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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:

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:

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:

State Bank of Vietnam

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.

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.

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.

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:

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:

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.

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.

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.

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.

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.

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%.

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).

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.

India's property prices- now falling, in real terms

Recently, Indian property price increases have slowed sharply. Of the 15 major Indian cities covered by the NHB Residex, nominal house prices rose in 9 cities and fell in 6 cities during the year to end-June 2012. However, when adjusted for inflation, house prices fell in more cities (11 cities) than rose (4 cities).

During the year to end-Q2 2012, house prices in New Delhi rose by 17.01% - but this was the lowest annual price increase since Q4 2010, according to the National Housing Bank (NHB). When adjusted for inflation, house prices in Delhi increased by only 6.23%.

In Mumbai, house prices rose by 8.84% (-1.18% inflation-adjusted) y-o-y to Q2 2012.

Pune registered India’s highest annual house price increase of 33.33% (21.06% inflation-adjusted) during the year to end-June 2012. Chennai and Jaipur also recorded strong house price increases of 24.6% (13.12% inflation-adjusted) and 21.88% (10.65% inflation-adjusted), respectively.

In contrast, Kochi, in Kerala, had seen the biggest annual house price fall of 31.78% (-38.06% inflation-adjusted). It was followed by Bhopal (-7.59%), Hyderabad (-6.59%), Patna (-4.11%), Surat (-2.68%), and Faridabad (-1.36%). When adjusted for inflation, all of these cities registered double-digit house price falls.

Based on the NHB Residex, Chennai has the most expensive housing in India while Kochi had the cheapest (figures as of June 2012).

Property sales in Mumbai had fallen by 70% by late-2011, from their peak levels in 2007, according to Firstpost. In central Mumbai, unsold units accounted for more than 45% of total launched housing units by late-2011. Similar drops in demand can be seen in other Indian cities.

DFL, India’s largest real estate developer, is projected to cut new project launches. Another property company, Unitech, said that it will halt new projects over the next few months.

The Indian economy has been slowing sharply. During the first quarter (April-June) of the fiscal year 2012-13, real GDP expanded by 5.5% from the same period last year, the decade’s worst Q1 performance. The economy is projected to grow just 4.9% in 2012, in contrast to an average growth rate of 8.3% from 2003 to 2010, according to the IMF.

Given this unusually uncertain economic outlook, India’s property market is expected to continue slowing in the coming months.

Indian house prices rose rapidly from 2002 to 2007. Strong economic growth and urbanization supported house prices, while in city centres a housing bubble was encouraged by inadequate infrastructure, lack of planning and antiquated land use laws.

The price increases were accompanied by low interest rates. Home loan rates fell to a historically low rate of 7.5% in early 2004 until 2005.

From 2005 to 2007, the economy grew at 8.9% per annum, making it one of the world’s fastest growing, after 7.6% per annum growth from 2003 to 2004.

The liberalization of major sectors of the Indian economy during the early 1990s brought a rapid influx of foreign direct investment into the country. A boom in the ICT and BPO industry generated rapid employment growth, increasing the demand for housing and causing a ripple effect in the construction and telecommunications sectors.

Yet though house price increases were supported by these strong fundamentals, speculation also played a role. From 2000 to 2006, residential property became significantly less affordable. By 2002, a dwelling in Mumbai cost around 85 times the average annual average income. By 2006, 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.

If there is a slowdown, it won’t be the first. During the world economic downturn in 2008, India’s developers cut prices and introduced lucrative deals such as subsidized furniture and internet connections.

Demand for luxury housing fell 50%, while affordable housing demand fell 10%, according to a May 2009 survey by the Associated Chambers of Commerce and Industry of India (Assocham). 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.

India prime lending rate graph houses properties

In September 2011, the RBI raised its policy lending rate by 25 basis points to 8.25%, the 12th interest rate hike since March 2010, when the RBI moved rates up from 4.75% to 5% to contain inflation.

The RBI’s prime lending rates are also heading up, having been dropped to 7.50% (low) and 8% (high) in July 2010, from 11% and 12% respectively. As of March 2011, prime lending rates are 8.25% (low) and 9.50% (high).

According to Finance Secretary RS Gujral, the government is now concentrating on fighting inflation and slowing growth. The RBI may hike rate again, as inflation remains high at 9.87%.

The increase in interest rates is already being felt in the construction sector, which grew by only 1.2% in Q2 2011, an 8.2% drop from the previous quarter. More construction gloom is expected to follow.

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

As a result, the ratio of housing loans to GDP is very low; in 2010, housing loans were only 4.04% of India’s GDP. The leading mortgage lender is the Housing Development Finance Corporation (HDFC) followed by the State Bank of India (SBI).

In 2010, total housing loans rose by 8.66% to INR 3009.29 billion (US$ 61.21 billion) from INR 2769.57 billion (US$ 56.33 billion) a year earlier. Interest rates at major banks and financial institutions range from 10.75% to 12% for floating rate mortgages, and 13% to 14% for fixed-rate mortgages. The loan to value (LTV) of most Indian home loans is 85%.

Rental yields remain low in India, according to Global Property Guide research. Smaller apartments have higher yields.

Residential rents from Q1 to Q2 2011, according to Colliers:

India’s rental market is hindered by problematic socialist laws protecting tenants. The laws are generally poorly conceived and ineffective, making implementation difficult. Although these 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.
Outlook is unusually uncertain, says IMF India house prices

From 2003 to 2010, the Indian economy grew by an average of 8.3% per year, according to the International Monetary Fund (IMF). In 2011, the country’s real GDP growth slowed to 7.2%.

The Indian economy continues to slow in 2012, owing to low external demand, slow new project approvals, corruption scandals, sluggish reforms and policy uncertainties.

During the first quarter (April-June) of the fiscal year 2012-13, real GDP expanded by 5.5% y-o-y, the decade’s worst Q1 performance, due to flatlining manufacturing, mining and quarrying sectors.

The IMF revised its GDP growth forecast for the country this year to 4.9% from 6.1%. Likewise, the World Bank has also cut its India growth forecast to 6% in 2012 from an earlier forecast of 6.9%. On the other hand, the Reserve Bank of India (RBI), the country’s central bank, expects the economy to grow by 6.5% this fiscal year.

Exports fell 9.7% y-o-y in August 2012, and imports fell 5.08% to INR2 trillion (US$38 billion), resulting in a wider trade deficit of INR831.3 billion (US$15.7 billion). The country’s current account deficit stood at 3.9% of GDP during the quarter ending June 2012.

In 2011, the country’s overall fiscal deficit was 9% of GDP. The gap may widen to 9.5% of GDP in 2012, the third highest in the world, according to the IMF. The fiscal deficit is projected to fall slightly to 9.1% of GDP in 2013.

Inflation is another worrying issue. Consumer price increases were projected to remain at about 7.7% in September 2012, according to Bloomberg. From 2006 to 2011, average inflation was 8.7%, in sharp contrast with an average inflation rate of just 3.9% per year from 2000 to 2005.

“The outlook for India is unusually uncertain, monetary policy should stay on hold until a sustained decrease in inflation materializes,” said the IMF.

The government has recently broken the political gridlock, opening the economy to more investment from abroad, in the most extensive policy changes since Prime Minister Manmohan Singh was reelected in 2009.

The economic policy revamp includes the following:

In addition, subsidized diesel prices have been raised by almost 14%, the first increase in 14 months, to tackle the country’s budget deficit. This measure is expected to help narrow the deficit to 5.1% of GDP this fiscal year ending in March 2013 from 5.8% of GDP a year earlier.

Despite violent crime, theft, and a weak economy...

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.

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:

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.

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:

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%.

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.

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%.

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.

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.

Australian house prices continue to fall

Australia’s housing market continues to weaken, despite its strong and resilient economy. The house price index for 8 capital cities dropped 2.1% (-3.2% inflation-adjusted) during the year to end-Q2 2012, according to the Australian Bureau of Statistics (Austats). House prices in Australia have been falling since Q2 2011.

During the year to end-Q2 2012, six of the eight capital cities have seen their house prices falling. Melbourne recorded the biggest house price fall of 4.8%, followed by Hobart (-3.2%), Brisbane (-2.7%), Canberra (-2.6%), Adelaide (-1.3%), and Sydney (-0.9%). In contrast, house prices rose in Darwin (10.3%) and Perth (1.1%) over the same period.

On a quarterly basis, the house price index for 8 capital cities rose by a meager 0.5% (-0.01% inflation-adjusted) in Q2 2012.

This was supported by the figures released by the Real Estate Institute of Australia (REIA).

Sydney has the most expensive housing in Australia, with the median house price at AU$642,425 (US$657,702), about 23.6% above the weighted average.

Residential construction is also slowing. The total dwelling units approved dropped 15.4% to 12,046 in August 2012 from a year earlier, according to Austats. Likewise, total dwelling units commenced dropped 10.4% y-o-y in Q2 2012.

Inflation fears have receded, with underlying inflation at 2.4% in September 2012, consistent with the central bank‘s 2%-to-3% target.

Despite external threats, the economy grew by 3.7% in the second quarter of 2012 from a year earlier, according to the Australian Bureau of Statistics. The Australian economy is expected to expand by around 3.25% in 2012, thanks to still strong resource investments, according to the IMF. The Reserve Bank of Australia (RBA), the country’s central bank, ended a three-meeting pause and cut overnight cash rate by 25 basis points to 3.25% in October 2, 2012, with the eurozone debt crisis weighing on growth.

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

Australia annual change established homes price index graph

The strength of Australia’s housing market 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:

First Home Owner Boost Scheme

First Home Owner Grant

The Housing Industry Association (HIA) claims there was actually a shortage of 22,000 dwellings in 2009/10 and of 16,800 dwellings in 2010/11.

“Australia continues to run large annual deficits between the underlying demand for dwellings and the completion of dwellings,” says HIA’s Senior Economist Andrew Harvey. “So in the longer term Australia’s housing market is underpinned by the immutable forces of insufficient supply and robust underlying demand.”

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

Nevertheless housing starts rose by a surprising 23.6% in 2010 (2009 saw a 6.8% decline in housing starts), prompted by the fact that interest rates only very slowly increased from the all-time low of 3% prevailing in October 2009. By March 2010, housing approvals were running at an amazing 17,439 per month, but fell back to 13,904 in April, when the RBA’s key interest rate was increased to 4.25%.

Australia has the least affordable housing market among the six developed countries covered by the 2010 7th Annual Demographia International Housing Affordability Survey.

The survey uses the Median Multiple to assess housing affordability in 325 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.

Australia’s Median Multiple is 6.1, compared to the international norm of three times household income. Of the 32 Australian markets surveyed, 27 were rated as “severely unaffordable” (Median Multiple of 5.1 and above), while 5 markets were regarded as “seriously unaffordable” (Median Multiple between 4.1 and 5.0).

Sydney’s Median Multiple in 2010 climbed to 9.6, from 8.3 last year. The Sunshine Coast, located in Queensland, is the most severely unaffordable market outside the major markets, with a Median Multiple of 8.4.

Another measure of stress is affordability. In the year to December 2010 housing affordability haddeclined by 10%, according to the Commonwealth Bank of Australia’s Home Buyer Affordability Report. Sydney had the largest housing affordability decline among capital cities at 5.5%, while Perth (0.1%) and Brisbane’s (0.5%) affordability improved.

Australia’s benchmark interest rate, the highest among developed countries, is likely to remain unchanged in the upcoming months, as inflation is expected to stay within RBA’s target of 2%-to-3%.

“The RBA seems pretty comfortable with where policy is as they’re ahead of the curve, having gained a bit of time from slower fourth-quarter inflation,” says Michael Turner, economist at RBC Capital Markets Ltd. However, Turner expects a rate rise in 2011’s second quarter, as commodity prices pick up.

The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 80% of GDP in 2008.

The mortgage market is highly concentrated.

Australia’s “big four” banks—National Australia Bank, Commonwealth Bank of Australia, Westpac Banking Corporation, and ANZ—had an almost 100% share of the country’s new mortgage market in July 2009, according to the Australian Prudential Regulation Authority (APRA).

Australia gross rental yields houses graph

Rental yields in Australia are moderate to poor. Gross rental yields for houses range from 3.52% in Melbourne, to 5.13% in Hobart, based on December 2010 figures from APM. Gross rentals yields for apartment units are also moderate, ranging from 4.17% in Melbourne to 5.48% in Canberra.

In Sydney, gross rental yields on 120 sq. m. and 170 sq. m. apartments were around 4.01% and 3.87%, respectively, according to Global Property Guide Research in August 2, 2010. Yields on smaller units of 50 sq. m. were higher, at 5.87%.

Average rents in the eight capital cities rose 4.8% in the year to December 2010, following a 2.6% rise the previous year. Nationally, house rentals rose 3% during 2010, while ‘unit’ rentals rose 3.2% in 2010.

“The capital city markets of Sydney, Adelaide and Darwin recorded flat growth in house rentals in the December quarter, with Melbourne and Perth growing slightly by just over +1%,” says Dr Andrew Wilson, APM’s Senior Economist. On the other hand, Canberra, Brisbane and Hobart showed strong yields growth.

Darwin rents are the highest, with median weekly asking rents at AU$550 (US$559). Rents are also high in Sydney, with a median of AU$480 (US$488), and Canberra, with a median of AU$460 (US$467). Hobart has the lowest median weekly asking rent, at AU$320 (US$325).

Wilson predicted that rental growth would resume by the middle of 2011, given strong population increases, falling dwelling construction levels, and income rises due to economic growth acceleration in 2011.

It achieved uninterrupted economic growth from 1992 to 2007, with an average GDP growth rate of 3.7% per year. While most developed countries fell into recession during the global financial meltdown, Australia has avoided it, with economy expanding 2.5% in 2008, 1.4% in 2009, 2.5% in 2010, and 2% in 2011.

Australia’s continued economic growth was mainly driven by the mining industry and robust demand for iron ore, coal and natural gas from Asia, especially China.

In the second quarter of 2012, the economy grew by 3.7% from a year earlier, according to the Australian Bureau of Statistics.

Unemployment was 5.1% in August 2012. From 2004 to 2011, the country’s jobless rate has been stable in a range of 4.3% to 5.6%, according to the IMF.

Consumer prices rose 2.4% in September 2012 from a year earlier, slightly up from 2.2% recorded in the previous month, but still consistent with the central bank‘s 2%-to-3% target.

Japanese house prices continue to fall

House prices in Japan have continued to fall, as the country’s recovery fades due to weakening exports, the appreciating yen, and deflation.

In Tokyo Metropolitan Area:

Land Institute of Japan

In Osaka Metropolitan Area:

Land prices have been more resilient. During the year to August 2012, the average price of land in Tokyo was unchanged at JPY187,000 (US$2,407) per sq. m., while in Osaka Metropolitan Area the average land price increased by 1.7% to JPY117,000 (US$1,506) per sq. m.

During the first seven months of 2012, the total number of new dwellings started in Japan increased y-o-y by 2.5% to 490,781, mainly due to reconstruction after the Great Tohoku Earthquake, according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT).

In Tokyo the number condos sold increased by 10.6% to 21,039, while detached houses sold increased by 9.5% during the first eight months of 2012, compared to the same period last year, according to LIJ.

Total outstanding real estate loans increased 1.5% y-o-y to JPY429 trillion (US$5.52 trillion) in Q2 2012, according to the Bank of Japan (BOJ).

Japan’s housing market is expected to remain weak and house prices to continue to fall in the coming months, as the economy remains fragile.

In the second quarter of 2012, the Japanese economy expanded real GDP grew 0.7%, only half of the government’s preliminary estimate of 1.4% and far lower than the 5.3% annual GDP growth recorded in Q1 2012. S&P expects the Japanese economy to grow by 2% in 2012.

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’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.

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%.

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 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.

Although land sales declined 2.16% in 2010, the sales slowdown is tailing off. Sales in Osaka were up by 0.24% during the year to September 2011. However, land sales registrations in Tokyo and in other cities declined 0.99% and 2.7%, respectively.

Other signs of recovery are housing starts, which rose to 890,000 units (seasonally adjusted) in Q3 2011. Housing investment is increasing due to earthquake rebuilding, according to the Bank of Japan (BOJ). Bankruptcies in the real estate sector declined 6%, to 312 firms during the year to November 2011.

So the picture is mixed but there are some positive signs, especially the strong financial sector.

Japan’s trade deficit continues to grow. From January to November 2011, Japan’s trade deficit was above JPY 2 trillion (US$ 26 billion), while over the same period exports fell by 2.3%.

The problem is not going to go away. The yen appreciated to US$1=76 yen in October 2011, well above its mid-1990s levels. However, unemployment remains low, at 4.5% in November 2011.

In sum, the signals in Japan remain mixed. The Japanese economy is expected to rebound as the plans for reconstruction progress. The IMF predicts that Japan’s economy will grow in 2012 by 2.3% - which will be positive for the housing market. But nothing very exciting here!

The Japanese economy contracted by 0.75% in 2011 due to the impact of the Great Tohoku Earthquake (magnitude 9.0) last March 11, 2011, and the tsunami which devastated much of northern Japan and triggered the explosion of the Fukushima Daiichi power plant.

Despite post-quake reconstruction, Japan’s recovery continues to stall. The China slowdown is a real problem, as China is Japan’s largest export market. Then there’s the anti-Japanese feeling in China sparked by the dispute over Diaoyu/Senkaku Islands.

In the second quarter of 2012, the Japanese economy expanded by just 0.2% q-o-q, after growth of 1.3% the previous quarter. On an annualized basis, real GDP grew by 0.7%.

Meanwhile, deflation in Japan has continued to worsen. Core consumer prices, which exclude volatile fresh food prices, fell by 0.3% in August 2012 from a year earlier to mark the fourth consecutive month of price declines. This is in sharp contrast with the BOJ’s 1% inflation target.

Japan is now struggling to end the continuous decline in prices, as the country is currently in a ‘deflation trap’. "Japan´s economy faces a critical challenge of overcoming deflation and returning to a sustainable growth path with price stability", the BOJ said.

Argentina’s housing market hit by unorthodox economics

This 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.

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 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.

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.

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%.

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.

Mixed signals for Thailand's housing market!

The Thai price index for single detached houses dropped by 1.15% (-3.59% inflation-adjusted) during the year to end-Q2 2012, according to the Bank of Thailand (BOT), the country’s central bank.

On a quarterly basis, it fell 1.81% (-3.03% inflation-adjusted) in Q2, the second consecutive quarterly decline.

However during the year to end-June 2012:

In the second quarter of 2012, total outstanding property credit rose by 11.7% to THB1.7 trillion (US$55 billion) compared to the same period last year, according to the Department of Land, Ministry of Interior.

The country’s gross domestic product (GDP) growth was up a stronger-than-expected 4.2% from the same period last year, with recovery from last year’s devastating floods. Despite external uncertainty, the domestic economy is expected to grow by a robust 5.7%, according to the BOT.

In the third quarter of 2010, there was a sharp drop in housing transfers in Greater Bangkok, because of the expiry of property tax incentives in June, according to the Real Estate Information Centre (REIC). Transfers fell 42% from the previous quarter, with a large number of transfers rushed through before the tax incentives ended.

In the same quarter, developers launched more than 23,000 condominium units onto the market to release pent-up supplies, according to the Colliers International Thailand. The launches were mainly in the low to medium end market, with reduced unit sizes, compensating to some degree for increasing land prices throughout the city.

The take-up, however, has been low, with buyers are increasingly likely to shop around before making a decision, notes Colliers. In Bangkok, take-up rate in Q3 plunged by to 51% from 77% in Q2, and 67% in Q1.

Nevetherless new condominium units near mass-transit routes will see price spikes of at least 5% in 2011, accprding to the real estate development firm Supalai Plc, due to higher construction costs and land prices. Customers will have to accept price increases as land for new condominiums in areas close to mass transit is very scarce. On the other hand, stable prices are expected for low-rise units.

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.

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.

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.

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.

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.

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.

After GDP growth of 7.8% in 2010 and a contraction of 2.3% in 2009, GDP expanded by a meager 0.065% during 2011, mainly due to the floods that hit the country in October.

In the second quarter of 2012, the country’s gross domestic product rose 4.2% from the same period last year. However due to the eurozone crisis, exports fell 4.2% during the year to June, the fourth decline in just six months.

Despite external uncertainty, the domestic economy is expected to grow by a robust 5.7%, according to the Bank of Thailand (BOT), the country’s central bank.

The Thai tourism industry, which makes up about 6.5% of Gross Domestic Product (GDP), has already recovered. During the first eight months of 2012, the total number of international arrivals in the country increased 8.7% to 14.34 million, fuelled by arrivals from the Middle East, Oceania, South Asia and Africa, according to the Department of Tourism (DOT).

The headline inflation is projected at 2.9% at between to 3.4% in 2012, according to National Economic and Social Development Board (NESDB). The BOT kept its policy interest rate unchanged at 3% at its September 5 meeting, after cutting the rate twice last November 2011 and January 2012 to help business after the floods.



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