September 16, 2014

Markets Will Not Be Liquid When Liquidity Is Needed Most

Reuters reports on Canada. “Jeff Lowry and his family left a sedate housing market in Tennessee last year and moved to Canada in the midst of a housing boom, where bidding wars and soaring prices were an unpleasant reminder of his American roots. Trading in his suburban home outside Nashville for a smaller $600,000 house in Waterdown, Ontario, the 39-year-old regional manager wonders if he’s just bought into another bubble. ‘Obviously it is risky, and we’re concerned,’ said Lowry. ‘The housing market is skyrocketing and we wonder, are we paying the top price?’”

“Lowry is already counting his gains as the Canadian housing market marches ever higher. ‘We’ve only lived here eight months and the values have even gone up since then,’ said Lowry, marveling at how much money his neighbors are getting as they sell. ‘I think I will make money here. I purchased it at C$600,000 and they are now going for C$680, C$690. If that trend continues I’ll be sitting pretty in two or three years.’”

From Bloomberg. “The Australian Prudential Regulation Authority in May warned of growing evidence of ‘lending with higher risk characteristics.’ Interest-only mortgages jumped to 43 percent of all new home lending in the three months through June 30, and credit to buy rental properties climbed to 38 percent, both record highs. Cheap money is driving prices higher. Property agent Darren Dowd last month sold a three-bedroom house in the northwestern Sydney suburb of Baulkham Hills for A$895,000, almost A$100,000 more than he expected. Two years ago, he sold the same house, about 30 kilometers (19 miles) from Sydney’s central business district, for A$605,000.”

“‘Prices in our area have increased about a quarter of a million dollars just in the past couple of years,’ said Dowd of broker Ray White Baulkham Hills, adding that the number of people choosing to sell their homes at auction is at a 15-year high. ‘We’ve seen a sharp increase in auctions in just the past three months because people are seeing the exceptional results others are getting and saying, ‘I want what he has.’”

The Star Online on Malaysia. “According to the first half 2014 Property Industry Survey by the Real Estate and Housing Developers’ Association Malaysia (Rehda), properties in the affordable housing price range below RM1mil have been facing a tough sell largely because of homebuyers’ difficulty in getting financing and a glut of unreleased bumiputra lots. Also, some 31% of properties in the RM500,001 to RM1mil range were still left unsold after completion in the past three years. These were largely in hot property markets like Selangor and Johor.”

“Rehda president Datuk Seri Fateh Iskandar Mohamed Mansor said demand for property was intact but with the Government’s cooling measures introduced a year ago, developers were finding it difficult to successfully sell in the affordable housing segment. ‘A property is a person’s biggest wealth creation asset, yet they can’t seem to own one,’ he noted.”

The South China Morning Post. “Mainland regulators have gone pretty easy on money launderers over the past few decades. That is set to change, however, as the People’s Bank of China begins to assign more responsibility to banks in flagging suspicious transactions, Michael Thomas, North Asia director at Wolters Kluwer Financial Services, told the South China Morning Post. President Xi Jinping’s anti-corruption drive is also aimed at stopping officials from moving large amounts of money - along with their families - abroad.”

“Mainland media have dubbed these cadres ‘naked officials’ and regional governments have come down particularly hard this year on those caught with major assets abroad. In July, the provincial government of Guangdong said it identified more than 2,000 ‘naked officials’ and removed more than 800 of them.”

The Financial Express in India. “Protests over delays in completion of real estate projects today reached doorstep of government minister, when some aggrieved buyers used an industry conference to air their grievances. About two dozen flat owners of Unitech’s two under-construction housing projects in Noida reached NAREDCO’s annual convention to petition Urban Development Minister M Venkaiah Naidu and I&B Minister Javadekar. Unitech Golf and Country Club Apartment Buyer’s Association, Noida VP Sanjeev Sood said: ‘The project was launched in 2007 but still we have not got the possession. We have paid 95 per cent of the total cost of the flat. The construction work has stopped on the site.’”

The Business Times on Singapore. “A larger percentage of high-end luxury condo homes on the resale market are selling at a loss and a smaller percentage at a profit, as the tide of the once-rosy property market recedes and reveals those who have been ’swimming naked’ - that is, those without adequate holding power for their extravagant purchases. The low-rental environment is leaving more owners struggling to repay their mortgages. In some cases, the monthly rental cannot cover the mortgage.”

“‘It’s quite common that rents cannot cover monthly instalments, especially for bigger units. But those who don’t have holding power would have to let go of their units. Others may be forced to do mortgagee sales,’ said Christine Li, head of research and consultancy at OrangeTee.”

“Losses made in resale transactions from January to August 2014 range from S$9,300 for a unit in Bukit Timah, to S$2.06 million for a unit in Tanglin. The latter was purchased at S$6.8 million in 2007, and sold for S$4.7 million in April this year. Four units at The Promont (at Cairnhill), St Thomas Suites (near River Valley), Tanglin View and Waterscape At Cavenagh also resold at considerable losses of S$800,000 to S$1.2 million each.”

From the AFP. “Loose monetary policies have created an ‘illusion of permanent liquidity’ that is spurring investors to make risky bets and push up asset prices, the Bank for International Settlements said Sunday. ‘The longer the music plays and the louder it gets, the more deafening is the silence that follows,’ Claudio Borio, who heads the BIS’ monetary and economic unit, told reporters. ‘Markets will not be liquid when that liquidity is needed most,’ he warned, urging ’sound prudential policies (and) extra prudence on the part of market participants themselves.’”

“The BIS, the so-called central bank of central banks, has long warned such moves are whetting investors’ appetite for short-term, high-risk investments and froth in property markets, potentially creating the bubble conditions for a new market crash. Borio said that markets have shown ‘exceptionally subdued volatility’ at levels similar to before the financial crisis in recent months, which could be ‘a sign of high risk-taking.’”

“Borio stressed that ‘a common mistake is to take unusually low volatility and risk spreads as a sign of low risk when, in fact, they are a sign of high risk-taking.’ ‘The illusion of permanent liquidity is just a prevalent now as in the past,’ Borio said, pointing out that years of ‘unusually accommodative’ monetary policy has left investors feeling secure low interest rates would continue or only be gradually tightened.”

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