This time is always, always different.
One month ago exactly, the WSJ highlighted the booming Miami luxury condo market, noting that a preponderance of wealthy Brazilians fleeing an undesirable political environment has played an outsized role in fueling demand for high-end real estate in the city.
Similarly, NPR ran a piece in November of last year which cited a laundry list of factors to account for the robust foreign demand Miami has seen for luxury properties. Those factors, according to several people quoted in the article, include: nightclubs, jets, diversity, beautiful weather, great taxes, great restaurants, beaches, and the perception among Russian oligarchs that Miami is “the next Singapore.” Peter Zalewski, who runs cranespotters.com and is an authority on these matters, told NPR the following: “...if we were to sit down in a year from now, we will be well over and above what we did during our last boom and ultimate bust and then ultimate recovery.”
Average resale prices for Miami condos jumped by 20%+ in 2012 and 2013, a torrid pace that we recently called unsustainable and in fact, we predicted the boom in high priced Miami condos might well suffer the same fate as ultra luxury Manhattan apartments should foreign interest suddenly dry up for whatever reason. As it happens, Miami’s Downtown Development Authority is out with its Annual Residential Market Study Update and wouldn’t you know it, average retail value per square foot not only fell below 20%, but in fact fell to under 16%, the slowest pace in three years.
Also, note the caption under the graph which says, “IRR-Miami predicts further slowdown in appreciation and resale transaction volume as new projects deliver to market in 2015.”
One of the main culprits for slowing growth is the simple fact that foreign buyers (especially Brazilians) are seeing their buying power crushed by the rapidly appreciating dollar.
From the Miami DDR report:
The primary driver for the Downtown Miami Condominium market is foreign investment. At the early stages of this cycle, South American capital was extremely strong versus the dollar and represented significant purchasing power for South American buyers using foreign currency to purchase pre-sale units that were being sold in U.S. Dollars. In addition to the favorable currency exchange rates, South American buyers are typically hedging against their own economies, which experience significant fluctuations due to political turbulence.
Due to the recent advance of the U.S. Dollar vs. most South American and European currencies, the advantageous buying power of foreign investors has been diminished significantly since 2011 (with the exception of China). While the Euro has not diminished as much as the South American currencies, its slide vs. the U.S. Dollar has only recently started and is expected to continue to decrease over the next 6-12 months.
The significant slide in currency exchange from 2011-2015 for Brazil (-38%), Argentina (-52%) and Venezuela (-32%) could have an impact on projects that were heavily weighted to buyers from these markets as buyers will need to produce proportionally greater funds for the remaining 50% of contracted sale price to close on the units that were contracted in 2012-2013 and will be delivered in 2015-2017.
Visualizing the pain...
And as for demand from anyone other than the wealthy, well..
The slowest pre-sale absorption is occurring in secondary locations in projects at lower price points. While some of these projects appear to be more affordable, they have not gained traction with the foreign investment community. While these projects report very strong interest from the local buyer due to the 50% deposit structure, local buyers are unable or unwilling to contract on a unit under the 50% deposit structure.
Lenders need to exercise caution as projects “reach” for sales hurdles, but do so by abandoning the 50% down model.
It’s not difficult to extrapolate what happens from here. If condo prices stop rising but land and construction costs continue to climb, developers will stop building as their profits get squeezed. Have a look at the following “report card,” which tells us everything we need to know about where this is heading:
We have “early signs of new demand slowing” while “construction pricing is busting budgets beyond feasibility” in a market where “speculation abounds” in land pricing. When framed against a very unfavorable foreign exchange dynamic for the market’s most important buyers, the situation really couldn’t get much more precarious.
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Don’t say we didn’t warn you.