Global Property Guide - Investment Research


    Vietnamese housing market’s amazing slump
     

    Vietnam is facing a housing catastrophe. A disastrous slump has overtaken its housing market. The government is embarrassed, the banks are bankrupt, and the economy is in a mess. Just consider the sheer scale of it all - during the year to end-Q1 2012:

    The average selling price of luxury apartments has plunged 40% Mid-end apartments' average selling prices fell 30% The average selling price of low-end apartments dropped 27%, according to Colliers International.

    This follows almost three years of house price falls in Vietnam.

    Apartment prices in all segments in Vietnam continued the rush to find the bottom during the first quarter of 2012, with demand low, and economic growth weakening. Average house prices dropped 6% during the first quarter. In Indochina Plaza Hanoi or Star City, prices fell by an average of 11% q-o-q.

    Colliers' estimates, though made in the absence of official house price statistics, are supported by Savills Vietnam, which estimates that in the first quarter of 2012 prices of mid-segment apartments plunged 9% q-o-q. Other property experts like CB Richard Ellis Vietnam and DTZ Research confirm that property prices are in freefall in Vietnam, especially in Hanoi and Ho Chi Minh City.

    In Q1 2012, the average asking price of apartments was VND26 million (US$1,230) per square metre, according to Colliers International. On the other hand, the average selling prices ranged from VND14.6 million (US$690) to VND42.4 million (US$2,000) per sq. m.
    According to DTZ Research:

    Asking prices for affordable condominiums ranged from VND10.6 million (US$500) to VND20 million (US$950) per sq. m. in Q2 2012 For middle segment condominiums asking prices ranged from VND20 million (US$950) to VND35.9 million (US$1,700) per sq. m. For high-end condominiums, asking prices were above VND35.9 million (US$1,700) per sq. m.

    Recent statistics show a staggering number of unsold housing units in Vietnam's two biggest cities. In Hanoi, the number of unsold apartments is about 40,000 units, and it has reached 20,000 units in Ho Chi Minh City.

    During the year ending in Q1 2012, the supply of apartments increased by 37% to 119,000 units, according to Colliers International. New apartment supply increased by 32% y-o-y, while the supply of existing apartments rose by 44% y-o-y in Q1 2012.

    Vietnam has a substantial number of bad loans. One out of every ten loans in the banking system has stopped paying, according to the central bank. Fitch Ratings believe the percentage of bad loans might be much higher. The total value of outstanding real estate loans in Vietnam is VND180 trillion (US$8.5 billion), though down from peak levels of VND280 trillion (US$13.2 billion).

    Many residential projects have stalled in mid-construction (an example being the Saigon Residence, a high-end residential building in Ho Chi Minh's centre). Many property developers have delayed launching projects.

    In an effort to bolster demand:

    A VND5 trillion credit package was given to homebuyers by the Vietnam Bank for Industry and Trade (Vietinbank). An exemption of about 10% of the value added tax (VAT) for home buyers is being proposed by the Housing and Real Estate Market Department. The local government in Ho Chi Minh City has proposed opening the property market to overseas Vietnamese. The State Bank of Vietnam (SBV), the country's central bank, slashed the refinance rate was lowered from 11% to 10% in July 1, 2012, the fifth consecutive monthly fall this year, as inflation cools. The discount rate was also lowered from 9% to 8% and the overnight inter-bank rate from 12% to 11%.

    House price falls are expected to continue in coming quarters, according to Colliers International.

    "The condominium market outlook remains bleak for the rest of the year, as purchasers continue to wait for both finance rates and prices to fall further," says KP Singh, General Director of DTZ Vietnam.

    The Vietnamese economy grew by 4.38% in the first half of 2012, its most sluggish rate for three years. Real GDP growth is expected to slow to 5.1% in 2012, from 5.9% in the previous year, according to the IMF.

    Decree 71

    The second issue was last August’s implementation of Decree 71/2001/ND-CP (Decree 71), providing guidance on the November 2005 Law on Residential Housing. Decree 71 aims to discourage speculative real estate investment. Intended to minimise risks for buyers, Decree 71 requires clearance from the Prime Minister for large-scale developments.

    Uncertainty over the implementation of Decree 71 caused developers to accelerate construction of some projects and the purchase of lands, lead to huge price spikes in some areas, while flooding other areas with new supply.

    In HCMC, Vietnam’s economic center, residential resale prices in all segments have been steady for the past two years, according to CB Richard Ellis Vietnam.

    In the low-end market, the average asking price was US$726 per sq.m. in Q3 2010 In the high-end segment, the average asking price was US$1,898 per sq. m. in Q3 2010

    On the other hand, Hanoi residential resale prices were up 9% on average during the year to Q3 2010, at US$1,837 per sq. m.

    In the low-end segment, average asking prices jumped 24% y-o-y to Q3 2010, but were up a mere 2.2% from the previous quarter. Prices in the luxury and high-end segment fell 1% during the quarter to Q3 2010.
    AVERAGE ASKING PRICE (Q3 2010)
    Hanoi Secondary Market US$ per sq. m. q-o-q change (%) y-o-y change (%)
    Luxury segment 3,009 -0.16 2.33
    High-end segment 1,924 -0.61 9.75
    Mid-end segment 1,349 1.37 15.1
    Low-end segment 977 2.21 24.09
    Total 1,837 0.29 9.02
    Source:CB Richard Ellis Vietnam

    In the third quarter of 2010, the average price of villas located in posh residential areas in Vietnam range from US$1.5 million to US$2 million while villas in new neighbourhoods are priced at US$250,000, according to local real estate analysts.

    Under the Ordinance on Foreign Exchange Management, all transactions done in Vietnam must be in VND. However, most real estate projects, especially luxury villas and apartments, are quoted in US dollars. These include projects like:

    Keangnam Landmark Tower, at US$2,800 to US$3,300 per sq. m. Indochina Plaza Hanoi, at US$2,800 per sq. m. Sky City Tower, at US$2,300 per sq. m. Mulbery Lane, at US$1,800 per sq. m. Parkcity, at US$3,000 per sq. m. Usilk urban area project, at US$1,000 to US$2,000 per sq. m. Mipec Tower, at US$1,000 to US$2,000 per sq. m. Thanh Cong Tower, at US$1,000 to US$2,000 per sq. m. 302 Cau Giay street project, at US$1,000 to US$2,000 per sq. m. Viet Kieus can now buy unlimited property, just like resident Vietnamese

    Decree 71 also contains revisions to the Housing Law allowing Viet Kieu (overseas Vietnamese) to possess as unlimited property just like Vietnamese citizens. The new regulations are expected to create more demand in the housing market. About 70% of the 4 million Viet Kieu retain their Vietnamese nationality, according to the Ministry of Construction.
    In addition, even if a Viet Kieu has given up his Vietnamese nationality, he is still given the same homeownership right, provided that:

    He has invested under the Law of Investment He is married to a Vietnamese citizen living in the country He is working in Vietnam as a cultural activist, scientist or has special skills and he has made contributions to the country

    Before the new decree took effect, Decree 81, already in force, allowed certain Viet Kieu to buy property. However after 9 years of implementation, only 140 Viet Kieu had bought houses in their own names, due to red tape.

    It is however unclear if the new decree will address the problems of corruption and red tape. In addition, many overseas Vietnamese prefer to purchase property under the names of relatives to avoid tax liabilities and other obligations.

    Decree 71 also mandates that residential housing projects with a total of 2,500 housing units (incl. villas, detached houses, apartment buildings, new urban zones and mixed use projects) must be approved by the Prime Minister. Any amendments to the project must also be approved by the Prime Minister. This can potentially lead to delays and more red tape.

    Perpetual Lease

    In theory, freehold land does not exist in Vietnam. Land can only be leased, even by Vietnamese; though in reality many leases seem to be for indefinite terms. “Buying” land is technically a transfer of leasing rights. The creation of a perpetually renewable lease means that Vietnam now has one of the most open property markets in Asia.

    However, the 70 years lease period allowed to foreign investors was reduced to 50 years in 2009.

    Under-served low-end market

    Demand for affordable housing has risen in recent years, given a rising population, rapid migration from rural to urban areas, and rapidly improving living standards. The demand for affordable houses is now outstripping supply, as residential development has largely focused on high-end customers.

    According to RNCOS, a global market research company, many Vietnamese do not have their own houses and more than 70% of households live in temporary wooden houses. RNCOS estimates that Vietnam is deficient of about 20 million permanent housing units.

    In Ho Chi Minh City, the country’s largest city, only 14% of the total supply of luxury apartments was sold in the first eight months of 2010, according to a survey conducted by Cushman and Wakefield Vietnam.

    On the other hand, about 670 units of newly-built apartments in Hanoi were sold in the 2nd quarter of 2010, or about 48% of the supply in the primary market in the capital, according to Savills Vietnam, a UK-based research firm.

    vietnamese and overseas Vietnamese account for about 70% of homebuyers in the country, while the rest are foreigners, according to Nguyen Kim Son of BTA Development Investment.

    Supply increases

    In the 3rd quarter of 2010, the total supply of condominium units in Hanoi was 75,235 units, up 4.5% from the previous quarter, according to CB Richard Ellis Vietnam. In addition, about 3,000 additional units are expected to be completed in Hanoi in the last quarter of 2010.


    TOTAL SUPPLY OF CONDOMINIUM UNITS (HANOI)
    Q2 2010 Q3 2010 Q-O-Q CHANGE (%)
    Luxury segment 2,186 2,186 -
    High-end segment 12,709 14,005 10.2
    Mid-end segment 44,403 46,392 4.5
    Low-end segment 12,671 12,652 -
    Total 71,969 75,235 4.5
    Source:CB Richard Ellis Vietnam

    Just like in the capital, other areas in Vietnam are also experiencing an increase in supply. There were around 11,200 newly-built apartments available for sale in the southern city in the 2nd quarter of 2010, up 24% from the previous quarter, according to Savills Vietnam.

    In addition, about 28,500 apartments currently under construction are expected to be completed in the next two years. The government also constructed low-income apartments which will be available for sale by the end of 2010.

    Underdeveloped mortgage market

    The Vietnamese mortgage market is still relatively underdeveloped, with majority of homebuyers paying in cash. In an effort to boost the housing market, developers are now starting to work with banks to offer mortgages to buyers.

    However, high interest rates and strict loan procedures are still hindering the local mortgage market from flourishing. The loan-to-value (LTV) ratio rarely exceeds 50% of the appraised value of the property. The term period is usually 15 years.

    In the first 9 months of 2010, the average lending rate was 13.5%, up from 12% in 2009. To curb inflationary pressures, the base interest rate was raised by 100 basis points to 9% in November 2010, from 8% since December 2009, based from figures released by the central bank, The State Bank of Vietnam.

    Rents up, yields high

    In September 2010, the average rent for high to mid-end condominium units in Vietnam was US$10 per sq. m. However, the local rental market is very diverse, with rents differing in each city.

    Hanoi has the most expensive housing in the country, with average asking rent at US$30.31 (VND587,311) per sq. m. per month in Q3 2010, up 5.9% from a year earlier, according to CB Richard Ellis Vietnam.

    In Hanoi, a 170-sq m. apartment has an expected rental yields of 7%, according to local real estate developers. On the other hand, a same sized apartment located in Ho Chi Minh City has higher rental yields of about 9%.

    In Ho Chi Minh City, the overall rental vacancy rate was 16.5% in the 3rd quarter of 2010, slightly up from 16% in 2009, according to the latest report from CB Richard Ellis Vietnam.

    The country's average economic growth was 7.2% from 2000 to 2010, according to the IMF. In 2011, GDP growth slightly slowed to 5.9%.

    Slowing economic growth

    The country's economic growth slowed to 4.38% in the first half of 2012, its most sluggish rate in three years, according to the GSO. This was in sharp contrast with the average annual GDP growth rate of 7.1% from 2000 to 2011, according to the IMF.

    Real GDP growth is expected to slow to 5.1% in 2012, from 5.9% in the previous year, according to the IMF.

    In an effort to boost the economy, the State Bank of Vietnam (SBV) slashed its key interest rates in July 1, 2012 for the fifth consecutive month this year. The refinance rate was lowered from 11% to 10%, the discount rate from 9% to 8% and the overnight inter-bank lending rate from 12% to 11%.

    In June 2012, consumer prices rose by just 6.9% from a year earlier, the lowest rate in three years, according to the General Statistics Office (GSO).

    Rating agency downgrade

    In December, rating agencies downgraded Vietnam’s foreign currency bond ratings. Moody’s lowered its rating from Ba3 to B1 (four steps below investment grade), while S&P rated Vietnam at BB- (three steps below investment grade). They both kept the outlook as negative, implying the future downgrades can be expected.

    In their report, Moody’s pointed to the increased risk of a balance of payment (BOP) crisis in Vietnam because imports are outpacing exports. Foreign reserves are being depleted because of capital flight and the effort to defend an overvalued currency. Other factors leading to the downgrade were high inflation, excessive bank lending and the near-collapse of the state-owned Vinashin.

    Originally a shipbuilding company, Vinashin expanded to a wide array of industries including tourism and animal feeds. As of June 2010, its total debt reached US$4.5billio, roughly 4.5% of Vietnam’s GDP. The government said that it will not bail out the company but provided zero-interest loans for the salary of its employees.



    Residential prices under threat in India: inflation now RBI's top priority
     

    India house prices India's property market is set for tough times. Residential property prices are falling in more cities than they are rising in real terms (given India's high inflation, it is important to distinguish nominal price rises from real price rises).

    The new governor of the Reserve Bank of India, Raghuram Rajan, has added to the pressure by hawkishly raising key interest rates, in the face of an already weak economy.

    Nominal house prices rose in 10 cities (out of the 15 cities covered by National Housing Bank (NHB) Residex figures) during the year to Q2 2013, while 5 cities had price nominal house price declines. But when adjusted for inflation, house prices actually fell in 11 cities, whereas only 4 cities experienced price increases.

    House prices in New Delhi rose by around 15.7%, the third highest nominal y-o-y growth of all 15 cities. When adjusted for inflation, house prices in New Delhi actually rose by only 4.6%.

    Mumbai posted a 12.2% y-o-y nominal price growth, but house prices only increased by 1.4% in real terms.

    The highest annual house price increase was in Jaipur at around 41% (27.4% in real terms) during the year to Q2 2013. It was followed by Kochi, which had a 17.8% price increase (6.5% in real terms).

    Faridabad registered the largest price drop in Q2 2012, contracting by 6.9%, or about -15.9% when adjusted for inflation. It was followed by Kolkata with a 3.6% drop (-12.9% in real terms) and Surat with a 2.1% drop (-11.5% in real terms). Chennai and Hyderabad also had nominal price declines of 1.9% and 1.2%, respectively.

    LOCAL HOUSE PRICES, ANNUAL CHANGE (%)
    CITIES Q2 2012 Q2 2013
    Nominal Real Nominal Real
    Delhi 17.01 6.23 15.70 4.55
    Hyderabad -6.59 -15.19 -1.18 -10.70
    Faridabad -1.36 -10.45 -6.91 -15.88
    Patna -4.11 -12.94 5.00 -5.12
    Ahmedabad 2.96 -6.52 6.90 -3.40
    Chennai 24.60 13.12 -1.94 -11.39
    Jaipur 21.88 10.65 41.03 27.44
    Lucknow 6.88 -2.97 9.36 -1.18
    Pune 33.33 21.06 9.50 -1.05
    Surat -2.68 -11.65 -2.07 -11.50
    Kochi -31.78 -38.06 17.81 6.46
    Bhopal -7.59 -16.10 9.66 -0.90
    Kolkata 1.03 -8.27 -3.57 -12.86
    Mumbai 8.84 -1.18 12.18 1.37
    Bengaluru 8.70 -1.31 8.00 -2.41
    Source: National Housing Bank (NHB)

    New home sales in Delhi-National Capital Region fell by 13% during Q3 compared to Q2, according to property research firm Liases Foras. Mumbai (-12%), Pune (-15%) and Chennai (-7) also experienced sales declines. The luxury home sector was the worst hit segment. Buyers are cautious, and are adopting a wait-and-see approach. In contrast, Bangalore had an increase of 25% in home sales.

    In future, prices are likely to be pulled two ways. Upward pressure on prices is likely as a result of increases in service taxes, and the new Development Control norms, according to both Cushwake and Colliers, two major international real estate agents.

    However India's economic growth is now much weaker than during 2003-2010, when the country achieved a 8.2% y-o-y average growth rate. India's 4.4% GDP growth during the first quarter (April-June) of fiscal year 2013/2014 was the slowest since Q4 2008/2009.

    Rajan's moves to tighten interest rates will add to the downward pressure.

    India's housing boom era

    From 2002 to 2007, house prices in India rose rapidly. Strong economic growth and urbanization supported house prices, as did inadequate infrastructure in city centres, lack of planning and antiquated land laws. From 2005 to 2007, the economy grew at 8.9% per annum, making it one of the world's fastest growing, following on from 7.6% per annum growth from 2003 to 2004.

    The price increases were accompanied by interest rates which fell to as low as 7.5% from early 2004 until 2005. By 2006 mini speculative boom had been set off, and residential properties in Mumbai cost 100 times the average annual income. Developers' capital rapidly grew as their stock prices increased, and they used it to bid high prices for huge plots of land, making it relatively easy to sell properties at very high prices.

    During the world economic downturn in 2008 demand for luxury housing fell 50%. House prices in Delhi fell by as much as 13.08% during the year to H2 2009. Developers refocused on building low-income homes. But India's economy quickly rebounded, and house prices soon started rising again - supported by the accommodative central bank.

    India's rupee and inflation crisis

    The dramatic appointment as RBI governor of Raghuram Rajan, former chief economist for the International Monetary Fund, came in a situation of near-crisis.

    On August 28, 2013, the Indian rupee had crashed to a record low of around 68.825 per US$. The depreciation made India's economic confidence drop sharply by 7 points to 53% in August 2013, according to research firm Ipsos. Causes included:

    The strong USD, aggravated by the Fed's decision to reduce Quantitative Easing; Slowing economic growth in India, rising inflation, volatility in the equity market, causing massive withdrawals of international investment A large current account deficit and fiscal deficit The price of crude oil
    India exchange rate

    In defending the country's currency, the RBI had spent around US$ 17.23 billion worth of foreign exchange reserves during the year to September 6, 2013, leaving the reserves at around US$274.81 billion. Planning Commission Deputy Chairperson Montek Singh Ahluwalia assures public that India has adequate amount of foreign exchange reserves to defend its currency.

    Given two years of rupee depreciation, it was expected that exports would be boosted. But though there was an 11.6% y-o-y increase in exports in July 2013, the effect was limited, with rising import prices having a severe effect on Indian industry.

    India GDP inflation

    "Exports are unlikely to get any significant boost," according to Indranil Pan, chief economist at Kotak Mahindra Bank. "Any benefit [from the weak rupee] will be offset by the fact that there is a huge inflation problem in India, and the cost of manufacturing is very high for local companies."

    Inflation was allowed to rise significantly during 2007-1010, and more recently has risen worryingly again. India's huge fiscal and current account deficits do not help. The current account deficit in 2012/2013 soared to a record high of US$ 88.2 billion or around 4.8% of GDP. The government aims to reduce it to US$ 70 billion this year. The fiscal deficit was 4.9% of GDP in fiscal year 2012/2013.

    The Reserve Bank of India (RBI) has in recent years tended to accommodate inflation, phased by the perplexing combination of high inflation and weak economic growth. The RBI's stance has been extraordinarily lax, leading the prestigious Indian Financial Express to talk of The rudderless Bank of India.

    India prime lending rate

    For example, the RBI reduced its key (repo) interest rate by 0.25 percentage points to 7.25% in May 2013, the third consecutive rate cut implemented this year. Amazingly, the pressure from business has been for even lower rates. Agencies such as the Federation of Indian Chambers of Commerce and Industry (Ficci), Confederation of Indian Industry (CII), Associated Chambers of Commerce and Industry of India (Assocham), and India Inc, all urged the RBI to announce a rate cut in the upcoming monetary policy review on September 20, 2013.

    Rajan took office on 4 September 2013. A day after he took office, the rupee reversed its decline and on 19 September hit a one-month high of 61.77.

    On 20 September the RBI released its first quarterly review on Rajan's watch, announcing an unexpectedly hawkish 25% increase in the key (repo) rate to 7.5%. Measures taken by the RBI on 20 September included:

    An increase in the key (repo) interest rate of 0.25% to 7.5%. The local market was shocked and stocks fell - but what is surprising is how moderate Rajan's 'hawkishness'is, given that: The RBI also eased liquidity through a reduction in the marginal standing facility (MSF) rate, at which banks borrow from the central bank, by 0.75% to 9.5%. The RBI reduced the minimum daily maintenance of Cash Reserve Ratio (CRR) from 99% of the requirement to 95%, a move aimed at inducing liquidity into the system.

    The message was simple: (a) controlling inflation is top priority; (b) it must not be pursued at the cost of killing the banking system.

    Small mortgage market in India India housing loans

    Indian buyers usually pay for apartments before construction has been completed. Many buyers do not take out mortgage loans. As a result, the ratio of housing loans to GDP is very low. In 2012, housing loans in India were only around 4.14% of GDP. The leading mortgage lender is the Housing Development Finance Corporation (HDFC) followed by the State Bank of India (SBI). Total housing loans in India were around INR 4,033.78 billion (US$ 63.36 billion) in 2012, up by 12.3% from INR 3,590.67 billion (US$ 56.40 billion) a year earlier.

    Interest rates at major banks and financial institutions range from 9.95% to around 11.10%, while fixed-rate mortgages are at 11.50% to around 13%.

    The loan to value (LTV) ratio of most Indian homes should not exceed 80%, according the RBI. However, according to RBI's Master Circular dated July 1, 2013, as of June 21, the following LTV ratios are now maintained by banks:

    CATEGORY OF LOAN LTV RATION (%)
    (a) Individual Housing Loans
    Upto ` 20 lakh 90
    Above ` 20 lakh & upto ` 75 lakh 80
    Above ` 75 lakh 75
    (b) CRE - RH NA

    Despite reforms since 1991, India's mortgage market is held back by problems:

    Banks prefer to lend to middle and high-income sectors, leaving limited financing options for low-income individuals. The government has a huge influence on major domestic banks, discouraging initiative. There's no proper legal framework for foreclosures Titling problems are rampant.
    Low rental yields

    Rental yields are relatively low in India. Smaller apartments have higher yields than their bigger counterparts, based on the Global Property Guide research of April 2013.

    South Mumbai has higher rents than in New Delhi and Bangalore. Monthly rents range from ?21.95 to ?27.05 per sq. m. Rental yields range from 2.28% to 2.44%, lower than the 2.64% average recorded last year.

    In New Delhi, apartments can be rented at around ?7.13 to ?8.94 per sq. m. Yields are also low at around 1.92% to 2.75%. However, the average New Delhi yield for this year (2.38%) was actually an improvement from last year's average of 1.93%.

    Bangalore has higher rental yields as compared to South Mumbai and New Delhi. Gross rental yields range from 3.75% to 3.97%. Apartment rents in Bangalore are cheaper, at ?3.32 to ?3.44 per sq. m.

    From Q4 2012 to Q1 2013, according to Colliers:

    Rents in Mumbai fell in almost all micro-markets by 1% to 4%, except in Bandra, Colaba, Cuffe Parade, Juhu, and Santacruz. In Delhi, rents for premium residential properties were stable, with a marginal downward pressure in some micro-markets. Bangalore had an increase of around 1% to 9% of rental values in almost all micro-markets, while rents remained stable in areas such as Airport Road, Cooke Town and Indiranagar. Rents in Chennai rose by 4% to 5% in most micro-markets. Increases in rents were also observed in Gurgaon (3% to 6%) and Kolkata (2% to 5%). Rents in Noida and in Pune remained unchanged in almost all micro-markets.

    Bangalore's rental market growth may be due to migration from other cities. This reflects to the 35,000 residential units launched in 2012 and 8,100 units in Q1 2013, according to the recent Knight Frank India Residential Research Report.

    On the other hand, Mumbai may be suffering from lack of demand. 'Some transactions in Mumbai may be taking place at 5-10% lower than last year's rentals,' according to executive director for residential business at Cushman & Wakefield India, Shveta Jain.

    India's rental market is hindered by problematic laws protecting tenants. The laws are generally poorly conceived and ineffective, making implementation difficult. Although they are gradually being replaced by more market-oriented laws, the rental market's full potential is yet to be realized.

    Cities with rent controls generate lower yields. Mumbai rents in houses with sitting tenants are frozen at their 1947 levels, due to the Maharashtra Rent Act of 1999, an extension of the Bombay Rent Control Act of 1947. Delhi also has rent controls.

    Weak economic outlook for 2013, sharp rupee depreciation

    In 2012, the Indian economy experienced its lowest growth rate in a decade at only 4%, according to the International Monetary Fund (IMF). This was a sharp slowdown from 7.7% growth in 2011, mainly due to the weak performance of the manufacturing, agriculture and services sectors. From 2003 to 2010, the Indian economy enjoyed an average growth rate of 8.2% per year.

    Weak growth is again expected this year. In July 2013, both the IMF and ADB cut their 2013-2014 India growth forecasts, the ADB cutting its growth forecast from 6% to 5.8% due to the slow progress of economic reforms, and the IMF reducing its forecast from 5.8% to 5.6%. Both multilaterals may have been too optimistic - during the first quarter (April-June) of the fiscal year 2013/2014, India's GDP grew by only 4.4%, the slowest pace of expansion since Q4 2008/2009.



    Despite violent crime, theft, and a weak economy...
    Jamaican beach properties

    Jamaica’s housing market has been on a minor upswing, helped by firm police action to protect tourists from theft and muggings. Tourist visits to Jamaica’s “attractions” are guided by their resorts, with the selected areas tightly controlled by police.

    Demand for mid to upper priced homes (worth J$25 million and above) has risen, encouraged by declining loan rates and competition in the mortgage market. Professionals, pension funds, and individual buyers, some first-time buyers, are expressing interest in J$25m-worth homes in Kingston 6, Kingston 8, as well as some parts of Kingston 9.

    The Realtors Association of Jamaica (RAJ) notes that Multiple Listing Service (MLS) transactions increased from 44 in 2010, to 104 in 2011. Around 75% of RAJ’s 365 members subscribe to the MLS.

    But Jamaica Redevelopment Foundation’s (JRF) Jason Rudd believes that in this price category, the market may be overburdened by inventory. Mid-income homes are the most popular, agrees Coldwell Banker Jamaica head Andrew Issa, followed by town homes and apartments.

    Red Hills and Stony Hill are in demand, with sales up and inventory low, in popular areas such as Mona, Havendale and Hope Pastures. National Housing Trust chairman Easton Douglas adds that there is a supply shortage for low- and/or middle-income buyers, agreeing with Issa agree that there is strong demand for lower priced homes.

    Jamaica’s real estate market has struggled for the last few years, thanks to weak economic growth, high inflation, and high crime rates. In Q2 2012, the country’s GDP declined for a second quarter in a row by 0.2% y-o-y, according to the Statistical Institute of Jamaica Statin). There are fears of another recession, and in April 2012 unemployment hit 14.3%.

    Yet Jamaica’s efforts in reducing violent crimes, as well as the Tourism sector’s intense promotion, brought increased tourist arrivals in Jamaica from 2011 to 2012. Tourist arrivals in 2011 rose by 8.7% in 2011, while stopovers were up 6.5% during the year to September 2012.

    Upward trend in tourism

    With the help of good publicity following Jamaica’s fantastic showing in the London Olympics (July to August 2012), its tourism sector has seen significant growth in stopover arrivals and cruise visits. But even before the Olympics, tourism was up. In 2011, visitor arrivals were 8.7% up y-o-y, to 3.08 million.

    The level of violent crimes in Kingston declined in 2011, according to the Overseas Security Advisory Council’s Crime and Safety Report although it remains a serious problem. The reduced number of crimes was due to:

    A 3-months State of Emergency effective in May 2010; Heavy exposure of wanted criminals’ photographs or posters in the news media; Increased police patrols; Police road blocks; Information given to crime stoppers.

    Petty theft and pick pocketing remains prevalent in some tourist areas, but visitors to the island are largely untouched by violent crime, since much of the criminality occurs in Kingston. Resort areas such as Montego Bay and Negril have been less affected.

    Small mortgage marketJamaican stop over visitors

    Jamaica’s mortgage market slowed during the last four years. Compared to growth of around 36.5% from 2006 to 2007 , followed by 30% in 2008, it is disappointing to see only 10% expansion in 2009, and 3% in 2010 and 2011. From around 2% of GDP in 1999, the ratio of mortgages to GDP rose to 4% in 2007, and then slid back to around 2% of GDP in 2009 and 2010.

    The sluggish growth is attributed to:

    Jamaican real estate market’s dependence on foreign and expat homebuyers, who usually pay cash High mortgage interest rates, pushing foreigners to obtain financing in their home countries.

    The maximum loan-to-value (LTV) ratio for foreigners is about 70% of the appraised value of the property, with a term period of 20 years. A government-owned company, the National Housing Trust, leads the mortgage market with around 63.7% market share. It is followed by building societies owning 36.1% of the market.

    The government recently hinted at a plan to amend the Mortgage Insurance Act (MIA) to make home buying easier for average Jamaicans. The amendment, as advised by the Jamaica Mortgage Bank (JMB), would raise the percentage of the allowed value for financing to 97%, from 90%. According to Minister Morais Guy of the Ministry of Transport, Works and Housing, the proposed amendment could make home mortgages more accessible and reduce costs to a sum of around 5%.

    High rental yieldsJamaica mortgage loans

    In 2011, the rent for four-bedroom houses rose by 4.8% to J$276,542 (US$3,210) from a year earlier, according to the UN International Civil Service Commission. The previous year’s growth was 9.3%, to J$274,706 (US$3,063).

    "While sales are not at the same pace they were in the days of the investment schemes, they are picking up and prices are holding. Apartments continue to be a good investment with rental rates of US$2,000 to US$2,500," says Issa.

    Rental yields on apartments are strong, ranging from 9.34% to 10.08%, based on Global Property Guide research in December 2011.

    Hopes for another IMF loanJamaica monthly rent

    Jamaica’s economic recovery remains anemic in 2012. It continues to face weak local and global demand, exacerbated by government austerity measures. Even before the global economic crisis, the Jamaican economy suffering from high inflation, high unemployment, a depreciating Jamaican dollar, and serious debt problems (with debt-to-GDP ratio at 126.5% in 2011).

    After escaping a recession in 1998, GDP rose by an average of only 1.6% from 1999 to 2007. Jamaica’s meagre growth was followed by a GDP contraction by 0.8% in 2008, and it was the only Caribbean country, along with the Bahamas, to experience recession. GDP fell by 3.1% in 2009, followed by a 1.4% decline in 2010.

    Jamaica’s recovery in 2011 (with 1.5% GDP growth) was weaker than other countries. The trend is expected to continue in 2012 with flat growth of around 1%.

    Jamaica GDP growth

    A spike in unemployment was observed, reaching 14.3% in April 2012. The inflation outlook was rather more positive, hitting 5.4% during the year to August 2012.

    Jamaica inflation

    The Jamaican government hopes to rekindle its borrowing relationship with IMF and reach a new agreement with them before the year ends. Until now, no agreement has been reached, despite an IMF visit in early-October. In his previous statements, Finance and Planning Minister Dr. Peter Phillips was positive that Jamaica could obtain a new agreement by the end of the year. Also, Dr. Phillips stated recently that the two parties were making progress.

    The 2010 agreement, heavily directed towards deficit reduction, allowed Jamaica to receive financial support as long as it met IMF conditions. But the US$1.27 billion standby agreement lapsed in May 2012, having stalled in early 2011 due to Jamaica’s inability to meet IMF performance targets.

    Prior to the agreement, the Jamaican government had devised a plan to restructure its public debt known as the Jamaican Debt Exchange (JDX), encouraging residents holding certain debt instruments to exchange them for new longer-dated instruments. The JDX produced good results early on, providing remarkable decline in market interest rates as well as interest payments. The country even earned upgrades in credit ratings from Standard & Poor’s and Moody’s in early 2010.

    However, the successful debt exchange in 2010 was not accompanied by fiscal consolidation, according to the IMF. Jamaica’s debt is at 140% of GDP, and is likely to increase to 150% or more in the medium term, unless strong fiscal reforms push through.

    Newly-elected Prime Minister Portia Simpson Miller, who assumed office in January 5, 2012, has pledged job creation and growth, even while implementing austerity measures and tighter partnerships with its international partners, such as the IMF.

     




    House price rises accelerating in Australia
    Australia annual house prices

    During 2013 Australia´s housing market saw its strongest performance, over the past four years. House prices in the country´s eight major cities rose by 9.48% (6.47% inflation-adjusted) during 2013, up from a minimal year-on-year increase of 2.61% (0.48% inflation-adjusted) in 2012, an annual decline of 4.41% in 2011 and a year-on-year rise of 4.72% (7.26% inflation-adjusted) in 2010, based on figures released by the Australian Bureau of Statistics (ABS).

    House prices increased 3.51% (2.66% inflation-adjusted) quarter-on-quarter in Q4 2013, the fifth consecutive quarter of quarterly gains and the highest quarterly rise since Q1 2010.

    However, the national figures conceal local house price variations. Sydney saw the biggest annual increase in 2013 from a year earlier, with house prices rising by 14.3% (7.4% inflation-adjusted), followed by Perth (8.9%), and Melbourne (8.6%). House prices also increased strongly in Brisbane (6%), Hobart (5.8%), Darwin (5.2%), and Adelaide (3.9%). Out of Australia’s eight capital cities, only Canberra experienced a slight price decline of 0.5%.

    Australian housing is among the most expensive in the world. In the last quarter of 2013, New South Wales, especially Sydney, had the most expensive housing in the country, with the median house price at AU$633,200 (US$574,667), about 17.4% above the national median house price of AU$539,400 (US$489,538), according to ABS.  Some critics believe that the housing market is severely overvalued.

    Demand is rising. Seasonally-adjusted purchases of established dwellings increased 14.2% to 43,176 units in 2013, according to ABS.   The number of finance commitments for owner-occupied housing units (seasonally-adjusted) rose by 14.1%, to 51,692, while the total value such financing commitments jumped 19.4%, to AU$16.28 billion (US$13.66 billion).

    Residential construction activity continues to surge. Dwelling unit approvals soared by 14.6% to 16,583 units in 2013, according to the ABS; new residential building consents skyrocketed by 29.1% to AU$4.47 billion (US$3.75 billion), both figures seasonally-adjusted.

    These dramatic price-rises are somewhat surprising, since Australia´s economy is estimated to have grown by a modest 2.5% in 2013, after GDP growth of 3.7% in 2012, 2.4% in 2011, 2.6% in 2010 and 1.4% in 2009, according to the IMF.   However two factors may partially explain it.  The Reserve Bank of Australia (RBA) has kept its cash rate at a record low of 2.5%, after cutting it by 25 basis points in August 2013 to match NZ´s OCR for the first time in more than four years.  The other factor is increased purchases of residential real estate by foreign nationals, especially Chinese, who continue to find Australian property very attractive.  Australia´s Foreign Investment Review Board (FIRB) grave permission for 11,668 residential property purchases by foreigners in 2012-13, to a value of AU$17 billion (US$15.21 billion), an increase of 19% on the previous financial year, according to the FIRB.

    Acquisition of residential real estate by foreign nationals and corporations is subject to Foreign Investment Review Board (FIRB) approval.

    Australia’s housing boom; crash avoided Australia annual change index

    The strength of Australia’s housing market through the great recession has amazed observers, who had predicted that Australia would suffer one of the worst housing market crashes, because of a perceived house price overvaluation.

    Australia has avoided a crash for these reasons:

    There are housing shortages, due to a rapidly growing population Strong overseas migration from 2004 to 2007 Australian household sizes are shrinking Lending standards are stricter than in the US Mortgage interest rates have been at record lows The government helped first-time homebuyers, introducing a AU$10.4 billion (US$7.24 billion) stimulus package in October 14, 2008 - around 1% of GDP - which included the First Home Owner Boost Scheme (FHOB), which raised the First Home Owner Grant (FHOG) from AU$7,000 (US$6,419) to AU$14,000 (US$12,838) for existing dwellings, and to AU$21,000 (AU$19,257) for newly constructed homes. However, the FHOG reverted back to $7,000 in December 2009 in NSW, and reduced it in other states. Housing remains “severely unaffordable”

    Among the seven developed nations covered by the 2013 9th Annual Demographia International Housing Affordability Survey, Australia ranks third as most unaffordable major market.

    The survey uses the Median Multiple to assess housing affordability in 337 markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom, the United States and Hong Kong.

    The Median Multiple follows this formula: Median Multiple = median house prices / median household income.

    In 2012, Australia’s major market had a Median Multiple of 6.5, compared to the international norm of three times household income. However, this was actually an improvement from 6.7 Median Multiple recorded in 2011. Overall, out of the 39 Australian markets surveyed, 30 of which were rated “severely unaffordable” (Median Multiple of 5.1 and above), while 9 markets were tagged as “seriously unaffordable” (Median Multiple between 4.1 and 5.0).

    Sydney continued to be one of the most unaffordable major markets next to Hong Kong and Vancouver, and is the least affordable market in Australia, with a Median Multiple of 8.3. Outside the major markets, the Port Macquarie, located in New South Wales, is the most severely unaffordable market, with a Median Multiple of 8.6.

    Yet based on Commonwealth Bank of Australia’s recent Home Buyer Affordability Report in March 2013, housing affordability has recently improved, rising by 1.2% q-o-q to March 2013.

    “Overall, the trend across the capital cities is one of continued improvement in affordability, with the capital city index increasing by 2.0 per cent in the March 2013 quarter. However the cities of Adelaide, Perth and Hobart each saw declines in affordability,” according to HIA Senior Economist Shane Garrett.

    The highest reductions in housing affordability occurred in Adelaide (-4.1%), followed by Hobart (-3.8%) and Perth (-2.6%). Meanwhile, affordability improved in Brisbane (6.2%), Melbourne (4.7%), Canberra (2.6%), and Sydney (1.2%).

    Moderate yields, but rent hikes continue

    Rental yields in Australia are moderate. Gross rental yields for houses range from 4.36% in Melbourne, to 5.42% in Hobart, according to the March 2013 figures of Australian Property Monitors (APM). Gross rental yields for apartment units range from 4.83% in Melbourne to 6.03% in Darwin.

    In Sydney, smaller apartment units of around 60 sq. m. have higher gross rental yields of 6.26%, according to Global Property Guide Research of October 2012. 100 sq. m. and 150 sq. m. apartments have lower yields at around 4.94% and 3.93%, respectively.

    The average asking rent on houses, in the eight capital cities, rose 6.1% during the year to Q1 2013. During the same period, the average asking rent on ‘units’ increased by 5.9%. On a national level, asking rents for houses were up by only 0.4% q-o-q to Q1 2013, while ‘unit’ rents were up by 2.2% during the same quarter.

    “Sydney, Melbourne and Perth were the big movers in unit rents over the March quarter with only Perth of all the major capitals recording a rise in house rents. Sydney median asking house rents were again steady over the March quarter at $500 but remained the highest rents of all capitals except Darwin. Sydney house rents have now recorded no growth over the past year,” says Dr Andrew Wilson, APM’s Senior Economist.

    The highest median weekly asking rents can be found in Darwin, with houses at around AU$ 700 (US$ 639.59) and units at AU$550 (US$ 502.54). It was followed by Sydney with median rents at AU$500 (US$ 456.85) for houses and AU$ 470 (US$ 429.44) for units. Hobart has the lowest median weekly asking rents at AU$ 310 (US$ 283.25) for houses and AU$ 250 (US$ 228.43) for units.

    Continuous upward pressure on rents is expected in Perth, Darwin and Sydney due to the chronic housing shortage. Increased demand for unit accommodation is expected to continue in Sydney and Melbourne, but new apartment supply is predicted to offset rental demand. Canberra, Adelaide and Hobart are likely to have subdued rental growth for the rest of 2013, Due to their under-performing local economies.

    Key interest rate on hold Australia interest rates

    Though Australia’s benchmark interest rate remained on hold at 2.75% as of July 2013, an additional rate cut is most likely to happen, and could be influenced by the future performance of the Australian dollar.

    “The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,” according to RBA Governor Glenn Stevens.

    Inflation has been consistent with RBA’s target, and is expected to continue for the next couple of years.

    Before arriving at this record low figure of the Official Cash Rate, the Reserve Bank of Australia (RBA) made seven rate cuts from November 2011 to May 2013. The rate cut started due to Australia’s overall moderate economic growth in 2011, and a more neutral stance of monetary policy would be consistent in having a sustainable growth and lower inflation of around 2% to 3% over time.

    Slight improvement in the mortgage market

    The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 87% of GDP in 2012. Outstanding mortgage loans rose by 4.8% in 2012, down from 6% growth in 2011.

    67.6% of outstanding housing loans to households are for owner-occupied homes. 32.4% of outstanding housing loans are for investment homes.
    Australia mortgage loans

    According to ABS figures, new home lending in Australia slightly improved in May 2013. Housing finance commitments for both new and established owner occupied dwellings were up especially in the Northern Territory (4.7%), Queensland (3.9%), and Western Australia (3.4%). In contrast, the Australian Capital Territory had a decline in the total number of housing finance commitments by around 0.5%.

    The mortgage market is highly concentrated. Australia’s “big four” banks—National Australia Bank, Commonwealth Bank of Australia, Westpac Banking Corporation, and ANZ—accounted for about 85% of the country’s housing loans in May 2013, according to the Australian Prudential Regulation Authority (APRA).

    Weak residential building activity

    In April 2013, housing approvals rose 37% higher to 13,202, but this was only 3% up on 2012’s monthly average of 12,792.

    Australia housing starts

    The lack of affordable housing has driven those at the bottom of the market to become renters instead, struggling with high rents. Australia’s affordability problem is also attributed to insufficient construction of new houses.

    Australia has been under-building new residential dwellings in the past years, for several reasons.

    Stringent urban planning policies and land use restrictions (called ‘smart growth’, ‘urban containment’, etc.). “An increase in state government zoning regulations is a significant factor driving up the cost of housing”, said Reserve Bank of Australia Governor Glenn Stevens. Tax burdens on builders and developers. In New South Wales, government taxes and other charges are estimated to account for about 30% of the price of new houses. Due to the global credit crunch, developers continue to struggle to secure finance.

    In 2012, housing starts fell by 2.2%, compared to the 11.3% drop in 2011.

    A mild recovery was expected in 2013, driven by interest rate cuts, new home incentives in some states, and focus on policy reform in New South Wales, according to HIA chief economist, Harley Dale. However, it was observed in Q1 2013 that there was no growth in the residential construction industry. “In seasonally adjusted terms, the volume of investment in new homes increased by 2.2 per cent over the quarter, as the modest recovery from very weak levels in the first half of 2012 continued. Meanwhile, the on-going decline in alterations and additions investment provides a weak update on the mindset and appetite for spending on the part of the household sector,” says HIA Economist, Geordan Murray.

    The weaker residential building activity was attributed to the RBA’s decision to keep its Official Cash Rate on hold at 2.75%. According to HIA’s Senior Economist Shane Garrett, lower interest rates were badly needed to help the industry.

    Modest economic growth, high unemployment Australia gdp inflation

    In the fourth quarter of 2013, Australia’s economic growth accelerated to 2.8% from a year earlier, up from an annual growth rate of 2.3% recorded in the previous year, fuelled by increases in household spending and exports, according to the Reserve Bank of Australia (RBA), the country’s central bank.  On a quarterly basis, the economy grew by 0.8% in Q4 2013, up from quarterly growth rates of 0.6% in Q3, 0.7% in Q2, and 0.5% in Q1 2013.

    Australia’s economy expanded an average of 3.1% from 2000 to 2012, according to the IMF.

    Australia’s export industry is now improving. In Q4 2013, the country’s current account deficit narrowed to a record AU$10.1 billion (US$9.17 billion), down from a previous deficit of AU$12.5 billion (US$11.34 billion). Despite this, demand from China remains unstable, according to the RBA.

    The RBA expects that the economy will grow by between 2.25% and 3.25% this year, thanks to a lower exchange rate and increasing activity both in the retail and housing markets.

    Australia exchange rate

    “The depreciation of the exchange rate should provide some additional impetus to activity in the traded sectors of the economy,” said the RBA.

    The Australian dollar (AUD) depreciated by more than 18% from AUD0.953 = USD1 in January 2013 to AUD1.1283 = USD1 in January 2014.

    In January 2014, the nationwide unemployment rate rose to 6%, the highest level since July 2003, according to RBA. The jobless rate is expected to rise further, as about 50,000 jobs in the auto industry are about to be lost due to the closure of manufacturing plants of Toyota Motor Corp, Ford Motor Co. and General Motors Co. In addition, Alcoa Inc. also announced that it will close it aluminium smelter and two mills in the country.

    From 2004 to 2013, the country’s jobless rate averaged 5% per year, according to the IMF.

    Consumer prices rose 2.7% in Q4 2013 from a year earlier, up from a rise of 2.2% recorded in the previous quarter, but still consistent with the central bank‘s 2%-3% inflation target, according to the ABS. The increase in inflation rate is mainly attributed to rises in costs of domestic and international holiday travel and accommodation, and prices of fruits, vegetables, tobacco and new dwelling purchase by owner-occupiers.

     

    Japan’s property prices continue to rise
     

    Japan house prices graph

    Japanese house prices continue to rise in 2014, after the strong market recovery last year. Housing demand remains robust. Residential construction activity is at its strongest in more than a decade. This is due to the reflationary policies of Prime Minister Shinzo Abe, who came to power in December 2012. These policies, affectionately known as “Abenomics”, include increasing public infrastructure spending, devaluation of the yen and aggressive quantitative easing by the Bank of Japan (BOJ).

    In Tokyo Metropolitan Area:

    The average price of existing condominium units rose by 4.5% to JPY415,300 (US$4,072) per sq. m. during the year to January 2014, based on figures released by the Land Institute of Japan (LIJ). The average price of new condominium units dropped by 4.2% y-o-y to JPY660,000 (US$6,472) per square metre (sq. m.) in January 2014. The average price of existing detached houses was up by 2.4% to JPY32,050,000 (US$314,268) over the same period.

    In Osaka Metropolitan Area:

    The average price of existing condominium units increased by 3.7% to JPY253,000 (US$2,481) per sq. m. during the year to January 2014. The average price of new condominium units rose by 6.5% to JPY526,000 (US$5,158) per sq. m. over the same period. The average price of existing detached houses was up by 1.7% to JPY20,480,000 (US$200,818) over the same period.

    Surprisingly, land prices are still falling. During the year to January 2014, the average price of land in Tokyo Metropolitan Area fell by 10.9% to JPY260,800 (US$2,557) per sq. m., while in Osaka Metropolitan Area the average land price dropped by 4.7% to JPY183,200 (US$1,796) per sq. m.

    In 2013, residential construction was at its strongest in more than a decade, with an 11% y-o-y rise in new dwelling starts.  New dwelling starts continued to increase in early 2014, rising 12.3% to 77,843 units in January 2014 compared to the same period last year, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Likewise, the total floor area of new dwellings started increased by 10.5% to about 6.76 million sq. m. Most residential construction is occurring in Tokyo, which accounted for about 40% of all new dwellings started. Osaka accounted for about 12% while Nagoya for 8% of all new dwellings started.

    In Tokyo, the total number of condos sold rose 15.9% to 36,567 units in 2013 from a year earlier, according to LIJ. Likewise, in Osaka, the number of condos sold increased by 10.4% y-o-y to 16,654 units in 2013.

    In 2013, total outstanding real estate loans in Japan increased 2.8% to JPY435.9 trillion (US$42.75 trillion) from a year earlier, according to the Bank of Japan (BOJ).

    House prices are expected to continue rising in 2014, given that the government is expected to inject an additional stimulus package in the second half of this year. Moreover, Tokyo’s successful bid to host the 2020 Summer Olympics is expected to boost property demand and the construction sector over the next 7 years.

    In 2013, the Japanese economy expanded by 1.5%, after GDP growth of 1.4% in 2012 and a contraction of 0.45% in 2011. The Japanese economy is expected to expand by 1.4% this year and by another 1% in 2015, according to the International Monetary Fund (IMF).

    The lost decade Japan urban land price index graph

    In fact, Japan is still recovering from the great asset bubble of the late 1980s. From 1970 to 1980, land prices in Japan rose 200% (23.5% in real terms), and 238.5% in the six major cities (39.3% in real terms). Then during the 1980s, there was a 103% increase nationally (61.6% in real terms) and a 272.2% rise in the six major cities (196.4% in real terms).

    The 1991 crash left banks with bad loans of almost USD 1 trillion, contributing to Japan’s ‘lost decade’.

    Japan urban land price change graph Japan’s super-strong financial system Japan non performing loans

    Japan’s financial system is now in excellent shape. During Junichiro Koizumi’s prime ministership (2001 to 2006) tighter asset assessments of major banks caused a large decline in NPLs, from 8.7% of total loans in March 2002, to 1.4% in March 2008, according to the Financial Services Agency (FSA). Lending competition has also intensified, especially in metropolitan areas. Net result: housing loan costs have fallen.

    Interest rates are “virtually zero” Japan interest and mortgage rate graph

    The BOJ’s key interest rate has been “virtually zero” (0% - 0.1%) since October 2010, and below 1% since mid-1990s. Bank variable interest rates in Japan have hardly moved since 2000, remaining at 2.475% in December 2011.

    Yet demand for loans remains weak, given the recent financial crisis, and the earthquake‘s impact. The ratio of outstanding home loans to GDP remains very much lower in Japan than in other developed countries, at around 24.5%.

    Japan banks lending

    Could a reason for lacklustre demand for housing loans be low rental returns? Global Property Guide research suggests that rental yields in Tokyo fell from an average of 5.5% in 2009, to 4.8% in 2011, findings consistent with trends shown in IPD-Recruit residential data (see chart below). However if Tokyo prices have been rising ahead of rents, weak loan demand is less likely to reflect a specific reluctance to buy versus rent, and more a general reluctance to spend on any kind of housing.

    Japan residential prices and rent Hints of recovery Japan-land sale registration

    Japan was seriously affected by the global financial crisis in 2008 and 2009, and following that house prices fell by up to 4% nationally, and by almost 8% in the six major cities. However, Japan’s economy bounced back in 2010, and there were strong new condominium sales in Tokyo, with the number of dwelling units sold up 22.5%, according to the Real Estate Economic Institute. The increase was helped by the enhanced mortgage tax break carried over from 2009.

    Property sales are now rising sharply. In Tokyo, the total number of condos sold rose 15.9% to 36,567 units in 2013 from a year earlier, according to LIJ. Likewise, in Osaka, the number of condos sold increased by 10.4% y-o-y to 16,654 units in 2013.

    Japan housing starts

    In 2013, residential construction was at its strongest in more than a decade, with an 11% y-o-y rise in new dwelling starts.  New dwelling starts continued to increase in early 2014, rising 12.3% to 77,843 units in January 2014 compared to the same period last year, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Likewise, the total floor area of new dwellings started increased by 10.5% to about 6.76 million sq. m. Most residential construction is occurring in Tokyo, which accounted for about 40% of all new dwellings started. Osaka accounted for about 12% while Nagoya for 8% of all new dwellings started.

    Trade deficit continues to grow

    Japan’s trade deficit continues to grow. In 2013, Japan saw a record trade deficit amounted to JPY11.5 trillion (US$112.7 billion), up 65.3% from a year earlier. Prolonged deterioration in the country’s trade balance is expected to erode its position as a net creditor, one of Japan’s main credit strengths, according to Moody’s Investors Service.  This is surprising, given the yen’s decline.

    In addition, the country’s fiscal health is the worst among major industrialized countries, with a public debt equivalent to more than 200% of GDP. In 2013, the country’s central government debt topped JPY1,000 trillion (US$9.8 trillion) for the first time in its history.

    Healthy economic growth in 2013 Japan gdp inflation

    From 2000 to 2007, the Japanese economy grew by an average of 1.5% annually. However due to the global financial meltdown, the economy contracted by 1% in 2008 and by another 5.5% in 2009. The economy returned to growth in 2010 with GDP growth of 4.7%.  Then Japanese growth contracted again, shrinking by 0.5% in 2011 due to the impact of the Great Tohoku Earthquake (magnitude 9.0) last March 11, 2011. In addition the economic slowdown in China, Japan’s largest export market, exacerbated the situation. Then there was the anti-Japanese feeling in China sparked by the dispute over Diaoyu/Senkaku Islands. The economy grew by an anaemic 1.4% in 2012 and by another 1.5% in 2013.

    The Japanese economy is expected to expand by 1.4% this year and by 1% in 2015, according to the International Monetary Fund (IMF).

    In an effort to boost economic growth, Prime Minister Shinzo Abe, came to power in December 2012 with a program of reflationary policies, widely referred to as “Abenomics”, including the following:

    Inflation targeting at 2% Correction of the excessive appreciation of the yen Negative interest rates Radical quantitative easing Expansion of public investment Buying of construction bonds by the Bank of Japan Revision of the Bank of Japan Act

    Effective April 1, 2014, the sales tax was increased from 5% to 8%. The sales tax is expected to rise again to 10% in October 2015.

    Inflation increased to 1.6% in March 2014, up from 1.5% the previous month and in sharp contrast with a deflation of 0.9% in the same period last year, according to Stat Bureau Japan. Consumer prices rose by 0.4% in 2013, after falling for four straight years (-1.3% in 2009, -0.7% in 2010, -0.3% in 2011 and -0.04% in 2012), according to the IMF.

    Japan exchange rate

    However, Abe risks losing public support. The new sales tax combined with price increases of commodity goods (e.g. dairy products, meat, gasoline and electricity) could pressure the consumer, given inadequate wages growth. Consumer confidence dropped for a fourth straight month in March 2014.

    “Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito of NLI Research Institute.

    In fact, the OECD recently warned the Japanese government that the economy may suffer a slowdown if inflation continues to rise without wage expansion. As a result, the OECD downgraded its 2014 economic growth forecast for the third largest economy to 1.2% from an initial 1.5%.

    “While the recent pick-up in inflation is encouraging, it could undermine the recovery unless it is accompanied by a matching rise in wages,” the OECD said.

    The yen weaken sharply by 18% to an exchange rate of JPY103.46 = US$1 during the year to December 2013, mainly due to Abe’s policies. However the yen reversed direction during the first four months of 2014, gaining 1.5% against the U.S. dollar. At time of writing, the exchange rate stood at JPY101.98 = USD1.

      

    Argentina’s housing market hit by unorthodox economics
     

    Argentina house pricesThis year has been rough on Argentina’s property market, after a recovery from the global downturn during 2010 and 2011.  The number of real estate transactions in Buenos Aires fell 46% to 6,315 in July 2012, according to the Colegio de Escribanos de la Provincia de Buenos Aires (Buenos Aires Notary College).   For residential transactions, Reporte Inmobiliario’s Buenos Aires database shows a 15% drop in sales in Buenos Aires during the year to May 2012.

    Why?  Newly imposed currency controls have frozen the market.  From October 31, 2011, President Cristina Fernandez de Kirchner restricted the acquisition of US dollars, the commonly used currency for property sales in Argentina.  The federal tax agency’s authorization is now required before making any foreign exchange purchase.  The implementation of these tight policy measures, as well as the slowing economy (expected GDP growth is 4.2% this year) has brought a general decline in real estate activity.

    The economy is slowing Argentina gdp growth

    Argentina’s economy enjoyed massive growth after the disastrous crisis of 1999-2002, the final year of which saw 10.9% GDP contraction. The peg was abandoned, and the peso fell to US$1 = ARS$3.52 by the end of 2002. Despite inflation soaring to 26%, devaluation, drastic reforms, and the debt renegotiations by the then newly elected President Nestor Kichner in 2003 caused Argentina’s economy to bounce back strongly, with growth maintained at an average annual rate of 8.5% until 2008.

    Growth declined again in 2009 as the financial meltdown hit the country. But it was a short-lived slowdown, and the economy expanded by 9.2% in 2010, and by 8.9% in 2011.

    This year economic growth will be much lower, around 4% to 5%, squeezed by tighter government economic policy, high inflation, continued global uncertainties, and lower demand from Argentina’s main trading partner, Brazil.

    President’s popularity plunging Argentina exchange rate

    President Cristina Fernández de Kirchner’s popularity dropped 30% in August 2012, according to pollsters Management & Fit. People are worried by the slowing economy, increased street crime and high inflation. Private economists say Argentina’s inflation is now over 20%, through the Indec figure is only 10%. Unemployment is unchanged on last year at 7.2% in Q2 2012. Kirchner is soon completing the first year of her second term in office.

    House prices not yet suffering Argentina average price old apartments

    Despite all this, Buenos Aires’ residential market remains stable, yet sluggish, according to Roberto Guichon, a director of Buenos Aires-based real estate firm Guichon Propiedades.   The average price of used apartments in Buenos Aires rose by 4.6% in 2011, after a 4.7% rise in 2010, based on Reporte Inmobiliario’s data.

    Over the last decade, the property market has enjoyed strong price rises. Land prices rose 518% between 2002 and 2011, from US$ 272 per sq. m. in March 2002, to US$ 1,680.2 per sq. m. in December 2011. Meanwhile from 2001 to 2011 average Buenos Aires apartment prices rose 143%, from US$ 891 to US$ 2,168 per sq. m.

    Apartments in Palermo, the city’s most popular and biggest neighborhood, cost from US$ 2,500 to US$ 3,500 per sq. m. (or US$ 232 to US$ 325 per sq. ft). Puerto Madero and Recoleta’s apartments range from US$ 3,000 to US$ 6,000 per sq. m., and may even go higher in some cases, according to Guichon.

    Rents and yields still OK

    From 1980 to 2000, Argentinean landlords benefited from high yields of around 11%. However, in 2002 rents dramatically declined due to the devaluation of local wages against the US dollar. Yields fell as low as 3.8% in 2004.

    According to the Reporte Inmobiliario, yields then rose to 5.3% in 2005, 5.5% in 2006, and to 5.3% in 2007, which was followed by an upward trend in house prices.  The Global Property Guide’s research suggests that gross rental yields in Buenos Aires’ higher-end districts  reached 9.4% by 2008.

    Despite rents almost doubling from 2007 to 2011, capital values then rose even more than rents, causing yields to slightly decline. In 2011, gross rental yields in Buenos Aires prime areas were at an average of 7.5%, down from 8.4% in 2010, according to Global Property Guide research.   Rental yields for apartments in Buenos Aires ranged from 6.52% to 8.73% in October 2011, while yields for houses ranged from 6.54% to 8.25%.

    “Pesification”?  No dollars, no sale! Argentina house construction

    The pesification of real estate operations is currently freezing the property market, discouraging investors in engaging in real estate projects.  Construction activity has slowed during recent months. Activity is expected to decline further, as restrictive policies continue.

    "The government needs dollars and they want to avoid another flight of capital like last year,” according to Federico MacDougall, an economist at the University of Belgrano in Buenos Aires.  “So they are closing the doors with a pesification of the economy."

    However, in a country where most real estate transactions are done in US dollars, the policy limits property purchases, since many sellers won’t accept Argentine Pesos. Buenos Aires City’s home sales fell 15% y-o-y to May 2012, based on the council of public notaries’ data.

    In 2009, Indec’s Construction Activity Synthetic Index (ISAC) showed a growth rate of only 2.4%, largely due to the effects of the global financial meltdown and the A(H1N1) flu outbreak.  Housing construction was up 9.5% in 2010.  The construction sector was strong in 2011, as showed by the 50% increase in the number of new construction permits in Buenos Aires, and the 7.9% rise in Indec’s ISAC. Most permits were issued in Palermo (10%), following behind are Belgrano, Villa Urquiza, and Caballito.  But now pesification has hit property sales, causing real estate companies to shut in Buenos Aires, and hitting economic growth, given that construction contributed 15% of Argentina’s GDP.

      




    Martial law in Thailand and the housing market
     

    The army has taken over the reins of government amid a political crisis in Thailand "to preserve law and order". The intention is apparently to calm the situation, while working for a compromise between reds and yellows after eight years of upheaval, which have pitted the largely rural supporters of populist former Prime Minister Thaksin Shinawatra against Thailand´s traditional elites.

    The populist businessman and politician Shinawatra was first removed from power in 2006 by the army, and then fled Thailand in 2008 after being given a jail term for corruption.  His allies then won the first post-coup polls, but were later removed by the courts.

    In 2010, his supporters occupied parts of Bangkok, where around 100 people died amid clashes and the following crackdown. In the elections of July 2011 Shinawatra´s sister, Yingluck, came to power in a landslide, and has faced rising protests from the yellow shirts.

    She was then removed by the courts, and her government has now been ousted by the military.

    The problem seems insoluble.  The people keep electing Shinawatra and his allies, but the elite won´t wear it, for good reason.

    Do the military and the elite have the right to prevent the country being ruined by the results of the popular vote?  Whatever the answer, the divide is deep, dangerous and will surely lead to disruption and bloodshed.

    Thailand´s economy has a long record of ignoring coups.  The army has staged at least 11 coups since the end of the absolute monarchy in 1932.  Yet Thailand’s economy grew by an average of 5% annually from 1999 to 2007. 

    Recent disruptions did slow growth to 2.9% in 2013, a sharp slowdown from a real GDP growth rate of 6.5% in 2012, according to the International Monetary Fund (IMF).  But there is no evidence that Thais cannot combine work and street-fighting.  It´s almost a tradition.

    In fact it was strong economic growth that pushed the Thai price index for single detached houses up by 5.71% (3.74% inflation-adjusted) during the year to end-Q1 2014, after annual house price rises of 5.61% in Q4, 5.34% in Q3, and 6.17% in Q2 2013, according to the Bank of Thailand (BOT).

    The condominium index, which increased modestly by 3.76% (1.82% inflation-adjusted), is actually a more relevant index, since condominiums are what Bangkok people tend to live in.  The price index for townhouses rose by 6.17% (4.18% inflation-adjusted) to end-Q1 2014, and the residential land price index surged by 7.04% (5.04% inflation-adjusted)

    Property demand has been soaring. The value of land and building transactions surged by 16.5% in 2013 to THB991.3 billion (US$30.6 billion), according to the Department of Land, Ministry of Interior. The Central region accounted for about 62% of all transactions, followed by the Eastern region (13%) and the Northern region (9%).  Total property credits outstanding rose 14.4% in 2013, to THB2.05 trillion (US$63.2 billion), according to the Bank of Thailand.

    Residential building licenses also by 12.8% in 2013 to 84,023 units, according to the Department of Land.  Condominium registrations surged 25.1% to 102,200 units. New houses in Bangkok Metropolis, including apartments and condominiums, self-built houses, and housing projects, also increased by 5.6% to 131,954 units in 2013.

    All this happened while demonstrators were fighting in the streets.

    Nevertheless, political instability has a price.  Industrialists and investors are scaling down their investment.  The economy is projected to grow by a modest 2.5% this year.  A warning sign: LPN Development, Thailand’s biggest condominium developer, recently cut its new project plans by almost 50%  in 2014 due to the ongoing political turmoil and sharply slowing economy.

    Now the initiative is with the army, whose job it is to knock some sense into the warring parties´ heads.  This will not be easy.  The King is old and relatively inactive. There is little confidence in the succession. So, expect a sharp slowdown.  Temporary or long term, who can tell?  If history is a guide, this too will pass.

    Economy slowing amidst political turmoil Thailand gdp inflation

    Thailand’s economy expanded by 2.9% in 2013, a sharp slowdown from a real GDP growth rate of 6.5% in 2012 but better than the meagre growth of 0.08% seen in 2011, according to the International Monetary Fund (IMF). Thailand’s economy grew by an average of 5% annually from 1999 to 2007. The economy contracted by 2.3% in 2009, mainly due to the adverse impact of the global financial crisis.

    The economy is projected to grow by a modest 2.5% this year and another 3.8% in 2015, according to the IMF. However, other agencies are now projecting below 2% economic growth for Thailand, as the country is embroiled in political unrest.

    The political crisis started in late 2013 when the government of Yingluck Shinawatra attempted to pass a political amnesty bill that critics claim would allow Thaksin Shinawatra, an ousted Thai leader and a brother of Yingluck, to return from exile. The move brought tens of thousands of protesters to the streets of Bangkok.

    Aggravating the situation, a court then ordered the removal of Yingluck Shinawatra from office, along with nine other cabinet ministers. Shinawatra was alleged to have abused her power related to the removal of Thawil Pliensri as secretary-general of the National Security Council in 2011.

    Former Deputy Prime Minister and Commerce Minister Niwattumrong Boonsongpaisan then became acting prime minister. The political crisis worsened, and on May 19 the army declated martial law.

    “The imposition of martial law is not, in itself, negative for Thailand’s ratings, although clearly we are keeping the situation under close review,” said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch Ratings. “It may even help to break Thailand out of the political deadlock of the past six months, by which the two sides have failed to agree on arrangements for new elections.”

    However, the economy is under pressure:

    Thailand exchange rate

    Consumer confidence tumbled to a 12-year low in February 2014, and is expected to continue falling in the coming months, according to the University of the Thai Chamber of Commerce (UTCC).

    Exports and imports are slowing.  Exports, which account for more than 60% of the country’s economic output, are also faltering. In January 2014, total exports fell by 1.98% from the same period last year, according to the Commerce Ministry. As businesses delay their orders, imports also plunged by 15.5% in January 2014 from a year earlier, the biggest fall since October 2009.

    The Thai baht is falling. From a record high of THB28.97 = USD1 in April 2013, the Thai baht dropped by more than 11% to THB32.26 = USD1 in April 2014, and fell again after martial law was declared.

    Consumer prices in the country are expected to increase by about 2.4% this year.

    What will be the inpact on tourism?  Till recently tourism was little affected by the uncertainty.  Tourist arrivals surged by 20% in 2013.  But now more than 45 countries have issued travel alerts for Thailand. The government estimates tourism losses for January alone at US$685 million.

    For sure the army takeover will not help, since tourists do not generally travel to see tanks in the streets.

    Decreasing yields

    The average rental yield in Bangkok is now around 6.2% in May 2010, down from around 7.2% in 2009, according to the Global Property Guide research. Higher yields are realized from condominiums measuring between 45 and 80 sq. m., with yields of around 7%.

    In Pattaya, foreigners are shifting from buying residences to renting, at monthly rentals ranging from THB 50,000 to THB 90,000, according to Clayton Wade of Premier Homes Real Estate. Demand for rentals in Pattaya grew strongly when the baht began strengthening against the US dollar.

    Interest rate hikes

    In July 2010, the BOT raised its key interest rate to 1.5% after maintaining it at 1.25% since April 2009. The rate was further increased by 25 basis points to 1.75% in August, and to 2% in December.

    There were concerns, however, about the BOT’s timing, given the weak economy in October. Baht appreciation may occur as interest differentials with the US widen, while higher costs will hit borrowers when banks follow the rates increase. However so far, the Government Housing Bank (GHB) interest rate has been constant since May 2009, at 6.75%.

    The BOT explained that a negative real interest rate is inappropriate when the economy is expanding. With the key rate at 2% and inflation around 3.4%, the real interest rate is -1.4%, suggesting that further interest rate rises may occur.

    BOT’s preventive measures

    The BOT has released new rules in response to public anxiety that Thailand faces the risk of another property bubble, particularly in the condominium sector.

    The BOT’s new rules take effect in 2011 and 2012.

    for condominium units under THB 10 million (USD330,300), bank loans must be limited to 90% of a home’s value, from January 1 2011 low-rise housing loan-to-value (LTV) ratios are capped at 95%, starting January 1, 2012. for larger loans, banks must increase risk weighting to between 75% and 100% of the loan value. At present, the risk weighting is set by the BOT for the property sector at 35%.

    Risk weightings are used to calculate the minimum amount of capital required to support lending. The higher the risk, the greater capital is required by banks leading to increased overall costs in the form of higher interest rates.

    Still no property bubble

    In fact, a bubble is unlikely in the Thai property market as prices have risen naturally in the past three years, according to the Government Housing Bank (GHB), a state-owned lending agency. GHB’s president Khan Prachuabmoh insists that there is nothing unusual in the present situation, despite the substantial recent increases in low-end supply.

    Real demand, not speculative demand, exists for low-rise housing below THB 3 million (USD99,100), which accounts for 70% of the market, according to Housing Business Association (HBA) president Issara Boonyong. The remaining 30% of demand comes from investors, who buy homes to generate rental income. The 23,000 registrations of new condo units in the first nine months of 2010, compares with 29,000 registrations of low-rise residences, adds Boonyong.

    Demand for residential projects is expected to grow by at least 7% in 2011 despite the BOT´s measures to control the property sector, says Thongma Vijitphongpun, chief executive officer of Pruksa Real Estate.

    The new rules are unlikely to affect demand, he adds, as down payments on residential projects are usually at least 10%. This is true for both condominiums and low-rise residences.

    The low-rise residence market is expected to recover after the mass transit system expands to Bangkok’s neighboring provinces including Nonthaburi, Samut Prakan and Pathum Thani, according to deputy-governor Teerachon Manomaipibul of the Bangkok Metropolitan Administration.

    Demand for rental units in city condominiums continues to grow from both local and foreign tenants as returns are higher (6-10% per annum) compared to saving in a bank, since interest rates for saving deposits linger below 2%, according to Asian Property Development’s senior vice-president Poompat Sinacharoen.

    Mortgage lending up!

    Somewhat confirming this, the preliminary figures for personal housing credit in Q3 2010 stood at THB 1.058 trillion (USD35 billion), up by 14.7% y-o-y, according to the BOT. The strong growth may be due to the special mortgage campaign launched by the Siam Commercial Bank, the biggest mortgage lender in Thailand.

    The campaign allows borrowers to pay monthly installments as low as THB 1,000 (USD33) in the first year for each THB 1 million (USD33,000) taken out, tied with a special interest rate of 1% during the period. The campaign was offered until the end of December 2010.

    Outstanding mortgages were 11% percent of GDP in 2009, only a percentage point up from 2008.