July 31, 2015

The Bust Doesn’t Destroy Wealth

It’s Friday desk clearing time for this blogger. “A Nobel Prize Laureate is warning that Sydney’s real estate market is showing every sign of being in a dangerous price bubble. Professor Vernon Smith, who was honoured for his work in experimental economics, is in Sydney to talk about global property prices and he spoke to our business editor Peter Ryan. Ryan: ‘What lessons should Australia be learning from the subprime crisis in the United States, which led to the housing crash which triggered the global financial crisis, even though the circumstances are different that Australian holders of mortgages simply can’t drop their key off at the bank.’”

‘Smith: ‘Guard against allowing people to buy homes that last up to 100 years largely with other people’s money and particularly bank money because it exposes the banks so seriously. Actually, we learned it in the 1930s, but forgot it. You see, it isn’t that we’ve never been there.’”

“Readers had plenty to say this week about the high rate of abandoned homes and ‘zombie foreclosures’ in New Jersey. Heisenberg: ‘It’s still very difficult for young couples to get a mortgage.’ Eh, I didn’t find this to be the case. My wife and I bought our first house 2 years ago, at the age of 25. We were both out of college, with excellent credit, and we were approved for approximately $400,000. WHAT? Sure we both made decent money and only had some student loan debt, but 400k? We wouldn’t be able to pay a mortgage and taxes on a $400k home. We ended up paying less than $300k for our home. We were shocked at how quickly the big-bank mortgage lenders gave us an enormous loan, like 2006 all over again.’”

“That ‘all-cash’ dominated luxury condo market you keep hearing about? Turns out, it’s not really a thing. In fact, more than 40 percent of buyers purchasing Manhattan condominiums priced at $5 million or more took out mortgages, according to The Real Deal’s analysis of condo purchases between July 2014 and June 2015. To be sure, some who buy $5 million homes avoid massive mortgages because they ‘don’t want the hassle,’ said Warburg Realty’s Jason Haber. Many of them ‘refinance after closing,’ he added.”

“Ed Mermelstein, a real estate lawyer, noted that wealthy individuals often finance home purchases by borrowing against their own portfolio of investments rather than against the property itself. ‘The wealthier you are, the more options you have in terms of the purchase of a real estate asset,’ Mermelstein said. ‘Investment professionals come up with some ingenious proposals on borrowing against your own assets.’”

“The ills of the housing crash are far from cured: 7.4 million borrowers were still ’seriously’ underwater on their mortgages at the end of June, according to RealtyTrac. How can this be when home prices are still rising? It depends on how you read those prices. The median, however, means half the homes sold for more and half sold for less, so if higher-priced homes are selling more, which they are, that skews the median higher. Another report from Weiss Residential Research digs deeper in local areas and finds that nearly half the homes in the nation’s top markets are actually losing value.”

“‘Don’t be fooled by averages,’ said Allan Weiss, CEO of Weiss Residential Research. ‘All of the largest metro indexes are rising more slowly than they were a year ago though market reports give the impression that values are rising across the board. However, people don’t own the entire market, they own one house.’”

“Renters in Edmonton are getting a break now that the oil prices have dropped and the economy is slowing down. The softer market means landlords have to try harder to get and keep tenants. David McIlveen, director of community development of Boardwalk Rentals, says they have to offer incentives. ‘Right now in Calgary and Edmonton, you could get at least a hundred dollars off many of the suites that are available from what you would be renting a year ago,’ he said.”

“The situation is even more extreme in Fort McMurray. Apartments are going for $500 a month less than they did a year ago. According to the Canada Mortgage and Housing Corporation, the vacancy rate is just over 22 per cent. McIlveen says apartments are going for $300 to $500 a month less than they did a year ago.”

“Mumbai’s real estate sector is going through one of its worst phases. According to Samantak Das, chief economist, Knight Frank India, various factors have led the realty sector to stagnate. ‘Builders are facing shrinkage in funds and are saddled with a huge pile of unsold inventory,’ said Das. The findings also point out that more than two lakh houses remain unsold in the MMR. ‘It will take at least three years to clear this stock,’ said Shishir Baijal, chairman and managing director, Knight Frank. ‘There will be turmoil if things do not improve in the coming months,’ he said.”

“China’s stock-market plunge soon could be crashing like an economic tsunami onto the shores of Orange County and the rest of California. China stands as California’s third-largest export destination, after Mexico and Canada, Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University, told us. Exports to China amount to $16.1 billion a year, 9 percent of the state’s total. Although no official numbers exist for Orange County alone, he estimated that roughly 10 percent of the Golden State’s total comes from here.”

“A slowing Chinese economy could scale back its citizens’ real estate investments in Orange County and other California coastal areas. Although that could cool a hot market for sellers, it also could make housing here a little more affordable. Much of China’s problem stems from government attempts to shift investments from its faltering real estate sector and into stocks. That created a stock market ‘bubble’ whose bursting probably was inevitable.”

“It’s similar to interference by the U.S. government, with the positive goal of increasing homeownership, that helped cause the real estate bubble of a decade ago – and the inevitable crash during the 2007-09 Great Recession.”

“Last week for the first time the average house price in Sydney passed one million Aussie dollars. But excessive house prices, although trumpeted by some as a sign of economic strength are usually the very opposite; they are more typically a sign of dreadful economic mismanagement. The higher house prices, the more vulnerable the market is to a massive reversal. Sometimes this reversal can be triggered by events that seem far away but suddenly appear right on your doorstep.”

“For Australia, events in China could well be the trigger to make Aussies realise that while house prices may fluctuate, debt doesn’t. Debt is real and if a market that is being driven by excessive lending slumps, the post-crash society will be characterised by excessive debts.”

“Australia is ‘China’s quarry.’ It exports all sorts of commodities to feed China’s apparently insatiable demand for raw materials. This Chinese demand drove commodity prices facilitating a boom in the vast mining outback of Western Australia. Right now, the Aussie housing market looks to be madly overvalued. Without commodity wealth, Australia looks like a large leveraged bubble.”

“When it comes to the fallout from housing booms, Aussies would be well advised to heed the wisdom of John Stuart Mill, the 19th century English economist and philosopher, who said of market booms and busts that ‘the bust doesn’t destroy wealth, it merely reflects the extent to which wealth has already been destroyed by stupid investment decisions taken in the so-called boom.’”

“When we see average house prices hit one million dollars, we can’t say we weren’t warned.”

Bits Bucket for July 31, 2015

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