Kathy Chu
USA Today

SHENZHEN, China — In this former Chinese fishing village where skyscrapers are springing up almost as quickly as the population of 9 million is growing, it’s not hard to find people who think real estate prices will keep rising, as well.

Zhao Jin is a believer. In late 2008, as sales of the licorice-scented tea that Zhao exports from Hunan province took off, he bought a modest three-bedroom apartment on the outskirts of Shenzhen. The property’s value has soared 63%, prompting an avalanche of calls from property agents asking whether he wants to sell (the answer is no).

“Property prices will definitely go up more,” says Zhao, who, like many others, moved here for job opportunities. “I’m an example of why the demand for real estate is there. People hear their country boy did good and come to seek their own fortunes.”

The migration of China‘s rural dwellers to its cities, along with rising income and the population’s aversion to debt, explain why many think soaring real estate prices pose little immediate threat to the economy.

But China’s frenzied real estate market is starting to turn optimists into pessimists, who say this sector could be the next big economic bust. The fear is that a collapse of China’s property market could hamper global recovery by rocking stock markets and sinking consumer confidence around the world. It also could sharply reduce China’s demand for U.S. exports, slowing the growth of the American economy.

Skeptics point to signs that consumer exuberance in China has reached a dangerous level: buyers snapping up luxury properties purely for investment; residential prices rising precipitously across the nation; and vacancy rates soaring for commercial properties.

“The pace of … the housing and property market indicators sort of smack of a bubble to me,” says Rachel Ziemba, a Roubini Global Economics senior analyst.

Nationally, real estate prices have risen for nine consecutive months in China, making home purchases unaffordable for a growing number of white-collar workers. Among large cities, commercial and residential prices in Shenzhen — known as much for its wealth as its seemingly boundless growth — have gained the fastest, rising nearly 21% in the 12-month period ended in February.

Overall, the most dramatic jumps are in Sanya, a resort city in southern China where property prices were nearly 50% higher in February than a year earlier, according to the National Bureau of Statistics. Analysts believe that China’s official data likely understate the price increases.

A $586 billion government stimulus package helped revive China’s economy and the downtrodden real estate market in 2009, but the massive capital injection has raised concerns about asset bubbles. To try to cool the property market, the government has enforced a requirement of a minimum 40% down payment on second homes and reinstated a capital gains tax on homes sold within five years of being purchased. The measures appear to be doing some good: Real estate prices increased in February by a slower rate than the previous month.

But Vitaliy Katsenelson, research director at Investment Management Associates, warns that there is still a risk that the bursting of the real estatebubble in China could turn the country from a “wind in the sails of the global economy to its anchor.”

If that happens, China may pull back on its purchase of U.S. dollars, a development that could ripple through the American economy and drive mortgage and auto loan rates higher, says Katsenelson, who has cut his exposure to industrial and energy companies that could be hurt by a downturn in China.

Economists warn that a fallout in China’s property market could have at least as much of an effect on global economics as the collapse of the U.S. housing market. “China is key to the global economy,” says Mark Zandi, chief economist at Moody’s Analytics. “If it can lead the (world) out of the recession, it can lead it back in.”

Gambling on real estate

In Shenzhen’s Nanshan luxury district, dozens of new residential buildings dominate the landscape alongside outstretched cranes and hulking masses of scaffolding. It’ll likely take years before these buildings are teeming with people.

But buyers already are bidding up prices in this ritzy part of town, which real estate agents call the “pure luxury property district” because there’s plenty of high-end housing but no low-end housing.

At the Curio — one of the most expensive new buildings in the city — buyers can purchase a nearly 2,400-square-foot apartment for $1.9 million. In the USA, that amount would buy a 2,400-square-foot beach house in Santa Cruz, Calif., a 12-acre New England farm in Sharon, Conn., or a four-bedroom pad near New York City‘s Central Park.

Demand for the Curio, which has expansive views of Shenzhen Bay and the Hong Kong skyline to the south, has been high since sales began last year. All 700 units in the first six buildings were sold before the developer finished construction, mostly to people who want to live in them full time or use them as vacation homes, says Michael Yuk, an agent with Centaline, one of the largest agencies in China. A few hundred more apartments will soon come onto the market.

Another high-end building under construction nearby, named Swire City after a Hong Kong developer known for luxury properties, also is selling quickly, for as much as $1.2 million per apartment.

For now, even completed buildings in this district are largely vacant, like so many other luxury developments in the city, because buyers aren’t moving in. Many are holding onto the property, hoping the value will appreciate. “The demand for Shenzhen property is very strong,” says Yuk, “but much of the demand is for the purpose of investment.”

Because most Shenzhen residents are transplants from other parts of China, “people have an attitude of gambling,” says Sherman Lai, CEO of Centaline. “They want to make some money and return to where they’re from.”

The gambler’s mentality isn’t confined to Shenzhen.

In Sanya, a resort city sometimes called the “Hawaii of China,” explosive real estate growth has led to questions about whether the property market is a “bubble ready to burst or a natural extension of China’s consumer society,” says a report from property consultant Crispins Property Investment Management. Many Sanya buyers are wealthy residents from other parts of China, says Marcy Zhang, Crispins general manager.

Meanwhile, in Shanghai’s older Puxi area, at the Baccarat — a posh residential building in one of the busiest commercial districts — most of the buyers are wealthy people from Hong Kong and Taiwan.

Unlike other luxury buildings in China, which are sold as concrete shells without furnishings, finished walls or floors, the marble-and-jade-accented apartments here come with Baccarat chandeliers, B&B Italia furniture and Bang & Olufsen TVs. The apartments, which range from about 900 to 1,600 square feet, cost $1.2 million to $3.5 million.

“People made a lot of money from stocks in 2006 and 2007, and came and invested” in the building, says Xie Jun Ling, a Shanghai real estate agent, noting that these investors typically already have three to four homes. “The rental market is not that great, so they buy and hold it.”

Demand for high-end real estate in China often is driven by investors rather than people buying places to live, which means “the pressure is quite big” for a potential price drop, says Michael Wu, China property analyst for Fitch Ratings.

“As long as the investment demand dominates the market, the pressure” will remain, Wu says.

The danger is that this speculation could create a glut in the residential market, says Michael Harris, investment officer at Gao Fei Consulting Services in Beijing. “If everyone puts their unit up at the same time for sale, there’s going to be so much inventory,” it could push prices down, and wreak havoc on the property market — and the economy.

‘Out of reach’

Excess inventory is a problem that already plagues China’s commercial property market.

In Shanghai and Guangzhou, the commercial vacancy rate exceeded 15% at the end of 2009. Meanwhile, in Beijing’s central business district, the commercial vacancy rate was 29.2%, while the citywide vacancy rate was about 20%, according to real estate broker CB Richard Ellis.

A healthy vacancy rate for Beijing would be around 10%, says Jack Rodman, president of Beijing-based Global Distressed Solutions, a property consultant. But he believes the city’s actual commercial vacancy rate is closer to 50%, after taking into account office space that’s been completed but isn’t on the market. To get back to a normal occupancy rate could take 15 years, he estimates.

James Macdonald, head of research at Savills China, an international property adviser, believes some corporations held off expanding or moving to new offices in the first half of 2009 because of the uncertain business environment. But demand for office space picked up in the second half of the year, he says.

“Should there be a slight overhang in the market, that will be absorbed,” Macdonald says. “If there’s an oversupply, the government will start to react.”

The question is how quickly the government can act to fill empty office space and bring residential prices back to earth.

In Shenzhen, rising home prices have priced even agents-cum-potential buyers such as Fiona Liu, with Savills Property Services, out of the real estate market. “The prices are going up a little too fast,” Liu says. “They put real estate a little out of reach for ordinary people.”

A March World Bank report said it’s difficult to determine home affordability — considered an indicator of whether real estate prices will drop — partly because of concerns that China’s data “underestimate average house price increases and overestimate average wage growth.”

Jing Ulrich, chairman of China equities and commodities for JPMorgan, warns that although home prices are rising rapidly, “such headline figures cannot be viewed in isolation of the broader trend in income growth.” From 2003 to 2008, China’s per-capita gross national income more than doubled to $2,940, the World Bank says.

Even if rising prices make home buying difficult for some people, that’s a “social issue, not a market problem” that points to a real estate bubble, according to Michael Klibaner, head of research at Jones Lang LaSalle, a property services firm. The supply of private housing in China is only enough for 20% of the population, he points out, and there are ample buyers in the market who can afford these prices.

Also, about one-quarter of all apartments in China are purchased entirely with cash, estimates brokerage firm CLSA Asia-Pacific Markets. Even those who borrow money to buy a house are required to pay a 20% to 40% down payment, a CLSA report points out. This contrasts with the USA, where no-documentation and low-down-payment loans fueled the mortgage crisis.

In China, “the lending primarily comes through big banks, and it’s relatively straightforward,” says Chris Brooke, Asia CEO of CB Richard Ellis. “People borrowing against the assets, where the interest rates aren’t transparent, those are not issues.”

Even so, real estate prices have risen too far, too fast, sceptics say.

“You can’t do any kind of rational and fundamental assessment of the market without thinking there’s a bubble,” Rodman says.

Alan Zibel, AP Real Estate Writer
USA Today

WASHINGTON — Sales of new homes fell unexpectedly to the lowest level on record in February as stormy winter weather kept buyers on the sidelines.

The weak results make clear the difficulties facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales fell 2.2% last month to a seasonally adjusted annual sales pace of 308,000.

It was the fourth consecutive month of declines and the worst showing on records dating to 1963. January’s results, meanwhile, were revised upward slightly to a pace of 315,000.

Economists surveyed by Thomson Reuters had expected February sales would rise to an annual rate of 320,000.

Sales plummeted dramatically in parts of the country that were hit with bad weather. In the Northeast, they fell 20% from a month earlier. Midwestern sales fell 18%. Sales fell nearly 5% in the South but rose 21% in the West.

The new home sales report reflects signed contracts to purchase homes rather than completed sales and thus gives economists a feel for how many buyers were out shopping for new homes in a given month.

The number of new homes up for sale in February increased slightly to 236,000. At the current sales pace, it would take more than 9 months to exhaust that supply.

There was some positive news for builders as the median sales price climbed on both a monthly and yearly basis. It rose to $220,500, up more than 5% from a year earlier and up about 6% from January.

Home sales have been sluggish during the winter even though the deadline for a tax credit for first-time home buyers was extended. It had been set to expire on Nov. 30. The earlier deadline caused sales to surge last fall.

Congress extended the deadline until April 30 and expanded it to cover existing homeowners who move. But economists and real estate agents say the extension has not had much of an impact on sales. That also was reflected Tuesday when the National Association of Realtors said sales of previously occupied homes dropped 0.6% in February to a seasonally adjusted annual rate of 5.02 million.

Some homebuilders say their outlook is getting better, but the recovery is not a strong one.

“A number of housing markets may be stabilizing or starting to rebound, though we do not yet see, in many respects, a sustained nationwide recovery,” Jeffrey Mezger, president and chief executive officer of KB Home, a major builder, said Tuesday as his company reported a $55 million quarterly loss.

Copyright 2010 The Associated Press. All rights reserved.

Mario Toneguzzi
Sun

The Canadian Real Estate Association is “improperly leveraging” the Multiple Listing Service (MLS) system that it owns by imposing anti-competitive rules that stifle competition, says Canada’s competition commissioner.

Amendments CREA made Monday to the rules of the MLS system could potentially be even more anti-competitive, said Melanie Aitken on Tuesday at a Calgary Chamber of Commerce luncheon.

“What they preserved was an absolutely open-ended blank-cheque opportunity to pass any rules that they wanted, including highly anti-competitive rules, and so give it with one hand, take it away with the other,” she said.

The issue is being taken to Canada’s Competition Tribunal.

The Multiple Listing Service system in Canada is owned by CREA and is responsible for about 90 per cent of all residential property sales.

CREA voted Monday on amendments it said clarifies some of the existing rules with the system. The amendments would allow a seller to pay a flat fee to a realtor to list their home on the MLS system and have prospective buyers contact the seller by phone.

Aitken said the rules that are in place deny agents on the one hand from offering innovative service and pricing models to Canadian sellers — “a la carte if you will, slice and dice, buy what you want” — and consumers on the other hand from being able to choose to only pay for the services that they want.

Becky Walters, vice-president of the Calgary Real Estate Board, said realtors feel they have completed everything that Aitken has asked for in this issue. “There always has been flexibility within the industry,” she said. “It’s something that we’ve always done [and] in the verbiage that we’ve changed, it allows it to be more clear to the public and to everybody that flexibility has always been there,” said Walters, who took in Aitken’s presentation at the chamber.

Walters said a flat fee to list a home on MLS is up to each individual realtor and their clients. But Aitken said there is no guarantee the amendments voted on by CREA are permanent.

“They are subject to rules being passed by CREA or its board willy-nilly, tomorrow, this afternoon, next week,” she said.

CREA has until Friday to file a document on its position to the tribunal. Aitken is hoping the tribunal will look at the issue by the fall.

The current controversy swirls at a time when the Canadian real estate market is humming along. In a report released Tuesday, Adrienne Warren, senior economist with Scotiabank, forecast the volume of MLS sales in Canada to hit about 510,000 this year, up 10 per cent from 2009 but still a touch shy of the 2007 record at the national level. Average prices are forecast to increase about eight per cent to a record $345,000 in Canada.

© Copyright (c) The Vancouver Sun

Reduced stimulus spending, rising vacancy rates will curb commercial sector, report says

Kim Covert
Sun

Residential building is expected to lead the construction industry in British Columbia, as it will in the rest of the country, over the near term as institutional construction feels the bite of reduced stimulus spending and rising commercial vacancy rates hold back a rebound in that sector.

Reports from the Conference Board of Canada released Tuesday paint a rosy picture for residential construction, while noting that non-residential construction always lags behind the economy.

“At their ebb in the early spring of 2009, [housing] starts had fallen to their lowest point since the mid-1990s,” Michael Burt, the board’s associate director, industrial economic trends, writes in a report on Canada’s residential construction industry. “Now, nearly one year later, some people are openly discussing the possibility of a housing bubble in Canada, and the federal government has decided that it is prudent to tighten mortgage-lending rules.”

In B.C., building-permit applications point to the expected resurgence with contractors taking out permits at rates that far outpace non-residential builders, who have seen permit values decline over the past three months.

In January, Statistics Canada recorded that B.C.’s residential builders took out $528 million in permits compared with the $156 million taken out by non-residential contractors.

In December 2009, residential builders took out $665 million worth of permits versus $218 million for non-residential builders. In November 2009, residential permits totalled $539 million, non-residential permits $241 million.

The board forecasts that housing starts will increase to 180,500 this year from 147,600 units in 2009, while new-home prices will grow 2.4 per cent this year and will continue to increase until 2014.

The report attributes the resurgence in the residential market to record-low interest rates and recovering employment prospects. Consumer confidence is also a factor, though the report notes that the number of people who say now is a good time to buy a home is almost equal to the number who say it is not.

“Once the Bank of Canada begins to raise interest rates later this year, mortgage rates are also expected to rise. Mortgage rate increases will take place gradually over a period of about 18 months to two years, but they will restrain the industry’s growth later this year and beyond,” Burt writes.

As the residential market rebounds, so will costs, with labour and materials both becoming pricier.

“After falling to a four-year low of $2.5 billion in 2009, industry pre-tax profits have begun to improve in tandem with rising revenues. However, it will be 2012 before profits return to their pre-recession peak,” he says.

But profits in non-residential construction will decline to a six-year low in 2010, Burt writes in a separate report on that sector, falling 19 per cent to $918 million as total non-residential investment drops 2.3 per cent.

© Copyright (c) The Vancouver Sun

Garry Marr
Sun

Office vacancy rates across the country continued to rise during the first quarter, but the pace is slowing down, indicating some stability may be returning to Canada’s commercial real estate markets, according to CB Richard Ellis Ltd.

The real estate company said Tuesday the national office vacancy rate rose to 10.1 per cent in the first quarter this year, up from 7.5 per cent a year ago.

However, vacancy rates were only up slightly from the 9.9 per cent at the end of the fourth quarter of 2009.

John O’Bryan, vice-chairman, CB Richard Ellis, said the small increase from the fourth quarter is an indication the commercial real estate market in Canada may be through the worst of the recession.

“A more promising employment picture, slowly improving leasing activity and the residual impact those factors have had on the country’s commercial real estate market is a welcome change from 2009 conditions,” said O’Bryan. “Expect to see a slow recovery progressively in 2010. The majority of Canada’s markets appear to be over the hump.”

Sublet space flooding the market continues to be a problem but is no longer growing rapidly. The percentage of vacant office space that was sublet space was 21.9 per cent in the first quarter, up from 20.8 per cent a year earlier.

Vacancy rates rose in most of the major markets.

In Vancouver, the overall vacancy rate rose to 10.2 per cent in the first quarter from 7.2 per cent a year ago. The city’s suburban area has added most of the new vacant space, said CB Richard Ellis. The vacancy rate in the city’s downtown core rose to six per cent from 4.2 per cent a year ago but suburban Vancouver’s vacancy rate has risen to 14.7 per cent from 10.7 per cent during the same period.

Alberta‘s two largest cities continue to be hit hard by weakness in the national gas sector. In Edmonton, the overall vacancy rate has risen to 10.6 per cent in the first quarter from 6.5 per cent a year earlier.

© Copyright (c) The Vancouver Sun

Casino resort proposed for parking lot between dome and Cambie Bridge

Andrea Woo
Sun

A massive retail and entertainment complex connected to BC Place Stadium, complete with a flashy Las Vegas-style resort casino, appears to be in the works.

The BC Pavilion Corporation, which operates BC Place, has negotiated an agreement with a private-sector partner to develop on the stadium’s surrounding land, according to Vancouver city councillors.

Though a formal proposal has not been announced, the most likely candidate appears to be Las Vegas’s Paragon Gaming, which already owns the Edgewater Casino at the Plaza of Nations.

“We haven’t seen a formal proposal yet, but there’s no surprise here,” Vision Vancouver Coun. Geoff Meggs said. “PavCo’s made it clear this is the direction they want to head in.”

The retail and entertainment complex would occupy what is now a 700,000-square-foot parking lot between the Cambie Bridge and BC Place.

The casino would connect directly to the stadium, which will undergo a $563-million makeover, including a retractable roof, starting in May.

Paragon spokeswoman Naomi Strasser would only say the company, which develops and operates facilities, is involved in the process.

“I can confirm for you that [Paragon] did respond to [a request for proposals] that related specifically to the development of the lands around BC Place,” Strasser said.

Edgewater Casino’s current location was always considered temporary, raising the possibility that it will simply expand into the new location.

“It was a short-term lease that was initially set for five years and was then further extended,” Coun. Raymond Louie said. “The intention was that this would not always be the location, that the landowner would likely want to redevelop for other uses.”

PavCo is expected to make a formal announcement on development details by the month’s end.

Meggs predicted the resulting public debate will be “nasty.”

“In my experience, debate about casino development is always controversial,” Meggs said. He anticipated advocates to laud potential advantages, including job creation and a tourism boost, and critics to condemn an increase in density. Louie would like to see the casino’s growth parallel its contributions to legacy funding.

© Copyright (c) The Vancouver Sun

It’s time to reset expectations, Scotiabank says

Eric Lam
Province

Canadian home prices will reach a record high this year, but those expecting the degree of home-price inflation seen in the past decade will be disappointed, a Scotiabank real-estate expert said on Tuesday.

“It’s time to reset price expectations for the Canadian housing market,” said Adrienne Warren, senior economist with Scotiabank. “This was an exceptional decade for pricing.”

Looking at the past 50 years, prices on average rose between two per cent and 2.5 per cent annually in each decade. But prices rose an average of 5.2 per cent each year between 2000 and 2009, she said, which led to the current elevated-pricing conditions.

“Some of that reflects a very strong global economy, a commodity boom, unemployment rates falling, all very positive for housing,” Warren said.

She added that some lean years in the 1990s meant there was an element of “catching up” going on in the last decade. Average prices increases between 1990 and 2009 was slightly less than two per cent, she said.

As for this year, Warren still anticipates a strong spring sales market as consumers take advantage of rock-bottom interest rates before an expected rate hike by the Bank of Canada in the summer.

Overall, she forecasts 10-per-cent growth in sales volumes to 510,000 transactions for 2010, just shy of record levels in 2007. Average prices will increase about eight per cent to a record $345,000, and housing starts will rise to 190,000 units, she said.

Starting midway through 2010, the market will likely start to slow down, a trend that will carry through to 2011 and beyond, she said.

“Next year we’re looking for somewhat lower sales volumes, somewhat lower prices, and lower housing starts,” Warren said.

© Copyright (c) The Province

Martin Crutsinger, AP Economics Writer
USA Today

WASHINGTON — Sales of existing homes fell for a third month in February, pushing sales to the lowest level since last July. There is concern that the fragile housing rebound could falter, making it harder for the overall economy to recover.

The National Association of Realtors said Tuesday that sales of previously occupied homes dropped 0.6% in February to a seasonally adjusted annual rate of 5.02 million.

The weakness in sales depressed prices with the median home price dropping almost 2% from a year ago to $165,100.

But sales activity varied across the country. In the Midwest, sales jumped almost 9%, and were up more than 2% in the Northeast. In the South, sales fell about 1%, and were down almost 5% in the West.

Nationally, sales have been declining since November, despite the extension of tax credits for homebuyers. There is a $8,000 credit for first-time buyers and a $6,500 credit for current homeowners who have lived in their property for the past five years.

Buyers must sign sales contracts by the end of April and complete their purchases by the end of June to qualify for the tax credits. So far, there has been little indication that the tax credit extension is generating much activity.

High unemployment and tough lending standards appear to be holding buyers back. That could derail housing as it tries to emerge from the worst downturn in decades and harm the overall economy.

“Without a firm foundation in housing, the economy will struggle to return to normal,” said Lawrence Yun, chief economist for the Realtors.

He said it will be critical to see a rebound in sales in coming months to keep inventories from surging and adding further downward pressure on prices.

For February, the inventory of unsold homes jumped by 312,000 to 3.59 million, an unusually large jump that pushed the supply of unsold homes to 8.6 months.

Yun called that increase “discomforting” and said if it climbs above 10 months supply it could put significant downward pressure on prices.

February existing single-family home sales and prices
	Median price		Percent change
Metro area	Feb. 2009	Feb. 2010	Price	Sales
Atlanta	$114,300	$110,100	-3.7%	-3.7%
Baltimore	$255,100	$236,200	-7.4%	8.3%
Boston	$299,600	$315,800	5.4%	15.1%
Cincinnati	$108,000	$120,400	11.5%	-19.0%
Dallas	$137,300	$139,700	1.7%	-2.8%
Houston	$138,900	$147,500	6.2%	-4.9%
Indianapolis	$96,000	$101,800	6.0%	39.5%
Kansas City	$128,200	$122,000	-4.8%	-4.1%
Miami/Ft. Lauderdale	$206,300	$190,900	-7.5%	21.0%
Minneapolis	$150,000	$159,000	6.0%	4.2%
New Orleans	$154,400	$157,700	2.1%	-20.6%
New York	$379,400	$382,600	0.8%	12.8%
Philadelphia	$198,600	$206,500	4.0%	-2.0%
Phoenix	$128,200	$139,400	8.7%	-2.9%
Pittsburgh	$99,300	$109,400	10.2%	-0.1%
Portland	$255,600	$234,200	-8.4%	25.1%
San Antonio	$145,100	$142,400	-1.9%	8.3%
San Diego	n/a	$349,500	n/a	-4.3%
St. Louis	$99,400	$102,700	3.3%	-1.3%
Washington DC	$271,700	$290,600	7.0%	-8.1%
Source: National Assn of Realtors

Copyright 2010 The Associated Press. All rights reserved.