Solving A Debt Crisis With More Debt
It’s Friday desk clearing time for this blogger. “Diana Gonzales’ Wylie home was picture perfect when she put it on the market. Still, she was surprised when it sold in a flash. ‘We had about 12 offers,’ says Gonzales, “and the offers were way over the list price!’ Corporate relocations like Toyota and State Farm have delivered a steady supply of buyers. But, experts have warned:’The inventory is so slow, it’s driving the prices up,’ says Realtor Valerie Kirkpatrick, ‘it’s driving the buyers up, they’re having to pay more and more and more and the houses are not worth what they’re paying.’”
“The Green Line is a bragging point for the builders of a 30-unit condo building — some priced as high as $750,000 — on Washington Street near Union Square, its sales pitch concluding: ‘It’s not just a home, it’s an investment!’ When word came this week that the project is in danger of being scaled back or even canceled because costs could be as much as $1 billion more than expected, it landed like a sucker punch for buyers and investors who bought into the excitement.”
“‘On Tuesday, I got up, saw the news on my phone, and said, ‘oh, [expletive].’ There was just a pit in my stomach,’ said Rob Day, who with his wife bought a condominium near Union Square in December and expected to commute to his job in Boston on the new Green Line.”
“The Fayetteville regional market started the year with too large an inventory of resales. Seven months later, little has changed. The current absorption rate for pre-owned homes is a 9.93-month supply of inventory. ‘We’ve got too many existing homes. We’re slowly trying to fix that,’ said David Evans, a broker who works with Manning Realty. ‘That being said, we’re moving in the right direction. July closed with 525 existing homes. That’s way over average. It has been because people who have existing homes all these years, waiting to sell their house, have been dropping their (market) price.’”
“The boom times are long gone for Owatonna homebuilders. Realtor Matt Gillard with ERA Gillespie said housing booms in Rochester and Mankato give him hope that Owatonna could soon start to see its own resurgence. But a lot of that will depend on people like David Schlobohm of Ace Construction building the homes to sell, and he’s still wary. ‘I got stuck in 2007, I got stuck with a million dollars inventory for a couple years,’ he said. ‘I ended up giving it away just to get rid of it. … That speculation market’s not there unless you like losing money, even though the Realtors are calling for that.’”
“Schlobohm said homebuilders will only get back into the game once they can be confident in selling new homes quickly on the market. ‘If you sit on it for six months and pay interest on it, whatever profit you had on it is gone,’ he said.”
“After a decade labouring on building sites around New Delhi, Akhilesh Kumar lost his scaffolding job last month when his employer halted work on an array of 30 residential towers. He joins more than half a million workers let go from sites around India’s capital in the last 18 months. According to brokerage Ambit Capital, rural wages may now be falling after growing 4 percent in the year to March - a far cry from the double-digit annual rises between 2010 and 2014. ‘Labourers are starving and are ready to work even at lower wages as there are fewer or just no jobs,’ said Navendu Kumar Thakur of the Builders Association of India.”
“But the slowdown around Delhi, where unsold inventory is highest, shows no sign of ending. Around the site where Kumar worked, half-built high-rises dot the skyline. Cranes and diggers stand idle. Real estate association CREDAI’s Rohit Raj Modi estimates more than a million labourers worked in construction at Noida at its peak in 2013, at least double today’s number. ‘From a labour point of view, the peak is over,’ he said.”
“Subdivided units are a feature of Hong Kong’s housing market, Kowloon Developmen said, as it priced mini flats in its Hung Hom project at an average of HK$15,567 per sellable square foot after discounts. Prices of special units can see sharp drops, Far East Consortium Internationa chairman David Chiu Tat-cheong called such units ‘imitation luxury flats.’ Chiu said he wouldn’t be surprised if their prices fell by half. He said as wage hikes among the middle class can’t keep pace with the sharp rise of property prices, developers have no choice but to develop smaller units to satisfy demand. ‘Hong Kong people’s hard work and income, and the size of our homes have the most unfair ratio throughout the world,’ Chiu said.”
“Centaline Property’s Louis Chan Wing-kit said the pricing reflects the impact from recent stock market shock. This marks the start of a trend where developers cut prices on their new projects, Chan said.”
“Share market investors are unlikely to flee in large numbers to the property market — as they did in previous routs — because housing markets are perceived as overheated in Sydney and Melbourne, with entry costs high and rental yields low. But other commentators have suggested no-one really knows how things will pan out, as the global economy is in uncharted territory. Bank of England research shows global interest rates are at their lowest in 5000 years.”
“‘We’ve never experienced a combination of events like this,’ Gareth Hutchens wrote in the Sydney Morning Herald. ‘None of our (economic) models demonstrate how the world works when interest rates are this low.’”
“China was always the Ashley Madison of public money. Finance ministers with an infrastructure problem would sneak off to Beijing for a quickie billion and return with smiles on their faces. The Chinese seemed willing and no one need know. China has been tipping cash into worthless transport and energy projects around the world, or storing it in empty London towers. It encourages reckless governments to get involved with stupid projects that no sane banker would support.”
“Any bubble stock market is a danger to all. As Shanghai’s prices more than doubled it was clearly going to burst. When the regime is as dirigiste as China’s, that doubles the risk to others. China’s sovereign wealth can be withdrawn as quickly as it was splurged. Whether the Chinese market crash can single-handedly return the west to deflation is doubtful, but that is the risk.”
“The nosedive reveals just how addicted markets have become to the flow of central bank stimulus and the faith that cheap money remains the path to economic deliverance. A recent working paper by the VP of the St. Louis Federal Reserve Bank finds that after six years of quantitative easing that swelled the Fed’s balance sheet to $4.5 trillion, ‘casual evidence suggests that QE has been ineffective in increasing inflation’ and only seems to have boosted stock prices.”
“Complaints once in the realm of conspiracy theorists wearing tin foil hats are now being embraced by the Wall Street establishment. In a note to clients, Deutsche Bank analysts warned that ‘the fragility of this artificially manipulated financial system was exposed’ and that ‘the only thing preventing another financial crisis has been extraordinary central bank liquidity and general interventions from the global authorities.’”
“They argue that ‘the genesis of this recent sell-off has been the threat of the Fed raising rates next month, but China’s confrontational move two weeks ago and the subsequent knock-on through [emerging markets] have accelerated us towards something more serious.’”
“Alberto Gallo, head of credit research at RBS, is more direct: ‘Policymakers responded to the financial crisis with easy monetary policy and low interest rates. The critics — including us — argued against ’solving a debt crisis with more debt.’ Put differently, we said that QE was necessary, but not sufficient for a recovery. We are now coming to the moment of reckoning: central bankers look naked, and markets have nothing else to believe in.’”
