October 20, 2015

It’s Wrong To Say We Know Too Little About Bubbles

Fort McMurray Today reports from Canada. “September housing prices and sales have fallen from their 2014 averages, according to statistics from Fort McMurray Realtors. The downturn continues to affect housing sales as statistics show single family detached home sales are down by over a third from this time last year. Housing prices have also dropped, as the average price of a single family detached home fell to $682,738, down from $774,007 in Sept. 2014. The numbers reflect housing statistics from Fort McMurray, Saprae Creek, Gregoire Lake, and Anzac.”

Domain News in Australia. “It’s time for spring home sellers to get real and accept the new reality. If you want some pie-in-the-sky price for your property, something your neighbour got back in winter, think again. You’re three months too late. Clearance rates have been on the slide for months, but with Saturday’s 65.1 per cent clearance rate – down from almost 90 per cent in May and 70 per cent just a week ago. In the north-west, where a renovated three-bedroom house at 27 Hilda Road, Baulkham Hills, was passed in for $940,000 on a vendor bid, LJ Hooker Castle Hill agent Brian Caba​ said he had seen it all before.”

“‘It would have gone for over $1 million only a few months ago,’ he said. ‘But I think this is only a temporary thing, the market will bounce back again next year. I don’t think its anything to panic about, we’ve got a train coming to the Hills that’s going to save this area.’ However, he said prices had recently dropped $100,000.”

“Laing + Simmons Cabramatta agent Minh Nguyen was keen to hear any offers for a three-bedroom townhouse at 3/53 Powell Street, Yagoona. It passed in for $630,000 on Saturday. ‘We had some bidders, but the owner wants more money,’ he says. ‘I told her if she doesn’t take it today, tomorrow might be different – it might be less.’”

The Wall Street Journal on China. “Economists worry that the empty properties ringing many of China’s cities are a major drag on the economy. How bad is the problem? It could be much bigger than either national or local figures show, as Esther Fung explains: Chinese national figures include only homes that are completed and ready for sale. ‘In other words, if developers stop working, then the number is correct,’ said Li Gan, a professor at China’s Southwestern University of Finance and Economics.”

“Homes that are partially completed or not yet for sale can go uncounted. ‘The real inventory situation could be bigger than the data we are seeing,’ said Yang Kewei, research head of data provider China Real Estate Information Corp., or CRIC, which tracks inventories.”

Interest in New Zealand. “Is New Zealand a paradise for money launderers? The NZ Police Financial Intelligence Unit (FIU) details suspicious transaction reports filed with it under the Anti-Money Laundering and Countering the Financing of Terrorism Act (AML/CFT Act) by the likes of financial institutions and casinos. Although at around 12,000 the volume of these reports didn’t budge much in 2014-15 from 2013-14, the value of transactions in them shot up to $8.6 billion from $3.4 billion. (See charts at the bottom of this article).”

“Here’s hoping that $8.6 billion figure paints an accurate picture of the parts of our economy that are caught by the AML/CFT Act. But even if it does it’s merely the low hanging fruit. Because tempting swathes of the economy are excluded from the AML/CFT Act, crucially including real estate.”

“It’s only just over two years ago, on June 30 2013, that the AML/CFT Act finally took effect having been passed by Parliament in 2009. This move saw NZ removed from a regular follow up list (effectively the dogbox) by the Financial Action Taskforce (FATF), the key global anti-money laundering oversight body, in October 2013. Although the likes of our banks, financial advisors, and casinos are now knee deep in AML/CFT compliance, plans to extend the Act to the likes of real estate agents, lawyers, accountants and potentially to jewelers and precious metal dealers, have progressed at the speed of an asthmatic snail.”

The Australian Financial Review. “Very soon after the magnitude of the 2008 financial crisis became clear, a lively debate began about whether central banks and regulators could – and should – have done more to head it off. The traditional view, notably shared by former US Federal Reserve Chairman Alan Greenspan, is that any attempt to prick financial bubbles in advance is doomed to failure. The most central banks can do is to clean up the mess.”

“Hence the fierce (albeit arcane and polite) dispute between the two sides at the International Monetary Fund’s recent meeting in Lima, Peru. It is fair to say that the debate has moved on a little since 2008. Most important, macroprudential regulation has been added to policymakers’ toolkit: simply put, it makes sense to vary banks’ capital requirements according to the financial cycle.”

“But if the idea of the countercyclical buffer is now generally accepted, what of the ‘nuclear option’ to prick a bubble: Is it justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target? And should central banks be given a specific financial-stability objective, separate from an inflation target?”

“Jaime Caruana, the General Manager of the BIS, and a former Governor of the Bank of Spain, answers yes to both questions. In Lima, he argued that the so-called ’separation principle,’ whereby monetary and financial stability are addressed differently and tasked to separate agencies, no longer makes sense. The two sets of policies are, of course, bound to interact; but Caruana argues that it is wrong to say that we know too little about financial instability to be able to act in a preemptive way. We know as much about bubbles as we do about inflation, Caruana argues, and central banks’ need to move interest rates for reasons other than the short-term control of consumer-price trends should be explicitly recognised.”

“My view is that Caruana had the best of the arguments in Lima. We need our central bankers to make complex decisions and to be able to balance potentially conflicting objectives. We accept that they will not always be right. However, it is surely incumbent on them to learn from the biggest financial meltdown of the last 80 years, rather than to press on, regardless, with policy approaches that so signally failed. - Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland. He was Director of the London School of Economics (2003-11)”

From Ghana Web. “In May 2010, I put out an article on the burgeoning real estate market in Ghana with the title ‘The luxury condo and townhome market is booming in Ghana’. Today, in the year 2015, I am going to be very bold and predict to my fellow industry practitioners that THE HIGH LUXURY REAL ESTATE PRICES IN GHANA WILL COME DOWN! The luxury real estate market in Ghana has been so flooded and saturated by so many industry players that, suddenly, we now have a glut and an oversupply of properties in that segment of the market; so much so that it is not funny.”

“In year 2015, it is a completely different marketplace. Recently completed apartment projects are empty, literally begging for buyers or renters to pick up! Because I am on the ground floor in our industry and I happen to be in direct contact with both buyers and renters on one hand and sellers and developers on the other hand. I recently got engaged by an investor who had purchased these beautiful 20+ units of apartments in a gated community two years ago in a highly desirable part of town. Except for two tenants, the property remained empty for the entire period until five months ago when I took up his appointment. At that time, the rent this property owner was asking for his 3-bedroom apartments was $2500 per month. I told him, ‘Sir, you have to reduce the price.’ Reluctantly, he agreed.”

“So from $2500, we went down to $2000, then to $1800 a few weeks after and finally down to $1600. Guess what? Today, we are filling up those apartments very fast and even the tenants are bringing their friends to come by and snap up the remaining.”

Bits Bucket for October 20, 2015

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