June 3, 2013

The Dirty Little Secret At The Heart Of Our Economy

Some housing bubble news from around the globe. The Wall Street Journal, “Hardly anyone turns up nowadays at a Homex sales center for low-income homes in this dusty town north of Mexico City. Even the lone saleswoman on duty, Carolayn León, says she no longer believes in her employer after several missed paychecks. Scores of new homes in far-flung communities sit empty, while banks have canceled credit lines to some of the country’s biggest housing companies. The National Action Party, which took power in late 2000, ramped up the number of loans handed out by government mortgage agency Infonavit and subsidized companies directly to build homes.”

“During the past 12 years, Infonavit, which is behind 75% of Mexico’s mortgages, handed out 4.4 million loans, double the amount it issued from its inception in 1972 through 2000. ‘It was a very simple and effective way to inject money into the Mexican economic system and make it flow down to the base, to construction workers and carpenters,’ says Oscar Castro, a professor of urban planning at the ITESO Jesuit University of Guadalajara.”

Peru This Week. “To dissuade fears of a housing bubble, economist Jorge González Izquierdo says that housing costs will not increase as much this year as in previous years. While growth rates have risen to 20 percent over the last three years, this year, growth is not expected to surpass 10 percent. The economist was careful to state that this is not an indication that the ‘bubble is popping.’ ‘There will be less demand because credit is being adjusted,’ González said. ‘Financial businesses are going to be more restrictive in their risk evaluations. When mortgage credit falls, so does demand. And what happens to the price of a product whose demand falls? Well, it falls also, but that’s not a bubble.’”

The National. “Controls are required to help guard against the risk of a repeat of the boom and bust cycle in the Dubai property market, Masood Ahmed, the regional director of the IMF said. Dubai residential sales prices rose by 18 per cent in the first quarter of the year compared with a year earlier, according to the property consultants Jones Lang LaSalle. Prices were rising too quickly considering there was a 30 per cent vacancy rate in existing housing stock, said Farouk Soussa, the chief economist in the Middle East at Citigroup.”

“‘We have investor demand coming back into the market, which isn’t necessarily a bad thing … but I have no doubt in my mind that on top of investor demand you also have speculators coming back into the market,’ he said. ‘Where speculative demand exists clearly the lack of end user spells risk to the downside.’”

The Saudi Gazette on Saudi Arabia. “Owning a home has become a far-fetched dream of many, as land and construction costs have sky-rocketed. Mansour Al-Salmi, an economist, said land prices have sky-rocketed due to the continued speculation between realtors and developers. He said that many plots of land are bought, sold and resold at exorbitant prices. In addition, there are many large land schemes that are not developed by their owners, to limit supply in the market, and hence, keep prices high.”

The Haaretz in Israel. “Israel has been experiencing a real estate bubble that included monstrous 60 percent price hikes over the last few years. Developers and contractors, naturally, have no reason to want home prices to drop. The banks who give them credit, but who primarily give credit to home buyers, certainly aren’t interested in being stuck, not to mention the fact that they are making very nice profits in the mortgage market. The ILA, which controls most of the nation’s land, isn’t interested in flooding the market with the treasure it holds. The finance minister and prime minister are enjoying the fact that the 73.4 percent of Israelis who own their own homes believe they are holding on to an asset whose value is increasing, because this leads them to spend more money.”

“In short: This bubble isn’t hurting those whose decisions influence home prices; in fact, under current circumstances, maintaining the bubble is crucial to them.”

MarketWatch on India. “India’s biggest property developer by sales, DLF Ltd., posted its first-ever net loss for a quarter as a sluggish property market added to woes at its insurance and hotel businesses. Higher borrowing costs and fears of job losses amidst an economic slowdown have crimped demand for new homes and offices in Asia’s third-biggest economy. To counter the weak market sentiment, DLF has started new projects to boost cash flow, while selling non-core assets to reduce debt.”

“Demand for real estate in India has also been hurt by commercial banks’ tougher rules on housing loans. Due to repayment defaults, banks are stricter about lending not only to individual borrowers but also to real estate companies. ‘[The company] envisages an uncertain and lower growth environment and hence plans to move to a risk mitigated, steady state business environment by adopting a cautious and conservative approach,’ it said, without elaborating.”

Free Malaysia Today. “Sabah’s past 10 years of vigorous growth spurred by its ‘booming’ real estate sector is heading for a slowdown and among the factors is the recent general election outcome, said a global real estate consultancy here. CH Williams & Talhar managing director Chong Choon Kim said young people who flocked to Kota Kinabalu and urban areas for jobs did not earn enough to pay to compete with the rising prices of houses. ‘Now in KK, over 50% employees earn less than RM2,000 a month; 20% earn between RM2,000 and RM3,500 per month and 20% between RM3,500 and RM7,000 per month. Only 10% earn more than RM7,000 per month.’”

“‘For young people earning RM2,000 per month, they could only afford houses at RM150,000 with a payback period of 30 years,’ said Chong. According to Chong the government’s ‘affordable homes at RM250,000′ was not ‘affordable at all.’”

From Bloomberg. “A 20 percent decline in Hong Kong property prices won’t ‘worry’ the government, TVB news reported yesterday, citing an unidentified government official. Even if property prices fall 40 percent in the long run, the government is confident that there won’t be a large amount of negative-equity cases like in 1998 and 2003, the report said. During the city’s last property crash, real estate values tumbled 70 percent between 1998 and 2003. The number of mortgages in negative equity peaked at the end of June 2003 when the slump ended. Home prices have more than tripled since then, according to the Centaline index.”

Thanh Nien Daily. “The government’s latest measures cannot revive the property market since it is the high-end segment that has a massive inventory while the new policies relate to affordable housing, Pham Sy Liem, vice chairman of the Vietnam Construction Federation, tells Vietweek. There is nothing that can help revive all segments except an economic recovery, he explains. ‘Property developers should learn from this. They have developed projects without careful consideration of the market demand causing a property bubble,’ he said.”

The New Zealand Herald. “It could take three to five years to close the gap between housing supply and demand in Auckland, if left to supply measures alone, says Reserve Bank governor Graeme Wheeler. In a speech to the Institute of Directors in Auckland yesterday Wheeler reiterated the bank’s concern that ‘the current escalation of house prices is increasing the probability, and potential effect, of a significant downward house price adjustment that could result from a future economic or financial shock.’”

“On the demand side, mortgage rates at 50-year lows and now only slightly above average rental yield of 4.5 per cent, combined with the rise in house prices, increased the incentives for renters to buy their first home and home owners to upgrade. As for the Reserve Bank’s ability to influence demand, Wheeler reiterated his reluctance to raise the official cash rate when inflation is low and the exchange rate is high. ‘This is where macro-prudential policies can play a useful role,’ he said. They include quantitative restrictions on low-deposit lending.”

“Such measures had been deployed in Canada, Israel, Korea, Norway and Sweden, he said, and the evidence to date suggested that limiting such loans during periods of quickly rising property prices could reduce credit booms and the probability of financial distress and sub-par growth later. ‘But they are no panacea,’ he said.”

The Herald in New Zealand. “The lament is echoing up and down the country: if only Auckland could build a lot more houses the Reserve Bank could avoid an interest rate hike that hurts everyone else from Kaitaia to Bluff. Reserve Bank Governor Graeme Wheeler even suggested this week a rate cut was possible if a ’supply response’ actually happened to dampen the current surge in Auckland’s house prices.”

“There are real questions about the capacity of New Zealand’s construction industry to build that many houses in that short a time, given so many of our tradespeople have either moved to Australia or Christchurch. Secondly, if the required tripling of building activity actually happened, most expect it would generate its own surge of construction cost inflation, which might of itself take that rate cut carrot off the table or even force rate hikes.”

“But there is a third and as yet un-debated problem with the assumptions holding up the 39,000 consents holy grail. Who will pay to build and buy these homes? If banks do lend on these sorts of buildings it is only with big deposits, which puts them out of reach for many first home buyers and investors. Then there is the bigger issue of how home buyers would finance their purchase, even if the housing development was consented, financed and built for a reasonable price. This is the dirty little secret at the heart of our economy. New Zealand’s households are already up to their eyeballs in debt.”

“So what should the Reserve Bank do, if anything? Its most effective instrument remains the Official Cash Rate and if it is serious about reducing the financial risks of a new housing inflation boom it should put it up substantially and now.”

“By relying on a mythical supply response to contain house price inflation, the Reserve Bank risks repeating its mistakes of 2003-07 when it acted late and let New Zealanders insulate themselves from rate hikes by fixing their mortgages for years, blunting the power of the bank’s one good tool. Right now, as the Reserve Bank and Government talk about holy grails and fret about unintended consequences, banks are offering 2 year fixed mortgages for less than 5%.”

“If Governor Wheeler is not careful he will end up like the Black Knight in ‘Monty Python and the Holy Grail’: a quadruple amputee railing at King Arthur: ‘Just a flesh wound!’”

Bits Bucket for June 3, 2013

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