The Problem Is The Bubble And That Hasn’t Gone Away
All Things Considered reports on Ireland. “The government has depended heavily on consumption taxes, which are down sharply, as well as taxes on real estate transactions. Because of government policies that encouraged property development and a flood of foreign investment, the country experienced an infamous construction boom. With the bust in the housing market, starting in 2007, property tax revenues slowed sharply, and Dublin began to amass a massive budget deficit. At the same time, the government decided to help prop up some of its bad banks, staggering under the weight of failed real estate deals.”
“Neither has the government altered its pro-development policies, though in this battered real estate market, few people are choosing to take advantage of them. Today, as many as 150,000 empty houses dot the landscape, in a country of about 4 million people, says Fintan O’Toole, a columnist for The Irish Times and the author of Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger. There are also several hundred ‘zombie hotels,’ erected because tax law favored their construction, he says.”
“Government policies made the problem worse, O’Toole says. It’s a situation he calls ’surreal.”When people used to come to Ireland from abroad in the 1960s and 1970s, one of the sad things you’d see on the landscape was all these empty houses, and they were the sort of physical manifestation of famine in the 19th century, of mass emigration, of the kind of depopulation of whole parts of the countryside,’ O’Toole says.”
“‘So it’s pretty sad to create that out of disasters like famine and emigration,’ he continues. ‘It’s really insane to create it out of a boom. So out of prosperity we managed to create all these empty houses, which have the same ghostly presence on the landscape as the houses from the 19th century had.’”
The Herald on Ireland. “NAMA chairman Frank Daly said that while all developers have sent representatives to meetings with the toxic loans agency, some did not attend these meetings in person. ‘Certainly not all of them have yet abandoned the extravagant mind-set of the 2003-2007 era,’ Mr Daly said.”
“Mr Daly also said one of the more baffling features of the boom was that banks seemed oblivious to other lenders who were financing similar developments in the same area. He also raised big questions about Ireland’s planning process in the past and asked how many shopping centres or apartment developments a medium-sized town could accommodate. The hundreds of unfinished housing estates across the country will never be completed, the NAMA chairman said.”
The Irish Times. “The recession has had a strange impact on interiors, says Isabel Morton. Having lived through an affluent decade in which many became obsessed with property, the nation has become knowledgeable about décor and home furnishings and now demands certain standards. Ironically, despite the number of empty properties littering the countryside, garages, attics, basements and extensions are now being converted, not as luxurious additional living space but as places for extended family members to live in.”
“Couples who have separated but have to stay living under the same roof because they can’t afford to sell their home, are erecting partition walls, installing second kitchens and battling over who gets the main bedroom. And middle-aged parents, whose adult children should have long since flown the nest, are also now housing their children’s partners and their offspring in sometimes very restricted spaces.”
“Interest-only mortgages depended on a rising market and now many in the small-time landlord sector smell trouble, writes Jack Fagan. The interest-only candy pot was also raided by an estimated 10,000 accountants, lawyers and other professionals who spent between €1 million and €2 million each on buying homes with a typical loan-to-value mortgage of 80 per cent. Ominously, the Irish Brokers Association is now warning that, with the value of many of these homes down by 50 per cent, ‘another disaster is waiting to unfold.’”
“Frank Conway of the Irish Mortgage Corporation has voiced concern that the refusal by the banks to extend interest-only facilities could lead to a ‘bloodbath in the small-time landlord sector where many properties were financed through interest-only facilities in the expectation that this market was all about capital appreciation and a relatively quick exit.’”
“Conway cites an example of one investor coming off a five-year interest-only loan facility who has been denied an extension. The borrower’s disappointment is understandable considering that he has been on an incredible deal – an interest-only repayment of only 1.95 per cent. Clearly, the bank has been subsidising the mortgage for at least two years and, with all the banks now looking at ways of bumping up profits, this arrangement – and many more – will inevitably end.”
“The €300,000 mortgage has been costing only €487.50 a month but, with no capital paid down over the past five years, the full loan is still repayable. Even with the borrower on a tracker mortgage rate of 1.95 per cent, the new capital and interest repayments over the remaining 20 years will rise to €1,510 per month – an increase of just over €1,023 a month.”
Business Daily Africa. “The battle for mortgage business is intensifying as cash-flush institutions such as Kenya Commercial Bank and Housing Finance pour cash into more housing development projects. The courtship of developers has reached fever pitch, with previously laid-back institutions now aggressively going out for customers. They are not only forming clubs for developers but also wooing them into more and even bigger housing projects.”
“CFCStanbic is targeting a wider clientele in the metropolitan after realising that the asking prices in areas close to the Central Business District are just too high. Said the bank’s home loans manager, Mr Peter Ondieki recently: ‘Property prices in Nairobi are just too high.’”
“Recently Hass Property Index showed that prices for apartments in Nairobi targeting high-end income earners had tripled in three years due to speculative nature of the market.”
AFP News in China. “China’s recent measures to rein in soaring property prices had been effective in stabilising the real estate market, a top housing official said during a rare online chat with Internet users. Prices in major cities rose 11.7 percent year-on-year in March, the fastest pace since a nationwide survey was widened to 70 cities in July 2005, official data show. At the Beijing Real Estate Expo last month, the average price of a new apartment in the Chinese capital was 21,164 yuan (3,100 dollars) per square metre, double that of last year, state media said.”
“That means a 90-square-metre apartment in Beijing would cost 1.9 million yuan, compared with the average per capita income of 17,175 yuan in 2009.”
“Questions posted on the central government’s website covered a range of issues such as the lack of affordable housing and corruption among officials. One web user with the name ‘Give Me Hope’ complained he and his wife could not afford to buy an apartment in a second-tier city and were jealous of ‘house slaves,’ referring to people with a mortgage.”
“‘We cannot afford the down-payment at all, particularly after the issuance of the new policy requiring a down-payment of at least 30 percent,’ he wrote.”
The China Post. “Europe’s debt crisis will have a “ripple effect” globally and may force China to reverse its tightening policies, JF Asset Management’s Howard Wang said. ‘There could be an economic ripple effect globally if this is not quickly contained,’ said Wang. ‘And as we saw two years ago, there’s a danger in underestimating these ripple effects.’”
“China’s economy slumped to the slowest pace of growth in almost 10 years in the first quarter last year, after a U.S. housing market collapse sparked a credit crunch and sent the world’s largest economy into recession. Chinese growth rebounded after the government implemented a 4 trillion yuan stimulus plan and banks lent an unprecedented 9.6 trillion yuan.”
From The Star in Canada. “Last week, I detailed the economic impact of the residential construction industry in the GTA and mentioned a statement by Gluskin Sheff chief economist and strategist David Rosenberg to the effect that housing was behind Canada’s miraculous economic recovery. This week, I re-read Rosenberg’s economic commentary and took heart in his glowing comments about the contribution of housing to the economy, particularly of late.”
“‘Looking back to last year, it would have been inconceivable to be talking about a Canadian economic miracle, but that is exactly what we have on our hands today; a classic V-shaped recovery. This begs the question as to what has been the principal factor underpinning this impressive Canadian economic revival, especially in relation to what is happening in the United States. We can answer the question in one word: housing,’ Rosenberg wrote.”
“‘Based on our statistical work, around half the seven per cent annualized growth rate in nominal GDP from the recession trough has been due to the combined direct and indirect benefits from the housing boom. And when we apply the price deflators to the various sectors of the GDP, we actual find that every penny of economic activity, in real terms since this recovery began, has occurred thanks to the housing sector’”
“So there you have it — housing and housing alone lifted Canada out of the recession. The question is whether housing can continue to be the driving force in the economy as government stimulus is withdrawn and interest rates start to increase.”
“Meanwhile, out of the blue, the feds took some buyers out of the market by tightening mortgage financing rules for first-time buyers and severely clamping down on condo investors. Regulators might want to take note of Rosenberg’s description of housing as the ‘goose that laid the golden egg.’”
The Vancouver Sun in Canada. “There is a theory — well-oiled and much-flogged — that home ownership in Metro Vancouver is beyond the limit of ordinary working folk. it’s a promulgation fed beyond logic by those who rail about our cost of living, about leaky condos and greedy developers and non-residents driving up prices, about the average cost of a detached house in the region being too close to $1 million.”
“Turns out there are a lot of sweet deals out there. The national Multiple Listing Service site has 382 listings for apartments under $300,000 in Vancouver alone, with hundreds more in surrounding municipalities. But what about a house, you say, one that comes unattached on dirt, one for raising babies and planting perennials, one that doesn’t cost more than, oh, $500,000, which by all accounts is almost reasonable given recent local real estate history.”
“Barring an inheritance or a winning lottery ticket, everyone has budget limitations, and that means sacrifice and compromise. It means getting over the fact that no matter how hard you work, you probably missed the boat on buying an Edwardian pile in Dunbar like the one your grandparents paid $15,000 for 50 years ago. It means you might have to buy what you can afford and not what you want.”
“The property ladder, despite that kvetching grapevine, is not a phantom hope. Here in paradise it just requires some whittling of the wish list. So stop with the despair already. If your grail is to own a little piece of Metro Vancouver paradise, get on with it.”
News 1130 in Canada. “There’s been a huge surge in home sales across the province over the last year. According to a new BMO survey British Columbians are the most confident across the nation to have bought a home because they felt prices would keep rising. Joanne Gassman with the Bank says the sense of urgency to get into the market is due to the upcoming HST. She explains the spike in interest rates and a rebounding economy are the two key reasons people are deciding to sign on the dotted line.”
“‘We’re actually seeing house prices go up as well. In Vancouver, actually house prices are up about 31 per cent compared to what we’ve seen as a national average which is around 18 per cent over last year.’ Gassman adds housing prices have risen 89 per cent since 2002.”
The Windsor Star. “Out-of-town investors with the right approach can compete, said real estate agent Rhys Trenhaile, who has been buying and selling apartment buildings in Windsor for seven years. He and his group have worked with 140 out-of-town investors, including White and his partners. Most are from Western Canada and the Toronto area. Some are ‘fixers and flippers’ but more longer-term investors are moving into the market recently as the vacancy rate is starting to come down, said Trenhaile, who is bullish on the city’s future.”
“‘A lot of these guys are betting Windsor is going to be the next Regina, the next surge city,’ he said.”
The New Zealand Herald. “Confidence in the housing market has weakened as people await details of expected tax changes in the Budget on May 20 and the start to a series of interest rate rises from the Reserve Bank. ASB’s quarterly survey of sentiment in the housing market has recorded a marked drop in the proportion of people expecting house prices to rise over the next 12 months, to a net 35 per cent from 51 per cent three months ago.”
“Looking forward, ASB expects the Budget changes to reduce demand for investment properties and therefore lower activity in the housing market. ‘Beyond the ups and downs of 2010 we expect weak house price growth. A positive for house prices is continued population growth at a time when new construction has not kept pace,’ it said. ‘However, prices do remain quite high compared with incomes and rents.’”
From Scoop in New Zealand. “ASB Economist Chris Tennent-Brown says the drop in confidence reflects the cooling in housing market activity over the last six months. ‘Overall it looks as though the supply of houses is more than keeping pace with the very modest turnover of house sales so far in 2010,’ Mr Tennent-Brown says. ‘Taking these supply and demand dynamics into account, it appears the balance is now tipped slightly in favour of buyers.’”
“‘This compares to the previous quarter, which saw a reduced supply of new listings feeding an increased demand as the market rebounded,’ he says. ‘Beyond 2010, we expect to see some house price growth, but not at the levels house sellers have enjoyed in the past.’”
The Herald Sun. in Australia. “One Victorian property owner is being evicted each day as consumer advocates express fears household repossession will increase as interest rates go up. About 250 properties have been seized in the state while repossession writs filed in the Supreme Court for the same period total 1388. The highest year for Supreme Court repossession writs in the past decade was 2008-09, when more than 3000 writs were issued.”
“The figures indicate that households are facing a similar spike in repossession to that experienced during the last period of high interest rates in 2006-07. Mortgage and debt-related stress are again becoming a major issue for all Australians, a fact recognised during the week by Prime Minister Kevin Rudd after last Tuesday’s interest rate increase. Mr Rudd described the rate rise as ‘a slug for working families.’”
“Richard Foster, CEO of the Financial and Consumer Rights Council, said financial counsellors were now reporting that more than half of their clients were seeking help over issues related to housing affordability. ‘It’s those people who managed to hang on the last time interest rates were high and who had a second bite of the cherry, that refinancing has now fallen in a heap,’ he said.”
The Australia. “Every time the Reserve Bank of Australia raises interest rates, Wayne Swan expresses his deepest sympathy for hard-pressed Australians with mortgages. His concern is touching, to be sure. But it would sound more convincing if he did more to address booming house prices, which is one of the factors feeding into higher rates.”
“Of course, you’ll never catch politicians criticising rising house prices. They would look too much like party poopers, given that higher prices are a cause for celebration for the 68 per cent of Australians who already own houses or are paying them off. Rather, they announce measures that pretend to do something about housing affordability, such as first-home buyers grants that feed directly into higher prices.”
“The Henry tax review thought it was better to get to the root of the problem. Its report says favourable tax and transfer provisions increase overall demand, particularly for owner-occupied housing. That is, exempting the family home from capital gains and land taxes means we tie up too much of the nation’s income in housing compared with more productive areas and we drive up house prices.”
“The report suggests addressing the bias in investment housing towards negatively geared investment, which it describes as ‘a major distortion in the rental property market.’”
“The Australian Taxation Office says losses declared from negatively geared property grew by 35 per cent in 2007-08 to $8.6 billion. The losses, which are the differences between rental income and deductions, mainly interest payments, do not send too many property investors broke, otherwise 1.2 million Australians and rising wouldn’t be plunging so eagerly into negative gearing. Instead, they make a profit from rising property prices with the help of another tax break, the 50 per cent discount on capital gains.”
“If negatively geared investment went mainly into new housing, you could argue that it was helping keep down prices, as well as rents, by adding to supply. Instead, 90 per cent goes into existing houses, meaning it is competing with people buying their own homes. Since the restoration of negative gearing in 1987, there has been an increase from 8 per cent to 40 per cent in the proportion of finance for existing homes that is taken by investors.”
“The Henry review says median house prices have risen from three times to five times average household earnings in the past two decades. Figures collated by Macquarie Bank’s Rory Robertson show house prices rising by 40 per cent in the past five years, compared with a fall of almost 20 per cent in the US. We wouldn’t want to wish the subprime debacle in the US on us but that’s only part of the story. While house prices in Australia have tripled since 1996, in the US they increased by 70 per cent.”
“Considering it is lower-income earners who suffer most from high housing prices and high rents, this does not look much like the actions of a Labor government. As Reserve Bank economist Tony Richards argued last year: ‘As a nation we are not really any richer when the price of housing rises but the more vulnerable tend to be hurt.’”
“Australia is in the midst of an unsustainable housing bubble that could burst at any time, warns the man who predicted the global credit bust of 2007. Edward Chancellor, of US investment management firm GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.”
“Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value - a once in 40-year event. ‘If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably,’ he told The Australian.”
“He described Australia’s banking system as a ‘cartel’ and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies. He attributed Australia’s ‘luck’ to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.”
“‘My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom,’ he said. ‘Those are the facts and you can’t paper over them. In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem. The problem is the bubble and that hasn’t gone away.’”
