A report from Bloomberg. “U.S. home prices shows signs of becoming ‘unhinged from fundamentals’ like they did in the housing bubble that preceded the 2008 crash, according to a blog post by the Dallas Federal Reserve bank. ‘Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s,’ the Dallas Fed researchers wrote, citing data to measure “exuberance” on property markets that they’ve developed with scholars around the world as part of the International Housing Observatory.”
“The measure suggests that ‘the U.S. housing market has been showing signs of exuberance for more than five consecutive quarters through third quarter 2021,’ they wrote. The surge in home prices has continued since then. The Dallas Fed researchers’ index is based on economic variables such as disposable income per-capita, housing rents and long-term interest rates. Their main takeaway is that since the beginning of 2020, price-to-rent ratios have soared beyond what those ‘fundamentals’ alone can explain, and moved into the ‘exuberance’ stage.”
“They also found that the surge in disposable income due to pandemic-related fiscal and monetary stimulus, as well as reduced household consumption because of mobility restrictions, may have lessened its usefulness as a gauge — suggesting that any bubble may be more advanced than those numbers suggest. ‘The price-to-income ratio measure alone may produce overly conservative results when identifying housing market bubbles,’ the researchers wrote.”
From Reuters. “The interest rate on the most popular U.S. home loan jumped last week by the most in 11 years as bond market investors rapidly repositioned for the Federal Reserve to take more aggressive action to contain inflation, a survey showed. The Mortgage Bankers Association said the contract rate on a 30-year fixed-rate mortgage shot to 4.8% in the week ended March 25 from 4.5% a week earlier. That was the largest one-week increase since February 2011, and it brought mortgage rates to their highest level since December 2018.”
“Mortgage rates have now climbed by nearly 1.5 percentage points since the start of the year, the most rapid run-up in home borrowing costs since 1994.”
From Bloomberg. “Corporate Bonds Lost $1 Trillion and There’s More Trouble Ahead.”
From Bisnow. “Ominous music is playing for owners of older office buildings in Chicago and New York City. In the last two weeks, owners of Class-B office properties in both cities have handed the keys to their buildings over to their lenders, much as owners of Class-B malls have elected to do in recent years. The Windy City’s office market is a microcosm of the concerns around cold-weather, higher-cost office markets that lost population during the pandemic. Nearly 11% of its $8.28B office CMBS balance was in special servicing in February, according to data Jellinek analyzed, compared to the national average of 3.1% in February.”
The Worcester Business Journal in Massachusetts. “A 117,000-square-foot office building in Framingham leased to renewable energy firm Ameresco sold for $13 million on Wednesday, according to Kelleher & Sadowsky Associates, Inc., the Worcester-based real estate firm who will be the leasing agent for the building going forward. The Framingham property was formerly owned by TA Realty, another Boston-based real estate firm, which bought the building in 2015 for $22.7 million.”
The Bellingham Herald in Washington. “The owner of Bellis Fair has defaulted on a $77 million loan secured by the mall, according to global credit ratings business DBRS Morningstar. The commercial mortgage-backed securities loan, with $77 million remaining on $93 million, defaulted in February and was transferred to Midland Loan Services Inc., according to Steven Jellinek, head of CMBS research at DBRS Morningstar. Brookfield’s options include negotiating a loan extension or simply walking away, Jellinek wrote.”
“‘Generally speaking, large savvy investors like Brookfield will walk away from malls where they deem the property value to be less than the mortgage balance,’ Jellinek wrote.”
The Financial Post. “Interest rates are beginning to rise around the world as central banks work to rein in inflation that’s soaring to heights not seen in decades. When the U.S. Federal Reserve raised rates in 1994 it achieved a soft landing for the U.S. economy, but sparked economic crises in Mexico, Asia and Russia that lasted the rest of that decade, writes Neil Shearing, chief economist at Capital Economics. Emerging markets ran into trouble because they had borrowed large amounts from overseas and when rates rose and their currencies fell against a stronger U.S. dollar they got squeezed.”
“This time around, Shearing and his team of economists argue, the risks lie in housing markets. ‘You don’t need to look far for evidence of froth in the residential property market,’ says Shearing, with global home prices running well above their trend in what looks ‘alarmingly similar’ to the run-up to the 2008/2009 financial crisis.”
“Capital singles out Canada as especially vulnerable because its economy has relied heavily on residential investment and New Zealand where the relationship between house prices and consumer spending is strongest. ‘Monetary tightening cycles in the past have been associated with problems for emerging economies. This time though, it is property that may prove to be the weakest link,’ wrote Shearing. Today there is less leverage; instead high home prices have been supported by cheap borrowing costs. The downside is that housing markets are now more vulnerable to rising rates.”
The Associated Press. “A troubled Dubai real estate developer said Monday it suspected that $42 million had been ‘misappropriated’ by the company’s former officials while saying it massively overvalued its holdings, declaring nearly $800 million in accumulated losses in recent years. The announcement by Union Properties comes as Emirati prosecutors announced in October they were investigating the firm. Already, the firm’s board of directors has seen its chairmen and other officials dismissed amid the probe.”
“The losses represent nearly 70% of the company’s capital, the firm said in a filing. It attributed $565 million in value losses in 2017, with another over $300 million in 2021.”
From Malaysia Now. “A lack of commercial development in areas with new housing projects appears to be one of several factors contributing to a shortage of demand among buyers, leaving units in such sites at risk of remaining unsold. This is a concern not only among developers but for real estate agents as well. Checks by MalaysiaNow at several large cities in the centre and south of the peninsula have found this to be largely true. A drive from Johor Bahru to the Klang Valley reveals a number of housing areas along the highway that appear comfortable and even luxurious but are dotted with ‘For Sale’ signs.”
The Bangkok Post in Thailand. “Residential developers should be more careful in terms of unveiling new launches this year as their plans represent the highest level recorded in more than a decade, while unsold inventory could exceed 1 trillion baht, leading to a high level of risk, according to Asia Plus Securities. Therdsak Thaveetheerathum, deputy director of the research division, said 342 projects worth a total of nearly 448 billion baht of new residential supply are scheduled to be launched in 2022, derived from 18 listed developers.”
“When combined with ongoing projects under development, which had unsold inventory worth a total of 557 billion baht from 14 listed firms as of the end of 2021, the amount of available supply would exceed 1 trillion baht for the first time in history. ‘Supply will be too great, even though purchasing power still remains in the market,’ he said. ‘Developers should be wary as demand will be not as high as in 2018.’”
The Financial Times. “Big Four accounting firm PwC, which audits more than a dozen listed Chinese developers, is under investigation in Hong Kong over its Evergrande audit. It and Deloitte have resigned as auditors of at least five Chinese developers in the past three months. Shimao, one of China’s largest property companies, said last week that PwC had resigned after it did not provide information related to ‘trust loan arrangements,’ a form of financing often used by mainland Chinese developers.”
“A total of 10 developers have announced they are delaying their audited results before a March 31 deadline after the sector was hit with a series of defaults. Big Four auditors have signed off on the accounts of China’s real estate developers for years despite warning signs that they might not be able to meet their large financial obligations.”
“‘We’re kind of in uncharted territory here,’ said Nigel Stevenson, a Hong Kong-based analyst at GMT Research. ‘I can’t remember in my time in Hong Kong a situation where you’ve had so many companies from a sector delaying results.’”
“Kaven Tsang, senior vice-president at Moody’s, pointed to the example of Hong Kong-listed developer Logan Group, which in February indicated that it had around $US1 billion in offshore guaranteed debt that had been previously undisclosed. ‘We want to understand more from the latest audited results if there is anything like this in the other developers’ situation,’ he said.”
“Auditors are at increasing risk of legal action in connection with the turmoil in the Chinese property sector. One bondholder in a major Chinese property developer said that his investment company was exploring whether it could bring professional negligence claims against the developer’s auditors. He added that financial risk to auditors relating to their developer clients was ‘abnormally high’ because of ‘the huge numbers involved in these defaults.’ All the property developers whose Big Four auditors have resigned have replaced them with smaller and in some cases local audit firms.”
The Daily Mail on Australia. “Sydney’s out of control property sector is finally showing signs of slowing down, potentially opening the door for young families and first home buyers who have been locked out of the market during the pandemic boom. Real estate guru Tom Panos told Daily Mail Australia ‘we’ve gone from a nuts to normal market’ with prices declining for the first time in 17 months in February. He expects March data to continue to show a further drop off with noticeably less people attending auctions and inspections, and a larger number of sellers forced to to reduce their reserve price.”
“‘If you have a property in the bottom 25 per cent of a suburb, you’re being impacted,’ the acclaimed real estate coach said. If you are on a busy road, you’re being impacted. If you are not in the right school catchment areas you’re being impacted. ‘I did an auction on Saturday at a property that ticked all the boxes but it had power lines nearby. So when the market changes, all of a sudden things like power lines, it matters.’”