October 28, 2015

From Euphoria to Revulsion

News Letter reports from Northern Ireland. “A growing number of towns in Britain now have average property prices in excess of £1m. According to Lloyds Bank, there are now a number of locations outside London with such a high typical home price. It will be many years indeed before any town in Northern Ireland has a seven-figure average price, although there are already streets such as Malone Park in Belfast that probably do, as well as one or two areas such as Cultra in north Down. But the last boom on both sides of the Irish border dramatically illustrated the downside of a housing bubble. It became akin to a ponzi scheme in which people at the bottom (ie first time buyers) pay more and more and those at the top (ie older people who own their home outright) become rich.”

“It has been good to see a return to activity in the NI housing market and to see relief for those worst hit by negative equity. But if people are becoming millionaires in their homes, it is often a sign of something unhealthy in the housing market.”

The Globe and Mail in Canada. “Toronto’s condo sector has seen rising numbers of newly built, but unsold condos this year, raising red flags among some industry watchers. But Canadian Imperial Bank of Commerce economist Benjamin Tal insists those who see the trend as a sign of a condo bubble about to pop ‘are barking up the wrong tree.’ While he dismisses the idea that Toronto’s condo market is facing ‘increased vulnerability,’ he does see stiff headwinds ahead for the sector. ‘To be sure, the GTA’s condo market will be tested as interest rates start rising in the coming years, and increased resale activity from domestic condo investors will result in excess supply and some downward pressure on prices,’ he writes.”

Bloomberg on China. “China’s moves to ease mortgage restrictions and cut interest rates are bearing fruit in the nation’s smaller cities, where home prices have staged a recovery. Now comes the bigger challenge: Clearing a supply glut to spur investment by developers. China’s urban dwellers already own about 24 square meters of housing per capita, and the stockpile of new homes being built suggests that another 7 square meters could be added, bringing the average home ownership to 31 square meters, according to Nomura’s chief China economist Zhao Yang. That’s ‘very high’ given China’s current level of economic development, and compares with 35 square meters per capita in Japan and 54 in the U.S., he said.”

“‘What the government can do is try to prevent too sharp a decline in property investment,’ Zhao said. ‘That’s the pragmatic target.’ Stimulating the property market to revive economic growth, ‘frankly speaking, won’t be a big help.’”

From Fairfax Media. “Jone Wang is just one among a thronging Chinese crowd at an international property expo being held at one of the main exhibition centres in central Beijing, where Australian and other overseas property developers come in increasing numbers to hawk their wares. Competition is intensifying as developers double-down on their marketing push into China, hoping to capitalise on the trend of mainland buyers taking flight over concerns of an acutely slowing domestic economy, accentuated by a volatile stockmarket and a real estate price bubble.”

“‘I don’t know much about Australian property,’ Wang said, clutching a fistful of showbags and brochures. ‘But property prices in China are far too high. And you invest millions of yuan in one property but only get a few thousand in rental income.’”

“A quick glance around the typical dwellings for sale in major cities like Beijing or Shanghai make it obvious why Chinese buyers, in stark contrast to locals, consider both Sydney and Melbourne real estate a bargain. And it is evident too in the widening gap between rich and poor. Homebuyers armed with a A$700,000 budget ($748,000) in central Beijing can at best afford a modest two-bedroom apartment, in a densely-populated, ageing residential compound built in the 1980s. Among the apartments at this price point shown to Fairfax Media by local real estate agents for this story include a 65-square metre three-bedroom apartment with no living room and a tiny kitchenette, shared by six construction site supervisors.”

“Another was a similarly-sized, well-worn two-bedroom apartment used by a restaurant as a make-shift workers’ dormitory, with 14 waiters and kitchen-hands sleeping on austere steel bunk-beds. Newer luxury apartments can easily go for triple or more the price per square metre. Wang said she was lucky to get out before the worst of the stockmarket crash, but said it only reinforced her opinion that there were no truly safe investments at home. ‘Now, China’s domestic economy is not good and I’m concerned my assets here will depreciate,’ she said.”

Domain in Australia. “Chinese investors being offered zero-deposit home loans over Australian apartments will be charged credit card interest rates, raising fears of increased offshore speculation in the already heady property market. The privately owned Ping An Insurance, which is offering the zero-deposit home loans, will charge clients an annual interest rate of 14 per cent. Eddie Yuen, the Shanghai-based manager of property agency Austpac, which is promoting the scheme to clients, said the loan had a two-year term and was to fund the initial 10 per cent down payment for an off the plan apartment.”

“‘You can walk into one of our seminars without a dollar in your pocket and still buy an Australian property,’ he said via phone. ‘We would never promote the loan for speculation as this is not smart for Australian property, where costs like stamp duty are high,’ Mr Yuen he said. He also denied it was a high-risk option as the down payment needed to be secured against an unencumbered property in China.”

ABC.AZ on Azerbaijan. “The Baku real estate market amid falling oil prices and reduction of population’s income is going through a very difficult period. Nusret Ibrahimov, CEO of MBA Consulting Group, says that the Baku real estate prices have fallen by 50% since the beginning of the year. ‘However, even this cost is high in the current situation: the price of a square metre in oil equivalent is now 33-34 barrels, and in order to provide at least minor activity it should be in the range of 20-24 barrels. Housing prices are still high, and there are almost no buyers,’ Ibrahimov said.”

The Hankyoreh. “The idea that the rise of emerging economies like China and India in the early twenty-first century would usher in a boom for the global economy was nothing more than ‘euphoria,’ a noted scholar claims. Jayati Ghosh, a professor at India‘s Jawaharlal Nehru University, is a world-renowned development economist who has focused mainly on the economies of emerging and developing countries.”

“The emerging markets are currently stumbling, as various indicators show. The emerging economies are also losing funds. As recently as last year, there was a net influx of capital accounts, but most analysts predict outflows will exceed inflows this year. ‘This would be the first time in the last twenty years that there has been a net outflow of emerging economy capital accounts,’ Ghosh said.”

“Instead of being used for direct investment in factory building, the funds that have poured into emerging markets since the 2000s have stayed chiefly in the financial sector, where they have been used to generate profits from the rate of return differences between different assets and countries, Ghosh says. Much of the money that has gone into emerging economies has indeed been invested in the real economy. But even there, the goal has been to produce financial profits rather than to reflect the daily needs (effective demand) of people.”

“It is no coincidence that the emerging economies have all recently been going through bubble-dependent booms in their real estate, asset, and/or securities markets, albeit at different times. The asset bubble in emerging economies was also an important factor shoring up the global economy amid the downtown for the advanced economies after the 2008 crisis.”

“In the words of Hyman Minsky, the economist who explained economic cycles in terms of the expansion and contraction of credit supplies, the emerging economies have slipped rapidly from ‘euphoria’ to ‘revulsion.’ The interesting question is how economies with such a relative lack of experience with capitalism became so quickly exposed to financial risks and instability.”

Bits Bucket for October 28, 2015

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