July 26, 2015

An Irrational Market For A Global Commodity

A weekend topic on house prices and the outsider perceptions. The Independent. “Foreign criminals are pushing up UK house prices by buying expensive homes to launder money, according to a law enforcement chief. Donald Toon, director of economic crime at the National Crime Agency, told The Times he believed money launderers were using the booming UK property market as a front to hide their money from illegal activity. He said he was alarmed by the number of homes registered to offshore corporations with ‘corporate wrappers’ - layers of linked companies that make it hard to find the original owner.”

“Mr Toon said: ‘I believe the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.’”

The Business Spectator. “As the RBA’s latest minutes bemoan the Australian dollar’s decline as still inadequate, fresh evidence has emerged showing offshore buyers are snapping up Australian property at increasing rates. In a pertinent reminder of how residential real estate is increasingly a global commodity, foreigners bought more than 28 per cent of all new apartments in Melbourne in the June quarter, according to figures from National Australia Bank.’

“NAB’s survey of property professionals found foreign buyers accounted for more than 16 per cent of all apartment sales in the new property market, and more than 11 per cent of all houses. It is no longer possible to dismiss the influence of foreign buying on property prices as trivial, either here in Australia or in global markets such as the US and UK, Canada and Auckland. Jeremy Bendeich, portfolio manager at Avoca Investment Management, notes that if the worst punishment for buying a house in breach of foreign investment laws is that you have to sell it again, potentially to a related party, then the ‘downside is tolerable.’”

“Exchange-rate effects have already impacted foreign buying in the US. For years, Canadians were the biggest foreign buyers of US homes. But Canadian sales have declined recently, in part due to the weak Canadian currency. Chinese buyers have now surpassed Canadians as the dominant foreign buyers of homes in the US, according to the National Association of Realtors, purchasing $US28.6bn of properties in the US to represent 16 per cent of international buyers in the year to March.”

“Any further falls in the Aussie dollar are likely to result in even more attractive buying conditions for foreign buyers, with some observers predicting exponential growth in property investment from China for some time. That won’t help the case for local residents trying to get on the property ladder, or what Glenn Stevens has deemed ‘crazy’ sale prices in some areas of Sydney.”

The New York Times by Robert J. Shiller. “Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on ‘new information,’ even if you don’t know what that information is.”

“The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.”

“The housing market is another matter. It is far less rational than even the often irrational stock market, for a couple of important reasons. First, most investors find it difficult to understand how housing supply responds to changes in demand. Only a small minority of people think carefully about such things. Second, it is very hard for the minority of smart-money investors who do understand such matters to bet against bubble-level prices in real estate markets. In housing, the smart money has relatively little voice.”

“For the first point, in ‘A Nation of Gamblers: Real Estate Speculation and American History,’ a presentation at the 2013 American Economic Association convention, Edward L. Glaeser of Harvard University reviewed real estate booms and busts. He showed how real estate investors have repeatedly made the mistake of neglecting the supply response to rising prices. In the Alabama cotton farmland boom of 1815 to 1819, for example, high cotton prices seemed to justify high prices for cotton land.”

“What most investors failed to see at the time was that these cotton prices would induce new farmers around the world to begin to grow cotton. That same failure to anticipate how supply can respond to demand applies to many forms of real estate today. Developers and builders will, one way or another, exploit overpricing, increasing effective supply, in that way bringing real estate prices down.”

The News Press Now. “While housing sales have been looking bleak since about 2008, a new study has shown the market is increasing significantly and the Midwest is the top dog. Don Evans, owner of Evans Realty, said that the Midwest is usually behind the curve by about 30 to 60 days of any study, and that this year has been busy for them. ‘Local real estate professionals had said that we don’t have a bubble here in St. Joe, we never have, never will,’ he said. ‘But I think we did. I think we had a bubble, I could see, we kind of fell off the ledge with everybody else.’”

“While there may have been tough times in the past, things are definitely looking up, and there are a lot of reasons for this, Mr. Evans said — particularly with the media. ‘We’re not seeing negative stories, we’re seeing positive stories,’ he said. ‘I think the most important thing is, is that people are not afraid to buy a home.’”

“One buyer who was not afraid to buy a home in the Midwest was Sherry Pendleton, who moved back to St. Joseph from California after 25 years. But Ms. Pendleton did find it a little difficult finding a home, specifically when it came to pricing. ‘I found that on the value of their home … if they felt like their home was worth this much money, they’re not going to negotiate,’ she said. ‘Even though the values of the house were not (that high) … they would not budge.’”

“It is hard for homeowners to have people tell them their home is worth less than they think, she said, especially when they’ve lived in it for a long time. ‘This is your home,’ Ms. Pendleton said. ‘It’s a very personal thing and you think that your house is worth this much money and for somebody to come in and say that it’s not worth this much money … that kind of hurts.’”

Bits Bucket for July 26, 2015

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