These were chilling words, heard in New York in June: “We are approaching a situation of systemic risk that nobody is talking about.”
The speaker was talking about the American property market, which is measured in the multi-trillions and is the world’s biggest single asset class. Under the rules of our conversation, I cannot identify him, but I assure you, his opinion should be taken seriously.
What he doesn’t know about US property probably isn’t worth knowing. Nor is he a sensationalist type, working as a top executive in a cautious profession not given to lurid headlines.
It’s worth bearing his view in mind as the Cityscape bonanza gets under way in Dubai. UAE property is of course a very different animal from the canyons of Manhattan, but if there is a problem with the biggest market in the world, we all have a problem, as became painfully apparent in 2008.
His pessimism derives from several factors. The macroeconomic environment and American demographics are combining to produce a distinctly gloomy outlook for property. GDP growth is slow at about 2 per cent, and jobs growth is sluggish.
Household debt is nearing the same levels as before the financial crisis, with a big chunk of student debt hanging over people who would normally be first-time buyers.
The millennials are not helping at all. There are 80 million people in the US between the ages of 20 and 35, and they are a big reason for the clouds in residential property. They are increasingly living in their parental home, but for the first time in American history they will not be as wealthy as their parents. They do not want the suburban dream, but are deterred by high prices from pursuing a property-owning downtown life. They are natural renters, not buyers.
Home ownership levels are dropping, now at about 54 per cent, the lowest in 150 years. In cities like New York, land is so expensive that affordable housing does not make sense. Only luxury developments work for the financiers.
That would not matter from a financial standpoint if there was a line of wealthy foreign investors ready to take up the big-ticket developments, but there are worries about virtually all the overseas markets that traditionally buy US property. The Chinese, Russians, Gulf nationals and Europeans all have their own worries. The biggest foreign investors in US property are, surprisingly, Canadians.
In commercial property, the situation is hardly less gloomy. The recovery in office prices since the crisis has been slow, in retail even slower. The post-crisis boom in hotel construction is beginning to show signs of petering out.
New financial regulations, put in place after the 2009 collapse are making it more difficult to fund big property developments. Commercial mortgage backed securities, although more tightly regulated, have the potential to wreak similar havoc in commercial that collateralised debt obligations did in residential in 2008.
The prospect of a new president with a track record of financial mismanagement and bankruptcy in the property market, Donald Trump, is the last thing the US needs in such fragile circumstances.
Follow The National’s Business section on Twitter