Global Urban Property Boom -- Is it out of control?

[SDNR]

Crash? What crash? In the world's top cities, real estate has never been hotter.

By Joseph Contreras and Emily Flynn Vencat
Newsweek International

March 19, 2007 issue - Cedric Cañas has been living the life of a handsomely paid expatriate for most of the past 12 years. The 33-year-old Spanish banker has spent time in both Boston and London, but it is New York City that he knows best, having first come to Manhattan in 1997. Cañas sold his one-bedroom Battery Park apartment at the end of 2005 when he was transferred to Madrid, but this winter he was sent back to the Big Apple, and he recently purchased a two-bedroom flat in Midtown for $1.3 million. Only this time around, Cañas intends to keep his New York property no matter where he goes next. "New York City is one of the principal cities of the world for finance; people from all over the world are coming here," says the Harvard Business School graduate. "At some point down the road, I'll probably be coming back to New York as well."

Cañas is a perfect example of the high-earning, globe-trotting cosmocrats who are driving housing prices skyward in the choicest world cities. From San Francisco and Seattle to Moscow and Shanghai, prices for prime residential property are surging, even as overall national numbers in some markets continue to be depressed amid worries of global recession and a real-estate bubble. The triumph of the glamour cities turns conventional wisdom on its head—for quite a while, experts including Yale's Robert Shiller have been predicting that these cities, having been hyped the most, would likely fall farthest, fastest. The decoupling of national and local real-estate trends, which were once much more closely linked, reflects the lives of the new "superprime" property buyers themselves, roughly 50 percent of whom are expatriates, according to the global-property research firm Jones Lang LaSalle. While globalization has allowed money, but not necessarily people, to roam the world more freely, Cañas and his colleagues are an exception—they float on a cushion of international capital, largely immune to regional concerns, and are flush with cash.

They're getting even more flush. A second consecutive year of big bonuses for bankers and traders has helped reignite demand for residential property in coveted neighborhoods like London's South Kensington and the Upper West Side of New York. Even outside these chief financial capitals, a decade of bull markets has swollen the ranks of the superrich so much that there is now a class of property buyer who can collect pied-à-terre apartments in Paris and Buenos Aires the way the merely wealthy collect cars or wine. With so much money in so many more people's pockets, the demand for luxury housing in the most-sought-after cities has simply outstripped available supply, hence the eye-popping prices. This is especially true in the toniest quarters of these cities, where growth is often double or even triple the over-all city figures. "It's quite an interesting irony that these buyers are globally footloose," says Sue Foxley, head of residential-property research at Jones Lang LaSalle, "because there are probably only 100 streets around the world on their shopping list."

newsweek

 

[Centurion]

Nothing new here. It is always going to be popular to live on Manhattan NY or in Chelsea London. There prices will just keep on escalating forever. Prices are even going to get more jacked up thanks to new millionaires like Poker players.

 

[Michael]

I agree with Luw, this is nothing new. Although some of the big cities like the one I live in, Miami, are having a housing crisis. The real estate as boomed so much because of the market, foreign investment, and the 'flippers' that many, if they had to, could not purchase a new home because of the rise in house prices. I remember when a house in Miami, a nice home, would go for about $200,000-$300,000. You could get 3 beds with 3 baths and a nice pool for that amount. That same house is not worth $700,000-$900,000 today days. Although many argue that real estate is the best investment, some are having a hard time, such as developers, getting sales high since now it has become a buyers market.

"they float on a cushion of international capital, largely immune to regional concerns, and are flush with cash." This is absolutely true. Thank you Rob.

 

[450SEL6.9]

I have been so busy lately and haven't logged in. How's it going, Rob? My username has been amended slightly because my old one doesn't work any longer! Maybe I'll ask the mods to fix that for me.

That article typifies everything that is wrong with the property market, especially in the USA. The source is Jones Lang Lasalle, a firm whose profits are tied to the health of the property market. Housing in the U.S. is in trouble because an alarming percentage of mortgages are subprime and held by homeowners with the worst possible credit! The only people calling a bottom to the American housing downturn work for organizations with a vested interest in having a strong real-estate market.

 

[450SEL6.9]

What? Why didn't my post show up? Damn, have to write it again.

I had to amend my username because my old one stopped working and I can't reset my PW. Nice to see you still active, Rob.

The article is not perfectly objective in my opinion. It keeps quoting Jones Lang Lasalle. They are a property services company with a vested interest in seeing a continuation of the bull market in real-estate. It seems that the only analysts calling a bottom to the American real-estate market downturn are those working at property companies. The fact of the matter is, and even Mr. Greenspan has warned about this, the subprime mortgage lending market in the U.S. is in deep trouble. HSBC is one of the largest banks in the world and they are being hit by the woes in their American subprime business. Small subprime lenders have gone bankrupt or will go bankrupt.

An alarming number of homeowners, probably 10-14%, were able to get mortgages despite having the worst statistical credit. They are safe if their house goes up in value constantly, but once that stops, and it has stopped, then they are in deep trouble. Can they say foreclosure and bankruptcy?

Also, there is no such thing as being immune to corrections. Canas sounds like an investment banker. They work in a very cyclical business. If he thinks he is immune, perhaps he sound do a google search and read up on the number of investment bankers that were out of their arse after the 2000 internet and tech. stock crash.

 

[SDNR]

Nothing new here. It is always going to be popular to live on Manhattan NY or in Chelsea London.

That is true lu, but the prices have dramaitacally risen over the past few years.

London Prime Home Prices Have Biggest Gain Since 1979
By Peter Woodifield

Jan. 15 (Bloomberg) -- The prices of London's most expensive homes rose last year at the fastest pace since Margaret Thatcher became prime minister in 1979, as bankers receiving record bonuses competed for a limited supply of properties.

Prices of prime properties in the U.K. capital gained 2.6 percent in December, bringing the increase for the year to 28.6 percent, London-based Knight Frank LLC, an international real- estate broker, said today in a statement. In 1979, prices advanced almost 44 percent.

``Bonus money has already started to impact the market,'' said Liam Bailey, head of residential research at Knight Frank. ``The proportion of prospective purchasers making an offer has increased since November. Much of this demand is due to people wanting to find a property before bonuses are distributed.''

Workers in London's financial district may have earned a record 8.8 billion pounds ($16.8 billion) in bonuses last year, 18 percent more than in 2005, according to the city's Centre for Economics and Business Research Ltd. London house prices rose at the fastest annual pace in at least four years last month, pushing the average asking price to 355,097 pounds, according to Rightmove Plc, the country's biggest property Web site.
The biggest gains in prime properties in December were in Chelsea, an area traditionally favored by bankers, as well as in Kensington, and Belgravia. Prices in those districts rose about 4 percent in the month, Knight Frank said. Belgravia prices jumped 35 percent last year and 34 percent in Chelsea.

Property Shortage
A property in central London that cost 100,000 pounds to buy in 1976, when Knight Frank started its survey, would have been worth almost 3.7 million pounds at the end of December. The same amount invested in the FTSE All-Share Index would have been worth almost 2.1 million pounds at the end of 2006. Consumer prices in Britain have risen about 400 percent over the same period.

In 1979, inflation was more than four times higher than now and investors were switching into assets from stocks and bonds, Bailey said.
Prices for prime London properties rose by at least 2 percent a month in 10 of the last 11 months and have risen for 24 straight months. The increases have been driven by a combination of a shortage of properties for sale and more potential buyers, said Knight Frank. The proportion of prospective buyers making an offer rose 8 percentage points since November to more than 20 percent.

Mittal, Abramovich
``The majority of growth has been in the market above 4 million pounds as shortages of stock continue to drive prices upward,'' said Bailey. ``We anticipate stock levels to improve in the new year as people return to the market.''

Lakshmi Mittal, chairman of the world's largest steel company, paid 70 million pounds in 2004 for a 12-bedroomed house in Kensington Palace Gardens. Other buyers of prime London properties in recent years include Roman Abramovich, Russia's richest man and owner of Chelsea Football Club, and brewing heiress Charlene de Carvalho-Heineken as well as Russian billionaire Boris Berezovsky, who was granted political asylum in the U.K. in 2003.
Knight Frank's survey covers apartments that cost an average of more than 1.5 million pounds and houses valued at an average of about 3 million pounds in seven central London postal districts.

Knight Frank currently has 27 properties for sale costing more than 3 million pounds in the seven postal districts covered by the survey. The most expensive is Swan House on Chelsea Embankment overlooking the River Thames, which is on sale for 32 million pounds. The three-story house offers 19,000 square feet of living space, a gym, cinema, ballroom, a swimming pool and staff accommodation for 22.

London is the most expensive city in the world for prime real estate, CB Richard Ellis Group Inc. said in September. Prices in neighborhoods such as Chelsea and Hampstead averaged $2,244 a square foot in the second quarter. The same space for Manhattan homes -- on Fifth Avenue, Park Avenue and Madison Avenue near Central Park -- cost about $1,870 a square foot.

The bonus season for the 330,000 workers of financial firms in London lasts from December to April, from the first announcements to the final payouts, according to Knight Frank.

 

[Mr. M]

There's a property boom here in Singapore right now, but honestly these things go up and down in a continuous cycle. I don't think the global boom is out of control, but within individual countries there are bound to be crashes, especially in more volatile 'new' cities like Singapore. Places like NYC have established themselves for hundreds of years already as global cities which will have their constant stream of investment and immigrants.

 

[450SEL6.9]

Why do property companies keep talking out of their arse like that? Do they think that property prices can only going up?

3.7 million pounds is still a huge price for London. Only properties in Belgravia, Mayfair, Kensington, etc. can fetch that average price. Reading that article, I get the impression that 3.7 million quid is the price for a distinctly 'average' London property. It's not!

 

[Osnabrueck]

Those talking about a "soft landing" for the real estate market right now have something to gain by fomenting public confidence in Real Estate. Mainly: Mortgage Brokers & Realtors.

What was National Association of Realtors saying last year? "It's a great time to buy a home, because now more than ever, there's so much choice afforded to buyers." They were also saying that we'd be back to price growth by the end of 2007. Check with your local Century 21 agent and I'm sure they'll have some wonderful spin about how the current situation is just a hiccup in an otherwise wonderful market.

The rotten stench coming from the subprime lending debacle is only the tip of the iceberg guys. Just like the tech bubble of the late 90s, investors have behaved like mindless sheep and bought into nonsense like "Real Estate is the only[/i sure-fire investment that always appreciates and outpaces inflation." (I actually heard that from a coworker, verbatim). People have lost their minds and are treating their homes like 401ks.

Here's the deal:

1 - The fundamentals got out of whack. People aren't earning more, they've just been gaining access to credit that's well above their pay grade. More eligible buyers = price inflation.

2 - In the states, prices are frozen because nobody wants to budge. If your home appraises at $800,000 and you've been watching gleefully as your equity racks up, you're not going let that go without a fight - especially if you've fooled yourself into thinking that prices can only go up. There's also the fact that you'll catch hell from your neighbors if you "run down the neighborhood" by undercutting percieved values. Prices aren't freefalling right now because there's not a significant volume of lower-priced homes on the market... yet.

3 - And speaking of yet. Banks aren't fond of holding on to homes, because they're liabilities on their balance sheets. 1 out of 8 subprime loans are going to default in the near-term future and will have their homes gobbled-up and spat out for fire-sale prices. Not only will there be a sudden surge of forclosed properties on the market, but there's the added knock-on effect of tighter standards for mortgage loans. More volume and a restricted pool of eligible buyers equals an inevitable drop in prices.

Count my words guys, unless there's a major natural disaster or terrorist attack - Real Estate will be the story of late 2007. Virtually overnight, the same people who have been talking about the miracle of real estate will be wondering what the hell they were thinking and how they could have been so diluded to think that growth could have continued at double-digit rates ad infinium.

There will be a double-digit correction in prices, retail will suffer and families across America will feel the pain as they choose between foreclosure or making payments on loans that exceed the value of their properties by a wide margin.

 

[450SEL6.9]

Osnabrueck, that post of yours might be the best I have read here. The realtors, brokers, construction and those 'national associations' have been calling a bottom to the real estate market every single month.

 

[SDNR]

The US Housing Bust is a Big Deal
By Desmond Lachman 10 Aug 2007

As US home prices at the national level begin to decline for the first time since the Great Depression, most Wall Street analysts maintain their rosy outlook for the US economy by allowing hope to triumph over experience. For while they concede that any bottom to the housing market bust is slipping ever further into the distant future, they hew to the view that the US housing sector is far too small to derail the overall US economy.


They arrive at this happy conclusion by blithely closing their eyes to the almost certain negative impact of falling home values on overall consumer spending. More importantly yet, they also choose to ignore the probable negative economic fallout from the seizing up of US financial markets that is presently fully in train as a direct consequence of the acute problems now plaguing the sub-prime mortgage market.


Wall Street optimists minimize the bursting of the housing market bubble by emphasizing that residential construction accounts for a mere 6 percent of the overall US economy. This observation leads them to contend that even were home construction to decline by 20 percent over the next year, it would not shave much more than 1 percentage point off overall US economic growth. And with the rest of the US economy still in fine shape, they happily conclude that there is every reason to expect that the US economy will still continue to expand at a perfectly respectable 2.5 percent rate over the next twelve months.


In maintaining their rosy economic outlook, most Wall Street analysts choose to ignore Fed Chairman Ben Bernanke's recent reminder that a protracted decline in home prices could have a material impact on consumer spending. According to Mr. Bernanke's congressional testimony last week, the Federal Reserve estimates that household consumption could be negatively impacted by as much as 9 cents for every dollar that home prices decline on a sustained basis. And considering that housing wealth, which is the main source of household wealth, presently amounts to 150 percent of GDP, and that household consumption still accounts for around 70 percent of GDP, the prospect of a protracted period of declining home prices is not something one wants to cavalierly brush aside.


Contrary to what many on Wall Street would have us believe, the prospect of a protracted period of declining home prices now seems to be anything but a remote possibility. Indeed, with home prices already falling and with increased inventories of unsold homes rapidly mounting, it is difficult to see how home prices do not start falling at an accelerating rate over the next few months in order to clear a saturated market. This would seem to be all the more so the case as a tightening in mortgage lending standards and as the resetting of adjustable rate mortgages further crimp housing demand at the very same time that a marked increase in home foreclosures leads to more houses returning to an already glutted market.


Perhaps an even greater overlooked risk to the US economy than slowing consumer expenditure is the prospect of a full blown "credit crunch" in the financial sector that would seriously curtail bank lending to the economy as a whole. Sadly, this prospect too now seems to becoming an ever increasing likelihood. In his congressional testimony last week, Chairman Ben Bernanke owned up to the very real possibility that the financial sector's losses from sub-prime mortgage lending could very well reach as much as US$100 billion. Judging by the roughly US$2.3 trillion presently outstanding in sub-prime and Alt-A mortgage lending, Mr. Benrnake's present mortgage loss estimate is all too likely to turn out to be on the low side.


Heightening the risk of a real credit crunch is the fact that mortgage lending was not the only form of reckless lending in which the US financial system has been engaged over the past several years. Rather, financial institutions increasingly made risky loans to the US corporate sector at ever tighter interest rate spread, while they dispensed with the usual covenants on these loans with which banks in the past had protected themselves. Now that the music has stopped, all too many financial institutions will find themselves nursing large losses that will temper their willingness to lend.


In the end, the Federal Reserve must be expected to ride to the rescue of the financial sector by substantially cutting interest rates. However, at present, the Federal Reserve sees the risk that cutting interest rates too soon might simply prolong a credit market bubble that needs to be deflated. The Federal Reserve also appears to be mindful that an unduly quick reduction in US interest rates might cut the ground from under the US dollar, which is already trading at a 16 year low on a trade weighted basis.


If the economy indeed slows abruptly over the next few quarters under the weight of its housing market woes, it will not be the first time that Wall Street analysts as a group missed a major turning point in the economic cycle. Rather, it will only confirm that those analysts seem to have learnt little from the bursting of the earlier dot.com bubble in 2001.

tcsdaily.com

 

[Osnabrueck]

Count my words guys, unless there's a major natural disaster or terrorist attack - Real Estate will be the story of late 2007. Virtually overnight, the same people who have been talking about the miracle of real estate will be wondering what the hell they were thinking and how they could have been so diluded to think that growth could have continued at double-digit rates ad infinium.

TA-DAH! As somebody who's been a Real Estate Chicken Little for the past 3 years I have to admit that I feel a twinge of vindication watching the events of the past couple weeks unfold.

How bad are things out there? Let's ask Jim Cramer:
http://www.youtube.com/watch?v=SWksEJQEYVU

 

[450SEL6.9]

Perhaps an even greater overlooked risk to the US economy than slowing consumer expenditure is the prospect of a full blown "credit crunch" in the financial sector that would seriously curtail bank lending to the economy as a whole.

Heightening the risk of a real credit crunch is the fact that mortgage lending was not the only form of reckless lending in which the US financial system has been engaged over the past several years.

In the end, the Federal Reserve must be expected to ride to the rescue of the financial sector by substantially cutting interest rates.

I too have been bearish on U.S. property and I work in the property business. There was just too much optimism and even very smart people were thinking that property prices could never go down. I have said many times before that 1/7th of all U.S. mortgages granted in the past few years were held by people with statistically the worst credit! That is a recipe for disaster. Some of these people have no business owning a home. I know that is a terrible thing to say, but damn it, it's true! Universal home ownership is not a good thing if you can't afford your mortgage. You'll just struggle to meet payments, lose your house and get kicked out on your arse when the bank forecloses!

The problem with the credit crunch is that it will unleash hell on many industries. Americans keep borrowing out of the equity of their homes. They use this money to splurge on luxury goods. More troubling is that the credit risk will really hurt several of the large U.S. automakers because their debt is junk status. So many private equity deals have been put together with a bucket load of debt financing.

The Fed cut the bank lending rate by 50 basis points already. This doesn't affect mortgage rates. I just don't know how much they can cut the benchmark fed funds rate. If they do, the U.S. dollar will take a bloodbath! There are some very serious storm clouds building over the world economy, but many are too preoccupied with celebrities to report about it. I even see credible business magazines talk about the Paris Hilton brand and what rappers earn what.

Does anyone (Rob, in particular) remember Jim Mellon's book? He predicted a looming depression based on crashing property prices. I don't think we are there yet, but perhaps we are closer to that tipping point.

 

[siko]

I have said many times before that 1/7th of all U.S. mortgages granted in the past few years were held by people with statistically the worst credit!

It got worse, in the past 2 years, 20% of all mortgage in the US are subprime mortgage (source)... which are aimed at people with bad credit.

Some lenders even offered what's called a "liar's loan"... which basically enables borrowers to get a mortgage without practically any documentation, including proof of their income!

Many economists in Canada are saying that although the US housing crashing is causing problems on the markets internationally, it shouldn’t affect the housing boom anywhere else unless that place has lax lending practices like in the US.

 

[SDNR]

It is crazy when people with virtually no income can get a 100% mortgage.