Our Enhanced Capacity To Bid More
Readers suggested a topic on the economy. “The whole world may go into a deflationary spiral soon. Look at Japan now. Probably GD2. Does US president election even matter anymore? Whoever is in the office cannot do much about it and in fact speed up the process of downfall by printing more and spending carelessly.”
One added, “Why not add the pitfalls of trade protectionism to the scope of discussion? The Smoot-Hawley Tariff Act, which was intended to protect American jobs, was credited by many historians with worsening the severity of unemployment and production slowdown of the Great Depression.”
A reply, “The pitfalls of free trade are deeper than the pitfalls of trade protectionism. I don’t recall multinationals sending career jobs overseas by the hundreds of thousands during the 1920’s. S-H may have made GD-1 worse, but sending those careers oversees was a large cause of the Great Recession. (which would be a GD if it weren’t for food stamps etc).”
Another asks, “I was going to suggest a topic on the the flip side of the deflation coin, inflation. There is an enormous amount of money being created. My sense is that inflation is the path that the Fed will use to work out the crisis so the underwater and distressed loans will come closer to being paid off at their nominal balances. In real terms, not so much. This mess is going to play out over a long period of time.”
A reply, “The only way for the loans to be paid off at their nominal balances is for there to be inflation in wages/taxable incomes. The Fed can make more money. It can’t force the money into wages.”
To which was said, “But they can raise the minimum wage, and significantly. What I observed in my years in Mexico was that a minimum wage that tracked high inflation (Mexico never quite reached true hyperinflation) forced higher paid jobs to increase their wages as well as minimum wage would catch up with them. Mexico had other gimmicks to put money into consumer’s hands: Mandatory year end bonuses (aguinaldo) which was 20 days pay (90 days pay if you worked for the government!) and mandatory profit sharing (8% of profit is shared with employees). I’m not saying that that this would be good, but if the PTB wants wage inflation, it can be accomplished.”
And finally, “The scary thing about central banker policy today is that it’s not just one country engaging in money printing…it’s: Japan, UK, US; and all of Europe (”sterilized” for now). These four areas represent about $41 Trillion of the world’s $70 trillion of GDP. If you add China with their currency substantially pegged to the US dollar, it brings the total to $48 of $70 Trillion of the world’s economies engaging in money printing (68.5% of all the world’s economies).”
“There is a race to the bottom occurring right now for paper money. What will go up the most in value relative to paper money? Food? Energy? Materials? Precious Metals? Real Estate?”
From Reuters. “New home sales held near two-year highs in August and prices vaulted to their highest level in more than five years, adding to signs of a broadening housing market recovery. Home resales surged last month, homebuilder sentiment jumped to a six-year high in September and home prices in 20 major metropolitan areas rose in July for a sixth straight month, recent reports have shown.”
“Still, the housing market lacks sufficient strength to take the baton from the faltering manufacturing sector as the main driver of the U.S. economic recovery. The Federal Reserve targeted housing this month as a channel to spur faster economic growth. Fed Chairman Ben Bernanke said housing was the ‘missing piston’ in the recovery and the central bank announced it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved significantly.”
“Those measures have pushed mortgage rates to record lows, and led to a rebound in demand for loans to purchase homes last week, a second report showed. Fixed 30-year mortgage rates hit an all-time average low of 3.63 percent last week. While residential construction accounts for only about 2.5 percent of GDP, economists estimate that for every new house built, at least three new jobs are created.”
“In addition, economists said rising home values could support consumer spending. ‘The turn in home prices is important, not only because the housing industry is an important employer, but also the wealth effect created by rising home prices can lift consumer spending on other big-ticket items,’ said Steven Ricchiuto, chief economist at Mizuho Securities in New York.”
The Australian Financial Review. “I’ve covered the housing question many times in this newspaper, and my view remains the same: house prices are not nearly as overvalued as some suggest. Long-term measures of mortgage affordability, for example, have been broadly stable over recent decades. While there’s been a run-up in house prices relative to income, this largely reflects our enhanced capacity to bid more for properties due to the structural decline in interest rates over this period.”
“Properly measured, house prices relatively to average incomes are also not drastically out of line with international norms – especially once allowance is made for high land premiums due to our highly urbanised lifestyle. If you dig into the details on household debt, you’ll find most of it is held by those on high incomes with decent levels of housing equity. Like poverty, mortgage stress exists, but thankfully it is not widespread.”
“So far, so good. Indeed, earlier this week in this newspaper, I suggested nationwide house prices could rise by around 10 to 15 per cent over the next year or so if – as I suspect – the Reserve Bank of Australia is required to cut interest rates aggressively as the mining boom winds down.”
“I’d also concede that in today’s low inflation environment and with higher levels of household financial exposure, nominal property prices are likely now more sensitive to the economic cycle. Property prices are more likely to spike higher in good times yet also correct reasonably firmly in bad times.”
From China Daily. “In contrast with Shanghai, the market for luxury property in Hong Kong and Taipei is more active. Hong Kong is the most sophisticated luxury housing market among the three cities. In the second quarter, about 30 percent of Hong Kong’s luxury homes were bought by the wealthy from the mainland, said Doris Lam, director of investment services at Colliers International. Over the past five years, luxury property prices in Taipei surged between 60 and 70 percent, with low mortgage interest rates between 2 percent and 2.7 percent boosting the market, the report said.”
“About 58 percent of Chinese wealthy buy a luxury property for their own use, but 73 percent believe that a luxury property has better investment returns than a common residential property, a separate report showed. ‘Having a high-end residential property, a villa, a winter house in Sanya (Hainan province) and a summer home on Lushan Mountain (in Jiangxi province) has become a new lifestyle choice for China’s most wealthy people,’ said Chen Sheng, VP of the China Real Estate Data Academy.”
From NBC News. “With many U.S. consumers still lukewarm about buying into the American dream, Canadians, Chinese and Mexicans are burning up Realtors’ cell phones and emails, grabbing up swank vacation nooks, secure places to stash their cash, or just old-fashioned bargains. Foreign purchases of U.S. homes have climbed by 24 percent since 2011, reports the National Association of Realtors, reaching $82.5 billion in total annual sales, and helping brace once-creeky markets like Miami.”
“‘They love the U.S. because their money is safe here. Even if they only break even on a property, they know they can get their money out,’ said Matey Veissi, broker-owner with Veissi & Associates in Miami.”
“‘On the West Coast, you might have five or 10 families from China who pool their resources to purchase something, have a student live in it and then rent out the rooms. At the end of the student’s time, hopefully they sell the place for a capital gain. Those are the middle-class Chinese, buying for an investment,’ said Jed Smith, an NAR economist.”
From CBC News. “Ben Rabidoux, creator of the Economic Analyst blog, which looks into housing and mortgage trends, suggests the Canada Mortgage and Housing Corporation has ‘absolutely been the key driver in the boom in the ownership rate in Canada,’ and that this is having an inflationary impact on everyone. ‘Without that government support that’s allowing people with very little down to jump into the ownership pool, you just would not see the ownership rate expanding the way that it is,’ he argues.”
“He also believes the CMHC mandate is inherently self-defeating. ‘They don’t provide affordable housing, they provide affordable financing. And when all you do is provide affordable financing, you inflate house prices.’”
“While not against home ownership per se, Rabidoux believes that at some point housing starts will fall substantially, and that more homes are being built than demographics would warrant. The problem is the Canadian economy is more reliant on the current housing boom to generate GDP and labour market growth than ever before, Rabidoux says. ‘So in my mind what’s going to end up happening is when this whole thing turns to normalcy there’s going to be a period of readjustment in the economy where there’s going to be unfortunately high unemployment and persistently high unemployment.’”
“‘What happens when you have a high home ownership rate is it reduces worker mobility and that’s a fairly well known phenomenon. So there’s that danger as well,’ he said.”
