The luxury real estate market is beginning to fully feel the effects of the global downturn, with yet more bad news coming from the financial services sector and over-supply becoming a major issue.
Bad Banks
Royal Bank of Scotland HQ
The financial services sector continues to supply bad news. I know I keep harping on about this, but until we get to the truth of the actual losses in the banking sector we are going nowhere. We recently reported on two European banks that needed yet more capital injections from their respective governments. HSH Nordbank in Germany needed €13 billion from German state government Inc, and just a day later, Royal Bank of Scotland needed a further £20 billion in cash plus £325 billion in guarantees. I have highlighted that amount, because, although the British press is focusing on ex-CEO Sir Fred’s pension – this is a truly staggering amount of money and apparently the only way British government Inc thinks it can get away with this is to inflate their way out of trouble. Rather than learn from Japan’s mistakes in the past, the virtual printing presses are on and running – although they are calling it “quantative easing.” I guess that sounds better than “printing money.”
More bad news in Britain today – Barclays bank shares fell yet again as they entered into talks with the government about their debt levels and Lloyds bank shares fell another 9.5% after it was revealed they had put more than £44 billion into the government’s Asset Protection Scheme which gives British government Inc around 70% of the bank. Why they just don’t bite the bullet and nationalize them completely is beyond me. All the major UK banks are now penny shares anyway so investors don’t have much more to lose. The deal Lloyds cut includes £80 million in bonuses for the top men, which is sure to be unpopular in certain quarters.
Speaking of penny shares, The New York Stock Exchange had to change the rules as CitiBank fell below $1 a share. Under “normal” conditions (read, “boom”) shares of companies trading in pennies are delisted from the big board. AIG came back to the US government Inc trough for a fourth serving of bailout money, claiming that they are “too big to let fail, ” and the amount of banks on the Federal Deposit’s “problem bank,” list is still over 250 and will likely rise this quarter. The FDIC is now saying they might face a “resource issue,” if they are forced to place a leading bank into receivership.
Over Supply
Arizona "Parade" homes still unsold.
All this continuing turmoil in the banking sectors is translated into lack of luxury home sales, and the situation in certain parts of the world is becoming dire. Some niche markets such as Chicago’s North Shore, are holding up relatively well, but others are in major difficulties. The Arizona Daily Star reports that “Last year’s Parade home go begging.” The Parade featured seven, million-dollar-plus luxury homes from some of Southern Arizona’s top custom builders in 2008. One year on – only two of the homes have sold, and at least four of the builders are in negotiations with their banks. New York faces a massive overbuilding problem. Many developers are attempting to turn their empty luxury condo developments into rentals but this is putting more pressure on an over-supplied rental market.
The Mercury News reports that another luxury condo development in Santa Cruz, 2030 North Pacific, is sitting mostly empty. Condos that once advertised prices between $525,000 and $760,000 are now listing for as low as $399,000. So far, only 13 of the 70 units have been sold.
Elsewhere in the world – Dubai’s luxury property market has collapsed, and some (myself included) are wondering if a recovery is possible.70,000 new units will be completed this year, on top of an already over-built market. A few developers are attempting to convert part finished luxury development into affordable housing, but there are so many ex-pats bailing out, it looks as though a 5,000 ft sq luxury condo will be the new “affordable housing,” in Dubai for some time. Rather entertainingly, the Dubai developers have stopped saying there is not an issue and have started saying things like, “The UAE real estate market will bounce back within the next eight to 12 months,” (Gulf Daily News) apparently because building costs have fallen 30%.
London’s luxury property prices continue to decline, although they have yet to come into line with drops seen in much of the rest of the country. London, like Manhattan was also in denial and only recently has the loss of jobs in the banking sector begun to make itself felt. In other parts of the country, overbuilding in the luxury apartment sector was rife, and discounts of over 60% have been seen to cash buyers in places like Manchester and Leeds.
Yet more scandals from Spain come to light and even places like Mallorca are seeing huge price reductions. It is hard to calculate exactly how over-built Spain is because of the amount of debt-for-equity swaps the banks are doing. The point has been reached where there is a danger of a complete collapse if one more major developer goes under. 866,000 new homes were built in Spain in 2006 alone, and most of this stock is sitting unsold. Much of this stock was aimed at British buyers using equity release programs on their UK property. The best estimate I have come across is 1.5 million and three years supply, although I have a feeling this is going to take a lot longer than three years to go through. The other issue is illegal building – dozens of court cases are under way, dozens of petty officials are awaiting trial, and I can see years of arguments, making Spain a very risky investment right now – you are just as likely to have your home bulldozed.
FNAIM, the French national real estate federation has finally admitted that French property prices fell in 2008. This was a grudging admission after months of denial and, much like Spain, certain parts of France relied very heavily on British buyers with a strong pound and equity release money behind them to push prices up – that changed overnight when UK prices started falling and the pound fell 20% against the Euro. It is unclear just how much further damage the Bank of England will do to the pound by printing money – the first estimate was £75 billion would be printed. That quickly rose to £150 billion, and some are suggesting that it will take £300 billion to have any effect. We will have to wait and see.
