Housing boom goes global; bust fears loom

By JON E. HILSENRATH and PATRICK BARTA, The Wall Street Journal via AP
July 10, 2005

It was a familiar story from Golden Land Property Development PLC. With its 35-story Sky Villas condominiums nearly sold out, it unveiled plans for an even more lavish project. The Infinity features a replica of Rome's Spanish Steps, a spa in a restored historic mansion and faux-Venetian canals. Some 90 percent of the units in the new development sold out in less than three months, even though some units were priced at more than $1 million.

The project isn't in a steaming-hot U.S. real-estate market like Las Vegas or Miami. It is in Bangkok, where home prices are soaring, bank mortgage lending is climbing and developers are adding thousands of glitzy units.

It is a remarkable turnaround for a city whose property market went belly up in 1997, and it points to an important facet of this housing boom: It is global and, in some places, more dramatic than in even the most frenzied U.S. markets.

Over the past three years, measures of housing values are up 48 percent in France, 33 percent in Brazil and they have nearly doubled in South Africa, according to data gathered from these markets from sources like the Bank for International Settlements, Economy.com and The Wall Street Journal. In just the past year, prices have risen 19 percent in Hong Kong and 48 percent in Bulgaria. In China, Australia, the United Kingdom and Spain, they have also boomed, though they are now showing signs of slowing in some places.

Americans are searching out castles in Umbria. Londoners are gobbling up beachfront property on the shores of Bulgaria. Europeans are finding dream homes on the Indian Ocean near Durban. And in Bangkok, eight years after the city's property market collapsed, Golden Land is seeking buyers from abroad with a sales pitch that promises "an environment so opulent, only in your dreams could it be imagined."

"There is a tremendous amount of money floating around looking to invest," says Liakat S. Dhanji, the Nairobi-born chief executive of Golden Land.

Low interest rates are the obvious engine of this global boom. But there are many other factors at play, including the intensifying flow of capital around the world, aggressive lending by banks here and abroad and a frantic search by investors, large and small, for returns that beat stocks and bonds. The question being asked by economists now is whether the links in the international financial system that helped create a housing boom from Bangkok to Boston could also create a global bust.

If home prices were to fall broadly, it would test the financial system, since banks and investors around the globe have been gobbling up mortgages and real estate at increasing rates. It could also undermine the ability of individuals to spend, since so much wealth is now tied up in homes.

Economists often say real estate, which can't easily be traded like a stock or oil, is driven by local factors — like the availability of land in an area or regional employment trends.

"The housing market in the United States is quite heterogeneous, and it does not have the capacity to move excesses easily from one area to another," Fed Chairman Alan Greenspan told Congress last week. "Instead, we have a collection of only loosely connected local markets."

But a growing body of economic research challenges that theory. While local factors do play a critical role in shaping real estate values — prices have risen more in Miami than Memphis, Tennessee, and they have fallen in Germany and Japan — economists are beginning to concede that global factors can play just as important a role. Researchers first recognized the global pattern in commercial real-estate markets after the office booms and busts that marked the 1970s and 1980s. Now they are seeing it in residential housing, too.

In a study written last year, Marco Terrones, an International Monetary Fund economist, found 40 percent of house price movements around the world were driven by factors that translate across borders, like interest rates and economic growth. "Just as the upswing in house prices has been mostly a global phenomenon," Terrones argued, "it is likely that any downturn would also be highly synchronized, with corresponding implications for global economic activity."

Prices are showing signs of slowing or even falling in some places. In Australia, for instance, home prices rose about 60 percent during 2002 and 2003. But they have edged lower since. In the United Kingdom, the Netherlands and South Korea, they also have lost some momentum. In many other parts of the world, regulators are working hard to cool housing fever. Real estate brokers in China, for instance, have seen signs of a sales slowdown since Chinese authorities imposed a 5.5 percent tax on properties that are flipped within two years of purchase.

Most economists still believe a housing slowdown, if it actually comes, would be absorbed by the global economy without much disruption to overall growth rates. Indeed, it is possible the globalization of this boom helps to spread out the risk associated with it. But some economists aren't so sure.

"I'm worried about a world recession when this thing finally unravels," says Robert Shiller, a Yale University professor and author of the book "Irrational Exuberance."

Shiller's own university is an example of how globalization touches a uniquely local asset like real estate. Managers of Yale's $13 billion endowment are increasingly looking outside the United States and outside of traditional stock and bond investments to diversify the school's portfolio.

In November, Dean Takahashi, senior director in Yale's investment office, rang the opening bell on the stock exchange in Bucharest. Then he told local reporters the university would be increasing its $20 million of investments in Romania, including some real estate projects. "We see enormous potential" for foreign investment in residential real estate projects, says Siminel Andrei, head of NCH Advisors Inc., the administrator of the Romanian unit of New Century Holdings, which manages some investments for Yale outside the United States.

It isn't just the free flow of capital that has globalized the boom. It is also the free flow of people. Doug Platt, a 41-year-old New York executive, counts on outsiders to flock to Italy. He and a group of friends and business associates are negotiating for the purchase of a 12th-century castle in Umbria for just over $5 million. Platt and his partners plan to carve the castle into 20 units and sell them to Londoners looking to hop over to Italy on discount airlines. He says he will keep one of the units for himself, because he and his Italian wife travel to the region frequently.

"If you are investing in Italy right now, one thing you will hear a lot is that the Italian economy stinks," he says. "But it doesn't really matter to us what is happening in the Italian economy. It's much more important to us what is happening 1,000 miles away in Britain."

The rise of an affluent, mobile class around the world should reassure him. Last year, there were 8.3 million people worldwide with $1 million or more in financial assets at the end of 2004, up from 7 million in 2000, according to research by Merrill Lynch and Capgemini.

While individuals and institutional investors spread bets on real estate, banks are directing more credit to home buyers. In the 12 nations that use the euro, mortgage lending has increased at an 8 percent annual rate since the end of 2000, according to Bank for International Settlements data. That is faster than the 5 percent rate of increase for corporate loans. Mortgage lending has grown at an 11 percent rate in the United States and a 6 percent rate in Japan, while business lending has contracted in both countries. In the United Kingdom, mortgage lending was up at a 20 percent rate while business lending was up at an 8 percent rate.

Some reports suggest banks also have become willing to take more chances lending. An April survey of loan officers by the European Central Bank, for instance, found European banks eased lending standards for housing loans during the past four quarters. Citing increased competition from other banks, they reduced margins on mortgages and slightly eased "loan to value" ratio requirements. Surveys of loan officers in places like Poland and Hungary turn up similar results.

"Lenders and investors have to be careful that they exercise proper risk management. If they don't, they're going to get burned," says William Rhodes, senior vice chairman of Citigroup. Rhodes says banks are better managed and better capitalized today than they were in the 1980s and 1990s, when he was helping to navigate debt crises in development countries. But he is still becoming concerned about a housing bubble.

The disparity between mortgage lending and business lending points to an undercurrent beneath the housing boom. Roughly five years after the 1990s tech bubble burst, business investment is still relatively modest around the world. In the United States, for instance, business investment in plant and equipment was 10.4 percent of gross domestic product in 2004, below its average of 11.5 percent of the 1980s and 1990s. In Germany, it was a little more than 11 percent of GDP, down sharply from 15 percent in the 1990s. GDP is a nation's total output of goods and services.

"Even in fast-growing Asia, most countries have not yet returned to the investment rates of the late '80s and early '90s, much less the frothy levels of the mid-'90s," says Kenneth Rogoff, a Harvard University economist and former chief economist at the International Monetary Fund.

The slow recovery of business investment, after the boom of the late 1990s, contributes to what Ben Bernanke, a Fed governor who has been nominated to serve as chairman of President Bush's Council of Economic Advisers, calls a "global savings glut," a flood of financial assets looking elsewhere for a home. That is helping to hold down interest rates and push up housing values.

Other factors contribute to the global savings glut. The boom in oil prices has resulted in huge trade surpluses among oil-producing nations, many of which are recycling their newfound wealth back into the world economy by purchasing bonds and sometimes real estate. Moreover, central banks have maintained relatively loose monetary policies in the wake of the 2001 recession and the uncertain recoveries that followed, adding liquidity to the financial system.

As a result, bond yields aren't just low in the United States. They are below 5 percent in Germany, France, Japan, the United Kingdom and Canada. That makes homes more affordable for individuals by reducing monthly mortgage payments. It also drives investors into real estate because the returns they can earn on bonds are so minuscule.

Equities have been a hair-raising alternative. The Dow Jones world stock index is down 1 percent so far this year, up 11 percent in the past 12 months and down 12 percent over the past five years.

"I see it on the face of people. They don't know what to do with the money," says Gary Garrabrant, who manages Equity International Properties Ltd., the international portfolio of Sam Zell, the real estate investor who made his fortune scooping up distressed properties in the United States. Garrabrant has been investing in homebuilders in Mexico and Brazil.

In Thailand, Bangkok Bank, Thailand's largest bank, is offering mortgages fixed for the first three years at a 5.25 percent rate, not much more than the rate on a five-year adjustable-rate mortgage in the United States. The result: Mortgage lending in Thailand is up more than 20 percent annually, after contracting sharply in the late 1990s.

A property boom in Thailand would have seemed unthinkable a few years ago. Thai banks were reluctant to lend and the number of developers dropped to fewer than 100 from as many as 4,000 during the 1990s boom. Between 1997 and late 2002, there were no major condominium projects launched in Thailand and government officials had to press the country's state-owned banks to extend more credit.

Now, there are some 14,000 condominiums in development in a city whose stock of existing units is less than 100,000. The number of single-family homes under construction shot up by nearly 80 percent over the past two years. Some analysts have started to worry that units in the city's most popular districts are being sold to speculators, who intend to resell them quickly for a profit. Average condo prices in Bangkok's high-end Sukhumvit expatriate district rose 34 percent in 2003, followed by an 18 percent gain in 2004.

Fearful of a 1990s repeat, Thailand's central bank has introduced rules that require banks to cap loans for large houses at 70 percent of the property's value and forced lenders to register major projects with the central bank. Regulators also began speaking publicly of a possible housing bubble. As a result, many analysts predict the country will avert another wrenching bust.

Golden Land Property nearly went belly up during the latest downturn. It was rescued by Dhanji, a Canadian citizen who worked as a real estate consultant in Hong Kong. Tapping into foreign investors like Morgan Stanley and financier George Soros, he says he raised $100 million and recapitalized the company.

Today, Golden Land has about 2,500 homes in the works or recently completed in Bangkok suburbs and 600 residential units planned or recently completed in the central business district. Its crown jewel is the downtown Infinity project. Condominiums will include Jacuzzi tubs with 270-degree views of the city. The company says it has raised prices 12 times since launching the project in mid-March due to high demand. Some 30 percent of the units are going to foreigners, many of whom see Thailand's luxury developments as a better value than pricey units in places like Shanghai, London or New York.

"There may be a (housing) bubble in the U.S. or Britain," says Gilbert N. Wong, an American executive whose company manufactures household appliances in Asia, but "there's no bubble here." He believes Bangkok is inexpensive relative to Tokyo or Hong Kong and he thinks incomes are rising, so sooner or later these will be in demand. Wong is shelling out more than $2 million for two Golden Land units; one is for himself and the other he might use for his children.

Rising rates or a change in sentiment by global real estate buyers are two main threats to the housing boom. In Bangkok, there aren't many signs of it happening yet.

"I think the U.S. is at the top of the cycle," says Dhanji. But Asian real estate, which only began recovering in the past few years, he says "is just beginning."

Location, affordability, jobs fueling area growth

Article published Jul 6, 2005

By ERIN EDGEMON
La Vergne is one of the fastest-growing cities in the state thanks to its proximity to metro Nashville and Interstate 24, affordable housing and job growth, said a local builder.
With a 7.6 percent growth rate from 2003-04, La Vergne ranks fifth in the state of Tennessee for overall population growth, according to population estimates recently released by the U.S. Census Bureau. La Vergne's population in 2003 was 23,053. The population grew by 1,758 residents to 24,811 in 2004.

"La Vergne has the most affordable new construction closest to downtown Nashville," said Mark Thomason, a partner in Greenvale Homes, a home construction and development company based in Murfreesboro. "La Vergne is the most affordable place to get in the Rutherford County School System."

Thomason said the bulk of his company's growth has been in the La Vergne market. The company's sales are up 11 percent this year from the first six months of last year. Greenvale plans to close on 350 homes this year, an increase of 59 homes over last year.

Based on raw population numbers, all of the major cities in Rutherford County — Murfreesboro, La Vergne and Smyrna — are in the top eight for growth out of the 349 incorporated cities in the state, said David Penn, director of the Business and Economic Research Center at MTSU.

In terms of sheer numbers, Murfreesboro saw the largest population growth in the state, he said. Murfreesboro grew from 78,049 residents from July1, 2003 to 81,511 as of July 1, 2004, an increase of 3,462 residents.

Based on percentages, Murfreesboro ranked 18th in the state for population growth at 4.4 percent, Penn said.

Murfreesboro Mayor Tommy Bragg said, "Low taxes, great location, educational access and livability make Murfreesboro and Rutherford County a very attractive location, and so much of the migration from other areas has been due to job growth, which is good not only for new residents but for existing residents."

Still, the mayor said the city is concerned about its growing numbers. For the past three years the city has put in place demanding restrictions and standards on residential and commercial developments, Bragg said.

"I think our growth is sustainable," the mayor said. "The city works very hard to provide the services required for quality growth," including the planning and construction of roadways, rehabilitating water and sewer lines and ensuring the local electric departments can handle additional growth.

Smyrna's population increased from 30,691 in 2003 to 31,925 in 2004, according to the U.S. Census Bureau, which is an increase of 1,234 residents or 4.0 percent.

Al Shannon, of Smyrna, drives through his hometown and La Vergne every day to get to his job in Nashville.

"I know it is crowded, that is about it," he said of growth in both cities.

Shannon, who works at Dell Computers, said even backroads in La Vergne are congested because of large housing developments and small, two-lane roads.

Mark Tucker, Smyrna finance director, said while he sees growth as a good thing for the town, staying ahead of the curve can be a challenge. The town is trying to keep up with growth by adding additional road widening projects to the town's budget every year. Smyrna also is adding three new police officer positions to the budget this year.

La Vergne Police Sgt. Gerry Howse, who lives in Smyrna, said both Smyrna and La Vergne are attractive cities because of low property taxes, industrial jobs and the rural setting that is still present just outside of the city limits.

Growth in the city of La Vergne means city officials will have "to work harder and faster to put infrastructure in place sooner rather than later," said La Vergne Alderman Jerry Gann, adding that the city's new water treatment plant is up and running and the city has many road widening plans on the way.

Despite added infrastructure, Gann admitted La Vergne will continue to have congested streets and other growing pains.

"I would much rather have a little more congested traffic than have no jobs and the things that you don't have if you have no employment," he said.

Howse, who has worked in La Vergne for 10 years, said growth in the city is hard to keep up with. "Our car volume has increased," he said, and the police department receives more calls.

"I think, you know, you have these people who want to keep that small-town mentality," Howse said, "but it is not a small town anymore."

The population growth in Rutherford County means nothing to Denise Decker, who moved to the county a year and a half ago from Columbus, Ohio. Decker, who moved to La Vergne a week ago from Murfreesboro, said the congested roads in the city are nothing compared to the heavy traffic in Ohio.

But Decker likes living in La Vergne because of its low rent prices and proximity to her job, she said.

Samantha Russell, who moved to La Vergne from Mesa, Ariz. in March, also said the population growth and related traffic do not impact her because she is used to living in a much larger city. She said it is fairly easy to get around La Vergne compared to Mesa, which has a population of more than 426,000.

From what she has observed so far, Russell, who plans to start graduate school at Tennessee State University in the fall, said La Vergne has plenty of room for additional growth.

Penn noted that Murfreesboro's population growth rate is less than half of the city's job growth rate.

According to the U.S. Department of Labor, Murfreesboro's job growth for the third quarter of 2004 was 9.2 percent.

"It suggests that the population growth rate may increase, being pulled up by the job growth rate," Penn said. "I think it is possible that the population growth may accelerate from where we are now."

Penn said no job growth percentages exist for La Vergne and Smyrna, but he expects rates in those cities to be as high or higher than Murfreesboro's.

In addition to job growth, cities in Rutherford County continue to be attractive to families because of the climate and the high quality of life, including access to cultural and recreational activities and a good school system, Penn said.

Estimates from federal income tax statistics show that roughly a third of newcomers into Rutherford County come from Nashville-Davidson County, another third move from another county in the state and the remaining newcomers move from out of state, he said.

Davidson County residents, drawn to Rutherford County because of low housing costs, often maintain their jobs in the northern county, Penn said.

The fastest-growing city in the state was Spring Hill, located in Williamson and Maury counties, with a 17.9 percent population growth, Penn said. He contributes the growth to the Saturn automobile manufacturing plant located in the town and to a growing number of families deciding to move outside of population centers like Franklin and Murfreesboro.

MHA to redevelop 600 housing units at Dixie Homes

By Amos Maki
Memphis Business Journal
Updated: 8:00 p.m. ET July 3, 2005

Memphis Housing Authority plans to redevelop the massive Dixie Homes public housing project on Poplar, another step in the city's march to revitalize some of its most blighted neighborhoods and obsolete public housing developments.

Robert Lipscomb, director of Housing and Community Development and MHA, says he will apply for a $20 million Hope VI grant that would turn the housing project into a mixed-income neighborhood similar to Uptown. And even if the city isn't awarded the grant, Lipscomb says Dixie Homes needs to be redeveloped.

The move to renovate the 600-unit, 46-acre site is being made in conjunction with Le Bonheur Children's Medical Center's $235 million expansion, which includes tearing down the Memphis Mental Health Institute and erecting a new bed tower on the site at the corner of Poplar and Manassas.

Built in 1938, Dixie Homes is currently home to 475 families. If the city is awarded the funding, the new mixed-income development would be home to 375-425 units, including a mix of market rate, affordable and public housing.

"This is a neighborhood improvement project that includes Le Bonheur," Lipscomb says. "We want to rebuild the neighborhood and create a real mixed-income neighborhood around that whole medical community. Everybody is working together on this."

The Le Bonheur expansion and other private money -- approaching $2 billion by some estimates -- pouring into the Medical District could significantly improve the city's chances for getting one of the six grants that will be issued by the federal Department of Housing and Urban Development.

Since the city began applying for the funds, it has tied the public housing improvements to massive private sector projects.

"When you look at what is going on in the Medical District and Le Bonheur, that is a lot of leverage," says Marty Boscacy, deputy executive director of MHA.

If the bid is successful, the Dixie Homes renovation would be another in a series of community revitalization projects using Hope VI funds that are stretched across the city.

In 2004, MHA received more than $22.5 million in Hope VI Grant funds as a part of a $75 million plan to turn the former Lamar Terrace housing development at Lamar and I-240 into University Place, a public-private housing development that will have at least 391 units, including rentals, subsidized rentals for senior citizens and new homes. University Place is located just south of the Medical District and the burgeoning Biotech zone.

In 2000, MHA won $35 million in Hope VI funds to revitalize public housing developments in Uptown, the $151 million urban renewal project that covers 100 city blocks on the north end of Downtown. There, nearby St. Jude Children's Research Hospital is in the midst of a $1 billion expansion.

In 1995, MHA was awarded a $47.2 million Hope VI grant for the redevelopment of the 842-unit LeMoyne Gardens public housing development near LeMoyne-Owen College.

"It will be much like College Park and Uptown where you really rebuild a neighborhood and create a mixed-income neighborhood around that medical community," Lipscomb says.

St. Louis-based McCormack, Baron & Salazar, the developer for University Place and a national leader in Hope VI development projects, is contracted to redevelop Dixie Homes and has formed a partnership with Memphis-based Community Capital, a real estate and municipal financing firm that worked on financing plans for University Place and portions of Uptown. Urban Design Associates of Pittsburgh and Looney Ricks Kiss of Memphis are part of the design team.

The competition between cities for Hope VI grants is always stiff, but it is reaching a new level this year because only six grants will be handed out. President George W. Bush has proposed eliminating the grants, which cities say are vital for redeveloping blighted urban areas, in the 2006 budget.

Begun in 1993, the Hope VI program has distributed about $5 billion in grants to redevelop failed public housing developments into mixed-use, mixed-income neighborhoods.

A central premise of the Hope VI program is that high concentrations of unemployed, poor families create many of the social ills that plague the developments.

Besides building new structures to replace the blighted ones and reconnect them to the surrounding neighborhood, the Hope VI program also aims rebuild lives through self-sufficiency programs. To continue living in a Hope VI community, residents must sign a self-reliance agreement that requires them to participate in case management and meet certain employment and educational benchmarks.

But the Bush administration will face stiff resistance to eliminating the plan in the halls of Congress, where many members view the program as a savior.

"By planning to cut Hope VI, the administration is seeking to eliminate a $5 billion program that has helped revitalize our nation's urban areas," says Rep. Harold Ford, the Memphis Democrat who is running for the Senate seat being vacated by Majority Leader Bill Frist, a Republican. "And the impact of Hope VI goes beyond just brick and mortar. By giving people a home and facilitating resident training and job creation initiatives, Hope VI grants help transform people's lives. They are vital to help change depressed areas into safe, secure and sustainable communities."

The Hope VI program has fans on both sides of the aisle, including Sen. Rick Santorum, R-Pa., usually a staunch ally of the administration. Earlier this month he helped secure a $17 million grant for Philadelphia, saying he is "opposed to any kind of elimination" of the program.

But the Hope VI grant, if awarded, wouldn't cover all aspects of the proposed redevelopment. Lipscomb says he will have to raise funds locally to take care of the social services aspect of the program and demolition of the buildings because, unlike in the past, the grant money cannot be used for those components.

Job training is part of the program and residents of the new development could be trained to work in a variety of Medical District-related jobs.

"Once the physical barriers come down, then you see economic barriers come down," says Tom Currell, vice president of McCormack, Baron & Salazar. "All of the Medical District has been very supportive and is looking at strategies to help find employment opportunities for people in the neighborhoods, to get job skills training and find employment in the Medical District because in that complex of facilities there are all kinds of jobs available."

Currell says the plan calls for increased green space, park space and a more pedestrian friendly environment.

Although some cities have fared better than others in using the grant funds, there is ample evidence to suggest the program is working.

The Urban Land Institute says in a 2002 report that the Hope VI program "is the single most significant new federal housing initiative of the last decade," reporting that the program produced "dramatic results in some of America's worst neighborhoods."

According to a report from the Housing Research Foundation, per capita income in Hope VI neighborhoods rose an average of 71%, while unemployment rates dipped 11%. And 11% of households receive public assistance, down from an average of 39% in 1989, according to the report.

Beth Flanagan, director of the Central Biomedical District, says projects like University Place and the proposed Dixie Homes redevelopment are crucial for continued development in the area.

"It is important to all the stakeholders in the Medical District and Robert (Lipscomb) has a done a wonderful job bringing together public and private stakeholders," she says.