bit of good news arrived in Reno Mayor Hillary Schieve’s email inbox: Construction activity had bumped up the rental vacancy rate to above 2 percent, which could curb rent increases if the trend continues. The city recently added 112 rental units and has another 3,000 units in the construction pipeline.”

The Union Tribune in California. “The 10-year, post-recession building recovery is heading for a pause and possible pullback, lending and investment experts predicted. The panel told a local Urban Land Institute forum that next year may see a slowdown in lending commitments for apartments, offices, industrial and retail projects. The profit margin has narrowed between costs and sale prices to make some deals viable, said panel moderator Connie Emmitt-Stern. ‘Something has to give on the land (price) side and that hasn’t changed yet,’she said.”

The Orange County Register in California. “Southern California — and the nation as a whole — is experiencing the biggest apartment construction boom in a quarter century. In the last 34 months alone, new apartments have been springing up from San Clemente to Sylmar, from Murrieta to Marina del Rey. More than 37,000 new apartments have been built in the region since the start of 2015, data from commercial real estate tracker CoStar show. More than 36,000 more are under construction.”

“And it’s happening across the country. U.S. developers are on track this year to complete at least 350,000 new apartments, the most since the late 1980s, according to rental data firm RealPage Inc. So, after seven years of galloping rents and low vacancies, are tenants finally going to get a break? Is there an apartment glut that will trigger a round of rent cuts?”

“In a word, experts say, no. If anything, developers still aren’t building enough. There might be some saturation in a few areas, like in downtown Los Angeles, where rent hikes have slowed. And because most of all this new construction is for luxury apartments, there’s very little that’s affordable to middle- and low-income workers. ‘We do see that the pace of rent growth is starting to slow,’ said Greg Willett, RealPage chief economist.”

“The 700-unit Eighth & Grand apartments cover almost an entire city block in downtown Los Angeles, with two-bedroom rents as high as $4,100 a month. It’s one of 42 complexes built or under construction in the 5 square miles that make up downtown Los Angeles. In all, 12,000 new units have been built or are under construction there.”

The Dallas Morning News in Texas. “Dallas-Fort Worth leads the country in new apartments opening their doors this year. More than 30,000 apartments are scheduled to open in the area through the end of the year, John Sebree with brokerage firm Marcus & Millichap. Along with D-FW, Houston, New York City and Atlanta will see the most new apartments this year. ‘Fifty percent of the total number of units being delivered in 2017 are in just 10 markets,’ Sebree said.”

“D-FW has almost 48,000 apartments under construction, down from a recent peak of almost 53,000 new units in the development pipeline. And, rent increases are slowing. ‘We are seeing a little bit of slowdown in performance relative to where we were in the past couple of years,’ said Greg Willett, chief economist with Richardson-based RealPage. ‘There is some slowing down from what had really been record levels.’”

The New York Times. “Logic, or perhaps a pleasant knowledge deficit about the mechanics of New York real estate, would tell us that to fill the vacant spaces, the remaining apartments should simply be offered to people making a lot less money. The way that these public-private partnerships are structured and underwritten, however, the revenue from more expensive units helps offset the rents of those apartments intended for lower-income tenants (some one-bedroom apartments at 535 Carlton, for example, cost as little as $589 a month). Developers can’t just lower the rents to accommodate demand and keep the projects financially viable.”

“In Brooklyn an overload of luxury rentals already exists downtown. As Adem Bunkeddeko, who is running for Congress in Brooklyn on a housing platform, put it, there is a glut of apartments for people making $80,000. As a member of Community Board 8’s housing committee, he has listened to people bemoan the structuring of 535 Carlton. ‘The main gripe is ‘this is absurd; who is this affordable for?’ he said. ‘Even the folks who came in as the first wave of gentrifiers can’t swing it.’”

November 18, 2017

A Buying Frenzy Has Been Encouraged

A weekend topic starting with a piece by Matt Barrie with Craig Tindale. “I recently watched the federal Treasurer Scott Morrison proudly proclaim that Australia was in ’surprisingly good shape.’ Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970. I was pretty shocked at the complacency, because after 26 years of economic expansion, the country has very little to show for it.”

“For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour — China. As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

“Unfortunately for Australia, that ‘lucky’ free ride is just about to end. Societe Generale’s China economist Wei Yao recently said: ‘Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses.’ Hyaman Capital’s Kyle Bass calls China a ‘$34 trillion experiment’ which is ‘exploding.’ where Chinese bank losses ‘could exceed 400 per cent of the US banking losses incurred during the subprime crisis.’”

“The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full-blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets. This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg.”

“Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016 — exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.”

“While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.”

“In April 2016, the average holding period for steel rebar and iron ore contracts was less than three hours. The Chief Executive of the London Metal Exchange, said ‘Why should steel rebar be one of the world’s most actively-traded futures contracts? I don’t think most people who trade it know what it is.’”

“Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50 per cent of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens. In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Over the last six years, the price of iron ore has fallen 60 per cent.”

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee. Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other. A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, ‘upswings’ last 13 years).”

“In 2016, 67 per cent of Australia’s GDP growth came from the cities of Sydney and Melbourne where both state and federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24 per cent of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.”

“This can only be described as completely ‘insane.’That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe ‘one of the biggest housing bubbles in history.’ ‘Australia,’ he added, ‘is the only country we know of where middle-class houses are auctioned like paintings.’ Our Federal Government has worked really hard to get us to this point.”

“The government decided to further fuel the fire by ’streamlining’ the administrative requirements so that temporary residents could purchase real estate in Australia without having to report or gain approval. It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”

“I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation — Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.”

“UBS estimates that $500 billion worth of ‘not completely factually accurate’ mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.”

“At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of ’severely unaffordable.’ Melbourne is 9.6x.”

“This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years — but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.”

The Globe and Mail. “In Vancouver, the detached house owner is often vilified. So too, is the resident who protests density. They are vilified by what one academic is calling ‘the housing supply myth,’ which is the belief that we need more housing in order to lower costs. It’s an argument commonly used by politicians, industry, and some academics and citizen activists. ‘There is an intuitive appeal to that argument,’ says Dr. John Rose, who spent the last year on education leave, researching the popular belief that Vancouver has a lack of housing supply. ‘We understand this idea of supply and demand, intuitively, even if you haven’t taken an economics course.’”

“However, he has concluded that Vancouver does not have a shortage of housing units. In fact, we have a surplus. And, as anybody in Metro Vancouver knows, prices have not plummeted as a result. ‘If we are looking back at the last 15 to 20 years, we have been providing more than enough units of housing – and it’s still unaffordable. And yet, you see this argument being thrown out there by various quarters, that we have this housing shortage.”‘

“He also looked at supply in housing markets elsewhere in Canada, the United States and Australia. ‘As a resident of Metro Vancouver and observing all this construction around me, I thought: ‘How do we have a housing shortage?’”

“And despite a surplus of housing stock, affordability has significantly worsened – a contradiction to the supply mantra. ‘We would think that if a market got less affordable, maybe that meant supply was getting tighter and tighter. But that’s baloney. That’s garbage,’ he says. ‘So my answer to the supply argument is that it’s tenuous for all the markets, because you can basically see no relationship – and this is over a 15-year period. Here we’ve had more than enough supply and yet the housing costs have gone crazy.’”

“Josh Gordon, assistant professor at Simon Fraser University’s School of Public Policy, has regularly spoken out against the more-supply argument. ‘There’s simply no evidence of a slowdown in construction or supply,’ says Dr. Gordon. ‘The construction industry in Vancouver is operating at full throttle. There are around 40,000 units under construction, which is twice the historical average for the post-2000 period. The idea that we should get more supply into the pipeline is a bit silly. The role of the supply argument is, to a large extent, to distract the public and policy makers from action on the demand side, specifically in terms of foreign capital.’”

“There are supplyists who are notoriously confrontational, particularly on social media, and Dr. Rose knows that his findings will be challenged. ‘Bring it,’ he says. ‘Here’s the data. If you want to argue against it, go ahead. It’s publicly available. And when I did this research, I had my independence. Nobody owns this. I get no sponsorship from any industry, any sector. I’m a free agent.’”

“‘I think that’s a benefit of this research. It’s not coming from a school of business that is being funded by the real estate industry, or somebody who’s passionate about densification and smart growth. I think there’s some romanticizing going on, about what the ideal city should look like, and unfortunately it gets sucked into this debate about affordability. I’m just saying look at the numbers, and we see Vancouver has plenty of supply. And can we build ourselves out of this? Not in this current model.’”

A letter to the editor in the Islington Tribune. “In the 1970s I had to travel to Portugal before I saw people begging on the streets. Now, I only have to walk down Stroud Green Road to see evidence of real housing need. But we are assured that an increase in housing supply will enable everyone to afford a home. This theory might apply to some commodities, under certain conditions, but not housing in 2017.”

“Our neoliberal governments have infected our basic need for homes with, first, their desire for a ‘property-owning democracy’ and then for us to acquire property assets to use as collateral for further debt with which to fuel the economy and keep them in power. Since the ’70s those same governments have allowed banksters to create the majority of new money, not to risk on manufacturing, agriculture or even house-building, but primarily for the purchase of existing housing.”

“In consequence, house prices have risen without the accompanying increase in productivity and the distributed incomes that would have generated genuine affordability. A buying frenzy has been encouraged, a race to get on the property-asset ladder while the bubble is still inflating. Dropping interest rates, in a misguided attempt to encourage the sort of investment that would actually increase wealth, has only served to divert the savings of ‘the haves’ into property.”

“The primary purpose of London’s housing is now to act as a treasure chest. Rather than blame the free market, government has put up a smokescreen of ‘initiatives,’ including the concept of so-called ‘affordable housing,’ that do nothing to address the underlying problem, which is their failure to manage the money supply.”

November 17, 2017

The Times Of Rising Interest Rates Is Beckoning

It’s Friday desk clearing time for this blogger. “A full-floor, 6,240-square-foot penthouse at Midtown billionaires’ bunker One57 recently sold at a foreclosure auction for $36 million. That number is 29 percent lower than the original $50.9 million price shelled out by Nigerian businessman Kolawole Akanni Aluko for the newly-minted condo in 2014. The fire sale was the fourth resale in the 1,004-foot-tall Billionaire’s Row flagship trophy tower to trade at a loss, according to data from appraiser Miller Samuel Inc. And there are currently 16 apartments at the building listed for sale, most of them by the developer. Additional unsuccessful flips include a 4,483-square-foot 65th-floor apartment that sold in April for 23 percent less than its 2014 purchase price and an identical unit on the 62nd floor whose buyer paid $31.7 million for it 2014 and sold it at a loss last year for $23.5 million.”

“Extell is now marketing units at a discount; in a regulatory filing on the Tel Aviv Stock Exchange this year where Extell sells debt, the company admitted that ultra-luxury sales are slowing in the city, saying it had a adjusted the building’s profit forecasts accordingly. And the developer and resellers both trying to sell units means there are more of them vying for top dollar.”

“If President Trump and congressional Republicans have their way, homeownership in California will become less attractive. And that really worries Realtors and builders. And, of course, it also should greatly disturb home buyers. ‘The current limit is too low for Californians,’ contends Steve White, a Studio City broker who is president of the state Realtors association. ‘In a high-priced state where we’ve already got a shortage of homes for sale, this simply traps people in their homes longer. Fewer people will move and that will just exacerbate the home shortage.’”

“Very possibly. And that also, of course, would cut into real estate agents’ commissions.”

“The Federal Housing and Finance Agency released its latest Foreclosure Prevention Report, covering the month of August 2017. Released monthly, the Report tracks foreclosure prevention actions undertaken by Fannie Mae and Freddie Mac. In August 2017, the Enterprises completed 15,298 foreclosure prevention actions. GSE foreclosure prevention actions as a whole increased 10 percent in August, with increases in loan modifications serving as the primary driver. Loan modifications were also up 10 percent for August.”

“One statistic that stands out is that the share of modifications with principal forbearance, where the lender delays foreclosure if the borrower can catch up within a given window of time, increased to 34 percent. That’s up from 30 percent in July, and up from 19 percent in January 2017. Foreclosure starts were also on the rise. August totaled out at 17,652, compared to 12,255 in July. That’s a noteworthy spike after foreclosure starts dropped from 13,028 in June.”

“Local property manager Danielle Dobson, concurs that Lower Mainland property investors have had very unrealistic expectations about the Squamish rental market. They bought condo apartments with the expectation they could rent them at rates that paid their mortgage and left them cash positive. ‘Some of these investors were seeking rents $800-900 above what the market would support,’ said Dobson. ‘I actually had one lady, not a client, she just wanted my advice, ask why her two bedroom apartment that was, maybe, 1000 square feet, wouldn’t rent at $2,800 a month. I told her because it should be at most $2,200, and really $2,000. But she didn’t listen, and it sat vacant. Now it’s down to $2,500, but it still won’t rent at that rate.’”

“‘The problem was a lot of people came to town buying income property, and the rental rates they expected were not achievable. You can always put something on Craigslist, that doesn’t mean you’ll get what you’re asking. The average income in Squamish just doesn’t support some of the rates people are asking,’ said Hannah Goodwin, a local property manager with Dynamic Property Management.”

“Norway’s currency, the krone, has been caught in another puzzling downward spiral this week that’s left analysts groping for explanations. A possibility is that foreign traders are spooked by the ongoing decline in housing prices after they’d reached record highs. ‘Most of us believe the housing market will land on its feet … but seen with other glasses, like American or Asian, the housing market scenario can be different,’ Magne Østnor, a currency exchange strategist for DNB Markets in Oslo told DN.”

“The value of the Swedish krone has also fallen this week, so the two Scandinavian currencies may have affected each other. ‘And there are signs that liquidity isn’t so good right now,’ said Bjørn-Roger Wilhelmsen, chief economist at Nordkinn Asset Management.”

“What has started to happen in Oslo, is now seemingly spreading to Stockholm: Evidence is mounting that the Swedish capital’s crazy, two-decade-long housing price surge could be levelling off. ‘Prices have dropped 10 to 15 percent since this summer,’ said Carina Husgård, a Stockholm real estate broker at Bosthlm to Dagens Industri. She was one of several real estate brokers confirming a — what one described as ‘permanent’ — dip in house prices to the Swedish business daily.”

“‘The times of rising interest rates is beckoning. That means a new reality for indebted households,’ notes Johanna Jeansson, a columnist at Dagens Industri, adding that 70 percent of Swedes’ mortgages are currently tied to variable interest rates. That exposure could potentially be catastrophic for tens of thousands of households, finds a new survey by brokerage firm Svensk Fastighetsförmedling, featured in Dagens Industri. With even small rises in interest rates, tens of thousands of Swedish households would have problems paying their loans.”

“With supply outweighting demand in the current real estate market, only transactions involving wider rooms are taking place, real estate agents said. In Yangon, the majority of such large-size rooms are located in South Okkala township. Rather than buying apartments for investment purposes, most buyers are looking for homes to live in, therefore they are weighing factors such as room size and taking that into account in their decision-making, said U Yan Aung.”

“‘In the past, people bought rooms for speculation or renting out. Nowadays though, land prices have stabilised, so most buyers in the market now are looking for property to live in. Therefore, they prefer larger-sized rooms, even though the prices are different,’ he said. Previously, there were less developers and more buyers. Now though, there are more developers than buyers. So, developers have to change and adapt to focus on what buyers want.”

“The imbalances in the property market pose significant risks to the overall market in the event of a shock, said Bank Negara Malaysia governor Tan Sri Muhammad Ibrahim. Among the segments in the property market that were highlighted are high-rise condominiums, office space and retail malls. ‘We have raised these issues for more than a year. Exposure of financial sector within this area is within a comfortable level. But if we’re not careful, the oversupply could have a negative impact on the economy,’ he said.”

“Muhammad pointed out that the supply-demand imbalances in the property market has increased since 2015, pointing to the decade-high of unsold residential properties, with the majority of unsold units being in the above RM250,000 price category. For office space, there are also high office vacancy rates, especially in the Klang Valley. BNM’s report shows that the incoming supply of 38 million square feet of office space could exacerbate the glut. According to Muhammad, the office vacancy rate in Klang Valley is projected to reach an all-time high of 32% by 2021, far surpassing levels recorded during the Asian Financial Crisis. Similarly, in the retail space, it is expected that 140 new malls will enter the market across key areas such as Klang Valley, Penang and Johor, which could worsen the oversupply moving forward.”

“Real Estate Institute (REINZ) figures for October show median prices in the Auckland region fell by 3.2 per cent year on year to $850,000 - the biggest fall since December 2010. But within the old Auckland City boundaries (the CBD and central suburbs) the median price has fallen 17 per cent from $1.025m to $850,000 since October 2016. The median in the Auckland CBD is down 24 per cent year on year and in the central suburbs of the Maungakiekie-Tamaki Ward it is down 14 per cent.”

“‘The Auckland Region’s decrease of 3.2 per cent year-on-year is predominantly the result of a large number of apartments being sold in the old Auckland City boundary which has therefore brought the median price down for the entire region,’ said Bindi Norwell, CEO at REINZ. The increase in supply of cheaper apartments was improving affordability without causing a crash in the wider market and was a positive for first home buyers, she said. ‘If you think about Auckland City, it was a median of over $1 million last year and now its $850,000 so it really does show the level of opportunity that has opened up.’”

“They may be in the same city but different pockets of Sydney have emerged poles apart from the recent­ housing boom. CoreLogic figures showed the biggest price falls were upwards of 10 per cent and tended to be in areas with a large supply of new apartments and even more high-rise unit projects­ in the pipeline. The weakest performing area was Eastwood, surrounded by new housing projects, where the median­ apartment price tanked 15.4 per cent. The median apartment price in construction hotbed Sydney Olympic Park is 9.5 per cent lower than a year ago, while unit prices­ in Concord dropped by an average of 7.2 per cent, in Rydalmere and Ermington they fell roughly 7 per cent and near the airport in Hillsdale they dropped 10.5 per cent.”

“Median apartment prices also fell 15 per cent in Forest Lodge and Annandale. SQM ­Research director Louis Christopher said the area around Parramatta was most concerning because it was ‘heavily oversupplied with units.’ ‘Prices are dictated by supply and demand and when buyers have more ­options … there isn’t the same pressure to (offer) more,’ said CoreLogic analyst Cameron Kusher.”

November 16, 2017

Something That Sellers Aren’t Used To

A report from Kamloops This Week in Canada. “Federal authorities have loosened incoming rules for new homebuyers who sign deals this year, allowing them to qualify under current mortgage rules. The issue was highlighted by the Canadian Home Builders Association, which said as many as 20,000 Canadians who purchased homes this year could be caught in the new mortgage stress test. The Office of the Superintendent of Financial Institutions is imposing the new stress test on buyers of uninsured mortgages — those with more than 20 per cent down — to ensure they can handle the shock of higher rates. Those rules will be in place as of Jan. 1.”

“But the industry argued buyers who ink deals before that date should not come under the rules. If so, they may not be able to get mortgages for contracts they entered. The Kamloops-based Central Interior branch of the association was one of those calling for an exception. The CHBA forecast up to 11 per cent of buyers who purchase a new home would fail the test — thus imperilling deals already made. ‘The CHBA was concerned that this issue could also trigger significant oversupply in certain markets, as unsold homes re-entered the market, potentially at distressed prices,’ the organization said in a statement.”

From Chiswick W-4 on the UK. “Chiswick’s estate agents appear divided as to whether the first rise in interest rates in the UK is a good or bad thing for the moribund local property market. Christian Harper of Harper Finn said, ‘It’s so easy to be doom and gloom however let’s try to focus on the positive rather than the current obvious. It will remain buyers’ market so please consider that you will have competition when you try to sell, something that none of us as sellers are used to in Chiswick.’”

From Reuters. “Sweden’s financial watchdog has proposed a further tightening of mortgage repayment rules to keep a lid on spiralling debt that could spell danger for the cooling property market and the wider economy. A surge in building and tougher mortgage rules have put the brakes on a 20-year bull run in the Swedish property market, but authorities remain concerned that debt levels among the highest in Europe are still rising.”

“Monday’s Housing Price Indicator from banking group SEB registered its second-biggest drop ever, falling by 39 points. The only steeper fall was at the start of the global financial crisis 10 years ago. Some worry there is a risk authorities will go too far. ‘Poorly thought out political decisions could hurt the property market and in a worst-case scenario spark a housing crisis,’ Norwegian builder Veidekke said in a report on the Swedish housing market.”

From Bloomberg. “To address imbalances, regulators passed a number of measures in Sweden, Norway, Denmark and Finland. Nordea characterises Sweden’s housing market as ‘wobbly’ and asks the question whether we’re seeing ‘the beginning of the end of the 20-year bull market?’ The bank notes that housing starts for apartment buildings are at the highest level since the beginning of the 1970s, but there are signs demand is cooling down.”

“Economist Andreas Wallstrom also says it’s ‘questionable’ whether a general housing shortage exists. ‘Looking at the trend in the number of homes and comparing this with population growth over an extended period, we find a housing surplus,’ with the exception of Stockholm, he said. In Norway, Nordea sees signs of a ‘cool down, no meltdown.’ House prices have risen more than 200pc since the beginning of the 2000s, but the average median household income after tax is up just 90pc over the same period, while home-loan rates are considerably lower than they were back then.”

“Since April, home prices in Norway have dropped about 3pc. ‘We believe home prices will fall somewhat further before they bottom,’ Joachim Bernhardsen wrote in the report. ‘But even if we take an aggressive view and assume that prices fall 5pc beyond our forecast, they are still at the spring-2016 level and still 20pc above the bottom.’”

From on Australia. “Sydney real estate has finally emerged from what economists are calling the ‘perfect storm’ — a five-year boom period when wave after wave of home price rises turned the city into the least affordable housing market in the world behind only land starved Hong Kong. Real estate mogul John McGrath says the shift away from the ‘crazy’ price rises of the past is a positive for buyers and sellers because it is providing a soft landing from the boom. ‘It would have been more concerning if the prices were still going up by 15 per cent or more,’ McGrath says. ‘Instead, the market is finally taking a breather.’”

“Upsizers Elissa Edwards and Janis Auzins recently discovered this first hand when they bagged a new home on the northern beaches after having struggled to get into the market for months. The purchase has allowed the couple to finally sell their apartment on the north shore, something they hadn’t wanted to do until they had found a new property.”

“‘It felt like it’s got easier as we went,’ Edwards says. ‘We had been priced out of a lot of auctions but we started to feel like we could walk away from more sales knowing there was something else. Knowing all this, now we kind of wish we had sold six months ago.’”

From Newshub on New Zealand. “Auckland house prices have tumbled in the biggest fall since 2010. A new Real Estate Institute (REINZ) report shows median prices in Auckland fell by 3.2 percent year-on-year to $850,000 - the largest decline since December 2010. The only other New Zealand regions to experience a fall in the median price was Nelson, which saw a decrease of 6.8 percent to $447,500 - its biggest drop since April 2012.”

“‘The Auckland Region’s decrease of 3.2 percent year-on-year is predominantly the result of a large number of apartments being sold in the old Auckland City boundary, which has therefore brought the median price down for the entire region,’ says REINZ CEO Bindi Norwell. ‘Auckland City’s median fell by 17 percent to $850,000, the lowest price it’s been for 16 months.’”

“The largest decreases in median prices were in the Maungakiekie-Tamaki and Albany wards, which experienced a decrease of 14 percent and 4 percent respectively. Ms Norwell says part of the fall in prices is due to the effects of the Reserve Bank’s loan-to-value lending restrictions (LVRs) and the REINZ is looking forward to the bank’s review of possibly removing these. ‘Uncertainty post-election remains as it did pre-election, with concern as to how the policies of the new Government will play out,’ she continues. ‘There is much discussion about the effects new immigration policies and potential Overseas Investment Act changes may have on the market going forward.’”

November 15, 2017

A Perpetual Seller’s Market Can’t Last Forever

A report from the Washington Post. “For the past few years, sellers have had all the power in the local real estate market. Today’s buyers and sellers are accustomed to a market marked by rapidly increasing prices, low inventory, fast offers and bidding wars. But real estate is cyclical and a perpetual seller’s market can’t last forever. We are sensing a subtle shift. Pickier buyers with less urgency are meeting sellers with unrealistic expectations that we’re still in the hot spring market. This dynamic is reflected in the slower rate of price growth across the region and the notable price decline in Washington. Shifts in the real estate market don’t happen overnight, but buyers may be regaining a bit more of the bargaining power.”

From CNBC on New York. “New York’s 1,000-foot-tall symbol of luxury is becoming a monument to the condo slowdown. Last week, Unit 79 of the condo tower called One57 became the biggest foreclosure sale ever in New York. It went at auction for $36 million — marking a 30 percent decline from its purchase price of $51 million in 2014. An analysis of recent resales at One57 shows that every apartment that has traded since it opened in 2014 or 2015 has declined in value — all by double digits.”

“Unit One 62A was purchased for $31.6 million in April 2014. In October 2016 it sold for $23.5 million, a 26 percent decline. Unit 65A originally sold for $29.3 million in 2014, but was sold in April 2017 for $22.5 million. And some of the declines were even faster. Unit 51C sold for $20.4 million in April 2015. It sold eight months later for $17.7 million.”

“‘It’s clear that 2014 was the peak,’ said Jonathan Miller of Miller Samuel. ‘It was a perfect storm. You had capital pouring into the real estate development market from overseas. And we had just come off the financial crisis and you had this new product coming on, with the feeling that everything was skewing toward the wealthy. Everyone thought this was some sort of new world that would go on forever. But it was not sustainable.’”

The Casper Star Tribune in Wyoming. “A real estate tax proposed by a Jackson lawmaker could allow voters to levy a fee on the sale of expensive property in Teton County. Rep. Andy Schwartz, a Democrat, said the tax has long been discussed and highlights the need for local governments to be able to raise money independently. ‘The state can’t support them,’ Schwartz said. ‘We need, as the Legislature, to take responsibility for giving them opportunities to take new revenue streams.’”

“Wyoming Realtors president Devon Viehman, herself a Jackson real estate agent, said that while she was not familiar with the details of the bill, the Realtors organization opposed taxing property sales regardless of whether the tax applied to all homes or was tiered. ‘You can’t target Teton County just because of the wealthy second-, third-, fourth-, fifth-home owners we have here,’ Viehman said. ‘Anything they do to make it more expensive to buy and sell is going to be detrimental to our locals.’”

The Palm Beach Post in Florida. “A tax bill making its way through the U.S. House of Representatives could slash Florida home values by 13 percent, Realtors said Monday. Realtors harbor ‘grave concerns’ about a Republican proposal to reduce the tax deduction for mortgage interest, end write-offs for property taxes and boost capital-gains taxes on home sales, said Maria Wells, president of Florida Realtors. ‘That would affect the economy in all sorts of ways,’ Wells said. ‘We know that housing is the canary in the coal mine.’”

“Proponents of the bill argue that less generous tax breaks for homeowners would be offset by a near doubling of the standard tax deduction, to $24,400 for married couples in 2018. Realtors and many Democrats aren’t buying that argument. They say less generous tax incentives for homeownership could make homeownership less attractive both to first-time buyers and to second-home buyers. ‘Most likely we are going to see a significant drop in the value of people’s homes,’ said U.S. Rep. Lois Frankel, D-West Palm Beach. ‘Why? Because the demand for housing will go down.’”

From Your Central Valley in California. “On Tuesday, real estate and building industry advocates urged GOP delegates to vote no on the new GOP tax plan. ‘It removes the incentives for home ownership that we’ve enjoyed for 100 years, over 100 years in the tax code. This would be devastating for the California housing market,’ said Steve White, California Association of Realtors.”

“Gary Carter a broker with Movoto Real Estate in Fresno says the plan could change how many people are buying and how long they wait to do so. ‘Some of the individuals who need the incentives. They won’t be able to qualify cause it will be gone. They won’t be able to buy their first home,’ said Carter.”

The Orange County Register in California. “The California Association of Realtors is fighting back against GOP tax reform plans, taking out full-page ads in seven California newspapers calling on state Republicans to oppose provisions curtailing tax benefits of homeownership. Measures seeking to curb mortgage interest deductions, property tax deductions and capital gains exemptions will dampen homebuying while ‘punishing’ millions of other California homeowners, the ads say.”

“Half of all existing California houses sold in September cost $555,410 or more, according to CAR data. Half of all condos or townhomes cost $450,000. In Orange County, almost 63 percent of all homes sold this year so far — houses, townhomes and condos — cost $600,000 or more, and 48 percent cost $700,000 or more, figures from CoreLogic show. California homes selling for more than $1 million also would be affected by the House proposal to limit property tax deductions to $10,000. The Senate version of the tax bill retains the $1 million mortgage interest deduction limit but eliminates all property tax deductions.”

“‘The average California house costs two-and-a-half times the national average,’ the ad states. ‘Only 32 percent of California families are able to purchase a median-priced home. With homeownership already a stretch, or out of reach altogether for so many Californians, now is not the time to make owning a home more difficult.’”

“The GOP tax plans have put Republican members of the California congressional delegation on the spot, with a half-dozen saying they oppose it, are undecided or have yet to express an opinion because they’re facing tough re-election fights, the San Francisco Chronicle reported Tuesday. U.S. House Majority Leader Kevin McCarthy, a Republican from Bakersfield, issued a statement this week defending the tax plan, saying it amounts to a tax cut when all provisions are taken into account. McCarthy blames California Democrats for the state’s tax burden, citing the recent 12 cents per gallon tax increase. Democrats ‘newfound concern for the high tax burden is laughable,’ McCarthy said.”

November 14, 2017

If There Are No Takers, There’s No Turning Back

A report from Q 13 Fox on Washington. “We’ve heard about Chinese investors driving up local housing prices but it’s rare to hear from them firsthand on why Western Washington is so desirable. On Thursday, a delegation representing nearly 60 percent of Chinese investors interested in our region visited the Eastside. They toured three luxury homes ranging from $5 million to $10 million. Realtors say the Eastside is now more expensive because of Chinese buyers. ‘Personally, for the last two years 40 to 60 percent of my homes, listings, have sold to international buyers,’ Anna Riley of Windermere said.”

“Then why are an estimated 10 percent of luxury homes sitting vacant? ‘The process of getting residences in the U.S. is getting longer and longer,’ said Yi Liu, vice president of China Alliance of Real Estate Agencies.”

From Global News. “Seattle is ’still much more affordable than Vancouver,’ realtor Steve Saretsky told Global News on Sunday. When you combine that fact with the foreign buyers tax enacted in Metro Vancouver last year, along with the perception that there aren’t many great deals left to be had in the city, Seattle’s attraction becomes more and more clear. ‘The prices have been rising a lot there, and I think it’s encouraging more and more investment,’ Saretsky said.”

“B.C.’s foreign buyers tax is ‘working by driving a share of buyers to other cities, especially Seattle,’ said Byron Burley, the B.C.-based vice-president of, a real estate platform aimed at international buyers. ‘It has taken the froth off of the top.’ But in terms of demand from Chinese buyers, search volume data released by the site shows that it’s ‘flat as a pancake,’ he said. ‘It’s very important to remember, however, that Vancouver is more like a pancake than a deflating souffle.’”

From Domain News in Australia. “Despite 2017 marking a bull run of top-end sales in the $20 million-plus range, this year is the first time in five years in which there hasn’t been a single trophy sale to a foreign buyer, to date. And prestige agents say the dearth of foreigners at the top end is in large part thanks to the NSW government’s recently introduced tax slug on foreign buyers. It’s not just the lucrative commissions for prestige agents or windfall to trophy home owners that have been affected by the changes. Sydney’s cache as one of the world’s top emerging international trophy home markets could be collateral damage, according to David Chin, managing director of Australia and China research firm Basis Point.”

“‘Have they overcooked things for that end of the market? I think they have,’ said Chin. ‘Even the fabulously rich have their limits and Sydney isn’t the only glamour city on Earth.’”

“BIS Oxford Economics managing director Robert Mellor said that while he understands why the government introduced the extra charges, they probably did it ‘too late in the cycle when the market had peaked.’ ‘People might think foreign buyers will just keep coming anyway, but if the market is no longer performing and yields are low then foreign investors aren’t going to opt into this market,’ he said.”

From The Sun Daily on Malaysia. “The overhang in stratified properties or apartments and condominiums has worsened, with the number of unsold units rising 40% to 20,876 units in the first half of the year (H1 2017) from 14,792 units in H2 2016. On whether the market will be able to absorb the new supply of homes, National Property Information Centre director Khuzaimah Abdullah said the impact is yet to be seen. ‘I am sure the developers are very prudent people. If there are no takers, no buyers, I’m sure they would hold off construction because once you are into the construction stage, there’s no turning back,’ she said.”

From NDTV on India. “India’s property sector was already battling a slowdown last year, when Prime Minister Narendra Modi’s crackdown on cash quashed any hope of an imminent revival. The high number of unsold units though indicates that a recovery is still some time away. In the National Capital Region, which includes Delhi, inventory stands at around 200,000 units, which would take 62 months to be absorbed; while for financial capital Mumbai it’s at 180,000, or 52 months away from being cleared, according to a report from Anarock.”

“Ritika Mankar Mukherjee, a research analyst from Ambit Capital, is looking at the government’s efforts to force about 50 heavily indebted companies toward insolvency. If successful, these companies may sell some of their property assets to pay down debt. ‘We expect land prices to fall from February 2018,’ Mukherjee wrote in a Nov. 1 report. ‘As land prices fall, it is but natural that real estate developers launch cheaper properties through 2019 and 2020.’”

From The Negotiator on the UK. “Over a third of properties for sale in the UK have had their original asking prices cut since being listed, says the latest Rightmove house price index. At 37% of all existing homes for sale, this is the highest proportion dropping their prices during the autumn months for five years, the portal says. Price cutting following the Summer market high-point is a pre-Xmas tradition within the property market but the proportion of homes for sale being cut in price has been rising over the past three years and is now at a peak.”

“‘In the run-up to the festive season many sellers are trying to tempt distracted buyers to look at their property by dangling the bauble of more attractive pricing given the quieter time of year and more challenging market,’ says Miles Shipside. ‘Many sellers who have been on the market for a while are curbing their initial pricing optimism and are hoping that reducing their property price will result in buyers selecting it as this year’s must-have Christmas gift. The effect is an impromptu Autumn Sale with the largest proportion of sellers on the market having reduced their initial asking prices at this time of year since 2012.’”

From the Irish Independent. “The brother of ex-Westlife star, Shane Filan has revealed he wept the day the singer packed up his family home and left lreland after the pair were left with nothing when the housing bubble burst. Shafin Developments, the property company the brothers established together, went bust in 2012. The singer, faced with a bill of €23m, was declared bankrupt. His brother Finbarr has revealed he was declared bankrupt last Monday to the tune of €15 million.”

“In a column in the Sunday Business Post, the Sligo businessman said ‘guilt, fear and denial’ plagued him in the wake of his brother’s bankruptcy. He wrote: ‘When it came, the drop was bleak and life-changing. The worst day for me was spent packing up Shane’s family house and driving him to the plane in Knock. He was on his way to London that day to start the process of rebuilding his life after being declared bankrupt himself. The guilt I felt at the part I played in him losing his home almost overwhelmed me.’”

“Mr Filan told how he and his brother never saw the crash coming. They took out their first development loan in 2003 and soon the business partners and brothers were going ‘too fast too soon.’ He writes in the Sunday Business Post: ‘Hindsight is never there when you are in the middle of an impending calamity.’”

“He previously told the Irish Independent: ‘There were a few very difficult years where I was quite worried and scared. But you take yourself out of the bubble, and you realise it’s happening all over the world, especially in Ireland.’ Finbarr, meanwhile, is urging others to come to terms with their own financial troubles after he grappled with the ‘fear’ that follows going broke.’”

November 13, 2017

Too Much Supply Or Not Enough Demand?

A report from Bisnow on Texas. “The Dallas multifamily market is looking a little rough with rent growth continuing to sag due to incessant Class-A deliveries. More product is on the way — Dallas is No. 2 in the nation for multifamily permits issued this year. This has raised some concerns about overbuilding. ‘Dallas continues to experience steady declines in rent prices due to a huge number of new apartments coming to the market,’ Abodo Senior Communications Director Sam Radbil said.”

“Despite this, Dallas issued 20,150 permits in 2017, including 1,389 in September, a study from RealPage shows. Taken together, these stats seem to indicate weakening in the market, but experts say these numbers do not tell the whole story. Axiometrics Senior Vice President Jay Denton said a decline in Dallas’ frenzied job growth numbers may have caused the recent stress on the market. ‘As of September, according to the Bureau of Labor Statistics, [job growth in Dallas] is down from 105,000 [jobs added year-over-year] to 67,000. So you can ask the question of, ‘do we have too much supply or do we not have enough demand?’”

From LA Weekly in California. “A wave of new apartments downtown has slowed the pace of rent increases and inspired landlords to offer free parking and a month’s free rent. ‘Rent has started to slow down, and that will make capital forces hesitant,’ says Greg Willet, chief economist at RealPage. Even as planned building is flat or even on the decrease, construction that was seeded two and three years ago will result in a peak year for new apartment openings in 2018, Willet says. As many as 18,000 units could come online, much of it in downtown, Hollywood and other core areas, he says.”

“That’s a mixed bag: It’s still not enough, and it’s mostly luxury housing. Downtown real estate agent Bill Cooper says the flat figures for L.A. are even more dire than they appear because, he believes, most of that planned construction involves high-end luxury units and not the kind of apartments the average Angeleno can afford. ‘They’re basically filling downtown with luxury apartments,’ he says. ‘There’s only so many people who can pay those rents.’”

“Cooper says the glut downtown could result in rents that aren’t as outrageous as L.A. has experienced in the last few years. ‘You’re going to see apartment pricing change,’ he says. ‘I think it’s going to have to make a correction in the next few years.’”

From BKLYNER on New York. “Hot on the heels of a mayoral election, we found ourselves thinking of the ‘the rent is too damn high.’ While we here at BKLYNER do our best to find the finest deals in the county of Kings, it seems nothing can shape markets like plain ol’ supply and demand (pursuant to incentives, etc.) Fortunately, it seems as though rents might be starting to tick downward thanks to the flood of new housing that has, in part, reshaped the skyline of Brooklyn and its denizens.”

“86 Court Street #3: This Brooklyn Heights one bedroom has seen its price dip from $2,499 down to just $2,099 a month during its time on the market. Now is the time to strike. 72 Clermont Avenue #1: After starting at $2,200 on October 15, the price has tumbled to $1,850 per month.”

The Real Deal on New York. “Though slightly down from last month, the vacancy rate in Manhattan rental apartments in October remained high. ‘We are seeing just general malaise or weakness in the market,’ said Jonathan Miller, the CEO of appraisal firm Miller Samuel and author of the report. ‘The market is soft. We’re seeing a lot of concessions.’”

The Washington Blade. “It’s not rocket science: The more housing there is, the more affordable housing will be. D.C. has begun to prove this simple reality of supply and demand. A report last month by real estate research firm Delta Associates indicated that D.C. rental prices dropped for the second consecutive quarter, following a rare drop in rents in the previous period. These drops were only the third decrease in rents since 2010.”

“This decline in average rents was the result of a record number of new apartments hitting the market in the past year, totaling more than 11,000 units. Optimism that prices will continue to drop is based on an already-planned addition of nearly 14,000 new units in the next three years. Rental prices were anticipated to plateau in the areas with the largest supply of new units, primarily the Riverfront area in Southeast-and-Southwest D.C., as well as NoMa and surrounding the H Street, N.E., corridor. These areas are expected to continue to lead the city in rental housing growth over the next three years, eventually exceeding the total number of units in central D.C.”

“Instead, rents dropped in the more established neighborhoods of northwest D.C., including Foggy Bottom, Dupont Circle, Logan Circle, Shaw, and the Mount Vernon Triangle area. The Shaw-Columbia Heights submarket experienced the largest decrease at 4.1 percent while average rents in Dupont-Logan-Mount Vernon declined 2.4 percent – all near-downtown areas.”

“Nearly all new rental housing in almost all cities is typically, and historically, higher-priced housing. The availability of new ‘luxury’ apartments, however, serves to reduce the pressure on existing housing, including less expensive units. This benefits the mainstream market overall and allows for a broader range of rental price points.”

November 11, 2017

The Battle Lines Are Drawn

A weekend topic starting with CBS New York. “How will local homeowners be impacted by federal tax reform? As CBS2’s Carolyn Gusoff reported, the Tri-State Area may already be feeling the impact in its real estate market. New homes are being built in affluent Roslyn, but who will buy them if high property taxes are no longer deductible and mortgage deductions vanish, too? ‘A lot of incentives to buy a home it looks like will be taken away,’ realtor Maria Babaey told Gusoff. She said it appears the rush is on to close deals before tax reform deal is done. ‘A lot more transactions, a lot more activity – offers that are being accepted,’ she said.”

“Realtors say the plan, as is, would hit luxury homes in high taxed suburbs the hardest. For example, one $2.5 million home has a $40,000 property tax bill, which would not be deductible. It’s not just luxury homes. Average property taxes in Nassau County are close to $20,000. ‘It will be a dramatic change. People will feel it literately double,’ Laureen Harris, president of the Association for a Better Long Island, said. She predicts a geographic housing recession – the inability to sell, a reluctance to buy, and lost equity. ‘Your house is going to be worth less. It’s going to result in an immediate housing crisis,’ said Harris. ‘It is decimating. It is very, very serious and it’s going to be overnight.’”

The San Francisco Chronicle in California. “In Alameda County, where the median home value is about $783,800, about 99 percent of people who bought today would take the deductions. However, that drops to 78 percent under the House bill and 55 percent under the Senate’s. Although most people in the Bay Area would still benefit from the deductions, limiting them ‘might impact your decision to buy a more expensive or less expensive home. The size of the mortgage interest deduction can be significant for a lot of households,’ said Skylar Olsen, senior economist from Zillow. If you limit the deduction ‘your willingness to outbid at the high end drops.’”

“That could put downward pressure on high-end home prices. But ‘it would not take away one of the major drivers’ of Bay Area real estate, ‘which is is constrained inventory in the face of incredibly strong demand,’ Olsen added.”

“Richard Green, a real estate professor at the University of Southern California, calculated that if Congress got rid of the mortgage interest deduction entirely, it might reduce the U.S. homeownership rate, currently around 64 percent, by about a half a percentage point, but prices could fall by 10 to 11 percent. ‘You have high-income people outbidding lower-income people for the same house because they get a bigger tax break,’ he said. If you remove the deduction, they would still buy a home, but pay less for it. If you cut the maximum deduction in half, ‘you might knock (prices) down 5 percent. Given that they are rising 3 or 4 percent (a year) it wouldn’t be noticeable,’ he said. It could even be good if it makes housing ‘a tad bit more affordable.’”

The Mercury News in California. “The decision to not lower the cap on deductible mortgage interest might not thrill large swaths of the country, but in the Bay Area, where the median price of a new home now stands at $752,000, the move will be most welcome. Note that this change would only apply to new mortgages, so Bay Area residents who are already homeowners have nothing to worry about; under the House plan, though, house-seekers would pay more to the tax man for a half-million-plus loan. The real-estate lobby has been fighting hard to stop it from happening.”

“The California Building Industry Association released a statement asking that the $1-million cap not be messed with, saying ‘in states such as California where the median price of a home is $533,000, it is essential for homeowners to be able to deduct the full amount of the mortgage interest deduction. We are concerned that the limits to the deduction in the Act will create a depressive effect particularly in California which could lead to a nation-wide housing recession.’”

The Desert Sun in California. “Ron Parks, a real estate agent with HOM Sotheby’s International Realty, said removing the mortgage interest deduction piles on to a bigger source of anxiety for his clients: Whether they will be able to list their new house on Airbnb without a hitch in light of local cities’ new restrictions on short term rentals. ‘If we put a noose on the pipeline of people wanting to buy second homes,’ Parks said, ‘it’s going to hurt the housing market.’”

“In Indian Wells, vacation homes account for 42 percent of the market. In Rancho Mirage, Palm Desert, La Quinta and Palm Springs, the analysis found that vacation homes are between a quarter and a third of total housing stock.”

“Jim Franklin, a real estate agent with Berkshire Hathaway Home Services, said the proposed legislation would impact people that split their time between the coast and the desert. He also thinks removing the deduction could dissuade retirees from buying a home in Greater Palm Springs. ‘It’s not a vacation home. It’s a retirement home,’ Franklin said. ‘They rent it out, pay the mortgage, because they would be crazy to wait ten years to buy it, because the price would go up.’”

“Some buyers don’t get a mortgage at all. ‘We find that the majority of our clients in the over $500,000 range actually purchase their homes with cash,’ said Jesse Huskey, a real estate agent with The Gurney Group. ‘We might see a leveling off of prices for a short while, but that’s a good thing if you ask me,’ he said. ‘The sky isn’t falling and neither is the housing market.’”

“With that said, markets along the California coast will find the lower cap harder to swallow than less expensive markets inland. In the San Jose metropolitan area, where the median home price tops $1 million, 75 percent of new mortgages this year to date were north of $500,000, the Wall Street Journal reported. In Los Angeles, 44 percent of new loans fell into that category.”

“And while economists at the nonpartisan Tax Policy Center in Washington, DC say the mortgage interest deduction does little if anything to raise home ownership rates and creates an incentive to build more expensive homes, trade groups for real estate agents and home builders argue that the cap will dampen home ownership. Across California, a third of homes have a mortgage over $500,000, according to an analysis by the National Association of Home Builders.”

“‘For us in California, we need to hang onto everything we can possibly hang onto in order for people to qualify and buy a house,’ said Gretchen Gutierrez, CEO of Desert Valleys Builders Association.”

From American Banker. “The battle lines are drawn between those seeking to protect the mortgage interest deduction (MID) and a legislative effort to greatly reduce the use of the MID. Hopefully, this is a battle that taxpayers will win over the housing lobby — the loudest supporter of keeping the deduction intact.”

“The housing lobby’s effectiveness is measured by its success at garnering subsidies. But the proposed House bill, the Tax Cuts and Jobs Act, would be a shot across the industry’s bow. The stage is now set for a crucial debate between two competing visions: the House plan — which would disincentivize the MID by raising the standard deduction and capping loans qualifying for the MID at $500,000 — and Senate tax reform legislation that effectively would leave the deduction intact.”

“From the perspective of taxpayer cost and federal budgeting, it’s no contest which plan is better. Since 1994, the cost of the MID, the separate real estate tax deduction (also downsized in the House plan), and other single-family tax subsidies has totaled over $2.5 trillion and in fiscal year 2017 were estimated to cost $141 billion. This does not include the many hundreds of billions in subsidies over the same period provided to or by Fannie Mae, Freddie Mac, the Federal Housing Administration, Ginnie Mae and others, and the $6.7 trillion in taxpayer mortgage debt guaranteed by these same agencies.”

“What did the U.S. taxpayer get for this massive level of rent-seeking? First, the U.S. homeownership rate today is 63.9% — statistically no different than the average rate of 64.3% since 1964 (excluding the bubble years). Second, these policies directly caused the 2008 financial crisis — a catastrophe for the U.S. and world economies.”

“It is worth noting the ‘man bites dog’ nature of NAR’s admission that the MID drives home prices up higher than they otherwise would be. While this certainly explains the NAR’s past and current support for the MID, it is a damning admission for a group that purports to promote homeownership and ‘affordable housing.’”

“In terms of the merits, federal subsidies for homeownership like the MID get capitalized into higher prices, encourage the taking out of more debt, promote the buying of larger, more expensive homes, and price homes out of reach of lower-income buyers. Recent research at the Federal Reserve confirmed these points and found ‘when house prices are allowed to adjust in response to the elimination of mortgage interest deductions, the homeownership rate actually increases.’”

“According to NAR, existing home sales have been in a seller’s market for 61 straight months and there are no signs of this abating anytime soon. A seller’s market is commonplace even at the higher price end of the home market. This includes San Francisco, where homes selling for more than $4.6 million have less than 2.5 months inventory along with similar conditions for the highest price points for metro areas such as Seattle and Los Angeles. Areas like Boston, Denver, New York City and Washington D.C. have a seller’s market except for price points in excess of $1.5 million to $2 million.”

“Jerry Howard, chief executive of the homebuilder association, told The Wall Street Journal that the House legislation is ‘a bad bill for housing.’ In reality, it’s a good bill for American taxpayers and homebuyers.”