March 24, 2015

If Everybody Is Thinking The Same Thing

Reuters reports on Sweden. “Having twice cut rates into negative territory, Sweden’s central bank is locked in a high-stakes currency war with the European Central Bank that could stave off deflation but risks creating another property bubble. The danger is that the ultra-loose monetary policy could encourage households to take on more debt. ‘Our fundamental view is that they have been forced to take this aggressive action because of past mistakes,’ said James McCann, European economist at Standard Life Investments. ‘The risk for them is if they go big on asset purchases it could feed through into bigger credit creation in the housing sector and they would be stoking financial stability risk.’”

“Memories of Sweden’s crippling property crash of the early 1990s remain vivid. Though set against a different backdrop — high inflation was then endemic in Sweden — a real estate lending boom crippled several banks as loans went bad, necessitating a costly state rescue. The rest of the decade was spent slowly restocking public finances amid soaring unemployment that even now has yet to return to pre-crisis levels.”

The Associated Press on Brazil. “Developers brag that the athletes’ village for the 2016 Rio de Janeiro Olympics will rival a five-star resort. The village will be turned into a private condominium complex after the games with some of the 3,600 luxury apartments selling for up to 2.3 million Brazilian reals ($700,000). Christopher Gaffney, who spent 5 1/2 years in Rio researching the 2014 World Cup and Olympics, called the village ‘a transfer of wealth program from the public (treasury) to private construction firms.’ ‘Beyond the floodlights, the Olympics are always about real-estate speculation in the local context and Rio, with its already major problems of housing stock and social polarity, is definitely no exception,’ said Gaffney, an American who teaches geography at the University of Zurich.”

The New Zealand Herald. “The head of Australia’s banking regulator says the current state of the housing market poses a possible risk to the economy, even if it isn’t in a bubble. But Australian Prudential Regulatory Authority chairman Wayne Byres stopped short of saying Australia was in a housing bubble. ‘I don’t know what a bubble is and I don’t quite know how you spot it … If these things were easy to spot and define, almost by definition regulators could deal with them,’ he said.”

The West Australian. “WA’s slowing economy and a flood of new high-density developments have pushed Perth’s housing market into oversupply. The number of Perth properties listed for sale is up by more than 2000 since the start of the year to 14,000-plus, while sales are down 15 per cent from the same time last year. The number of properties advertised for rent has also continued to rise, up 210 per cent in three years to 6500, according to Real Estate Institute of WA figures.”

“‘It’s not just that everyone’s selling, it’s that we are getting fed into the market a very high number of units and apartments that are coming on-stream,’ said REIWA president David Airey. ‘With this large supply of homes for sale and rent, it’s likely we will see negligible price growth across 2015 and a fairly slow market for those selling property or looking for tenants.’”

The Financial Post in Canada. “Real estate sales in Alberta are off as much as 30% to 40% from a year ago and listings are way up, creating one of the worst scenarios in which to sell your home. Robert Brown, who just published Wealthing like Rabbits, says preparing for a downturn comes well before the economy turns and begins with staying out of personal debt. Selling off assets is a possibility, but if everybody is thinking the same thing ‘you take a hit on price,’ as people will discover if they sell houses in Alberta today, said Mr. Brown. ‘Maybe you don’t have to sell off big-ticket items but things that are inside your home,’ he says.”

The Strait Times on Singapore. “Almost six in 10 public rental flat applicants today are former home owners who had sold their flats. Cases where unforeseen circumstances such as illness or retrenchment lead to mortgage trouble, are not uncommon, MPs, social workers and tenants told The Straits Times. They also listed debt, divorce, family conflict and imprudent spending as other reasons. There are also home owners who get carried away with the proceeds after selling their flats. ‘Many have not seen so much money before, they think it’s a bottomless pit,’ said Pasir Ris-Punggol GRC MP Zainal Sapari.”

“Chua Chu Kang GRC MP Zaqy Mohamad mentioned a family who went on vacations and stayed in hotels in Singapore after getting more than $100,000 from selling their flat. ‘By the time they came to me (three years ago), they were living in a van,’ he recalled.”

From Asia Times. “There’s certainly been no shortage of ‘How’ questions on Kaisa, the first Chinese property company to default on its offshore U.S.-denominated public bond obligations in the history of the Asian high yield market. This article though, isn’t about Kaisa. It’s more about the trends of debt in Asia and that ever-familiar sense of deja vu one gets whenever the subject turns to lending in this region.”

“Its difficult to shake off a feeling that nothing changes in Asia until and unless it really has to under the force of circumstances. A reader can’t be faulted for asking an obvious question – if nothing has changed, what’s the point of changing it? The answer to that is worthy of a separate article. But a summary of my views are appended below.”

“The penultimate reason and one that has been largely overlooked is – Japan. That country failed to take defaulting real estate companies by the horns in the late ’80s and early ‘90s owing to self-serving logic of avoiding a rapid decline in asset prices. As history has now shown, that decision to protect these companies from bankruptcy helped to create 20 years of zero to negative growth for the nation and made it the impotent economic sideshow it now is.”

“The last reason is also one that may be controversial – but it is something I fervently believe in. Failure to repay without fear of consequences is arguably a ‘public bad’ as inefficient businesses remain in operation and end up sucking what are essentially illegal public subsidies to remain in operation.”

“As a friend who is a restructuring lawyer in Asia mentioned recently – ‘Look at the proverbial table. The issuers of debt who are now defaulting are the same chaps who defaulted in 1997. That’s bad enough, but what’s more galling is that investors who are on the other side of the table are also the same institutions (if not the same individuals) who were at the table back then. No one learns anything in Asia.’”

“He could have added that all other professionals – lawyers, financial advisers, bond traders and private investors in such bonds – are also pretty much the same from 1997.”

Bits Bucket for March 24, 2015

Post off-topic ideas, links, and Craigslist finds here.