A report from Reuters. “In mid-April Harsh Grewal and his wife settled on a place in a San Francisco suburb and were prepping a bid, above the listed price so they’d have a chance of besting other offers. Then he checked his phone and saw several alerts, all touting reduced prices for other homes they’d been tracking. The Grewals pulled their offer and put their search on ice in hopes it was a sign the market was finally cooling. ‘I want to see where this goes, and where the dust settles,’ Grewal said.”
“That’s exactly what Federal Reserve policymakers hope to see more of as they raise interest rates to bring down 40-year high inflation.”
The Marina Times. “Taylor Marr, Redfin’s deputy chief economist, is seeing early indications that the housing market might be cooling down in some pricey coastal areas — including San Francisco. Tours of for-sale homes in California have dropped 21 percent as of March 31 from the first week of 2022. The number of homebuyers in San Francisco who applied for a mortgage dropped 13 percent year-over-year in February.”
“And finally, Marr adds, ‘For this time of year, the share of homes with price drops has been growing at its fastest pace in at least seven years. While price drops are still a rarity, the fact that they are quickly becoming more common tells us that sellers are reaching a limit on their ultimate control over the market as buyers reach a limit on how much they are willing to pay for a home.’”
The Commercial Observer. “Partner Insights spoke to Michael A. Hanin and Uri A. Itkin, leaders of the structured finance litigation practice at the law firm Kasowitz Benson Torres, about the commercial mortgage-backed securities (CMBS) market, and the ramifications arising from the quarter of a trillion dollars’ worth of commercial loans set to mature in 2022. Hanin: There’s been an unfortunate history of special servicers delaying tough decisions with respect to CMBS loans held in trust — what’s often referred to as an ‘extend and pretend’ mentality. That mentality can avoid losses to the most junior certificate holders in the short term but can, and has, resulted in far more significant losses to CMBS investors on the whole over the long term.”
“CO: What do you expect to happen if and when delinquencies and loans in special servicing rise? Will special servicers take enforcement actions? Itkin: Generally, over the past several years, there’s been a trend of special servicers trying to preserve the status quo and keeping the loans in place, rather than pursuing more aggressive options like foreclosure. My sense is that will continue to be the case in the short to medium term. Of course, this calculus might change in light of macroeconomic factors, such as if the Fed continues to raise interest rates.”
From Bloomberg. “The global shift away from easy money is poised to accelerate as a pandemic bond-buying blitz by central banks swings into reverse, threatening another shock to the world’s economies and financial markets. Bloomberg Economics estimates that policy makers in the Group of Seven countries will shrink their balance sheets by about $410 billion in the remainder of 2022. It’s a stark turnaround from last year, when they added $2.8 trillion — taking the total expansion to more than $8 trillion since Covid-19 arrived.”
“That wave of monetary support helped prop up economies and asset prices through a pandemic slump. Central banks are pulling it back — belatedly, in the view of some critics — as inflation soars to multi-decade highs. Their new policy, known as quantitative tightening — the opposite of the quantitative easing that central banks turned to during the pandemic and the Great Recession — will likely send borrowing costs higher and dry up liquidity.”
“Already, rising bond yields, falling share prices and the stronger U.S. dollar are tightening financial conditions — even before the Fed’s push to raise interest rates gets into full swing. ‘This is a major financial shock for the world,’ said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA, who previously worked for the European Central Bank and International Monetary Fund. ‘You are already seeing the consequences of tapering in reduced dollar liquidity and dollar appreciation.’”
The Globe and Mail in Canada. “As high as Toronto and Vancouver rents may seem to local tenants, landlords are often losing money on them. In recent years, many mom-and-pop real estate investors in the two cities have been quietly paying more in mortgage and other ownership costs than they receive in rent, trusting they’d eventually sell at a profit thanks to rapidly rising home values, experts say. But as interest rates shoot up and price growth slows, some highly indebted landlords are beginning to feel the squeeze more acutely. ‘It’s all about leverage,’ said Ron Butler, a Toronto-based mortgage broker.”
“His firm, Butler Mortgage, is getting daily calls these days from real estate investors in Ontario who’ve used a home equity line of credit (HELOC) for all or some of the down payment on a second property. ‘If you bought a rental property seven years ago, which was enormously cheaper – you might even have had positive cash flow – you’ve had time to pay down the HELOC,’ Mr. Butler said. But if you’re an investor who bought in the past 18 months at a much higher price using a HELOC for the down payment and with rent not fully covering your monthly costs, ‘you now have an issue,’ Mr. Butler said.”
“It’s not uncommon for homeowners who’ve seen the value of their first home soar in recent years to borrow against their home equity with a HELOC to fund the down payment on an investment property, Mr. Butler said, speaking about the Ontario market. Borrowers often don’t disclose to their bank they intend to use the HELOC to acquire a second home, he added. Once they’ve drawn the cash for a down payment from the HELOC, borrowers typically apply for a mortgage to finance the rest of the real estate purchase, Mr. Butler said.”
“With HELOC rates climbing, many of those highly leveraged investors are now scrambling to convert their line of credit balance into mortgage debt that comes with fixed payments, according to Mr. Butler. The risk is that some may not be able to do so. In a March 2021 report, CIBC deputy chief economist Benjamin Tal and Shaun Hildebrand, president of Toronto-based condo research firm Urbanation, found that 37 per cent of GTA condo rental units registered in 2020 had negative cash flow, with the carrying costs of home ownership outstripping rent by an average of $492 a month for that group.”
From ABC News in Australia. “Tara Higginson pulls no punches when asked what will happen if interest rates rise on Tuesday, off the back of soaring inflation. ‘I’m up shit creek’, says the single mother of four who, in the midst of the pandemic, took out an interest-only variable loan of $510,000 – more than six times her income. ‘I don’t have a second income to be able to buffer that fluctuation when it [interest rates] increase,’ she says.”
“To build her dream home in Logan Reserve, in the outer suburbs of Brisbane, Ms Higginson took out a big home loan and the rest was funded by the $25,000 HomeBuilder grant and first home buyer grants of about $15,000. She also pulled $20,000 out of her superannuation. She currently pays a variable interest rate of 2.98 per cent, interest-only, and says if rates rise even slightly, she will have to cut back on her youngest daughter’s education and take out a second job. ‘I hope it never comes to it. But if it [rates] start to increase, which we know it will, I need to find a second source of income. It’s something I’m really scared to actually think about,’ Ms Higginson says.”
“She says if she can’t bring in extra income, she could be forced to sell. ‘I’m 100 per cent at risk of having to sell the property,’ she says. ‘That would like, kill me, to say goodbye to it. I know, a lot of our neighbours are currently looking at refinancing and using the equity because the price of their house and the valuations have gone up so much that they can now look at fixing interest rates and things like that, just to give them a bit more security.’”
“‘And I honestly don’t think I could do that. I don’t think I could approach a lender and say, ‘Hey, can I try and fix my loan for five years at the current low rates? Because of the changes [tighter lending standards] that have happened, I wouldn’t get approved again.’”
“Dr Sy was the principal researcher at APRA between 2004 and 2010, and a big part of his role was assessing housing credit risk. Or in other words, whether people who cannot afford to are taking on too much housing debt. ‘APRA doesn’t look at individual consumers,’ Dr Sy notes, having called it a ‘fake regulator’ in a 2019 paper that was submitted as part of a review into the organisation. ‘If some of the investors or consumers get in trouble, because they didn’t really understand some contracts that they struck with a bank or financial institution, then it’s caveat emptor (a Latin term that means ‘let the buyer beware’),’ he says.”
“Ms Higginson says she was surprised she even got the home loan in the first place. ‘I never thought they’d give me as much money as they did,’ she says. ‘I have been able to build my dream house with what they’ve lent me. But at the same time, the whole time was pinching myself thinking, ‘how the hell is this happening?’ Like, how have I been approved for over half a million dollars on a single income with less than 20 per cent deposit?’”
“Ms Higginson’s advice to others who want to get into the housing market is to plan for the worst-case scenario. ‘I have borrowed [to] my max capacity,’ she says. ‘And at the time, it was literally a whirlwind. I got the pre-approval, found the land three days later, found the builder a week after I signed the land contract — it just all happened so quick. I didn’t stop to think, how’s this going to affect me… whether I can [make] the repayments. I was just so swept up in being approved, that I was like, ‘this is a dream come true. Just roll with it and keep going and think about the consequences later’. Now I’m in here, I have to look at how things are going to change and what the future holds.’”
“‘I know, owning a house is the Australian dream. It’s what everyone wants. It’s your own slice of paradise, that’s yours. But make sure that the banks can’t take it away. Make sure that you are secure and you are looked after.’”
From Stuff New Zealand. “New Zealand gained 27,875 new homes last year – the largest increase in property stock since 2017 when house price stagnated, property data firm Valocity figures show. While supply was going up, demand stagnated. When Auckland University professor of economics Robert MacCulloch reads the figures, he is reminded of a guest lecture given by Harvard economist Edward Glaeser in 2013.”
MacCulloch says Glaeser, who is regarded as the father of urban economics and an authority on housing bubbles, spoke about how housing shortages could trigger a price boom, and that even when supply caught up, price momentum could carry on. ‘Even when you release supply you still get this momentum, the bubble can keep churning on for a year or two,’ MacCulloch says.”
“”It’s the ‘fuel in the fire’ effect, so making the money so much cheaper as a response to Covid creates excess demand for properties, trumping the amount of new stock being created,’ Wilson says. ‘When the cost of borrowing goes past a certain point people pay less attention to the price they’re paying and more on just getting a house. It seems a little ludicrous to say that, but we have seen the market act that way.’”
“Infometrics principal economist Brad Olsen says a bubble is only known as a bubble when it pops, and the market has not popped yet. ‘It’s something that is slowly deflating, after being pumped larger over the last decade and some extreme acceleration in growth over the pandemic period,’ he says. ‘Given all the factors we are currently seeing, I don’t think – yet – that we can call the housing market in a bubble, simply because I don’t think at the moment it’ll pop. It’s more like a tyre with a slow leak at the moment – it hasn’t collapsed, but it’s leaking out slowly – but still looks like a tyre.’”
“There has been concerns of a slowdown in developments after two townhouse sites recently appeared in mortgagee sales and Auckland property developer David Whitburn saying there has been a general pullout of Chinese finance from the property market. ‘We are now hearing about developments not being completed, or developers changing halfway,’ Wilson says. ‘They are probably ‘late to the cycle’ developers, or new developers without experience or scale to ride through short to medium-term disruptions.’ Wilson says developers whose business model rely on rising prices to make development profitable may be in trouble.”