Commercial real estate is in trouble. There are several reasons why.
First, higher interest rates put pressure on commercial real estate operators who financed their acquisitions with debt at historically high property values and low interest rates. Many of these loans mature in the next couple of years and may have to be refinanced at much higher rates potentially resulting in maturity default.
Second, recent technology-sector layoffs and a potential U.S. recession could lead to a significant decline in the demand for commercial properties, adversely affecting their valuation.
Finally, the shift in workplace culture to more hybrid and remote styles is putting significant pressure on office properties, which constitute a sizeable share of all commercial real estate. As of July 2023, just half of U.S. workers had returned to the office on an average day relative to pre-pandemic levels.
The signs of commercial real estate distress are already visible, especially in the office sector. In the first quarter of 2023, the office vacancy rate reached 18.6%, 5.5% higher than it did in first quarter 2020 when the pandemic began. This is a larger trough-to-peak increase than the 4.6% increase during the Great Recession.
The shares of real estate holding companies (REITs) focused on the office sector declined by about 60% since the beginning of pandemic, implying more than 30% decline in the value of their office buildings. While the overall delinquency rate on commercial mortgages is still relatively low, it has been quickly rising, especially in the office sector. Several deep-pocketed investors including PIMCO and Blackstone recently defaulted on their office loans.
But how big of a threat is the commercial real estate decline? The subprime mortgage crisis that started in 2007 eventually launched the 2008 Great Recession. Many economists aren’t yet seeing the ties between empty office buildings and the future of U.S. banks.
My new research with Erica Jiang, Gregor Matvos, and Amit Seru explores bank-level data to assess the commercial real-estate distress risk for each of 4,844 of U.S. banks — accounting for about $24 trillion of assets in the aggregate. As I explain below, the news is mixed: the risk is not as big as sometimes portrayed, but is real.
Commercial real estate (CRE) loans are an important portion of bank assets, accounting for about a quarter of assets for an average bank and $2.7 trillion of bank assets in the aggregate. Most of these loans are held by smaller- and midsize banks. So, banks indeed have a very significant exposure to commercial real estate loans.
To assess the banks’ ability to withstand the CRE credit distress, we consider a range of CRE stress-test scenarios ranging from 10% to 20% of commercial real estate loans defaulting at each U.S. bank. We assume that in the case of a default the banks can recover about 70% of outstanding face value of their loans, which is in line with the historical data. Notably, delinquencies on bank-held commercial real estate loans reached almost 10% during the Great Recession.
The good news is that direct losses to banks due to CRE distress are not that large. At a 10% to 20% default rate, the direct losses on banks’ CRE loans relative to their book value amount to about $80 to $160 billion. If CRE distress would manifest itself early in 2022 when interest rates were low, not a single bank would fail, even under our most pessimistic scenario. This is because the losses due to CRE distress are less than 10% of aggregate book value of equity in the banking system — which was about $2.3 trillion at the beginning of 2022 — and banks were sufficiently capitalized to withstand them.
The bad news is that we are in 2023, and interest rates are much higher. Banks engage in maturity transformation: they finance long maturity assets with short-term liabilities — deposits. Banks operate with high financial leverage, with a typical bank funding itself with 90% of debt, consisting of mostly deposits. As interest rates rise, the value of a bank’s assets can decline, leading to bank fragility and insolvency risk.
Read: The $1 trillion ‘wall of worry’ for commercial real estate that spirals through 2027
As we show in our other related work, following recent monetary tightening the U.S. banking system’s market value of assets is about $2.2 trillion lower than suggested by their book-value accounting for loan portfolios held to maturity. Consequently, about half of U.S. banks (2,315) with $11 trillion of assets have a lower value of their assets compared to the face value of their debt liabilities.
This does not mean that half of U.S. banks are insolvent. Banks primarily fund themselves with deposits so they could survive these asset value declines if they can pay low rates on their deposits and their depositors do not flee.
However, about half of deposits are uninsured, accounting for about $9 trillion of bank funding in the aggregate. Unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run in response to the decline in bank assets values following an increase interest rates.
We show that if half of uninsured depositors would withdraw their money, 186 banks would fail. If there is a widespread run by uninsured depositors, more than 1,600 banks could fail with aggregate assets of close to $5 trillion. In sum, higher interest rates combined with high leverage has made the U.S. banking system extremely fragile and eroded the banks’ ability to deal with credit distress.
The commercial real-estate distress would add up to an additional $160 billion of losses and a $2.2 trillion decline in the value of bank assets due to higher rates. While losses due to commercial real estate distress are an order of magnitude smaller than the decline in bank asset values associated with a recent rise of interest rates, they would impact a sizable set of banks.
Due to these losses, up to 580 additional banks with aggregate assets of $1.2 trillion would have their mark-to-market value of assets below the face value of all their non-equity liabilities. If half of uninsured depositors decide to withdraw, the losses due to CRE distress would result in up to 58 smaller regional banks becoming insolvent in addition to 186 banks that would become insolvent just due to higher rates.
Importantly, the news about commercial real estate default and banking losses could be a trigger for a widespread run on the banking system by uninsured depositors, unraveling a fragile equilibrium in the banking system. Moreover, commercial real estate distress could also lead to a credit crunch adversely affecting the U.S. economy and increasing recession risk.
What can be done? As long as interest rates remain elevated, the U.S. banking system will face a prolonged period of significant insolvency risk. In the near term, the creation of the Bank Term Funding Program in March 2023 together with other policy responses to the recent banking vulnerabilities may put a pause on the crisis and reduce the risk of acute deposit runs across the banking system.
However, these are temporary measures that do not really address the fundamental insolvency risk, which our analysis indicates could involve hundreds of banks.
A near-term solution is a market-based recapitalization of the U.S. banking system. Longer-term, banks could face stricter capital requirements, which would bring their capital ratios closer to less regulated non-bank lenders that retain more than twice as much capital buffers as banks. Increased capital buffers would make the U.S. banking system more resilient to adverse shocks to their asset values.
Tomasz Piskorski is the Edward S. Gordon Professor of Real Estate at Columbia Business School.
More: Commercial mortgage-backed securities are in the spotlight again, but this isn’t 2008
Plus: San Francisco’s push to turn office buildings into homes hinges on this simple idea
16 July 2023, 18:32 | Updated: 16 July 2023, 18:40
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Getty
New houses could be blocked if they do not have schemes similar to the hated ULEZ, according to reports.
Natural England have commissioned a review into the traffic emissions control schemes in order to limit exhausts in more than 330 areas around the nation, The Telegraph reports.
Essex’s Epping Forest has already seen the intervention from the statutory body, as it threatened to block a new development if it did not implement measures to curb air pollution.
Read More: ‘He has no choice’: Keir Starmer backs London mayor Sadiq Khan over controversial Ulez scheme
Read More: Sadiq Khan ‘lacks the legal powers’ to expand London’s ULEZ, High Court told
The quango is already accused of blocking around 145,000 new homes in recent years and this new tactic could see this figure rise even further.
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Getty
Natural England’s chair Tony Juniper said: “We simply cannot halt and reverse the decline in nature or improve the quality of our environment – as the Government has legally committed itself to do and is rightly demanded by the public – if we don’t mitigate the impact of pollution sources.”
The Telegraph claims that air pollution mitigation tactics listed on an internal email between consultants and Natural England list low-emissions zones and clean air zones as acceptable when it comes to approving housing developments.
The expansion of London’s ultra-low emission zone (Ulez) will be challenged at the High Court this summer after five councils requested a judicial review.
It throws the expansion date of August 29 into question.
Nick Rogers AM, City Hall Conservatives transport spokesperson, said: “The High Court has now ruled there is sufficient evidence that Sadiq Khan’s ULEZ decision may have been unlawful.
Read more: Hero mum fights for life after pushing pram out of the way of ‘hit-and-run’ driver
“The Mayor clearly does not have the legal grounds to proceed with his ULEZ tax plans, which take money from charities, small businesses and low-income Londoners who cannot afford a new car.
“Sadiq Khan should do the right thing, immediately stop work on his ULEZ expansion, and explain his actions to the court.”
Short term vacation rentals — and their impact on affordable housing and the tourism industry — are vexing both local and state leaders.
Literally, I could hardly pick up a newspaper last week that didn’t have front-page stories with everyone trying to figure out how to get a handle on this issue.
It’s going to come to a head, but no one seems to know exactly what to expect.
Buying a home has always been a huge expense that many middle-income folks couldn’t afford until they found a partner and had two incomes. So yeah, real estate is expensive to buy, especially here, but the truth is it’s never been cheap. The larger problem, at least in my mind, is that locals can no longer find affordable housing, especially rentals. Those rentals allow people to save the down payment needed to buy. But now there aren’t any cheap rentals, and a huge component of that problem, without doubt, is the rapid growth of STVRs.
The headline in the July 9 Asheville Citizen Times was “Asheville Airbnb bust?” The package was really two stories, both by longtime ACT reporter Joel Burgess, one of the best journalists in the region. It examined the skyrocketing growth of short-term vacation rentals — STVR — and how local and state leaders are reacting .
Burgess dove deep to come up with the numbers for his story, so I want to be sure to credit him. His reporting found a 1,127% increase in revenues from STVRs in Buncombe County from 2016 to 2022. The revenues rose from $18.7 million to $229 million in 2023. The number of units that are renting short term rose from 1,247 to 5,223. So, during that time — only six years — at least 4,000 houses/apartments/rooms that could have been rented to locals have been turned into vacation rentals for tourists.
This is happening in WNC’s largest metro area even though the Asheville City Council banned STVRs in 2018, except some existing vacation rentals and for those who are just renting a room in their house. A quick search of the Airbnb website (I didn’t even check VRBO — Vacation Rental by Owner), however, found dozens of places in the city limits that apparently violate that ban. Two hours after I’m off Airbnb, I’m getting emails showing me places to rent in the Asheville city limits.
It’s obviously not just Buncombe County in this boat. A March report released by Airbnb reported total volume sales in 2022 for the 70 counties in North Carolina that are considered rural. Here’s the numbers for our region, which amount to staggering dollar figures: Haywood County had $19.79 million in Airbnb sales in 2022; Jackson had $11.16 million; Macon had $11.76 million; and Swain County, with a population of just over 14,000, had $16.27 million in Airbnb revenue.
Those headlines I was speaking of earlier? In The Smoky Mountain Times, Swain County’s weekly newspaper, the July 6 issue had this on the front page: “Airbnb’s decline comes as long-term rentals are still hard to find.” The story by Larry Grifffin reported on a study released a couple weeks ago that warned of a collapse in the Airbnb market. It also reported on a social media post by the human resources director of Swain County Schools asking for help in finding housing for new teaching hires.
From Griffin’s story: “There is an abundance of short-term rentals in Swain County, however, long-term rentals, and rentals that accept pets, have proven to be harder to acquire. Rental availability is an issue for all ‘working class’ people looking to relocate to Swain County,” Tommy Dills, schools human resource director, said in an email.
Over in Macon County in the July 5 issue of The Franklin Press, the headline was “Task Force talks about housing issues in Macon.” Reporter Thomas Sherrill’s story revealed many veterans in Macon are having a difficult time finding affordable rental housing, and recovering addicts from a program in the county are almost four times as likely to relapse if they don’t have housing. A local real estate agent, Evan Harrell, said the number he’s heard is that there are 1,150 short-term rentals in Macon County.
That study by Reventure Consulting that says Airbnb revenues are slowing also predicts that the slowdown might lead to a massive sell off of houses that could develop into a situation comparable to the real estate collapse of 2008. All those who took out low-interest loans to invest in short-term rentals may not have the financial savings to withstand lower-than-anticipated revenues.
It’s coming to a head, this massive growth in STVRs that has also been the catalyst for the huge problem we’re having with affordable housing. I’m no economist, but when working people can’t afford to buy and can’t even find a place to rent, something’s got to give. I’ll keep following this issue, so stay tuned.
(Scott McLeod can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..)
Real estate is a lot like the weather: A momentary appearance of sunshine usually hides a storm on the horizon.
That seems to be the conclusion from Yardi Matrix, a national commercial real estate analytics and research firm, in their new sectors-specific report “U.S. Multifamily Outlook: Summer 2023,” published June 28.
The Yardi Matrix data revealed that the fundamentals for multifamily “remain strong” with ongoing demand, continued rent growth and nearly 1 million new deliveries expected over the next two years. But property values and sales prices have plummeted in 2023, and the high cost of debt has reduced demand and is also expected to lead to more defaults in the months ahead.
Despite a shaky economy that appears poised to enter a recession, national multifamily rents increased through the first five months of 2023, with the average U.S. monthly rent reaching an all-time high of $1,716. Large metro areas with forecasted annual rent growth between 3.1 percent and 3.7 percent include Central Jersey (3.7 percent), Austin (3.3 percent), Charlotte (3.2 percent) and Oklahoma City (3.1 percent).
“Multifamily risk is some of the lowest in the industry, as opposed to office or retail,” explained Doug Ressler, manager of business intelligence at Yardi Matrix, told Commercial Observer. “And that’s because of the fundamental fact that people need housing and there’s a shortage of housing that won’t be corrected in the next five or six years.”
The national housing crisis has no doubt fueled multifamily demand, which has been boosted by an annual drop in home sales and higher mortgage rates, which reached 6.5 percent in March 2023, up 230 basis points from March 2022. The number of available single family homes has continued to decline, Ressler explained, as homeowners are choosing not to sell amid high interest rates, creating a housing crisis that multifamily is poised to capitalize on and reap higher rents from — especially in the high-end lifestyle segment of the sector.
“While healthy demand will enable those units to get filled over time, the short-term impact will be strong competition for renters in the high-end lifestyle segment,” the report concluded. “Asking rents in renter-by-necessity properties rose 4.5 percent year-over-year through May but only 0.6 percent for high-end lifestyle properties.”
However, it’s not all sunny skies for landlords as higher multifamily rents are expected to be constrained by a wave of new supply entering the market later this year and in 2024.
More than 1 million units were estimated to be under construction in the first six months of 2023, with more than 430,000 units expected to be delivered by the end of the year (and an additional 450,000 delivered in 2024). Markets expected to see the highest number of new units this year include Austin (22,310 units), Dallas (21,769), Miami (18,571), Atlanta (15,611), New York (15,510) and Phoenix (13,592), according to Yardi Matrix.
“It’s going to give the consumer a lot better options to choose from,” said Ressler, who added an important geographical caveat:
“When you look at it — and we cover over 200 markets — when you look at where the new supply is coming, it’s coming in only 25 major markets where we’re seeing it grow.”
As rents grow and new supply stays channeled to only a handful of large cities, the uncertainty on the capital markets front could create additional challenges to the positive fundamentals highlighted earlier.
The fastest interest rate increase by the Federal Reserve in 40 years has combined with a pullback in liquidity by the national banking sector in recent months to inject pricing uncertainty into a multifamily market that has seen transactions and mortgage origination volumes plummet in 2023.
“The capital markets, long the strength underpinning the multifamily market, are turning into an Achilles’ heel,” the report stated. “Property fundamentals are strong, but the increase in capital costs has injected pricing uncertainty into the market and made it difficult to complete a transaction of any kind.”
Further, the pace of multifamily transactions is roughly 70 percent slower in 2023 than in recent years. Only $23 billion in sector sales were completed by mid-June, compared to $194.7 billion in 2022 and $226.5 billion completed in 2021, according to Yardi Matrix.
Lagging sales volumes have consequently impacted unit prices: The average price-per-unit for multifamily is down 15 percent through May 2023, falling from an average of $210,000 in 2022 to $181,000 in 2023.
“It’s more of a wait-and-see in what the market will do, what the Fed will do,” explained Ressler. “The market is anticipating two more rate increases from the Fed … and people are saying, ‘Let’s wait until it calms down before we look at transactions again.’ ”
Even the ever-dependable government-sponsored entities (GSEs) space is failing to provide cover for the multifamily transactions. Fannie Mae (FNMA), Freddie Mac (FMCC) and Ginnie Mae issued only $20.1 billion of bonds through mid-June, compared to $55.4 billion in the first half of 2022, according to the report.
Moreover, while loan defaults for multifamily bonds currently stand below 1 percent, these defaults are expected to rise over the next 18 to 24 months as property owners assess their portfolios. CMBS special servicing rates are increasing for multifamily owners, according to the report.
Despite the headwinds, Ressler said that interest rate clarity and a flow of new supply will help stem the bleeding by this point next year and dispel some of the clouds overhead.
“We expect transactions to pick up steam again in the second quarter of 2024,” he said.
Brian Pascus can be reached at bpascus@commercialobserver.com
By Helena Kelly Consumer Reporter For Dailymail.Com
14:58 10 May 2023, updated 16:03 10 May 2023
- Ian Shepherdson said prices would crash 15 percent before they recover
- Shepherdson predicted the 2008 crash three years beforehand in 2005
- It comes after prices tumbled 5 percent in a year while new listings plunged 21 percent in April
An economist who predicted the 2008 housing crash claims US property prices will fall a further 15 percent – after already tumbling 5 percent in a year.
Ian Shepherdson said a recession and credit crunch will drag down the value of properties while rising unemployment will also deter would-be buyers.
Shepherdson, the chief economist and founder of Pantheon Macroeconomics, predicted the 2008 crisis three years before it happened, in 2005. Prices peaked in 2006 before sharply falling until 2012.
Now he predicts that a recession will push down treasury rates, which in turn will cause mortgage rates to drop.
But while this might stimulate some activity, Shepherdson said it would not be enough to encourage would-be buyers to invest in property.
Shepherdson added that economic uncertainty would prompt a pull-back in lending – further dampening the demand for homes.
He predicted prices would fall by 15 percent before they recover.
‘Mortgage applications in April looked like they hit a new low,’ Shepherdson told Insider.
‘Now that’s quite striking because mortgage rates are no longer at peak, but applications are still falling.
‘And to me, that suggests that credit standards are tightening.’
He added: ‘When you’ve got very tight credit conditions, it can be so much more difficult, on average, to get a mortgage at any rate.’
On top of that, a recession would trigger a surge in unemployment, prompting reluctance among workers to ‘take on a new obligation like a mortgage if they’re worried about losing their existing job.
‘A weak labor market really is a big challenge for housing,’ he told Insider.
His comments come as the housing market appears to have stalled after sustaining red-hot demand for the last two years.
Home sales plunged 21 percent in April, while the number of new listings fell 31 percent from 2019 figures.
Demand for new homes exploded during the pandemic as lockdown left homeowners wanting bigger properties with more outdoor space.
And the work from home culture meant office employees no longer needed to live in the big cities – prompting them to flee to coastal areas.
Prices across the board surged by 26 percent in May 2021.
Experts have long predicted that the market would experience a natural ‘correction’ in 2023.
According to the S&P CoreLogic Case-Shiller US National Home Price index, prices have already dropped by around 5 percent since June.
The trend has in part been sparked by soaring mortgage rates.
Mortgage rates have hovered over 6 percent since September 2022. In 2021, the average rate on a 30-year mortgage was below 3 percent.
Home loans were pushed up by the Federal Reserve’s repeated hikes to its base rate – which lenders base their mortgages on – to tame soaring inflation.
It has led to a host of economists predicting similar housing crashes to Shepherdson.
Desmond Lachman, a senior fellow at the American Enterprise Institute, told Insider he expected home prices to fall between 15 and 20 percent.
But Morgan Stanley’s chief US Economist Ellen Zentner predicted a less dramatic fall of 4 percent in 2023.
By Peter Vincent For Daily Mail Australia
16:46 10 Apr 2023, updated 16:52 10 Apr 2023
- Young Aussies giving up model of working to rent or buy home
- They are rejecting it if they can’t afford a home
- They are examining moving out of state capitals or overseas
Elarna Spinks and her partner Luke have everything going for them, except the hope of owning a home to raise a family in the city where they grew up.
Ms Spinks, 23, is just one of thousands of young Australians who has had enough of working herself to exhaustion while barely keeping up with bills just so she might one day be able to afford a house.
‘I don’t think we’ll ever be able to afford our own house,’ the fashion designer said.
‘The average house price here is more than $2million.’
To raise a 20 per cent deposit for the kind of unit she and Luke live in – a $1million one bedroom flat at Warriewood on Sydney’s northern beaches – the pair would have to save for years on end and sacrifice experiences such as holidays.
Like many young Australians Ms Spinks is now wondering if there’s any point in working hard when there’s no guarantees she’ll ever own a home.
While that might sound entitled to some, many young Aussies are deciding that busting a gut for the chance of buying property is too much of a gamble thanks to an ever-surging market, recession fears, spiking interest rates and the worsening cost of living.
Ms Spinks and Luke have talked about getting a foot on the property ladder by investing in regional properties in the hopes that the combined equity might help them to come up with a 20 per cent deposit on a city unit.
But it all relies on the numbers falling in her favour, while the opportunities to have fun pass her by.
It’s something her friends talk about regularly.
‘One hundred per cent, we do,’ she said.
‘We are living to work, not working to live.
‘You go “am I actually stuck in a cycle here”? Will have to rent forever anyway? So much is unknown.’
Luke does well as an electrician, but Ms Spinks quit her fulltime job in March as a store manager for an Australian high street fashion label in order to preserve her mental health.
The job paid $31 an hour with no penalty rates for nights and weekends and no extra money for up to 10 hours unpaid overtime every week.
‘I was going crazy, it’s a huge relief,’ Ms Sparks said.
‘I’m so much happier and my mental health is better.’
Since quitting Ms Spinks is making more money by making side hustle – hiring out designer dresses through online rental platform The Volte – her main gig.
But she’s still paying about 40 per cent of her income on rent – significantly higher than the ‘safe’ level (30 per cent) that property managers are told to stick to.
Those are worrying statistics when you consider the traditional definition of being in ‘mortgage stress’ is when a homeowner puts more than 30 per cent of their pre-tax income into repayments.
Ms Spinks said her parents and grandparents ‘frowned on’ the amount of rent she and Luke pay because it’s ‘wasted money’.
‘But just to be able to afford a deposit for a house, that’s more than a year’s wage,’ she said.
‘With the cost of living and other expenses it just doesn’t work out that we can save enough for deposit if we want to be living near our family.’
Ms Spinks says Sydney property prices are making Australia’s biggest city less attractive to her and her friends.
‘We have got no idea where we might be living, but we know it wouldn’t take us as long to buy a home if we were living on the Central Coast or the Gold Coast,’ she said.
‘Is it really worth me working so hard, saving so hard and missing out on other things I could be doing just to try and live in this area?
‘Would I live a better lifestyle elsewhere, because I wouldn’t have to spend so much just to live?’
Ms Spinks’ story is echoed by two viral posts online in the past month.
One was by a young nurse who quit her career because it was unlikely to deliver her a home, and another by a couple who bought a home – only to be penalised with crippling bills.
They showed how dissatisfied young people are with the cost of living and especially of housing.
The couple posted that ‘being a young person in Sydney is a scam’.
According to the Australian Youth Affairs Coalition, Ms Spinks’ concerns and the social media posts are the tip of the iceberg as frustrated young Aussies are looking at their lives and asking ‘is this it?’
According to the AYAC’s Luke Rycken, Australia’s ‘social contract’ – the idea that you work hard and you’ll be rewarded with a home to raise a family in – is crumbling.
Australia’s cost of living crisis worsened in January with inflation hitting a new 32-year high of 7.8 per cent.
The consumer price index in the year to December surged at the fastest annual pace since the March quarter of 1990, with Treasurer Jim Chalmers describing it as ‘unacceptably high’.
The main contributors to the CPI increase were housing (up 9.8 per cent), food and non-alcoholic beverages (up 8.2 per cent).
Faced with rising bills and housing costs eating up more and more of their pay packets, young Aussies are abandoning demanding careers that in the past would have set them up financially.
‘We’ve been sold a raw deal’: Nurse
A young Sydney nurse, 25, said she had quit the profession she felt committed to because it barely covered her bills.
She worked five days a week, for 12 hours a day in the high dependency unit of a major hospital, but quit because the money left over after paying rent and bills wasn’t worth the stress of the job.
‘I just quit my job and I’m giving up. We have been sold a raw deal’, they wrote in a viral social media post.
‘I’m saving at a rate so slow I’ll never be able to buy a house, and if I can get one it will be two hours from the hospital.
‘At the end of the month I’m left with such a small amount that it makes no sense.
‘Not working anymore, getting abused daily, having poor sleep and failing my health.
‘I give up. I’m laying down. I’m not going to partake in the rat race anymore and just focus on living in the here and now.
‘I’ll move in with my parents and I’m considering changing to another career and even moving to Japan. Going to take some time to decompress and figure things out.’
It’s worth noting that is the experience of someone able to handle working 60 hours. As one Aussie said, if you are someone with a chronic and debilitating physical or mental health issue you are ‘straight up drowning’.
Although house prices have stopped boiling over because of interest rate rises, actually buying a house seems like a fantasy because high rents are stopping young people save.
Across Sydney the median cost of renting a unit jumped 18.6 per cent to $575 in the past year but in some suburbs, such as Zetland, rent went up 23 percent or $140 a week.
In Melbourne rents jumped 20 per cent, to reach $450 a week, but tenants reported increases of $75 a week were common.
With the average weekly wage for the 21-34 age bracket at $1,127.60 according to a survey by Instant Offices.
That means on average Melbourne renters are spending 40 per cent of their pre-tax income on housing while in Sydney it’s 51 per cent.
Once tax is taken, people have to pay for owning a car and fuel, cabs and public transport, phone and broadband plans, groceries, clothes, study and actually having a social life by going out.
And if you do what is recommended and see a psychologist to cope with the pressure of work, relationships and the cost of living, you’d be lucky if there’s anything left at all.
The Australian Psychological Association’s recommended rate for psychology for 2023 is $280 for 50 minutes, with and initial assessment fee of $406 for an 80-minute session.
It’s little wonder young Aussies look at house prices and resign themselves to never owning one.
In Melbourne the average house price was $897,222 in February while the cost of units is $585,366.
The median price for a house in Sydney in February was $1,217,308 in December and for a unit it was $769,773.
According to analysis of CoreLogic data, Sydney property values grew 449 per cent in the past 30 years.
It’s clear that for many young people, Australia’s capitals cities are losing their appeal because of their high costs.
So they are looking further afield – to overseas and in many cases regional Australia.
For the nurse, leaving Australia to live in Japan is an option she’s considering.
She was impressed her friend, who is married to a Japanese man, ‘bought a house for $350,000k in Osaka.’
Mr Rycken said the nurse’s decision to quit and opt out of the ‘rat race’ is not unusual in 2023.
‘We are hearing lot of young people reconsidering their career and the rest of their lives because of constant worries about paying bills,’ he said.
‘They are seriously questioning they can justify working fulltime if they still won’t be able to afford a place to live anyway.’
Mr Rycken said a major cause has been the failure of wage increases to keep pace with rises in house prices and rents.
‘The relationship between wage and the cost of buying a house has changed dramatically in Australia over the last 50 years.
‘The reality is this isn’t just about young people, it’s a problem for the entire country.
‘Do we really want to live in a country where working fulltime doesn’t provide enough money to visit doctor, raise a family and afford a home?’
‘Being a young person is such a scam’
Even when young people do make huge sacrifices and manage to buy property, financial penalties seem to be waiting.
A young couple’s angry post social media post was titled ‘Being a young person in Sydney these days is such a scam’.
The couple, who battled to buy an apartment, described how they became saddled with unexpected bills of $10,000 a year in ‘special levies’ to repair the shoddy work of builders who constructed their block.
‘I just feel like giving up honestly,’ they wrote.
‘No matter how hard you try it just seems like there are huge obstacles at every step to achieve what the older generation was essentially handed to them.’
The couple claimed that in their small circle, who were all were apartment owners, all of them have to pay levies of between $2,000 and $10,000 a year to fix dodgy building work.
Special levies are charged in addition to normal strata levies and are raised when a major unexpected repair requires urgent action.
In 2019, unit owners in Sydney’s Mascot Towers building were told the bill to repair cracking that evacuated the building could blow out to $20 million.
‘With the levies can never hope to get ahead,’ the couple wrote.
‘I know life isn’t fair but come on.’
Mr Rycken said a online survey of 500 young people done in January by the Australian Youth Affairs Coalition asked what they wanted the federal government to address in 2023.
An overwhelming 68 per cent answered they wanted the cost of living brought under control.
Broken down further, the three main types of costs young people worried about were housing costs and affordability (including rents), the cost of seeing a doctor (including mental health professionals) and day to day expenses, including petrol and groceries.
While it’s tempting for older generations to mock people in their 20s as soft or lazy, Mr Rycken says younger and older Australians share the same concerns about cost of living pressures.
The only differences between generations are the type of costs that are affecting them, for instance the rising costs of education tends to be a young person’s concern.
Fixing the problem of housing affordability is a problem that won’t go away – and will only get worse – he said.
‘What is required is a direct response from the federal government about how they will improve the problem of house and rents prices for young people.
‘Certainly there needs to be a big increase in the number of affordable homes built.
‘Then there needs to be a plan to address faults in property market and tax system that feed into high prices.’
The Silicon Valley Bank crisis has led to depositors pulling out monies from smaller US banks that dominate lending to the commercial real estate sector.
With fears of contagion following the failure of Silicon Valley Bank and others in the US and the Credit Suisse saga in Europe have ebbed over the last week, there remains an area of concern in the world’s largest economy that could cause the next banking crisis there.
Depositors are said to be shifting their monies from smaller US lenders to larger ones as well as to money market funds, crimping the capability of such banks to lend more.
US small- and mid-sized banks are vital to credit formation as they collectively represent 80 percent of commercial real estate lending, according to Brett Nelson, head of the tactical asset allocation for the Asset & Wealth Management Investment Strategy Group at Goldman Sachs.
Moreover, as these lenders tighten their lending standards, that could represent something on the order of a half a percentage point drag on gross domestic product growth this year, and the equivalent of about 25 to 50 basis points of Federal Reserve rate hikes, according to Goldman Sachs research.
Also read: Asian, Indian banks remain sheltered from West crisis..for now
The tightening in lending standards among those institutions is expected to reduce economic growth this year, Goldman Sachs Research said.
“While the macroeconomic impact of a pullback in lending is highly uncertain until the extent of the stress on the banking system becomes clear, economists in Goldman Sachs Research lowered their forecast for U.S. fourth-quarter GDP growth (year-over-year) by 0.3 percentage point to 1.2 percent,” it added.
Goldman Sachs economists expect lending standards will tighten more to a degree that’s greater than during the dot-com crisis, but less than during the financial crisis or the height of the pandemic.
Meanwhile, property commercial real estate prices in the US have fallen by 4-5 percent from their peak in mid-2022 and Capital Economics expects a further 18-20 percent fall from here.
Also read: Will the collapse of Silicon Valley Bank in the US impact Mumbai’s office leasing market?
What’s happening at smaller US lenders?
The smaller banks are experiencing pressure on their deposit base amid concerns about the health of these lenders in the wake of the collapse of SVB and worry about uninsured deposits in excess of the federally-insured limit of $250,000.
“But this has obscured a broader problem, which is that higher interest rates are causing a shift out of bank deposits and into money market funds as interest rates on short-dated securities rise faster than those on commercial bank deposits,” according to Capital Economics.
This has left the banks in a bind: either they would need to raise deposit rates in line with money markets and try to maintain profits by increasing rates on loans that are due to refinance, or they would need to shrink the asset side of their balance sheet in order to accommodate a smaller deposit base.
Either way, the fact that smaller banks dominate lending to commercial real estate means that financing to the sector is likely to tighten, the brokerage said.
The doom loop
In a worst-case scenario, it is possible that a “doom loop” develops between smaller banks and commercial property, in which concerns about the health of these banks leads to deposit flight, which causes banks to call in commercial real estate loans, which then accelerates a downturn in a sector that forms a key part of its asset base, which intensifies concerns about the health of the banks and thus completes the vicious cycle, Capital Economics said.
“Likewise, it’s possible that concerns about commercial real estate expose other vulnerabilities in the financial system, such as maturity mismatches within open-ended funds,” it added.
The distribution of dollar liquidity needs to shift to stabilize conditions in the financial system, according to Eugene Leow, Senior Rates Strategist – G3 & Asia at DBS.
While, on the whole, liquidity appears flush in the US, a closer look at the distribution of liquidity presents a problem for the Federal Reserve.
“First the failure of regional banks has worried depositors. As a result, deposits in larger banks have increased to the detriment of smaller banks,” Low said. “This shift is problematic if a liquidity crunch (from deposit flight) results in banks being forced to sell their assets.”
Moreover, not all the monies from smaller banks have shifted to the larger banks, with a large proportion also moving into money market funds.
“This also means that the banking system is losing deposits in this era of very high risk-free rates,” Low said. “This is not sustainable in the long run.”
What must the Fed do?
Fed policymakers’ goal for the year will be to keep demand growth below potential in order to keep the rebalancing of supply and demand on track, according to Goldman Sachs economists.
Tighter bank lending standards help to limit demand growth, sharing the burden with monetary policy tightening.
As such, Goldman Sachs has penciled in a pause in Fed hikes for the March 21-22 meeting. It expects a peak funds rate of 5.25-5.50 percent, but notes the sharply increased uncertainty around the path.
In February, 3.12 per cent of U.S. commercial mortgages were delinquent, according to data tracker Trepp Inc.FangXiaNuo/iStockPhoto / Getty Images
The humdrum business of renting out offices and stores is suddenly in the spotlight as property experts and economists warn that growing problems in U.S. commercial real estate could trigger a new financial crisis.
Among the people raising alarms is Scott Rechler, chief executive officer of RXR Realty, a large property manager in New York, and a director of the Federal Reserve Bank of New York.
In a Twitter thread last week, Mr. Rechler warned that US$1.5-trillion in commercial real estate debt will mature over the next three years. Most of it was taken out when interest rates were near zero.
“This debt needs to be refinanced in an environment where rates are higher, values are lower,” and markets are less liquid, he wrote. If lenders balk or problems emerge, “we risk a systemic crisis with our banking system, particularly the regional banks which make up 80 per cent of [real estate] lending.”
Somewhat similarly Neil Shearing, group chief economist at Capital Economics, warned that a “doom loop” could emerge in which falling commercial real estate values feed back into the U.S. banking system, choking off lending and creating further declines in commercial property prices.
“Historically, problems in the property sector have been at the heart of major crises,” Mr. Shearing wrote. Examples include the 2007-08 financial crisis, the U.S. savings and loans debacle of the 1980s and 1990s, and the British secondary banking emergency of 1973-75.
The current situation would have to grow far, far worse to match those previous episodes. It does have its worrisome aspects, though. The potential problems start with the plight of office and mall landlords in the United States.
Both groups were already struggling to keep up with the accelerated shift to an online economy that began during the pandemic. Now they are suddenly facing much higher borrowing costs as a result of the big increase in interest rates over the past year.
Office landlords are looking particularly haggard. They have been hit hard by the widespread shift to work-from-home arrangements.
Mall landlords are also feeling some heat as online shopping shrinks retailers’ demand for physical space.
The stresses in the office and retail sectors are taking a toll on even the most sophisticated of operators. Blackstone Inc. BX-N, the giant U.S. asset manager, made headlines late last year when it started to enforce limits on how much investors could withdraw from a private real estate investment trust designed for wealthy individuals.
The need to impose such restrictions speaks to how nervous those investors are growing about the prospects for commercial real estate and how many of them would like to head out the door.
Ian McGugan: Canadian bank stocks may not be quite as special as we think
Growing stresses in commercial real estate were further highlighted in February when Brookfield Corp. BN-T, the big Canadian asset manager, defaulted on loans tied to two office buildings in Los Angeles.
Such cases could multiply. In the U.S., the majority of lending to the commercial real estate sector comes from smaller banks that cater to a specific region instead of the entire country. The recent failure of Silicon Valley Bank, one of the larger of these regional institutions, has created concern about whether depositors may start to edge away from smaller lenders.
If depositors were to grow nervous and decide to transfer their savings to money market funds or larger banks, regional banks could be forced to suddenly curtail their lending to the real estate sector.
This would be no small matter. Cumulatively, regional U.S. banks have US$1.9-trillion in loans to commercial real estate operators on their balance sheets, according to Paul Ashworth, chief North American economist at Capital Economics.
The stresses at regional banks and the problems in commercial real estate could interact in nasty ways, Mr. Ashworth warned in a recent note.
Canada’s biggest shopping malls scramble for anchor tenants in wake of Nordstrom’s departure
“An adverse feedback loop” would begin with regional U.S. banks reining in their lending to commercial real estate operators. These tighter lending standards could cause more defaults in commercial real estate. That would drive down the value of commercial properties, forcing regional banks to increase their provisions for loan losses, triggering an even greater tightening in bank lending standards. And so on.
“In a worst-case scenario, we could have a rolling crisis that lasts for years,” Mr. Ashworth wrote.
Still, it’s far from certain that the worst case will materialize.
For one thing, the commercial real estate sector is made up of several distinct subsectors. While office and retail landlords are struggling, some other areas, such as industrial properties, have held up just fine, while still others, such as hotel properties, are actually seeing conditions improve as the economy reopens and travel resumes.
Taken as a whole, the commercial real estate sector doesn’t look so bad. Delinquent mortgages – that is, those on which payments have been overdue for at least 30 days – are rising in number, but the statistics are still a long way from panic levels.
In February, 3.12 per cent of U.S. commercial mortgages were delinquent, according to data tracker Trepp Inc. That is slightly higher than the 2.98 per cent recorded six months earlier but far below the record 10.34 per cent recorded in July, 2012.
Could heavy exposure to troubled office and mall landlords bring down some regional lenders? Maybe, but analysts aren’t sounding any alarms yet.
According to the Financial Times, the credit research team at JPMorgan recently ran a simulation exercise in which they assumed that regional banks take a 9-per-cent loss on their total office exposure and 6 per cent on retail. They concluded that the losses would barely dent the banks’ capital ratios, although they would weigh on earnings for as long as the losses persist.
This sounds painful. It doesn’t sound like a new financial crisis, though. At least, not yet.
By Danyal Hussain For Daily Mail Australia
14:43 15 Feb 2023, updated 15:50 15 Feb 2023
- Mark Bouris sold his home in crisis in the 90s
- He thinks many Aussies will have to do the same
- Said he has been inundated with desperate messages
One of Australia’s top mortgage lenders has issued a dire warning to homeowners after interest rates reached a 10-year high: Sell now before it’s too late.
Businessman and ex-Celebrity Apprentice host Mark Bouris told Daily Mail Australia he was forced to sell his house when interest rates hit a record 17.5 per cent and the country plunged into recession in 1990 – and warned history may be set to repeat.
Reserve Bank governor Philip Lowe on Wednesday told a Senate hearing in Canberra this month’s ninth consecutive interest rate hike – taking the cash rate to 3.35 per cent – would be far from the last.
Average borrowers on a 30-year loan term are now paying $3,303 a month – a 43 per cent jump from $2,306 in May 2022 – and further rate rises this year are all but certain.
Mr Bouris, one of Australia’s top financial advisors and founder of mortgage lender Wizard Home Loans, said today’s hikes reminded him of 1990 when interest rates hit record highs and he was forced to sell his home.
He said families today need to ‘bite the bullet’ and consider doing the same because the worst could be yet to come.
‘My kids were young and we had to move out and rent a place. That wasn’t great. They wanted to know why we were leaving and I had to explain it,’ he told Daily Mail Australia.
‘[My wife] would ask when would we have the security of our own place again … I was a young guy and I felt a bit embarrassed about the situation.’
Mr Bouris said his family spent four or five years in the rental home before finding their feet and getting back on the buyers’ market.
He said the struggle of selling the family home and moving into a rental was tough, but it was the right decision for their future.
‘You’ve got to bite the bullet sometimes and realise that selling now is probably better than selling later,’ he said.
‘I had to sell my home and I think a lot of Australians are in a similar place this time. Don’t feel embarrassed. Sometimes, it’s just how it is.’
Mr Bouris published a video on TikTok where he asked Aussies struggling with interest rate hikes to get in touch.
Within a few hours, he was inundated with messages.
‘I’ve had to actually put up another post saying please just hold off sending because I’ve had hundreds of responses,’ he said.
‘I’ve had responses from people struggling because of all sorts of circumstances.
‘There’s domestic violence where people had to move out or one of the partners has had to leave and the other is left with the mortgage and can’t maintain it on a single income.
‘Others have had problems with businesses … because of COVID – and they can’t now afford to pay the new interest rates.
‘I’ve had literally hundreds [of messages] and I’ve probably replied to maybe 60 – but each one requires a fair bit of time and effort.’
He said one of the major issues he’s come across is the new variable rate kicking in.
The era of the record-low 0.1 per cent interest rate in 2021 saw borrowers take advantage of home loan rates of two per cent or lower.
But now more than 800,000 loans, temporarily fixed with those ultra-low interest rates, will expire this year – and those mortgage holders will face a massive increase in repayments.
Meanwhile, Dr Lowe told the Senate hearing on Wednesday the situation for homeowners would get worse before it gets better.
‘There is a risk that we have not yet done enough with interest rates and spending is more resilient and that inflation stays high,’ he said.
‘If inflation stays high, it’s very damaging for the economy, it worsens income inequality, it makes it harder for businesses to plan, it erodes the value of people’s savings, it’s corrosive for the economy.’
Dr Lowe warned worsening inflation would lead to even higher prices and higher unemployment, referencing the early 1990s when the jobless rate hit double-digit figures even after a recession.
‘We’ve got to be attentive to the risk from higher inflation – it’s more than 30 years since we had higher inflation, I think many people have forgotten the really, serious damage that does to people, to livelihoods, the functioning of the economy if it persists,’ Dr Lowe said.
Dr Lowe acknowledged it was ‘really, really hard for some people’ who would have to battle ‘a very big increase in their mortgage payments’.
However he noted that he had to tackle inflation running at a 32-year level of 7.8 per cent to avoid a repeat of 1990 when wages growth failed to keep pace with price rises.
‘When we’re raising interest rates… it’s unpopular in large parts of the community, particularly given the history of the lower interest rates over the years,’ he said.
‘It is unpopular and it’s the job of the central bank to do what’s unpopular in the national interest and that’s what we’re doing.
‘If we don’t get on top of this, the pain will be worse.’
But Dr Lowe, who is on a $1,037,709 remuneration package, said he understood borrowers were doing it ‘really, really tough’.
‘I read those letters and hear those stories with a very heavy heart,’ he said.
‘I find it disturbing. People are really hurting, I understand that, but I also understand that if we don’t get on top of inflation it means even higher interest rates and more unemployment.’
Mr Bouris hit out at the government and Reserve Bank for putting Aussies in the position of having to sell their homes – and offered advice for those struggling with rising mortgages.
‘If I was in that position, if that was me, knowing my circumstances, I would sell now rather than sell in six months time because I think the chances are that you get a better price now,’ he said.
‘I don’t see why the government should put people through that. The government have raised outstanding amounts of taxes over the last couple of years .
‘The government is in a position to probably give a little bit back to those people who are going to suffer during this inflation fighting period.’
Mr Bouris was unimpressed with the government’s actions tackling the crisis and said its policies during Covid made the situation worse.
‘Governments cause inflation because they give money and people think, “oh, that’s free money. I’ll go and spend it”,’ he said.
‘During Covid, they gave the bank’s money to lend money to people to buy houses. They gave it to banks really cheap. So therefore, the banks pass that on to borrowers really cheap. We gorged ourselves with cash and then we gorge ourselves once the lockdown closed off.
‘We gorged ourselves with luxury. We went on holidays, we bought second-hand cars, we bought four wheel drives, televisions, we just rewarded ourselves ridiculously and that is human behaviour.
‘Both the government and the Reserve Bank created inflation. Now they are trying to fix inflation and mortgage holders are going to pay it. I just think that’s really unfair.’
As a solution, he called on the government to offer a rebate to mortgage holders.
‘If you have a rebate off tax for a mortgage, let’s say a million or less, then that will help them keep their heads above the water while interest rates keep rising,’ he said.
‘Make it $2,000, for example. That $2,000 you then make an application to the Tax Office for. The $2,000 rebate will be distributed to you and it will help borrowers who need it.
‘I think that’d be a great economic policy for the government to bring out the next budget, it makes sense.’
Finance guru David Koch explodes over interest rate debacle and says EVERY Australian who took Reserve Bank Governor’s ‘derelict’ advice should get their loan guaranteed
Sunrise host David Koch has called on the government to guarantee every home loan taken out on the ‘derelict’ advice of Reserve Bank Governor Philip Lowe that interest rates would not rise until 2024.
The Reserve Bank Governor will face a grilling in federal parliament on Wednesday over the nine rapid rate interest rises that have have occurred since he forecast that they would not go up until 2024.
Interest rates rose to 3.35 per cent last week – the highest they have been in 10 years.
The succession of interest rate rises mean thousands of households are facing the so-called mortgage cliff, as low fixed-rate mortgage deals expire and the higher interest payments begin.
Koch said many who invested on Mr Lowe’s erroneous forecast could lose their homes.
‘All of these Australian households, imagine the emotional pressure you would be going under at the moment, facing the prospect of a sale on your house,’ he said on the Channel Seven breakfast program on Wednesday.
‘It would be destroying families and destroying relationships. That’s the human side of it.’
Koch proposed the Albanese government should go to the banks and say ‘we will guarantee these people’s loans because they followed the derelict advice of the Reserve Bank’.
‘They’ve still got to paying their loans but many of them are in negative equity and the bank will be on the verge of selling them out,’ Koch said.
‘It’s not a handout, it’s just saying to the bank, don’t close them down, we will guarantee it until things improve.’
Negative equity occurs when a property is valued at less than the loan taken out to purchase it.
Koch’s Sunrise co-host Natalie Barr initially raised her eyebrows in shock at the suggestion but by the end of the explanation she was nodding in agreement.
The Reserve Bank Governor will face Senate Estimates on Wednesday.
Last week, the Reserve Bank lifted interest rates to 3.35 per cent, in the latest increase.
For those coming off fixed rate deals this could mean a jump from paying 2 per cent of their loan to over 5 per cent.
This means an extra $1,114 for a borrower with an average $600,000 home loan who is coming off an ultra-low fixed rate of 2 per cent and moving on to a new 5.26 per cent variable rate mortgage.
Dr Lowe will be questioned by the economics legislation committee as the Reserve Bank foreshadows more interest rate rises to rein in inflation, which grew by 7.8 per cent annually in the December quarter.
The federal government is concerned about the 800,000 mortgage holders on fixed rates yet to feel the full brunt of increasing rates.
The future of the RBA’s leadership has also come under question ahead of the treasurer’s decision on whether to extend his term in the second half of 2023.
Several MPs, including Labor backbenchers, have questioned the future of Dr Lowe based on the RBA’s predictions issued during the pandemic that interest rates would not rise until 2024.
Treasurer Jim Chalmers has refused to comment on Dr Lowe’s future as Reserve Bank governor.
The RBA is also subject to an independent inquiry, with the findings due in March.
City asked to reconsider role in commercial developments
Recently, I responded to the City of Flagstaff (COF) appeal to residents regarding current budgeting priorities and objectives. Earlier this year I had the opportunity to attend the City of Flagstaff’s budgeting retreats. Over multiple days, I learnt a great deal regarding the anticipated spending on operations and capital projects for fiscal year 2023-2024. The days were filled with charts, tables and diagrams.
At the end of one day, a COF staff member presented the refurbishing and rebuilding of a commercial property owned by the COF. The property is located before the entrance to Buffalo Park and it is primarily leased to the USGS. He proceeded to tell the budget meeting attendees, City Council and City Staff primarily, that a new investment in the USGS buildings would cost over $50 million. This amount was higher than prior year estimate of over $35 million! But not to worry, USFS and the COF were close to agreeing to a five-year lease with a five-year renewal! Not one question from the audience! Not a peep! Not a graph, table or diagram! I was stunned! I do not believe any commercial developer would spend over $50 million with a potential five- or 10-year lease in the future.
Developing commercial property is NO WHERE to be found in the Flagstaff Key Community Priorities and Objectives used in the COF budgeting. The COF mission does not mention the COF developing commercial property.
If the COF remains in commercial building business, this presents numerous conflicts of interest for the COF. This situation today is like having the fox guarding the hen house given the COF enforces and creates the building codes!
The COF should divest all commercial property; the residents tax dollars can be better spent on actual COF’s Priorities and Objectives.
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