October 7, 2011

The Bet Has Failed

It’s Friday desk clearing time for this blogger. “Elaine Dobson, partner at Bircham Dyson Bell LLP believes that even with the economic doom and gloom in the UK property market, central London and in particular prime central London is a property bubble that can’t be burst. ‘The Central London property bubble seems to be intact with much of the investment coming from abroad, explains Dobson. ‘The outer edges of London, north of the M25 and in other areas around the UK are stagnating badly. It just seems to be London and other small pockets in Cheshire, Cornwall and Oxfordshire that buck the trend completely - and seem immune from the full effects of the economic downturn.’”

“It’s spring and a young man’s (or woman’s) thoughts turn towards … property. And what charms it may hold this year. The days are long gone when you had to race from auction to auction to nail a purchase before prices soared higher. Researcher Australian Property Monitors is predicting just 5 per cent growth in values over the next year. Prices in some areas may fall. The days of 100 per cent home loans are gone, so you’ll need at least a 5 per cent deposit - preferably much more.”

“With Sydney and Melbourne median house prices about $600,000, that’s a deposit of at least $30,000.”

“Some lenders are still insisting on a 10 per cent deposit. HSBC’s head of mortgages, Alice Del Vecchio, says some lenders are lowering their hurdles but ‘from our perspective, we remain quite rigorous in terms of how robust we want customers to be … we want to make sure they’re not stretching themselves even before they start.’”

“With Greece on the verge of debt default and other European countries threatening to follow, it was a little ironic this week to hear the International Monetary Fund issue a warning Canadian household debt is getting too high. After all, aren’t we the poster children for financial prudence in the new millennium? Well, actually no. Canadian household debt really is at the highest levels in history, by many measures.”

“It’s quite understandable we have racked up such debts, with rising house prices and ever more convenient line of credit products allowing the use of people’s homes as ATM machines. The worst part of it, in my view, is that much of this money has been used for consumer goods, from cars to home theatre to travel, all of which are depreciating assets.”

“Finance Minister Jim Flaherty answered the IMF report by saying he wants to see ‘clear evidence of a bubble in the housing market in Canada, which we have not seen,’ before taking more steps, according to Bloomberg News.”

“There are currently 132 highrise buildings under construction in Toronto, according to the figures. There is little fear among industry experts that Toronto construction is outstripping demande. In fact, some are worried about the opposite. There are more than 39,000 condo units under construction in the region, according to Ben Myers, executive VP of market research firm Urbanation — ‘and 88 per cent of those are already sold.’ A further 118 buildings are in pre-construction, he said, and three-quarters of those are sold. ‘We’re just continually getting larger and larger and larger.’”

“Setting the standard for height are buildings like the Burj Khalifa in Dubai, the tallest building in the world with over 160 storeys. And Toronto is set to follow suit. ‘The whole centre of the city is going to change dramatically; it’s going to be very tall. In the very centre of the city, the height limits that are possible are unlimited so we can have a 1,000-storey building in the centre of the city,’ says Richard Wit, director of Toronto’s RAW Design.”

“There are mountains of bargains at Blue Mountain Ski Resort with condo prices on the resale market down as much as 40 per cent from their peak. Gerry Wayland, broker at Village Realty Inc, explains that a two-bedroom unit with ‘moderate owner usage’ will generate an income in the rental program that will cover most of the about $16,000 operational cost of ownership. ‘But it won’t cover the cost of the mortgage,’ he says. ‘An investor says, ‘You mean it won’t cover my mortgage?’ while end users are delighted that their other costs are covered,’ says Wayland.”

“Joe Zinner, who purchased a one-bedroom unit at Red leaves when it was launched in 2008, says his family has enjoyed using their unit, but he is now hopeful that he will start to see a return on his investment. ‘I can tell you we are all thrilled and very pleased about the new owners, they are very shrewd operators,’ says Zinner.”

“A number of the long vacant condo units at Aquattro in Colwood found buyers over the summer. Anthem Properties, based in Vancouver, has taken over marketing the empty units on behalf of the receiver of the bankrupt $350-million project. Now Anthem is looking to move five larger units for deep discounts, including some with three bedrooms and a den, in the $500,000 range. ‘That’s 40 to 50 per cent less than they were originally listed for,’ sales director Robert Marchant said. ‘These are homes built pre-2008, when the economy was better.’”

“The Haven project, which has become the talk of many Perakians given the many advertisements on billboards here and the developer’s continued commitment to the project despite skepticism by certain quarters, has thrust Superboom Projects into the limelight. The developer is now in talks with landowners from Kuala Lumpur, Cameron Highlands in Pahang and Australia to undertake condominium developments on their land.”

“Although property prices of its earlier two projects have appreciated by 100% in just two years, it is The Haven that has put Perak in the limelight for five-star luxury condo-living. ‘The price may not reach those of the major cities (in Malaysia), but the appreciation will be faster because of a lower base,’ said Superboom Projects CEO Peter Chan. He added: ‘There is a vacuum for such (luxurious) properties that the people want to own it but the only thing preventing them from getting it is the mindset on condo-living in Ipoh. So there is no supply until we come along (with the project).’”

“There are signs of trouble in the China’s real-estate market, which has the potential to ripple across the Pacific Ocean and affect Vancouver housing prices. Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing, adds that ‘one potential interpretation of this crisis is that China is entering the terminal stage of a bubble, and that what we are seeing are the early signs of a much broader collapse.’”

“‘More significant, in my eyes, are reports — which began emerging in late August — that in several cities across China, prices in primary housing markets (developers selling to homeowners) have begun falling away from those in secondary markets (homeowners selling to other homeowners). The effected markets include not only 1st tier metropolises (Beijing, Shanghai, Guangzhou, and Shenzhen) but also 2nd tier (Chongqing, Wuhan, Tianjin, Zhenghou) and 3rd tier (Ningbo, Foshan, Wuxi) ones as well.’”

“Chovanec mentions that one report mentioned a price gap in Beijing and Shanghai of 20 percent. Developers are dropping the price of their product because they need cash. In recent years, Vancouver’s real-estate market has been fuelled in part by the influx of Chinese buyers. If our housing becomes less competitive and the rich in China are feeling squeezed, that could reduce the number of purchasers.”

“Farmland prices are rising rapidly across Minnesota and the rest of the United States. Data tabulations lag a lot, but much evidence supports estimated price increases of 25 percent to 30 percent in just the past two years. Even the tax statements for our own small farm show a tripling of value in less than a decade.”

“Bubbles may stem from irrationality, something the geezer generation within economics is loath to accept. In late 2007, even as the housing bubble began to collapse, Eugene Fama, the father of efficient market theory, famously denied that bubbles can even exist. ‘The word ‘bubble’ drives me nuts,’ he said.”

“A few see the Fed as the instigator of all of this. First, its low interest rates over the past four years make buying farmland cheaper, and its repeated commitments to keeping interest rates low for an extended period accentuate the incentives. Its recent initiative to lower long-term rates further compounds the problem. Secondly, some blame easy money for a bubble in commodity prices themselves, including those of farm products, thus artificially inflating the profits numerator in valuation calculations.”

“In 2008, panicked governments and central banks injected huge amounts of money into their economies, in the form of government spending, tax concessions, ultra-low interest rates and ‘non-conventional’ monetary strategies - code for printing money.”

“The actions prevented the Great Depression 2.0 temporarily, converting it into a deep recession. The US economy shrank by 8.9 per cent in 2008. As individuals and companies reduced debt as banks cut off the supply of credit, governments increased their borrowing, propping up demand to keep the game going for a little longer. Governments gambled on a return to growth, solving all the problems.”

“That bet has failed and high levels of government debt in some developed nations have become the central problem.”

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