A False Basis For Confidence
A reader posted this article. “Shaky Cyprus teeters between Moscow and Brussels, as the latest troubled EU nation hurtles towards a seemingly inevitable financial rescue.”
I replied, “This brings up a topic I’ve been thinking about. When I do searches for the Friday post, I get an idea of what’s going on by the volume of reports in one area or another. Right now, the global bubble situation is producing a lot of press in Australia, Asia, and Canada. And the rolling bubble effect into the US has the NAR rubbing their hands in glee. Hard to say for sure, but something big could be about to happen.”
One said, “Australia’s game is to limit the amount of buildable lots so that there is nothing affordable. America’s game is slowly dribble out a small number of foreclosures so that people are in bidding wars to get them. It really is beginning to feel like the wheels are about to come off. The real question is what will cause a sea change in the current situation? Political elections, global trade slowdowns, or perhaps global instability come to mind over the next several months.”
Another had this, “Between the escalating civil war in Syria as a proxy for war with Iran and the heating up of the old cold war against Russia/China, not to mention the Egypt elections thing and Israel beating the war drums, the Middle East is ready to explode. Then you have the PIIGS of the Eurozone going full retard which doesn’t bode well for China or the US. Bottom line, everyone is scrambling for safety. How do I think this relate to housing? Hard assets.”
And another, “There is definitely some coordinated campaign to blow up housing again. The press reports of bidding wars, the slow drip of inventory, the sudden rise of FHA, and the convenient timing with the NAR’s march on Washington are all indicators that the PTB are putting a floor under prices.”
One asked, “What’s on the international banking system bailout agenda for this weekend? Last weekend saw the bailout of Bankia and the Spanish banking system. This weekend, the world faces the prospect of titanic countervailing effects between the Grexit and a high-level coordinated central bank effort to sterilize its potential effect on the global financial system. Are there any further global financial time bombs on the near-term horizon?”
And finally, “I honestly believe we are only one or two bailouts away from prosperity.”
The Vancouver Sun in Canada. “With the Toronto-Dominion banking group calling for a gradual 15-per-cent drop in Vancouver home prices over the next two to three years, both lenders and homeowners will likely reduce spending. When asked what the implications of this prediction or a drop in prices could be for homeowners, mortgage broker Chris Pughe said ’some people who have used their equity to sustain their lifestyle choices may make the decision to sell because there is nothing else for them to do — a drop in prices could have serious consequences for some of our families.’”
“She also said lenders could make it tougher to qualify for loans if they think the prices are going to fall. ‘We have already seen some changes in Canada Mortgage and Housing Corporation’s policies when they decreased the maximum loan-to-value ratio on a refinance from 90 per cent to 85 per cent.’ Those restrictions were made in 2011 at the same time CMHC dropped the maximum amortization period to 30 years from 35.”
The Globe & Mail in Canada. “A severe downturn in the market would cause significant problems for the government, not only because it would cause economic shock waves but because both Mr. Flaherty and Mr. Carney would inevitably shoulder a large portion of the public blame. The tactics used so successfully to keep the market going in the wake of the financial crisis – namely prodding the banks to lend more by purchasing $69-billion worth of their mortgages and maintaining record-low interest rates – are part of the reason why condo prices in Canadian home prices have reached levels that almost all experts say are unsustainable.”
“‘People are really scared right now,’ said real estate agent and author Brian Persaud. ‘When Flaherty says the condo market is overheated, you get people who have bought [units] walking away within the 10 day cooling off period.’”
Property Observer on Australia. “Negative gearing was used by around 2 million property investors in the last financial year to reduce their tax bill, according to ATO figures. A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation – exceed the rental income it produces.”
“Prime Minister Julia Gillard says her government has ruled out removing the tax break. ‘We think that an abolition of negative gearing will cause distortions to the property market that we did not want to see,’ she said.”
Smart Company on Australia. “The current interest rate cutting cycle, which began in November, is not aimed at boosting house prices or ‘re-igniting a boom in borrowing,r says RBA governor Glenn Stevens. Stevens said one thing Australia should not do is ‘try to engineer a return to the boom.’ Stevens said he agreed that there was a need for more confidence in the economy among households and businesses, but said it had to be ‘the right sort of confidence.’”
“‘The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. Unfortunately, we have been rather too prone to that misplaced optimism on occasion.’”
“‘You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. It would surely be a false basis for confidence. The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months,’ he said.”
The Newcastle Herald on Australia. “Residex chief executive John Edwards said ‘all the statistics’ pointed to a significant spike in some Hunter suburb prices within the next five years. ‘When statistics tell you something is going to happen, you can bet it will.’”
“Though the national market was declining, double-digit growth in some areas in the Hunter could be considered conservative. ‘Unfortunately, a lot of the time, the last people to realise the potential of an area are sometimes the people living in it,’ Mr Edwards said.’
“Hunter Valley Research Foundation director Simon Deeming disagrees with the predictions of a looming property boom. Mr Deeming said the region’s property market was suffering ‘a nasty hangover from the party’ of the last boom. He said prices were ‘going nowhere fast’ and he struggled to understand the logic behind such large predictions.”
Property Wire on India. “India has been hailed as one of the more interesting emerging property markets in Asia but figures reveal that in one of its major cities, Mumbai, a substantial amount of real estate is unsold. Up to 60% of luxury apartments, both developed and under construction, remain unsold in Mumbai and experts say it is due to surging prices and regulatory uncertainty. The Confederation of Real Estate Developers Association of India (CREDAI) has called for urgent reforms, saying there is too much ‘black money’ in the system and corruption.”
“Of the 3,300 luxury apartments being developed in Mumbai it is estimated that between 55 and 60% are yet to be sold. The Mumbai market saw about 100 luxury apartments sold in 2011/12 tax year compared with about 400 sold in 2007/08 , the peak of the property market. But an oversupply due to developers rushing to cash in in what was perceived as a property boom is now blighting the market.”
The Business Standard on India. “Housing sales dipped by more than half in the first quarter of 2012 in Mumbai and national capital region. The decline in housing sales was the highest in Mumbai at 58%, followed by 57% in Delhi-NCR and by 18% in Bangalore, the third major property market. The data includes housing sales figures for homes sold by the builders and not the secondary market re-sell deals.”
“‘Residential unit absorption numbers in the first quarter in the National Capital Region (NCR) and Mumbai Metropolitan Region (MMR), plunged over 50% due to economic slowdown,’ the research firm said in a statement. ‘Mumbai and Gurgaon have already seen one of the sharpest falls in absorptions, with MMR seeing a drop of 58% and NCR with a drop of 57%. If this trend continues, there could be ‘stage 1’ price correction in the range of 5% to 20%, especially in micro-markets of NCR, MMR and Hyderabad,’ said PropEquity CEO Samir Jasuja.”
“As per the data, the total absorption in NCR has dropped to 15,104 units in the first quarter of 2012 from 35,420 units in the year-ago period. The total supply was 1,07,731 units. In MMR, the total absorption fell in the first quarter of 2012 to 11,473 units from 27,676 units in the corresponding period of last year. The total supply was 89,461 units.”
The Morning Whistle on China. “Ren Zhiqiang, a controversial mainland Chinese real estate tycoon known for his bold predictions on China’s property market, was back to his usual tricks on Sina Weibo recently with his latest thoughts. ‘If [there are] no home policy changes, home prices will rise again next year.’”
“‘Supply can’t meet people’s demand, and the reserve requirement ratio is expected to be lowered three to four times this year. Usually the market defers the effect of monetary policy for about a half year, so home prices probably won’t rise again until March next year.’”
“He also said that the government has made some changes to encourage home supply, and that there may be more policies coming. ‘In China, the commercial property market is only for the rich.’ Ren replied to the question: are homes only sold to the rich? Land for low-cost flats is separately allocated and no land fees imposed on these projects.’”
“However, this does not mean low-cost flats are really cheap, as Lang Xianping, a well known Chinese economist, pointed out, ‘The price of a low-cost flat is 80 percent of a commercial home. Is that really low-cost for the public?’”
“Lang mentioned that people have to draw lots for a chance to buy a low-cost flat. ‘I heard a citizen said the he felt lucky but not happy after getting the chance to buy a low-cost home. That’s ironic, that’s not what low-cost homes should make people feel.’”
