Pakistan Property & Real Estate News

Home ownership in record plunge

NEW YORK (CNNMoney.com) -- The housing and mortgage meltdown caused the biggest one-year drop in the rate of homeownership on record, according to government figures released Tuesday.

The decline, while expected, is yet another indication of the housing market's sudden and dramatic turn.

The Census Bureau report showed that home owners accounted for 67.8% of occupied homes in the fourth quarter, down 1.1 points from a year earlier. It's the largest year-over-year drop recorded in the report.

"It's an incredible story," said Dean Baker, co-director of the Center for Economic and Policy Research. "We're back to where we were in 2002, which is before the subprime nuttiness and run-up in prices. And it's not clear how much farther we're going to fall."

The ownership rate was well below the 68.2% ownership rate in the third quarter of 2007. Homeownership rates, which have been tracked since 1965, hit a record high of 69.2% in the second and fourth quarters of 2004. Foreclosures leap 75 percent

A record 2.18 million homes sat vacant and available for sale in the fourth quarter, according to the report, up from 2.07 million in the third quarter and the 2.1 million a year earlier. The fourth-quarter reading on vacant homes for sale matched the previous record set in the first three months of 2007.

The report shows that 2.8% of homes not in the rental market now sit vacant, matching the record high, also from last year's first quarter. That's nearly twice the rate of vacant homes that were on the market during the first quarter or 2001, just as the economy was heading into its last recession.

"For some perspective sake, this measure never topped 1.9% until the housing bubble started deflating," said Mike Larson, a real estate analyst with Weiss Research.

Dream turns into nightmare: The report shows that the ability of home ownership is slipping away for many Americans who had taken the plunge and bought homes during the housing boom of 2003 to 2005. The accelerating decline in ownership rates is a stark contrast to the relatively steady rise over the previous 20 years.

"The vast majority of those switching from ownership to renting are foreclosures or those forced to sell because they can't make the payment," said Baker. "What's really striking is we should have seen a rise of ownership because of the demographics, with all the baby boomers entering their peak home ownership years. Instead, we're seeing it fall quite a bit."

But the subprime mortgage crisis of 2007, which cut off financing to many who had previously been able to use riskier loans to buy a house, and the rising foreclosure rates are just the latest blow to home ownership.

The real estate boom that preceded the mortgage meltdown had produced its own problem, as rising prices reduced affordability for many homeowners and locked out many who wanted to buy a home. Now the reports of falling prices are scaring many potential buyers even in markets where homes are becoming more affordable.

The glut of vacant homes and the falling rates of ownership are signs of the evaporation of demand for home sales, which in turn has hammered housing values, particularly in neighborhoods with multiple homes sitting empty.

Flood of bad news: The report comes the same day that RealtyTrac, an online seller of foreclosure properties, reported that total foreclosure filings grew 75% in 2007 and S&P Case/Shiller, which tracks home values in the nation's largest markets, posted the biggest price decline on record for its November reading.

The downturn has also hit home builders particularly hard. Hollywood, Fla.-based home builder Tousa (TOUS) filed for bankruptcy protection Tuesday.

And builders have been stuck with a record inventory of 195,000 completed homes at the end of December, according to a separate Census Bureau report Monday. That report also indicated that new home sales posted the biggest annual drop on record last year.

Lennar (LEN, Fortune 500), the nation's largest builder by revenue, reported a company record $1.25 billion fourth-quarter loss on Thursday, as it was hit by lower prices, weak volume and hefty charges to write down land values. At the end of its most recent quarter, Lennar agreed to dump 11,000 properties to the real estate arm of Morgan Stanley (MS, Fortune 500) for only 40 percent of their previously estimated value.

Other top builders, including KB Home (KBH, Fortune 500) Centex (CTX, Fortune 500), D.R. Horton (DHI, Fortune 500) Pulte Homes (PHM, Fortune 500) and Hovnanian Enterprises (HOV, Fortune 500), are all expected to post losses through much of 2008.

The sharp decline in home building, coupled with the reduced ability of many American consumers to tap into home equity lines of credit to support their spending has significantly increased the risk that the broader U.S. economy will topple over into a recession this year, if it hasn't done so already.

Interest rate hike has no lasting impact on property markets

The Reserve Bank of Australia (RBA) has lifted the official cash rate by 25 basis points to 6.75% - an 11 year high following the strong inflation numbers in September. The widely anticipated rate hike will hit those who those repaying home loans as well as renters.

Craig James, chief economist with CommSec says the rate hike will further delay recovery in home construction, keeping the rental market super-tight and putting upward pressure on rents.

"Today's rate hike will have the biggest impact on the housing market. Recovery in the construction sector will be postponed yet again with a pick-up now unlikely until mid 2008 at the earliest. And not only will home borrowers need to find more dollars for the fortnightly or monthly repayment, rents are also likely to rise due to the lack of new apartments on the market."

However, residential Managing Director of Colliers International Grant Dearlove believes Australia's real estate market is unlikely to experience a downturn as a result of the rate rise. He says that traditionally, a rise in interest rates leads to a reduction in sales volumes in the short term but it would not have a lasting impact on the overall residential property market.

"The residential property market has too much momentum for it to be arrested by a quarter of a per cent interest rate rise," says Dearlove. "However, it is expected that there will be a slow down in sales volumes while people assess their personal positions. "The sales activity normally slows for about one to two months before picking back up again."

Dearlove said historically, some of the biggest property price hikes have occurred when interest rates were at their highest.

"My advice would be to check your finances, see what you can afford," he said. "Don't think if you buy -- the value of your assets will go backwards -- the economy in Australia is too strong for rate increases to have a negative impact," he says.

James agrees that for those who are still struggling to gain a foothold on the property ladder, there may be a silver lining. "Those people that have no mortgage may actually stand to benefit from the latest rate hike as it will push up returns on bank and money market investments," says James.

He also noted that while repayments on the average home loan have gone up by around $50 a week over the last three years as a result of rate hikes, the average after-tax wage has increased by $130 a week during the same period. "Plenty of people will feel worse off after today's rate hike, but clearly the move needs to be kept in perspective," he says.

The 6 key drivers of property prices

Learning to know what precedes property price increases can be challenging for any investor. What do the statistics really mean? Do they represent the factors that change prices in the property market? How do we use these primary sources?

There are some well-recognised factors that drive the market. Seasoned investors should stay informed about two main economic conditions and four current situations where demand and affordability interact to create opportunities.

1. Supply and demand Population change is the key driver of demand. When an area becomes popular more people want to live there. Given there are fewer dwellings than interested parties, prices increase. Conversely, when the population declines and there are more dwellings than people, prices decline. The Australian Bureau of Statistics (ABS) publishes figures on population growth after each five-yearly Census. Generally trends in population growth don't change rapidly.

The other driver is availability of land. Natural geography limits this, while in other areas such as the ski fields it's limited by National Parks.

Things that do change population growth rapidly - and provide investors with opportunity - are changes in immigration quotas, changes in infrastructure making areas more or less attractive and accessible to live in, and changes to employment such as the booming resources industry.

2. Affordability and availability of money Affordability is the relationship between housing prices, interest rates and wages.

It's the cost to the owner or investor to retain and enjoy a property. When prices, interest rates and wages reach a ceiling in a particular area, residents often realise they can have a better lifestyle elsewhere. A good example of this has been the rapid migration of Sydney homeowners moving into the Brisbane and Gold Coast regions. This, in turn, has raised prices significantly in Brisbane to the point where the median price is almost on par with Melbourne.

3. The resources boom The current boom in natural resources being mined, harvested and extracted to fund international infrastructure - especially in China and India - has increased the demand for skilled and semi-skilled workers.

Unlike some other industries, the mining industry pays most of its workers high salaries and demand for these workers is driving salaries even higher. These workers are then seeking to improve their lifestyle by buying bigger and better homes, or maybe an investment property or two. In Perth, Darwin, parts of Queensland and other mining areas there are whole suburbs, towns and cities of people with the ability to afford more.

4. Infrastructure Infrastructure is always a major driver for price growth when it increases the attractiveness and amenities of an area.

The benefits of infrastructure are generally recognised after the changes. Here are a few examples:

North-west Sydney, NSW - the opening of the M2 and M7 freeways made the north-west of Sydney more accessible and attractive and resulted in increased property prices and rental return.

Airlie Beach, Queensland - the impending addition of a multimillion-dollar marina and additional infrastructure to cater for tourism has caused property prices to increase by over 25% in the last year.

Gladstone, Queensland - the introduction of a new aluminium smelter is providing new jobs, and a strong economy is another major driver.

Mt Hotham, Victoria - the re-development of the Mt Hotham Village and the concomitant limited land release will increase prices.

5. Sea change The population shift towards waterside living has pushed prices up in all capital cities and many coastal regions.

This trend is continuing and has resulted in waterside investors obtaining greater returns.

6. Ageing population Over the next 5-10 years most Baby Boomers are expected to retire from the workforce and look to move to the seaside in order to improve their lifestyle. They will also need income and many have responded in surveys that they intend to buy investment properties.

This may include consideration of commercial property investment as they can use their super scheme to invest; it's easier to manage than residential property and has greater returns.

Put a number of these drivers together and you have an extremely good understanding of what's going to drive price growth. Having identified these areas, careful homework may reveal good cash-flow returns as well.