The share of investor purchases of U.S. homes have climbed to an all-time high, a sign that rising home prices have done little to dampen demand for flipping homes or turning them into single-family rentals.
Big private-equity firms, real-estate speculators and others that buy properties comprised more than 11% of U.S. home purchasers in 2018, according to data released on Thursday by CoreLogic Inc.
The investor purchases are the highest on record and nearly twice the levels before the 2008 housing crash. The investor interest poses a challenge for millennials and other first-time buyers who are increasingly looking to buy starter homes and are forced to compete with deep-pocketed cash buyers.
Big commercial property owners like Blackstone Group LP and Starwood Capital Group began buying thousands of homes out of foreclosure during the housing bust. Many economists credit investors with helping to stabilize the housing market in 2011 and 2012 by buying with cash when prices were low and mortgage credit froze.
But analysts expected those purchases to slow, as the market rebounded and properties could no longer be had for fire-sale prices.
Instead, demand for properties has intensified. While these purchases dipped slightly when the market started to recover in 2015 and 2016, they have rebounded to surpass the previous peak of six years ago.
Strong rental demand, technology that facilitates buying homes online and low interest rates that make other investments less appealing have fueled investor appetite.
Investors are an especially powerful force at the bottom of the market, where they often pay all cash. Investors purchased one in five homes in the bottom third price range in 2018, according to the CoreLogic analysis, up 5 percentage points from the 20-year average of less than 15%.
“These are the homes that first-time home buyers would logically be buying,” said Ralph McLaughlin, deputy chief economist at CoreLogic.
Shane Parker, a real-estate agent in metropolitan Detroit, said first-time buyers he works with are struggling to win bidding wars against out-of-state buyers. The locals he works with are becoming more aggressive, putting in escalation clauses and agreeing to pay the difference if properties don’t appraise.
One of his clients, Michael Burnett, a tech writer in Detroit, and his wife are looking for their first home so they can have a treehouse for their young girls. They have visited 25 properties and bid on half a dozen but keep losing out to cash buyers.
The couple recently fell in love with a property they thought had great potential. “It’s ugly on the outside, ugly on the inside, but it can be made beautiful,” said Mr. Burnett, 43 years old.
The house ended up getting a dozen offers, more than half of which were cash, and selling for $40,000 over the asking price of $150,000. “We write letters. You think you’ve composed this great heartfelt, ‘I have a family, see my family,’” he said. “Oh, please…Cash is king.”
Real-estate entrepreneur Gregor Watson’s business has helped boost investor participation. Following the housing bust, he and partners bought more than 6,000 homes across the country and turned them into single-family rentals.
Then he founded Roofstock, a company that enables investors to purchase properties online. The internet has made it easier for smaller investors and foreign buyers to purchase properties they may never have visited. Demand is also shifting toward former industrial cities in the Northeast and Midwest where prices remain low.
Mr. Watson said that many people in San Francisco and New York are priced out of buying homes where they live but are able to purchase an investment property in less expensive cities.
Michael Pickens, 31, who works in tech sales in the Bay Area, and his wife kept losing out in bidding wars to all-cash offers. “It was all cash, no contingency, seven-day close,” he said.
He and his wife decided instead to rent a small apartment in Santa Clara County and buy investment homes on Roofstock in less expensive locales.
They now own homes in Georgia and Tennessee despite never having visited either state.
So-called iBuyers, such as Opendoor, Zillow Offers and RedfinNow, which snap up homes in cash for a fee to help sellers avoid the hassle of putting their homes on the market, comprised less than 2% of investor purchases last year, according to CoreLogic.
The biggest markets for investor purchases in 2018 were Detroit, followed by Philadelphia and Memphis, Tenn., where home prices are still low enough for investors to profit by renting them out. Investors bought nearly half the starter homes in Philadelphia last year and about 40% of lower-priced homes in Detroit, according to CoreLogic.
When Tawan Davis launched a business renting out single-family homes three years ago, he focused on Philadelphia because of the city’s slow foreclosure process and history of disinvestment, he said.
Mr. Davis typically purchases homes for about $75,000 to $90,000, puts an additional $50,000 to $80,000 into renovation and rents them out for around $1,300 a month.
He said he is often welcomed in these neighborhoods because his modestly priced rental properties help act as a bulwark against gentrification. Many of his renters are single and work as nurses or adjunct professors, he said.
“They’d much rather see us than a lawyer from New York,” he said.
A southern Tasmanian community has raised concerns about the State Government’s plans to rapidly rezone land for social and affordable housing.
The Tasmanian Parliament passed legislation last year to “fast track” the rezoning of land for new affordable housing.
A proposal for a 37-hectare site at Huntingfield, near Kingston, would see 450 dwellings, including a mix of social, affordable and private housing.
But local residents say they only had two weeks to respond during the community consultation process, and the State Government has not been transparent about the proposal’s details.
Huntingfield resident Matthew Jones said he received a letter in the mail from the State Government two weeks ago.
“Chatting around the street we quickly realised the houses that were receiving these letters were the ones that bordered the proposed land development, which wasn’t ideal because a lot of people weren’t receiving these letters,” he said.
“Between the two streets about 15 houses received it.”
He said two weeks to respond was not enough and there should have been a full community consultation.
“Everyone’s supportive of housing, there’s obviously a housing crisis, but there’s a proper process,” Mr Jones said.
“A lot of our concerns are the infrastructure and access to this development.
“The schools are at capacity, the medical services are at capacity and it’s quite a rushed process.”
Consultation process ‘fallen over’: Kingborough Mayor
Kingborough Mayor Dean Winter said while he was supportive of more housing in greater Hobart, the local community was concerned about the consultation process.
“This is actually putting the whole project in jeopardy, it’s lost the community support already before the consultation’s already finished because people don’t have the information they need to make their own assessment,” he said.
“They’re concerned about infrastructure, they’re concerned about overcrowding and environmental impact and until the government gives them the information they need … they are going to be concerned.”
Cr. Winter said the consultation process did not appear “genuine”.
“Locals have only been given 14 days to respond and very few of them were made aware directly by the Government,” he said.
“People haven’t had enough time, they haven’t got all the information they need and therefore the consultation process has really fallen over.”
TasCoss chief executive officer Kym Goodes said building new affordable and social housing is a high priority for Tasmania.
“What we’ve heard over many months now is the long delays that can happen when trying to get housing stock built,” he said.
“My understanding is there will be 15 per cent of it dedicated to social housing and the balance of the development will be more affordable housing.
“So we can address those 3,000 people on the waiting list looking for somewhere to call home.”
Labor MP David O’Byrne said getting affordable housing built was crucially important.
“But we’ve seen with the Huntingfield development that you can’t trust this Government with anything,” he said.
“They have driven the Tasmanian community into this crisis … and now they’ve failed to consult and work with the local community on what could be a really important development.”
In a statement, Housing Minister Roger Jaensch said the fast track rezoning legislation does not apply to the development application process, which will go through the normal council process.
“The accelerated rezoning process shaves an estimated six months off the typical rezoning process, without compromising planning and community considerations,” he said.
“The act requires that adjacent land owners are notified, which is consistent with the Land Use Planning and Approvals Act 1993.
Disabled people and others receiving Support for Mortgage Interest (SMI) will now be able to transfer this support to their new property when moving home, rather than having to repay the loan and reapply, it has been announced.
SMI is the help offered by the Government to owner occupiers in times of need. It is paid as a loan and contributes towards the interest on people’s mortgages if they are in receipt of certain benefits, to protect them against repossession and keep them in their own homes.
Previously, those receiving an SMI loan were required to repay the balance once a property is sold or transferred, provided there is enough equity after the mortgage has been paid off. They would then be asked to reapply for the loan on their new property.
However, the Minister for Family Support, Housing and Child Maintenance, Will Quince, confirmed that anyone with an SMI loan secured against their property will now be able to request their loan balance to be transferred to their new home when they move.
The policy shift will ensure those looking to move home to secure better employment will not face barriers to progressing in work. This follows the Work and Pensions Secretary Amber Rudd’s recent call for a new Government focus on helping people to move to higher paid, higher skilled roles.
Quince pointed out that the change will have a particular benefit for those who move into a new property due to a disability or health condition, as they will continue to receive uninterrupted support towards their mortgage payments.
‘This measure helps some of the most vulnerable people to stay in their homes and live independently. And we are now making it easier for people to keep this support, even when moving house,’ he said.
According to David Abbey, MySafeHome Limited Managing Director, allowing vulnerable people with disabilities to port their SMI loan reaffirms the Government’s full support for HOLD (Home Ownership for people with Long-term Disabilities).
‘This change should give many more individuals the opportunity to choose where and how they live their lives. The ability to transfer an SMI loan balance will also apply to those who have previously received this form of support but are no longer claiming benefits,’ he said.
And to ensure vulnerable customers or those with additional needs are fully supported, the Department for Work and Pensions (DWP) has issued two videos explaining Support for Mortgage Interest and setting out how to apply. These videos form part of a new range of fully accessible products offering helpful information in alternative formats.
An expert in the real estate, Mr. Chibundu Marcellus has said that the movement of the economy can make positive impart in the built environment if government can straight out the laws regulating the industry.
Marcellus who is an investor in one of the biggest real estate firm in India said that by 2020 investable real estate will have grown by 55 per cent compared to what it was ack 2012. He said that a lot of things will have to act together to bring about that. He said that the industry, no doubt faces a number of fundamental shifts that will shape its future despite the fact that confidence is gradually creeping into the sector.
According to him, global megatrends will change the real estate landscape considerably over the next six years and beyond. “While many of the trends are already evident, there is a natural tendency to underestimate how much the real estate world will have changed by 2020. The changing landscape will have major implications for real estate investment and development. It will increase the size of the asset pool, yet change the nature of investment opportunities. Real estate organizations will need to adapt early to survive and prosper,”he stated.
He noted that Real Estate in 2020 will capture important trends in the industry and the impact they will have for real estate managers and the investment community. “Key areas include the urbanization that’s taking place as people cluster around the great cities of the world, the new real estate subsectors that are emerging to satisfy the needs caused by shifting demographics, and also the technological implications that need to be considered as companies think and go globally. Every investor and asset manager can benefit from the profound implications shared herein, “he emphasized.
Specifically, experts, who looked into the performance of the sector, however, noted that the indices that will drive the market remained government actions or inactions. The implementation of the budget and the amount of money in circulation as well as the perceived government willingness to focus on economic growth. “A lot of investors will be guided by their perception of the dedication of the government towards its own policies and not just lip service,” Chudi Ubosi, President, African region of International Real Estate Federation, (FIABCI ) said.
According to him, stakeholders could continue to look out for government policies that encourage private enterprise. “The world is moving towards economies where the private sectors take the lead in driving the economy whilst the governments focus on providing the enabling environment for economic growth. Until these are visible in Nigeria we may not be forward bound”, he noted. Ubosi, a renowned estate surveyor and valuer was also optimistic that the real estate sector will enjoy slow recovery this year. He hinged his optimism on the few policies enunciated by the Federal government in its budget. Ubosi however, noted that this could be short lived based on the perception of players in the economy and their confidence level as well as the political risks involved.
Collaborating his views, the Chairman, Faculty of Housing, Nigerian Institution of Estate Surveyors and Valuers (NIESV), Chief Chika Okafor noted that the sector will be highly dependent on government’s policy, but expressed doubt that the budget for housing would be able to have any significant impact on the built environment.
The home-buying season is on in the US, despite the current dispute with trade partner China. However, the market looks different than it used to just a year or two ago. Geek Wire reported that buyers and sellers will be looking at a drastically changed–for better or worse–market, with real estate technology doing its expected disruption of traditional and slow processes.
With technology, there are quite a few changes expected. Homeowners can now have direct access to major realtors without the help of a middleman.
New technologies and innovative apps have also provided a better version of buying and selling a home or renting out a place. Major players, who were once traditional marketers, have also begun to expand their reach and capabilities, thanks to the disruption of tech.
The prevailing feeling with these companies, as well as well-known Wall Street investors, is that everything will change to adjust to the tech of the times.
The real estate landscape will inevitably undergo a chance. Redfin CEO Glenn Kelman said that 20 percent of the US economy will be up for grabs for companies willing to take a bigger risk than usual.
The notion that real estate is changing is shared by many others, including Stephens stock analyst John Campbell. Campbell recently spent some time studying the industry deeper.
He then shared his opinion that consumers are ready for change, but it’s not clear whether it’s because they want results or they want to see change.
Market Watch reported that today, that effort resulted in industry players like Zillow and Redfin, with customers at the center of that strategy. There are also new participants to this strategy making themselves known, eager to present a solution to the industry where Zillow and Redfin belong in.
Zillow and Redfin are in the market to create waves, and Seattle looks like the place where the waves will crash. The national transformation converges on the state as Redfin and Zillow are located here. Redfin has been in operation for 24 months–two years–while Zillow has re-invented itself to become a company that’s involved in direct buying and selling these homes per month.
Others have been making their presence felt slowly but surely, and real estate will be all the better for it. Outside of Zillow and Redfin, Compass–a Softbank-backed startup brokerage–has been creating quite the buzz. Instant home offers, quick resolution of processes, and the elimination of the middle man have become the new norm thanks to these real estate startups.
Walk through the streets of cities, towns, and villages in Nigeria and you will see the signs everywhere, clearly erected in front of gates or painted explicitly on fences in colours that immediately grab your attention — This Land is Not For Sale. In Nigeria, having a land ownership deed is no guarantee that the land is really yours. Why? Because the government’s land ownership records aren’t trustworthy enough. Land disputes happen all the time. Sometimes, leading to violence and death.
According to data from Nigeria Watch, there were over 2,100 deaths from land disputes alone in 2018. Already, close to 100 have been recorded in 2019.
Apart from the violence and death that land disputes and a lack of a credible, trustworthy land ownership records cause, there’s also the restriction of access to loans and capital. According to the Centre for Affordable Housing Finance Africa, there is an estimated $100 billion worth of trapped capital in Nigeria, land that cannot reach access to financing in Nigeria.
How do we solve this problem? How do we unlock the capital trapped by poor and untrustworthy land registry records? One that is quickly gaining traction is the use of blockchain technology.
A lot has been said about blockchain. It’s often associated with cryptocurrency, but that’s not all there is to it. Blockchain technology can be applied in so many practical and immediately relatable ways — digital identification, supply chain monitoring, digital recordkeeping, copyright protection, and real estate.
Blockchain technology is quickly gathering buzz in Nigeria. By July 2018, Nigeria was already the 7th highest trader of bitcoin, transacting over 4% of the total volume. Also, big companies and brands like Dangote, Interswitch, Nigerian Customs Authority, Sterling Bank are already creating blockchain technology solutions. So, the concept of blockchain is not new to Nigerians.
However, using it to solve land registry problems is a novel idea and one company spearheading this innovation in Nigeria is Seso Global, a blockchain powered mortgage registry and real estate platform that connects stakeholders in a property market and enables them to make trusted transactions.
“Seso aims to provide trust and security in the real estate market to allow easy property sales and access to mortgages.
Seso allows users to query property information, contract land service providers such as lawyers and estate surveyors, apply for a mortgage and buy a property. Through our network of trusted property developers, we ensure a simple buying experience,” Phillip Jarman, co-founder and Chief Operating Officer, says.
Seso Global’s primary aim in Nigeria is to create a real estate boom that will provide opportunity and capital to the ending market in collaboration with key stakeholders such as the Nigeria Mortgage Refinance Company, a consortium of 25 banks and the Nigerian Ministry of Finance.
“We are confident we can succeed in Nigeria through our industry partners who are keen to see the growth of the mortgage industry. We have assembled a team from Nigeria and across the world with key experience to drive the solution forward. We seek to work with the people of Nigeria to build the mortgage registry and provide trust to the real estate market,” Dimeji Belo, Senior Vice President of Business Development, says.
Newly empowered Democratic leaders in Albany announced a landmark agreement Tuesday to strengthen New York’s rent laws and tenant protections, seeking to address concern about housing costs that is helping drive the debate over inequality across the nation.
The changes would abolish rules that let building owners deregulate apartments, close a series of loopholes that permit them to raise rents and allow some tenant protections to expand statewide.
The deal was a significant blow to the real estate industry, which contended that the measures would lead to the deterioration of the condition of New York City’s housing. The industry had long been one of the most powerful lobbies in Albany, but it suffered a loss of influence after its Republican allies surrendered control of the state Senate in the November elections.
“These reforms give New Yorkers the strongest tenant protections in history,” the Senate majority leader, Andrea Stewart-Cousins, and the Assembly speaker, Carl E. Heastie, said in a joint statement. “For too long, power has been tilted in favor of landlords and these measures finally restore equity and extend protections to tenants across the state.”
Both chambers are expected to vote on the legislative package this week.
The current rent regulations expire Saturday. The new and strengthened rules would mark a turning point for the 2.4 million people who live in nearly 1 million rent-regulated apartments in New York City after a decades-long erosion of protections and the loss of tens of thousands of regulated apartments.
The legislation in Albany is far-reaching: While rent regulations are currently restricted largely to New York City and a few other localities, the new package would allow cities and towns statewide to fashion their own regulations, which are meant to keep apartments affordable by limiting rent increases.
It would also make the changes permanent — a major victory for tenant activists who have had to lobby Albany every few years when the old laws expired.
Gov. Andrew M. Cuomo, a Democrat, said he would sign whatever package of rent bills the Legislature passed.
The imminent changes come as New York and other major cities are grappling with a shortage of affordable housing, prompting even Democratic presidential hopefuls to increasingly court renters as a new voting bloc.
New York has seen record numbers in homelessness statewide and skyrocketing rents that have acutely burdened low-income and older residents. “The Senate and the Assembly are taking a massive step in the right direction,” said Cea Weaver, the campaign coordinator of Housing Justice for All, a statewide coalition of tenants.
“We have a long way to go to reach a point where every tenant in New York is protected, but this is a big step forward to correct decades of injustice between tenants and landlords,” she added.
Real estate trade groups called the proposed legislation an existential threat to building owners. In hearings and through expensive ad campaigns, the groups warned that the changes could put small landlords out of business because they would be unable to increase rents to deal with escalating costs.
“This legislation fails to address the city’s housing crisis and will lead to disinvestment in the city’s private sector rental stock consigning hundreds of thousands of rent-regulated tenants to living in buildings that are likely to fall into disrepair,” Taxpayers for an Affordable New York, a coalition of four real estate groups, including the powerful Real Estate Board of New York, said in a statement.
“This legislation will not create a single new affordable housing unit, improve the vacancy rate or improve enforcement against the few dishonest landlords who tend to dominate the headlines,” the statement added. “It is now up to the governor to reject this deal in favor of responsible rent reform that protects tenants, property owners, building contractors and our communities.”
The agreement Tuesday underscored the rising power of the progressive wing in Albany. Many of the lawmakers who fueled the Democratic takeover of the Senate last year pledged to decline contributions from real estate interests and ran on promises to take on the industry by passing legislation supported by tenant groups.
Landlords and developers, accustomed to ready access to Albany insiders, were shut out of meetings and vilified at rallies.
“None of these historic new tenant protections would be possible without the fact that New York finally has a united Democratic Legislature,” the legislative leaders said in their statement.
As Saturday’s deadline loomed, tempers and tensions had risen. Last week, hundreds of activists flooded the state Capitol, staging a rowdy demonstration and leading to dozens of arrests.
Anxiety over the deadline, and fighting among some Democrats, seemed to heighten the intensity surrounding the rent negotiations. On Tuesday, lawmakers and staff members huddled into the evening as they hashed out the final details on the legislation.
Left uncertain was the involvement of Cuomo, an outsize figure in any negotiations in the capital, who won a third term in November.
Tenant activists had urged the Democratic majorities in the Senate and the Assembly to shut out Cuomo, who has received millions of dollars in real estate campaign contributions. Though legislative leaders did not explicitly agree, Tuesday’s package was the product of two-way negotiations, according to a person familiar with the talks.
Cuomo, at a news conference before the deal was announced, had dismissed the idea that he needed to be involved.
“There is no negotiation. I will sign the best bill they can pass,” he said.
He did not immediately comment after the Legislature’s deal.
Encouraged by the Democratic takeover, a statewide coalition of tenants had been pressuring lawmakers for months to pass nine bills collectively known as “universal rent control.”
The deal reached Tuesday included several of those proposals or modified versions of them.
Lawmakers agreed to abolish so-called vacancy decontrol, a provision that allows landlords to lift apartments out of regulation when their rents pass a certain threshold. The rule has led to the deregulation of more than 155,000 units since it was enacted in the 1990s.
They also agreed to repeal the so-called vacancy bonus, which allows landlords to raise rents by up to 20% whenever a tenant moves out of a rent-stabilized apartment.
And they pledged to rein in provisions that allow landlords to raise the rents of rent-regulated apartments when they renovate units or fix up buildings — perhaps the most hotly debated proposal of the package.
Housing advocates have long argued that building owners routinely abuse those provisions, inflating construction costs to jack up rents and push out tenants.
But Cuomo and Mayor Bill de Blasio of New York City said they supported revising the provisions, not repealing them, because they provide incentives for landlords to keep buildings in livable conditions. The real estate industry has argued the same.
To combat abuse, the state would be required to inspect and audit a portion of building wide improvements.
Additional changes would make permanent discounts on rents known as “preferential rents,” preventing landlords from sharply increasing those rents when a regulated tenant renews a lease.
Only one component of the tenant activists’ platform was notably absent: a “good cause” eviction bill that would have made it considerably harder for landlords to evict tenants in most market-rate apartments statewide.
The Legislature did agree to limit security deposits on apartments statewide to one month’s rent and to provide tenants in eviction proceedings with more time to hire a lawyer, address lease violations and pay overdue rent.
The legislation would also make it a punishable misdemeanor for landlords to evict tenants by illegally locking them out or through force.
While tenant groups did not win total victory, they applauded the overall legislative package.
“I think this is a huge win for the tenant movement that will impact the lives of millions of renters in a way that beats back the real estate industry,” said Jonathan Westin, the executive director of New York Communities for Change, an advocacy group. “But we also feel we have a long way to go.”
Ogun State has the largest number of funded estates in the Southwest, the Managing Director, Federal Morgage Bank of Nigeria (FMBN), Ahmed Dangiwa, has said
Dangiwa made this known at an enlightenment programme on the re-admission of Nigeria Union of Local Government Employees (NULGE) and members of the Nigerian Union of Teachers (NUT) into the National Housing Scheme in Abeokuta, the Ogun State capital.
Dangiwa, represented by Deputy General Manager, Field Office Coordination Group, Sunday Ogunmuyiwa, said about N500million has been refunded to 4,858 retirees who were contributors to the National Housing Fund in Ogun State.
He said: ‘’Under the FMBN Home Renovation Loan, over N283million has been disbursed to 354 beneficiaries in the state. A housing estate project at Laderin Phase 1, in the state is funded by FMBN through the disbursement of loans to 171 beneficiaries, while the Ministerial Plots Scheme at Ajebo, is also funded by the bank. It is on record that Ogun State has the largest funded estate in the entire Southwest.
‘’Other estates include Rockview Estate in Abeokuta; Sparklight Estate, Ibafo; Davids Court, Arepo; Master Golden and Evangel Estates in Ofada; New Creation Estate and Noah Pavilion, Mowe; Oba Sikiru Adetona Estate, Ijebu; and Metro Park, Abeokuta, among others.”
He said the FMBN, empowered by law to manage the NHF, has the responsibility to provide long-term loans to contributors to buy, build and renovate residential accommodation.
He stated that the bank would ensure that Nigerians who contributed to the NHF benefited more in the administration.
According to him, the bank has scrapped equity contribution for houses costing not more N5million, and loan requests above N5million but not more than N15 million attracts 10 per cent equity.
The Chairman, NUT, Ogun State, Titilope Adebanjo, commended FMBN for its achievements in the state.
He, however, appealed to the state government to further reduce the cost of obtaining titles to facilitate the creation of more mortgages.
For decades, the burgeoning power of China’s middle-class has been promised as a cure-all for many of the global economy’s troubles (not to mention its own). Enriched by three decades of rapidly rising wages, Chinese consumers should have long ago begun turbo-charging sluggish economies everywhere.
That hasn’t happened. In past years, it’s largely been because they received a much lower share of national income than was their due. But there’s a new reason, one that should alarm both China’s leaders and the scores of foreign companies still waiting for China’s middle-class consumers to ride to their rescue.
After a decade-long real estate boom, home prices in many Chinese cities are unnaturally high. In Beijing and Shanghai, buying a home costs about what the average family would earn in 23 years if it spent none of its income. And in 2016, Chinese residents began splurging on borrowing, most of it in the form of mortgages—as well as untold sums of high-interest personal loans—to buy increasingly pricy homes. With somewhere around $6.8 trillion in personal debt, with most wrapped up in real estate, the risks of a sharp drop in prices setting off a financial crisis akin to that of the US or Spain in 2008 are rising. The alternative, however, is only slightly less ominous.
New analysis reveals that consumer debt rose at a much brisker clip than the GDP or household disposable income. Thanks in large part to this latest home-price boom, Chinese consumers are now stuck shelling out more of their income covering debt payments than ever before—and a greater share of their incomes than their counterparts in the US, Germany, France, or Japan. If this continues, Chinese consumers may soon find themselves too overwhelmed by debt payment to power the consumption boom foreign companies, trade partners, China’s own leaders, and, indeed, the world economy have been counting on.
China’s “silver bullet”?
Chinese consumers are different from those pretty much anywhere else. In most places, everyday consumer spending contributes somewhere between half and two-thirds of national economic output. Not, however, in China.
Chinese shoppers weren’t always so unusual. In 1990, domestic consumer spending’s share of real GDP was about 60%, according to the Penn World Table, a database of national accounts. That share plunged in the decades that followed—by a far greater magnitude than normally happens when a country industrializes.
The flip-side of this was an over-reliance on investment and exports to power ultra-fast growth, which resulted in wasteful corporate spending—and, as a result, outstanding corporate debt of at least $20 trillion.
The world has been waiting for China’s economy to shift back to a greater dependence on domestic consumer spending. Over the last three decades, scores of multinational companies have set up shop in China, making expensive bets that consumer demand—pent up after decades of privation under Communist Party economic mismanagement—would finally be unleashed, promising huge profits on everything from fast food to SUVs.
Real consumer spending has indeed surged since the late 1990s, turning China into the planet’s second-biggest consumer market. But that boom was vastly smaller than it should have if Chinese consumer spending grew at the same pace as GDP. For instance, if consumption levels had stayed at the level they were in 2000, Chinese households would have consumed an average of nearly $1 trillion more a year over the next 12 years, according to one study.
Most companies have done fine. Some—GM and Apple spring to mind—have even come to rely on Chinese consumption. (China is, after all, a vast market, and wages—and therefore buying power—have been rising swiftly.) But despite frequent lip service from the government about the need to “rebalance” back toward consumer spending-driven growth, the much-anticipated Golden Era of the Chinese middle class consumer never dawned.
The back-up engine
For economists and other observers, the chronic thrift of Chinese consumers has long implied the existence of a backup engine for when growth stalled and corporate debt maxed out.
“For years, there was this idea that China’s silver bullet for an economic slowdown was its high household savings rate,” says Andrew Polk, economist at Trivium, a Beijing-based research firm.
This was the flip-side of China’s under-consumption: Consumer balance sheets were pristine. If the government needed to unlock consumption potential, Polk said, they could always encourage household borrowing, with more favorable mortgage policies, for example, or encouraging expansion of credit card issuance. Indeed, in 2016, the head of China’s central bank and the all-powerful State Council (pdf, p.415) both declared as much.
Suddenly, however, what had been a rainy-day abstraction became a reality. Chinese consumers are now deep in debt.
The Bank for International Settlements calculates that individual Chinese borrowers owe $6.8 trillion, as of December, up from $4 trillion three years earlier, much of it for home mortgages.
The “silver bullet” economic stimulus that Polk mentioned hinges on the fact that when people borrow, they have more cash to spend—for instance, to buy a new car. Those who purchase new homes through mortgages might increase their spending to furnish their apartment, because their new monthly mortgage payments are less than their rent was, or because owning a home makes them feel more financially secure.
Given the staggering scale and pace of this recent household credit binge, that should have boosted consumer spending. However, any such effect was temporary at most.
Last year, auto sales fell for the first time on record. Apple and Starbucks (paywall) surprised shareholders with warnings about weak China earnings. More general measures of spending have faltered too. So what’s behind the silver bullet’s misfire?
Wage growth, for one thing. According to Polk, annual salary increases that had been in the double-digit growth a few years ago have since slipped into the low single-digits.
Then there’s the impact of the recent consumer borrowing stimulus to consider—specifically, the cost of monthly interest and principle payments, says George Magnus, an Oxford University economist and author of Red Flags: Why Xi’s China Is in Jeopardy. And indeed, this is where the picture gets troubling. But to understand why, it helps first to understand the origins of Chinese households’ unusual zeal for real estate.
The origins of China’s real estate mania
China’s housing market is an economic marvel. In most countries, a 30% surge in home prices every couple years would swiftly give way to financial crisis. Not in China. Its housing market is yet another example of the country’s eerie, and widely envied, immunity to market consequences.
Its crash-proof nature is all the more astonishing given that home ownership is among the highest on the planet. Back in 2015, more than nine in every 10 urban households already owned at least one home, according to a recent survey by China’s Southwestern University. And not only is home ownership unusually high; so is multiple home ownership. It’s common for owners to keep their apartments empty, foregoing rental income, since unlived in apartments tend to have better resale value.
Small wonder, then, that housing accounts for around four-fifths of Chinese household wealth, according to Wei Yao, economist at Société Générale.
A clue to this puzzling phenomenon lies in the way the Chinese government manages its financial system. To create the cheap pool of savings needed to fund hyper-industrialization, the authorities have long barred households from investing outside the country.1 That has left them with few—and mostly lousy—options for preserving the value of their savings.
There was one major exception. In the late-1990s, the government privatized the housing market, allowing resident families to buy their apartments from the state-owned companies that owned them—and for a huge discount. These dingy apartments were on the most coveted plots of city real estate, and as China urbanized, their value rocketed. These served as original stakes of wealth that households sold at a massive profit, funding still more home purchases.
“Commercial apartment units have been far and away the best-performing assets for the Chinese investor,” wrote Anne Stevenson-Yang, founder of J Capital Research, a China-focused research firm based in Hong Kong, in a May 2018 note. Official home price data—which have tended to understate sharp rises in home values—show that prices fell only once in the two-plus decades since China privatized housing. (And that year, 2014, average prices were still 9% higher than two years earlier.)
“So in the worst year historically for Chinese housing, in the worst local markets, investors still made 4.5% on a two-year investment,” she said. “This is a much better proposition than, certainly, the stock market, which has led to heavy real losses for retail investors more years than not, or average yields on bank wealth products over the same period of time.”
Thanks to the sure bet provided by property investment, China’s economy has become disproportionately reliant on the real estate industry to keep growth aloft. Beyond spurring construction, it also boosts consumer spending—on things like new washing machines and furniture—as well as banking and manufacturing. Counting the knock-on effect to other sectors, economists estimate that real estate activity contributes somewhere between 20% and 30% of China’s GDP.
The problem is, the economy—and, therefore, income growth—has been slowing. That means keeping the Chinese housing market chugging along requires that new homebuyers rack up more and more debt.
Risky borrowing takes off
That’s what happened in 2016, when a home price rebound set off a parallel jump in mortgage debt. But the soaring cost of housing has become a growing source of urban popular outrage (particularly among younger workers keen to live on their own, but whose earnings barely cover mortgage payments). To keep the lid on home-price froth, the authorities pressured banks to curb mortgage loans, raised mortgage interest rates, and increased the requirements for down payments.
Though property sales slowed somewhat, people didn’t stop buying homes. Instead, they supplemented their mortgage borrowing with higher-interest consumer loans, including from ultra-dodgy peer-to-peer (P2P) lending platforms, said Ernan Cui, an analyst at Gavekal Dragonomics, a research firm in Beijing and Hong Kong, in a recent note.
So how much has this consumer borrowing binge strained household budgets? It’s hard to know; the only publicly available estimate comes from the People’s Bank of China, which puts the debt service ratio at 9.4% at the end of 2017 (pdf, p.39, link in Chinese).
However, in a note published last month, Cui reported the results of her own estimates. As of the end of 2018, China consumers were forking over between 8.1% and 11.3% of their disposable income (depending on which calculations of household income used) to keep current with monthly interest and principal payments. However, including high-interest borrowing conducted via P2P platforms and other non-bank financing would likely push this burden even higher.
That puts China in the middle-upper range of global household debt-service burdens. More worryingly, though, is that it seems likely to climb in that ranking.
“If these trends continue, China’s debt-service ratio will likely reach 12-13% in no more than three to four years’ time,” Cui says. “This may not prove to be a hard ceiling, but relatively few countries have sustained debt-service ratios above this level.”
Putting it all together
So what happens when consumer borrowing bonanzas finally ends? The most notorious way debt-service ratios tend to fall is through housing market crashes; over time, the mass foreclosure and consumer belt-tightening that follow tend to bring debt-service burdens down to more manageable levels. That’s what happened in the US and Spain over the last decade or so.
Even without a housing market meltdown, though, when consumer debt rises suddenly and sharply, economies suffer. Research on 30 countries from 1960 to 2012 by Atif Mian and Amir Sufi, two leading scholars of debt dynamics, found growth slows after booms in consumer borrowing. (Interestingly, that was true only of household—and not corporate—borrowing.) What’s more, the burden of debt service accounts for almost all of the hit to growth, according to follow-up analysis by BIS economists (pdf, p.22).
The risks might be even greater for China than other countries’ fates suggest. Thanks to the central role real estate plays in powering the Chinese economy, its leaders faces a nasty dilemma.
If they curb credit growth and home-buying too much, it will be near-impossible to hit the 6%-plus official growth target (an aim of unique political urgency this year, which happens to be the 70th anniversary of Mao Zedong’s proclamation of the People’s Republic of China). But that might let Chinese households clean up their finances, increasing the chance that they’ll eventually start spending on goods instead of mortgage payments.
On the other hand, another round of loose lending will undoubtedly let China reach its politically sacred GDP goals. Home prices will, of course, shoot up too—and with it, the household debt burden.
The authorities seem to have opted for the latter course. That will let jittery global investors and central bankers relax a little. And foreign companies will welcome the (temporary) reprieve from uncomfortable China-related earnings revelations. For a while anyway. The odds are good that in a couple years, China will find itself in the exact same place—but with more household debt, more empty houses, and even less means of paying for it.
At weekends and especially during holidays, campuses tend to empty out but the buildings still incur operating costs and require maintenance work to keep them in top condition.
Underutilized space is a valuable asset when marketed and positioned correctly in the market, says Shaun Johnson, business development manager at Integral UK, JLL’s UK facilities and engineering services firm.
“The way campus buildings and facilities are used is slowly changing to generate more revenue all-year round,” he says. “Whether they’re hosting external conferences in lecture halls or opening up sports facilities for local teams to use, universities are collaborating more with businesses and the local community.”
Making the most of facilities
Universities across the UK and U.S. often have state-of-the-art facilities which have significant construction and running costs. Indeed, the UK’s higher education sector has started £8.8 billion-worth of capital projects since 2014, according to industry tracker Glenigan.
In the U.S., universities from New York’s Columbia to California’s Stanford have been pursuing a range of options within their real estate in recent years, explains Julia Georgules, senior research director at JLL U.S.
“We’ve seen straightforward divestment of real estate, the repurposing of campus buildings and creating portfolios of real estate – as well as a combination of all three,” she says. “There are more options on the table for those universities who are on sound financial footing.”
Privately-held Massachusetts Institute of Technology has a dedicated real estate management team tasked with the rotation and redevelopment of assets, as well as a ‘capital projects’ website – highlighting its investment in refurbishing and expanding its own real estate portfolio.
However, less-affluent institutions across the U.S face a shortfall between revenue and upkeep costs at a time of decreased further study and tuition discounts to lure students.
In the consequent search for revenue and book-balancing, there’s been some impressive leveraging of real estate by U.S. universities, says Georgules.
“Some of that has been reactive and driven by need, while more prosperous establishments have innovated and collaborated with the outside world,” she says, pointing to California’s Stanford University. Its Research Park in Silicon Valley forms part of a wider drive to collaborate in the world of tech.
Such partnerships between universities and the innovation economy will become more common in years to come, and will work to the benefit of both parties, she adds.
In the UK, third party use of university real estate is in its early days.
Local, national, and even international organisations, are frequently looking for high-quality facilities in easily accessible locations to host events, says Johnson.
The University of West England in Bristol, for example, regularly hosts events at its exhibition and conference centre for the UK’s Institute of Workplace and Facilities Management body.
“A university with a top-class conference hall is hugely appealing to businesses or trade bodies looking for a venue,” says Johnson.
“Universities are already set up to accommodate and cater for hundreds, or even thousands of short-term visitors, in a way that few hotels can match.”
Sports facilities – such as football, hockey and rugby pitches, are also in demand, says Johnson. Players from Welsh football team Newport County, for example, train on University of South Wales pitches.
“It’s often a two-way thing,” says Johnson, who points to the way the football club is working with the university to offer sports degrees and courses. “Students in return get the chance to gain real time sports science experience.”
New relationships between campus theatres and the wider community are being established.
Last year, the University of Southampton opened a second theatre in Southampton’s Cultural Quarter, over 50 years after the construction of its first on-campus venue. Also in Southampton, the university’s data centre is used by businesses as well as the establishment’s own staff.
Meanwhile other universities are turning to tourists; the University of London, for example, rents out rooms in its student halls located in prime areas of the city outside of term-time at prices to rival those of cheaper hotels.
Keeping facilities in top form
As universities come up with new ways to generate revenue from their real estate, it’s not just their events teams that are growing. More maintenance workers will also be needed.
“When wear and tear rises, there’s a point where having a full-time maintenance team on site to respond to new needs becomes worthwhile,” he says. “Standard visits and checks which may have sufficed in the past may not be enough.”
Indeed, while a university’s reputation may help to attract interest from conference and events planners, ultimately, it’s the quality of the facilities themselves that will ensure repeat business. And this can make a valuable contribution to a university’s longer-term finances.
“The extent to which UK universities think more openly about their real estate could help to generate revenue and define how financially effective they are in the future,” concludes Johnson.