Housing is local. Housing bubbles are local too. And the subsequent busts are local as well. Different dynamics are at work in each city that is finding itself in a housing bubble currently – and there are quite a few of them. Because I live in San Francisco, I’ve written numerous times about our housing bubble here. It’s more magnificent and spectacular than the prior housing bubble, which blew up with great fanfare. In San Francisco, it’s the hot money that rains down from all over the world that is driving it. I call it the money transfer machine.
And that’s one of the things every housing bubble needs: plentiful money, wherever it comes from.
Then there is Miami.
Many of the 22,000 condos built in Miami during the prior housing bubble remained vacant for years as the hot air was hissing out of the condo bubble, and prices plunged. Ravaged by losses in their loan portfolios, banks walked away from lending on condos, and prices plunged further. Then cash buyers from abroad started showing up, mostly from Latin America, but also from cold parts of the world: Canada, Russia, and Europe. A feeding frenzy ensued. And over the last two years, prices on these units soared about 75%.
This renewed demand triggered another construction boom: 14 high-rises with over 4,000 condos are under construction in the downtown area; and 44 high-rises with about 13,500 units have been proposed. Builders are shelling out mega-dollars for prime sites. The Wall Street Journal called it a “land rush”:
Last July, Swire Properties Inc., a subsidiary of a Hong Kong-based commercial developer that is building Brickell City Centre, an enormous mixed-use project in downtown Miami, paid $64 million for 1.55 acres at 700 Brickell Avenue.
Four months later, the Related Group, chaired by Jorge Perez, a billionaire developer and minority owner of the Miami Dolphins, paid $104 million for a four-acre site at 444 Brickell Ave.
And a few blocks away, at the corner of Biscayne Boulevard and NE 3rd Street, multiple bidders have offered more than $80 million for two acres of land next to a Holiday Inn facing the water.
“These are trades that, three years ago, would have far surpassed anyone’s imagination,” is how Ezra Katz, CEO of real-estate brokerage Aztec Group, explains the phenomenon. “It’s a contest now, to see who can control the best sites in Miami.”
“A humongous shortage of land,” a developer called it. “On the waterfront, there’s none left. Every hole you see on the map now is being filled.”
So who is buying all these new condos?
A soon-to-be-released study for the Miami Downtown Development Authority, conducted by Integra Realty Resources and cited by the Wall Street Journal, dove into this somewhat delicate topic. Turns out, buyers from abroad snapped up 90% of them.
The soaring prices are no deterrent, said Anthony Graziano, author of the study. At least not yet. And they are soaring: prices of the 22,000 condos built during the prior bubble jumped from $230 a square foot to about $400 a square foot over the last two years, according to the study. Condos currently under construction are going for $450 to $550 a square foot. And condos in projects where construction hasn’t started yet are going for $550 to $675 a square foot. Nearly triple the $230 a square foot that condos sold for two years ago.
Developers don’t appear to be concerned. The last plunge and the resulting mayhem in the Miami condo market? No problem. This time it’s different:
Developers say there is less risk of a steep plunge in the current cycle. They have weeded out speculators, they say, by imposing a Latin American-style financing model that requires buyers to put down at least 50% before closing. As a result, developers are relying more on those deposits, and less on debt, to fund construction.
This should work out well. Purchasers clamoring to get their deposits back was a feature of the last bust.
But this renewed craziness is going according to the central-bank master plan. The many trillions that central banks have printed around the world, the zero-interest-rate policies they have imposed on their countries, and the financial repression they have inflicted on savers and fixed income investors with the express purpose of driving up asset prices, are doing their job. They are driving up prices not only of stocks and bonds and leveraged loans and junk bonds and farmland and synthetic structured securities, but also of real estate – including condos in Miami.
Everyone has their own list of exactly how this condo bubble is different from the one last time, which turned into brilliant and unforgettable fireworks whose debris scattered far and wide. This bubble won’t blow up, not this time. In fact, it’s not even a bubble. It’s just natural demand and a shortage of supply. Which is precisely what they said about the last one – until one day, demand just evaporated and supply kept piling up.