April 6, 2014

A Boom Based On Unshakeable Faith

I suggested a topic on bubble peaks. “I was pondering some recent news and thought about the parabolic nature of manias. It’s discussed at this link among other places. A parabolic blow off is more than a spike on a graph. In participant terms, it reflects an extreme optimism, even a frenzy, concluding with the maximum number of fellow believers. The number of market participants then exhausted, the market will then experience a sudden reversal. Of course, almost everyone will be totally surprised. Confusion, disbelief should be expected at first.”

“Denver is at an all time high, or was at an all time high. So are several other markets; Dallas, parts of Boston and California. People begging sellers, throwing huge amounts of money around. A parabolic move explains the dumbstruck feel that is settling in in Phoenix, Las Vegas, San Diego and Los Angeles. Because a parabolic move turns so quickly, one should expect at first aspects of total fear to be happening at the same time as total euphoria. Not everybody realizes what’s going on at the same time.”

A reply, “Fear more than optimism. The middle class is shrinking. If you don’t own a home, you are left out of the middle class. If you don’t buy now before the price goes up, you’ll never be able to. It’s your last chance. There is only room for a few more on the ark, and the rest will be left to drown. My impression is the number of suckers has gone down. But not to zero.”

And finally, “Massive denial and very little open acknowledgment that the China housing bubble is popping before our very eyes.”

The San Francisco Chronicle. “Earlier this month, there was an invite-only reception at Vida, a condominium project being built next to the New Mission Theater. 250 potential buyers sipped on cans of Modelo and ate tapas. Two days later, 20 units were in contract - and the building won’t even open until January. ‘It was a madhouse,’ said Matt Fuller of Zephyr Real Estate.”

“If that sounds reminiscent of late 2007, when buyers lined up outside One Rincon Hill until the wee hours, it is. Median condo prices in San Francisco are now above $830,000, about 8.2 percent higher than the peak reached right before the economic crash in early 2008. At One Rincon Hill, a unit sold recently for $815,000, a 15 percent profit over its early 2008 purchase price. The seller’s broker, Leslie Bauer of Sotheby’s International, said, ‘Even a year ago it would have sold for about $650,000.’”

The Guardian in the UK. “It was smaller than I remembered it. Cramped and with a strange smell. ‘Why is the fridge in living room?’ I asked the perky estate agent, who sensed my alarm. ‘Well, it’s more rentable that way. Do you know the area? It can only go up.’ I did indeed know the area, inside out. The flat I was looking at had been mine just over 20 years ago.”

“My old flat was on the market for more than half a million pounds. It is an investment because anywhere in London is an ‘investment’. This is the way to think. A house now has to be multifunctional: a home, a pension pot or a buy-to-let. The last budget has made it easier to release pension funds to buy property. A house in London, everyone says, just keeps going up in price whatever you do to it. Every viewing is full of anxious, desperate people whispering about storage space while eyeing up the enemy: people just like them.”

The Irish Mirror. “Property prices are rocketing by €5,000 a month in the capital and what do we do? That’s right, Bank of Ireland pours petrol on the flames by offering to pay the stamp duty for first-time buyers. And to prove the good times are rolling again for the rich, the Irish Times yesterday published an 18-page property supplement. You’d have imagined the ghost estates would act as warning signs on the road to future ruin. And the plight of 100,000 families in mortgage arrears and many more in negative equity might deter anyone from joining them in home-loan hell.”

“But no, it appears us Paddies are genetically programmed to purchase property and the madness of the past boom is set to start all over again. The signs are all there with queues forming outside estate agents as frantic buyers try to outbid each other for homes which are already overpriced. On Dublin’s northside homes are being bombarded with leaflets urging owners to consider selling to take advantage of the property shortage.”

“Hang on, there’s a property shortage in the capital just five years after you could hardly give the stuff away? Was there not whole swathes of land, including the notorious 25-acre Irish Glass Bottle site, which could have been built on to provide thousands of homes but weren’t?”

The South China Morning Post. “Municipal officials in the Yangtze River Delta are learning a hard lesson: excitement over a flourishing regional economy can be dangerous. While a loan default by a developer in Zhejiang sparked fears of a collapse of the residential property sector, the situation in the office sector appears to be even worse. Residential property developers can at least slash prices to dispose of flats to recover part of their investment. Half-empty buildings, however, are not just white elephants but financial black holes.”

“Jones Lang LaSalle found that at the end of last year, occupancy rates for Grade A office buildings stood at 58 per cent in Wuxi, Jiangsu, and 30 per cent in the Zhejiang capital, Hangzhou. In other major delta cities, which together make up the most vibrant and developed regional economy on the mainland, occupancy rates also hovered around 30 per cent last year.”

“Over the past decade, delta cities have pulled out all the stops to launch one new town one after another. Located on the suburban fringes of each city, they are designed to accommodate millions of residents and attract more corporate investors. The boom was based on officials’ unshakeable faith that sustainable growth of delta cities would last for decades.”

The Kingston Region. ” Margaret Wente’s ‘The phony crisis of the middle class’ proclaimed ‘every income group in Canada has gotten richer, while the people at the very top have gotten filthy rich. Is this a problem? You decide’, while the National Post’s John Shmuel wrote ‘the three middle quintiles - which can roughly be defined as Canada’s middle class - increased their share of the country’s $8.07 trillion personal net worth by 1.8 percentage points.’ The overall message was crystal clear: The data speaks for itself. You’ve never been doing better. Keep calm and carry on. Everything is fine.”

“Well, not quite. As economists Eugene Lang and Frank Graves have argued in the Toronto Star, Wente and Shmuel gloss over the fact that the net worth boom is almost entirely due to the phenomenal increases in housing values, which has had the doubly negative effect of pricing a new generation out of the housing market while enabling boomers to drown themselves in lines of credit and credit card debt. Then of course, there’s the troubling question of how long can the housing boom possibly last before meeting its inexorable end?”

“Total debt has increased 110 per cent over the past 15 years, from about $450 billion to well over $1 trillion. These are supremely uncomfortable debt-loads, all underpinned by a housing market that may very well be on the brink of catastrophe. This level of personal debt is relatively new for our country, and most economists worth their weight fully realize that it’s not at all sustainable without significant economic growth.”

“Which turns us to the question of wages. Andrew Sharpe at the Centre for the Study of Living found that the median real wage increased from $41,348 to $41,401 (in 2005 constant dollars) over 25 years. That’s $63. Not exactly boom time figures. In fact, the same Stats-Can report referenced by Wente and Shmuel found that over 30 years, real wages only grew by $2.50 for men and $4.50 for women, which translates to 11 per cent and 26 per cent, respectively (in 2010 dollars).”

“Hardly enough to support and drive the kind of debt binging currently fueling the economic ‘recovery’ from the 2008 economic collapse. Things are different now -more precarious, less just. We really aren’t richer than we think.”

Bits Bucket for April 6, 2014

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