A weekend topic starting with Catalyst. “There’s an apparent contradiction in urban America’s real estate market. On one hand there’s a general housing shortage, namely of affordable workforce housing. But there are lots of luxury condos that get built and stay empty, unable to sell at their exorbitant prices. The New York Times recently cited a report stating that a quarter of condo units built in New York City since 2013 haven’t sold. Similar tales can be found in fellow superstar cities like Seattle and San Francisco.”
“Just because new luxury condos sit empty doesn’t mean there’s a housing glut, nor does it mean that the condos themselves are in low demand. The Times noted that some of the empty ones in New York had been sitting around since 2013. But many of them are vast Manhattan penthouses being listed at 7- and 8-figure sales prices. That kind of housing doesn’t play by the same rules as normal housing. Developers know there’s a strong but fluctuating market of foreign buyers who have vast resources, and can bite at any time. So developers purposefully bid up units, and keep them on the market for prolonged periods, in what is effectively an act of speculation.”
From the OCCRP. “Since 2012, hundreds of millions of dollars from Kyrgyzstan — one of the poorest countries on earth — have poured into bank accounts in Europe, the United States, and the Middle East on behalf of a single family. Much of that money ended up in an expansive real estate portfolio that stretches from the Persian Gulf to the shores of California.”
“That portfolio includes prestigious acquisitions, such as a mansion in one of London’s most exclusive neighborhoods and a $1.2 million home near Washington, DC. It also includes new real estate development projects, like a new 26-floor apartment tower in Dubai. But though some of the other projects occupy prime real estate, they have stalled for unknown reasons, prompting questions about who is behind them.”
From Business Insider. “A sense of gloom hangs in the air. ‘Bloodbath,’ ‘free fall,’ and ‘slump’ were just some of the choice idioms deployed by headline writers to describe the New York real estate market during the twilight of 2019. Across the pond, townhouses in central London — long the favored investment vehicle for billionaires from Bahrain to Belarus — have lost 20 percent of their value in a five-year nosedive. Worldwide, according to Savills, a global property consultancy, ‘everything is trending to zero.’”
“‘This is not a normal cycle,’ says Frederick Peters, CEO of Warburg Realty. Even after the global financial crisis, luxury property prices in the world’s capitals recovered fully within two years and went on to smash all records. This time round, brokers and analysts agree, it’s different.”
“One Manhattan Square, an 815-unit monolith that looms over the Lower East Side, has become a symbol of the city’s condo glut. Struggling to sell, it has offered a series of perks, including 10 free years of common charges for buyers and a lease-to-own scheme that deducts a year’s rent from a future purchase. Its lavish amenities, which include an adult tree house, a putting green, and a cigar room, now look like peak bubble.”
“Condo prices in the exclusive southern tip of Miami Beach fell by 18 percent in the third quarter of 2019, compared to the third quarter the previous year, according to Brown Harris Stevens, and condos on ultra-exclusive Fisher Island lost almost half their value. Ed Kaminsky, a realtor at Strand Hill in Southern California says: ‘Global and political uncertainty causes buyers pause. In Palo Alto and Silicon Valley, in 2016, any seller could put any price on any house and there would be five or six buyers. Now buyers come in low and don’t budge.’”
From The Tyee in Canada. “Another year of sliding home values in Metro Vancouver has wiped out $87 billion in home equity wealth, according to a calculation by a property assessment expert. To some, that’s an outrage. ‘People aren’t pleased. They’re very unhappy,’ said Paul Sullivan, a senior partner with BCS, a real estate appraisal company, who totted up the total loss.”
“To others, it’s easy come, easy go. ‘It seems a little bit like crocodile tears to put out a press release saying that all of these owners have lost $87 billion, when that’s just an evaluation based on BC Assessment,’ said Marc Lee, an economist with the Canadian Centre for Policy Alternatives who has argued governments should increase taxes on real estate wealth. ‘They’re not actually out $87 billion.’”
“A real estate price run-up like no other peaked in 2016 and made many Vancouver homeowners paper millionaires, especially on the increasingly pricey west side. But for the past few years home prices have been falling: single-family homes started to drop in value and have become harder to sell. At first, the drop didn’t affect lower-priced condos. But this year, the value of all types of housing has fallen, according to BC Assessment data.”
“Sullivan said that far from being just a ‘paper’ loss, the value drop has had dire effects on younger homeowners who bought at the peak of the market and now owe more than their house is worth, meaning they can’t get refinancing or a home equity line of credit. It’s also affected older homeowners who have lived in their homes for 20 years or more, and planned to use the proceeds of selling their home to fund their retirement.”
“‘So that old couple that’s been living in that house for 30 or 40 years thought they had $5 million to retire, sell the house, live off the money for the rest of their lives,’ Sullivan said. ‘Instead of having $5 million, now they have $3 million and out of that $3 million they have to buy a home, and then retire.’”
From Domain in Australia. “For the past three years, Alyssa Onorato and Max Vernon have been saving for a deposit on their first home but were unable to get a foot in the door. The couple have finally caught a break, nabbing a spot in a new federal government scheme for first-time buyers. Buyers agent Paul Wilcox said the scheme would push up prices in an already tight market that has seen a shortage of homes for sale and rising values towards the end of 2019.”
“‘It’s probably going to inflate prices again like the government did when it introduced the first-home buyers allowance,’ Mr Wilcox said. ‘Value will go out the window because they’ve got the safety of the 5 per cent deposit. I see too many buyers upping their budget during the search, which is not good as the market moves quickly so any increase in deposit and/or budget is funded by net savings.’”
“AMP Capital chief economist Shane Oliver said conditions for Sydney first-home buyers were better than at the market’s 2017 peak, but affordability was still ‘very poor.’ The government’s scheme will help ‘at the margin,’ he said. ‘Only a small number of first-home buyers will be able to participate in the first place,’ he said. ‘Some may be a little bit wary, because it does involve borrowing a lot more money.’”
“Demand-driven schemes that help buyers borrow more can have the effect of pushing up prices, he said. Laing+Simmons Parramatta, Granville and Carlingford group principal Ray Fayed said there was a lot of interest in the unit market, where prices are below $700,000.”
From India Legal Live. “There are now enough episodes in economic history to find similarities and to allow for causal interpretations. One such episode is the uncanny similarity between India’s current economic environment and the Asian crisis that started in Thailand in 1997, a crisis that within a very short period plunged stock markets and currencies across seven East Asian countries. Hundreds of banks, builders, and manufacturers went bankrupt. The Thai baht, Indonesian rupiah, Malaysian ringgit, Philippine peso and the South Korean won depreciated by between 40 percent to 80 percent.”
“All this happened despite the fact that Asia’s fundamentals looked good. But these fundamentals painted a false picture. The unwinding of the 1990s boom and the eventual crisis suffered by the East Asian countries were a complicated and multifaceted process. And there is an eerie similarity to conditions that currently exist in India and maybe a harbinger of things to come in 2020.”
“Moral hazard is a term used to describe a tendency to take on more risk than is warranted, given the knowledge that one is protected against any loss. This was at the heart of the Asian crisis. The governments in the affected countries directly or indirectly controlled the commercial banking system, and this allowed the banks to operate injudiciously with the knowledge that the state would protect the downside. The South Korean government, for example, directed the banking system to lend to companies that it viewed as economically strategic.”
“As a result, financial institutions were encouraged into funding risky projects with little regard for their profitability. This problem was compounded by crony capitalism, where people favourably connected with the government were able to borrow large amounts of money without proper due diligence. Without the discipline that free capital markets impose on bank lending, the result was overinvestment and inflation in the prices of assets in short supply such as real estate.”
“Excessive state intervention in the capital allocation process and the associated policies of implicit guarantees combined with crony capitalism and lax banking supervision were significant factors in the 1997 Asian crisis. These same conditions exist in India and have led to poor credit decisions and a massive misallocation of resources. This reckless lending has created a large stock of non-performing loans, posing a high risk to the banking system.”
“Financial excesses inevitably lead to asset bubbles. Typically, a financial cycle is generated by waves of optimism (greed) that result in the underestimation of risk, overextension of credit, excessive price inflation in real assets and buoyant consumer expenditures. Real estate plays a central role in this cycle because it allows banks to lend larger amounts against increasing property values. With rising prices, the value of bank capital increases commensurate with their holding of real estate denominated assets, allowing them to lend even more.”
“India has also experienced a large real estate bubble that started around 2003 with massive investments by developers in housing projects. Rising real estate prices kept feeding into this, and both the regulated and the unregulated banking system poured increasing amounts of capital into this sector. But as with every asset bubble, the underlying fundamentals did not support the run-up in prices. Incomes did not match asset valuations and soon the real estate bubble burst.”
“When an asset bubble bursts, it starts the dominoes falling. As asset prices fall, so do their collateral values. NPAs begin to increase and when investors realize that the government does not have the resources to bail out banks, confidence drops. As confidence declines, foreign capital starts to flee, the currency depreciates, exports drop and growth slows down dramatically. All these are now beginning to happen in India.”
“The only way out as Confucius put it, ‘is through the door.’ The strategy the East Asian countries adopted was to quickly and methodically restructure their financial systems by shutting down and selling failing state-run banks and disposing the collateral underlying the bad loans. The key to India’s recovery is also a massive institutional shakeup of the financial system. Merging failing public sector banks will only aggravate systemic risk. These banks need to be shut down, and government intervention in, and regulation of, capital markets should immediately be reduced to a minimum.”
“Without bold and immediate action to restore confidence in the financial system, India faces a 1997 Asian crisis of its own in 2020.”