The Next Real Estate Collapse

As daily commutes go, I have nothing to complain about when I point my car toward Sovereign HQ each morning. The traffic congestion on Interstate 95, South Florida’s main artery, is horrendous. So I take the scenic route, the coastal beach road known as A1A.

The views of the Atlantic Ocean are nice. But more recently, I enjoy the drive for a different reason. It’s a ringside seat to the extravagance of the now-deflating luxury housing bubble I warned about three months ago. Recent data point more ominously to a serious problem in this sector.

Each day, my drive on A1A takes me past what is the single most expensive new home for sale in the United States: Le Palais Royal, under construction for the last five years.

Situated on 4.4 acres of beachfront, the “spec mansion” features the Atlantic Ocean as its backyard. The front yard is a nearly 500-foot deep-water expanse of the Intracoastal Waterway – perfect for even the largest private super yacht.

The mansion’s soaring front gates, accented in 22-karat gold leaf, make it sort of hard to miss as you drive by. Just beyond the gates is a 60,000 square foot home with 11 bedrooms, 17 bathrooms, an 18-seat IMAX home theater (with its 50-foot-wide screen), and a 30-car subterranean garage. The building plans call for a second phase on the vacant beachfront lot next door. That’s where the ice-skating rink, go-cart track, bowling alley and private nightclub are supposed to go.

And it can all be yours for just $159 million.

But the tide of money fueling the purchase of luxury homes, big or small, is receding as we speak.

Luxury Homes: The Next Real Estate Collapse?

Largely ignored in the holiday rush was the news that luxury home prices fell 2.2% during the third quarter – the first such decline in nearly four years.

According to the Redfin real estate brokerage, wealthy clients are stepping back out of fear from stock market volatility, and are worrying about tying up too much of their wealth in non-liquid assets, especially if another real estate collapse appears.

The decline is even more notable because luxury homes serve as something of a bellwether for the rest of the “non-lux” real estate market (which still rose just under 4% for the same period).

The original housing-bubble stocks of a decade ago might offer a clue on the timing. Shares of Toll Brothers (NYSE: TOL), the nation’s largest builder of luxury homes, peaked in July of 2005 before starting their precipitous decline. But the stock prices of builders focused on the low- and mid-priced ends of the market stayed strong – at least at first. For instance, the shares of Lennar Brothers (NYSE: LEN), one of the biggest homebuilders in the country, didn’t crack until April of 2006.

Interestingly, Toll Brothers’ shares today are down nearly 25% from their post-recovery highs (to the lowest price in 13 months), while Lennar shares are just starting to break down.

California Dreamin’?

Chinese buyers have been key players in the run-up of America’s luxury home prices. And their influence is felt most strongly in California and the San Francisco Bay area, the hottest of America’s real estate markets this go-round.

Not coincidentally, it appears Chinese buyers may now be pulling back there as well, possibly ushering in the next real estate collapse. Home sales in California fell 20.5% in November – more than twice the monthly average (it’s traditionally a weak month prior to the end of year holidays). October’s home sales also fell a little over 5%, while dropping 1.5% in September.

For now, the real estate community appears to be dismissing the collapse of sales as the result of changes in new loan disclosure rules by the Consumer Financial Protection Bureau, and what is usually a softer seasonal period for home sales anyway.

I don’t blame them. As a media consultant once told me back in my reporting days, “Never let too many facts get in the way of a good story.”

But the “Chinese buyers” real estate gravy train is grinding to a halt fast. Last summer’s 40% decline in the Shanghai Composite Index should have been the first clue. The second was the relentlessly positive “it’s just temporary” narrative spun by so many brokers and property developers who don’t want the ride to end. The third clue may be upon us here at the start of 2016 as the Shanghai index lurches lower yet again.

So what’s it all mean to you?

As Jeff Opdyke has warned, don’t get comfortable with the Federal Reserve’s spin on things. As Chinese buyers retreat from American real estate, it kicks out yet another leg of support for the U.S. economy.

Australian Property Forecast 2016

We will remember 2015 as the year when the Australian Prudential Regulation Authority (APRA) stepped in to try and slow down the investor frenzy, introducing guidelines to major lenders that resulted in capping the growth rate of their residential investment loans. 2015 saw an end to the lowest auction clearance rates in a decade, agents listing and selling property like it was candy encouraging and vendors accepting pre-auction offers, more buyer than properties for sale.

2015 will also go down in Australian history as the year of falling rental yields, rising house prices, rising investment loan interest rates and declining buyer confidence. 2015 could go down in history as the year the property boom in Sydney and Melbourne came to a whimper.

• Brisbane performing the best at 1.30 per cent positive growth along with having the highest unit rental yield of 5.3 per cent.

• Sydney performing the worst at -2.3 per cent negative growth

• Hobart is still the most affordable capital city to purchase property along with having the highest house rental yield of 5.4 per cent.

It’s not all bad news for property owners and investors as prices have been steadily rising since June 2012. The complete year results for Australian Property is a positive growth of 7.8 percent. Both Sydney and Melbourne recording over 11% capital growth in 2015, not to forget the rental yield all investors have been receiving in addition to the capital growth. Is this the top of the market? Personally I don’t think so but I do believe that the sellers’ market that we have been in for the last 2 years is over. The next 6 months will provide us with a buyer sentiment so it will be imperative to watch the auction clearance rate, capital growth, and rental yield numbers.

RP Data had this to say about 2016:

“If, like many, you were outbid on your dream home in 2015 by a buyer with deeper pockets, then this could be your year.

Property Forecast 2016

Property markets will not crash altogether. There will only be selectively healthy price growth. Foreign investors will be paying a little more than what they did for Australian properties they amassed in the past three years before these investor lending changes.

Despite their 2015 performance, Sydney and Melbourne property markets still top the growth rate due to strong economic, jobs, and investment growth as well as massive population and immigration growth. Around 60% of immigrants come to these two cities for business and employment. Many property investors are still targeting these two cities for their capital growth. Rent rates fell over the year in Brisbane, Perth and Darwin, and other major cities have seen rents rise by less than 1.5% over the year.

Home prices have continued to rise across most of Australia, particularly in Sydney where they have jumped about 40% since the past year. Investors dominated new lending. The Reserve Bank of Australia reduced interest rates in February to 2.25% and again in May to 2%. The lowest RBA cash rate in our history and are not in a rush to increase them. Earlier this month, Reserve Bank of Australia Gov. Glenn Stevens said the bank was working with other regulators to assess and contain risks that could arise in the property market.

Despite arguments around the effectiveness of these APRA policies, the new guidelines have made investors and borrowers more calculating. They seem to have adjusted their expectations in seeking investment property loans.

Mortgage brokers, financial planners, and property investment experts are still digging up more data to dissect global figures and movements that are affecting the Australian Market, housing prices, and the overall property market to forearm their clients.

The last quarter of 2015 has certainly shown us again that the Australian Property Market is not immune to negatively finishing the turbulence with capital dwelling values declining by 1.4%.

As we move into 2016, it is clear that the strong housing market conditions of 2015 have softened over the final months of the year, setting the scene for more sedate conditions in the New Year.

Interest rates are likely to remain at their current historically low setting, which will continue to stimulate housing demand, however migration rates are continuing to taper which will offset some of this housing demand, particularly in the mining regions, which were previously benefiting from strong rates of migration from both overseas and interstate.

Clearance rates in Sydney and Melbourne slipped from the high 80% mark around the middle of last year to the low 60% range in December. Listing numbers are rising, homes are taking longer to sell and value growth has slowed sharply in Sydney and Melbourne, which were the primary drivers of growth over the recent growth cycle.

Throughout 2016 we may see further moderate value declines in Sydney and Melbourne, however considering population growth has remained strong in these areas and economic conditions are very healthy in these cities, we would be surprised if dwelling values fell materially before conditions start to level. The city that is showing the most promise for capital gains in 2016 is Brisbane, or for that matter, the broader South East Queensland region. Yields are much higher compared with Sydney and Melbourne, the rate of capital gain has been moderate but sustainable to date, and affordability is far superior to the two larger cities as well. Interstate migration remains positive into Queensland and may start to improve with the higher rate of job creation over the past year. The Canberra housing market has also been showing tentative signs of growing values along with Hobart however, market conditions have been more volatile from month to month in these areas.

The regions that are likely to underperform are those associated with a higher degree of economic uncertainty. The Darwin and Perth housing markets peaked in late 2014 and both home values and rental rates have fallen over the past year.

The rate of decline may start to ease in these cities; however growth prospects are likely to be at least a year away in these markets. The Adelaide housing market has remained relatively steady over the year, with values virtually unchanged in 2015. However, as the automobile manufacturing sector continues to wind down in the region, coupled with the soft resources sector, the economic outlook for the city isn’t likely to have a positive influence on housing market conditions in the area.

Along with the many other economic variables and factors, the changing regulatory environment is yet another factor likely to influence the market in 2016, particularly proposals released just prior to Christmas by the Basel Committee to levy higher capital on investment loans.

However you see it, 2015 was still an exciting year in the property climate, and signs point to an, even more, interesting yet different 2016. The greater the challenge, the more positively engaged we can become. If you are local or a foreign investor thinking of buying, investing, or building in Australian property, find out what you need to know from your trusted brokers.

Dubai Property, Through 2015

The enticing tropical climate, sandy white beaches, endless dining options and utterly beautiful skyscrapers, Dubai is the place to be when you want to witness the future now. Development is top notch and the best thing is, it is getting better every year.

So when someone talks property, they automatically know that Dubai is the place to invest. Dubai contains within itself, one of the most diverse portfolios of property marvels in the world. Take the Burj Khalifa for instance, the tallest building in the world, the Burj ul Arab hotel, the only 7-star hotel in the world, The Dubai & Emirates Malls, known for being two of the largest malls in the world, are just a few of the many standing tall in this dynamic city.

Investors from around the world come to Dubai in hopes of investing in property and seldom return empty handed. In fact there are so few cases of people returning empty handed that they can’t even be mentioned because almost everyone who invests here in Dubai, returns with success stories that are enough to inspire others looking to make money and share the experience of investing in the fastest growing city in the world. There are oodles of new development projects featuring exceptional floor plans and innovative features, offering unique growth opportunities to people who invest in them. One of the most well-known and sought after areas for investment is the Dubai Marina, where usually either an apartment or a villa is being bought. People from around the world look for either an apartment for sale or villa for rent in the most flourishing parts of Dubai and then end up decorating their investments using the principles of Feng Shui & vastu happens to be a key ingredient to attract the most jaded interior enthusiast. Another area, according to reports happens to Downtown Dubai, the area which encompasses the tallest building in the world, the Burj Khalifa. Here too, either an apartment is bought to be sold afterwards when the value skyrockets or for rent. People yearn for a view of the building so the apartments closest to the Burj Khalifa top the most wanted list for accommodation. The Palm Jumeirah is also one of the most evident places for investment. An area mostly visited by celebrities from around the world contains hotels and resorts that are now a ‘must see’ for tourists from around the world. Dubai has now outpaced almost every city in the world in terms of tourist and investment attraction, with numbers skyrocketing every year. And 2015, was no coincidence.