Property Inspector: What next for Detroit?
Earlier this month, Detroit became the biggest US city in history to file for bankruptcy after the city clocked up an estimated total deficit of $18.5 billion. As the application awaits approval, TheMoveChannel.com’s podcast asks what is next for Detroit.
– Bankruptcy offers “fresh start” for Detroit, say estate agents
– Bankruptcy is “exactly what Detroit needs – it couldn’t continue on this path”
– Property prices predicted to rise in certain locations
– Values up 13pc in last 12 months, 30pc below market peak
– 3 US cities filed for bankruptcy last year; all have seen house prices rebound
– “The population has declined, but so has the size of the city… There are some streets where people just don’t go.”
The Property Inspector interrogates Chris Stead, Director of Property Investment House, who specialise in Detroit real estate, to find out where Motor City goes from here.
Click here to listen to the full investigation.
$18.5 billion. It’s a big number. Was it expected?
“Certainly, it is a big number and Detroit is obviously well documented now for being the biggest city in the US to file for bankruptcy. For people on the ground, the whispers have been going around for a number of years that it was on the cards. And yes, although the figure is a big one, $9 billion, just over half of the total debt is legacy costs. One of the reasons why Emergency Manager Kevin Orr decided to go this route is it gives the city a chance for the majority of this debt to be sort of taken off.”
So this is a chance for a fresh start?
“If it goes according to plan, Detroit will be coming back a lot stronger and leaner, which is the whole point of a bankruptcy.”
It’s better to be honest about the level of deficit rather than just pretend everything’s fine…
“And they have been for decades – that’s been the problem. They have been going on and hoping things will get better. The reality is that if you don’t do something about it, it can’t get better. So Kevin Orr had very little option: this is exactly what Detroit needs – it couldn’t continue on this path, it was getting deeper into debt. To file for bankruptcy and wipe the slate clean is certainly the way to go.”
Detroit isn’t the first city to file for bankruptcy…
“It’s just the largest. Three cities in California lastyear filed for bankruptcy and their housing markets have all rebounded very strongly. San Bernardino filed in August 2012, house prices increased just over 30pc year on year. Stockton was another. They filed in June 2012 and house prices there rose 24pc year on year. Mammoth Lakes was the other one and a year later their house prices were 13 per cent higher. So there is no correlation between a bankrupt city and a housing decline. It looks like it tends to go the other way. It’s the uncertainty that doesn’t drive growth. If you take that off the table that will give a lot of confidence to local people and investors from other states and other countries.”
There have been a lot of foreclosures in Detroit. A house last year was up for sale for just $1…
“It’s well documented that there are parts that you wouldn’t want to buy in! There are some streets and neighbourhoods where people just don’t go. There are a lot of homes that are rundown and vacant. Those homes, you could sell them for $1 all day long, because no one wants to buy them. Nobody wants to live there. If you want to make money in the Detroit market, and wherever you buy, it’s about the location. Certainly, he houses that we offer at Property Investment House are good houses on good streets in good neighbourhoods. When we advertise them for rent, we get 20 to 30 phone calls from people wanting to live there.”
Is that tenant demand still high, despite the population drop? The population was at 2 million in the 1950s. Now, it’s nearer to 700,000. There are something like 78,000 abandoned buildings…
“If you think the population has declined, so has the size of the city. There are blocks that the city has already allocated to rezoning and demolishing. What I will also say, again, just like in London and other parts of the world after the recession, a lot of people lost their jobs. They were forced into rented accommodation. Rental demand has been very strong because the majority of tenants cannot qualify for a mortgage because the banks aren’t actively lending. That’s why there’s a real opportunity for investors who have the liquid cash to go in and buy a home. These homes are solid brick homes – the first time we went to Detroit we were very pleasantly surprised by the leafy streets and how well the homes are built.”
Rewind 12 months and in July 2012 house prices climbed by 12.2 per cent year-on-year. What’s happened since then? Have they continued to climb?
“Absolutely. They’ve grown around 13 per cent in the last year but are still excellent value at 65% to 70% of the peak of the market. We believe, and a lot of wealth businessmen in the area are seeing, this is a buying opportunity.”
Do you think house prices will drop again if the bankruptcy application is approved?
“A temporary blip maybe, for a few months, who knows? But again, if you look at the three cities that filed in California last year, certainly on a 12 month chart whether there was a little dip or not, the 12-month chart shows they rebounded upwards of 13 and 30pc. There’s nothing to suggest that house prices will come down at all in the next six to 12 months.”
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Notes to Editors
Founded in 1999, TheMoveChannel.com is the leading independent website for international property, with than 400,000 listings in over 100 countries around the world, marketed on behalf of agents, developers and private owners.
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Contact Dan Johnson on 0207 952 7650 for further information.