December 28, 2014

A World Without Grossly Overvalued Assets

It’s Friday desk clearing time for this blogger. “A claim by Fitch Ratings Service that the Texas housing market is the most ‘overvalued in the country’ and homes are selling for prices which are ‘unsustainable’ is being openly mocked by housing industry experts in the state. ‘I think that’s pretty silly,’ Mark Dotzour, an economist who heads the Real Estate Center at Texas A&M University, told News Radio 1200 WOAI. Fitch also says the falling price of oil exposes the Texas housing market to a bubble. Dotzour says, please….’If our stays under fifty dollars for the next six years, yes, Texas could have a problem.’”

“A 4 bedroom, 2.5 bath, 2400 square foot home in a nice neighborhood in San Antonio for sale today for $180,000. An almost identical home in a similar neighborhood in Los Angeles is on the market for $715,000. ‘And they say it’s Texas that has a real estate bubble?’ one local real estate executive told News Radio 1200 WOAI.”

“Home sales plunged 23 percent across the San Fernando Valley in November from a year ago, and the persistent market slump will likely drag into next spring, said the San Fernando Valley Economic Research Center at California State University, Northridge. Sales declined 30 percent from 1,380 in October. November’s total was the lowest since 947 in February of 2009, the center said, making the month the 14th consecutive of year-over-year sales decline. ‘This year has been one of consistently slow home sales, and we are seeing a further expected slowdown as we move to the end of the year. We expect this slowdown to continue into at least March of 2015,’ said economist William W. Roberts, the center’s director.”

“Residential brokers who help Russians find homes in Miami say the plunging value of the ruble will probably affect their clients in a variety of ways. The exchange rate from rubles to dollars results in properties that are twice as expensive for Russian buyers and current condo owners, said Irina Kim Sang, broker/associate for Coldwell Banker Miami Beach. There will be a number of consequences, Ms. Sang said. ‘Those who have invested $1 million plus [for a condo] have at least $1,000 in monthly fees,’ she said. ‘With the ruble devalued, they’re paying double the amount for maintenance and, should they only be using the property for three to six months of the year, they may want to sell.’”

“House prices in London went into reverse in November, falling below the £500,000 mark on average, and have slumped in some of the wealthier south-west postcodes of the capital, in the latest evidence that 2014’s property boom is cooling rapidly. The collapse in both the oil price and the Russian rouble will hurt the prime central London market, according to forecasters Capital Economics. It said: ‘The collapse in the value of the currency means an average priced home in a prime London borough in roubles is now around twice as expensive as it was at the start of the year.’”

“Although the supply for Phnom Penh’s condominiums currently outstrips demand, their numbers are expected to more than triple from 3,090 today to around 10,000 by 2018, according to real estate firm Century 21’s Condominium Report 2014. Driving this growth are large projects such as the $700 million, 900-unit DI Rivera development on Diamond Island, scheduled for 2017, the report says. Prices grew 6 per cent year on year, with an average price per square metre at $1,900.”

“But despite this expansion, the majority of the capital’s completed condominiums are vacant, as most sales go to foreign speculators and Cambodians remain culturally reluctant to purchase the units. Developers’ claims of selling out 70 per cent of their projects may be too rosy as well. ‘Despite the high rate of reported sales by condominium developers, it is found that the some of the reported figures are bookings with small deposits rather actual sales transactions whose rate remains low,’ the report reads.”

“Secondary market prices of properties in posh South Delhi localities have fallen 25-30 per cent over the last one year as a pileup of inventory and need for money turn many investors into desperate sellers. Compared with peak prices, the discount is as much as 40 per cent, say brokers. Property brokers and consultants say there are several distress deals available in the market today. A south Delhi broker, who did not wish to be named says every builder today has unsold inventory. ‘Many of them are unable to hold on to this inventory anymore as they are strapped for cash.’”

“In a recent deal, an apartment built on a 1,200 square yard plot in Delhi’s posh West End area was sold for Rs 13 crore. The sellers were asking for Rs 17-18 crore a year back. During the peak, it would have sold for around Rs 22 crore. Similarly, a builder sold a floor in Niti Bagh for around Rs 13-14 crore, climbing down from his ask of Rs 18-19 crore about 10 months ago. A 1,200 sq yard plot in Hauz Khas that a family was asking Rs 60 crore for six months back isn’t getting sold for Rs 45 crore today.”

“Housing prices in the Kingdom will go down 30 percent due to falling oil prices distribution of more low-cost homes and the imposition of Zakat on vacant land a real estate expert has predicted. ‘The real estate market is facing an unprecedented recession and many agents have spoken about falling sales’ said Bandar Al-Aboud. He said commercial banks in the Kingdom have played a role in hiking prices by granting huge amounts to citizens in long-term housing loans. ‘This increased liquidity and led to skyrocketing prices.’”

“According to one blogger Khamis Al-Jaary prices of plots in north Jeddah rose from SR20000 to SR200000 per square meter. ‘After the real estate collapse it came down to SR30000. But now prices have gone up again to SR500000. It’s now time for them to fall again’ he said.”

“The current turmoil in global commodity markets, most notably with the collapse in oil prices, is a result of global supply outstripping demand – something we also see graphically in the number one market, China. China is suffering historically unprecedented levels of overcapacity for everything from steel to solar panels and nowhere is this more glaring than in the housing market. House sales nationally fell by 10 percent in 2014 and the country now has around seven years worth of unsold housing inventory, according to real estate expert Ai Jingwei. A Beijing business newspaper has published a ‘ghost town index’ stating there are at least 50 cities in which half or more of the housing is unoccupied.”

“The term ‘new normal’ to underline lower GDP growth has been adopted by the CCP regime and widely promoted in the state media. The regime is trying to pull the wool over people’s eyes by presenting the deepening slowdown as a deliberate and intended policy, as something positive. Deflation arises when financial bubbles burst as occurred in Japan when its property bubble collapsed in the early 1990s, and today in China as a result of overproduction and overconstruction. Worst of all, deflation exacerbates the debt burden for companies and governments by increasing the real cost of loans.”

“Whether China’s economy will suffer a hard landing in the next period (commonly defined as GDP growth below 5 percent) is an open question. Some economists warn that a ‘long landing’ is the most likely scenario, echoing our own predictions that China is now entering a ‘Japanese phase’ of deflation, debt crisis and stagnation, with major implications for the class struggle and political stability in the period ahead.”

“Thirty years ago, a steep slide in crude prices forced Larry Oldham to gut the payroll at his Midland oil company down to just himself and one other who worked as secretary, accountant and oil lease specialist. It seemed to Oldham that everybody owed somebody else a little money. The oil bust of the mid-1980s still swallowed up oil companies, banks, real estate markets, and thousands of jobs in Texas, sending the state’s roaring economy into a slump for years. ‘I wish I could paint a rosy picture, but I’m a realist. This is my fourth downturn,’ said Oldham. ‘Everything’s going to get pretty ugly.’”

“The state’s housing market also sees big dips in home permits when U.S. crude prices fall sharply, and the current oil crush may hit the market as hard as it did in 1986 and in 2009, according to Barclays.”

“In this latest boom, oil companies have found a new source of eager money lenders. The Federal Reserve has kept interest rates low since the financial crisis, prompting investors to seek better returns by pumping more than $200 billion into higher-paying - but risky - low-grade corporate bonds for energy companies. Prices for the U.S. energy sector’s high-yield debt instruments, known as junk bonds because they carry high risk for investors, have dropped nearly 20 percent since June. ‘The whole credit spectrum has been experiencing a significant amount of shock,’ said Shaia Hosseinzadeh, a principal at investment firm WL Ross & Co.”

“The credit strategy team at Deutsche Bank, headed by Jim Reid, pose an interesting question: ‘Are we any nearer to finding a more sustainable financial system? Or have we simply delayed the economic pain and are continuing on the completely wrong path policy wise?’ In a report entitled ‘Plate Spinning,’ they state: ‘The problem for central bankers is that they have inflated certain asset prices to levels where, if they reined in their actions too much, then they would likely see adverse market moves and a loss of confidence in the system.’”

“Central bank ‘easy money’ has inflated stock prices across the world but there has been an absence of any meaningful improvement in the underlying economy. The stark reality facing investors in 2015 is that the depression which was avoided in 2009 by ‘printing’ huge amounts of money is still unresolved and five years of inflated asset prices have left global markets incredibly unstable.”

“The unimaginative and badly handed policy response of money printing has wreaked havoc on asset allocation across the globe. Overinflated asset prices have magnetically attracted capital to all sorts of inappropriate places where it doesn’t belong, while the size of the Federal Reserve’s balance sheet has snowballed. We now have billions invested in oil rigs that could be left rusting in the middle of the ocean if prices remain at their current level. Even more capital is gathering dust in empty houses across China. In both cases, tumbling asset prices could results in trillions in loan losses for the banking sector. Technology companies have also attracted billions of investment yet create very few jobs, no profits and no tangible product.”

“The 2009 depression avoided by printing money remains unresolved. What we do know is that the US monetary base is now shrinking after the third round of QE was brought to the close in October. And the Fed is also expected to hike interest rates at some point next year. Investors might have to readjust to a world without grossly overvalued assets in 2015.”

Bits Bucket for December 28, 2014

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