January 1, 2016

The Entrenched Moral Hazard Of The Asset Economy

It’s Friday desk clearing time for this blogger. “Houstonians know all too well that real estate fortunes rise and fall with the price of oil. That made last year a particularly interesting market to watch as developers announced big projects and builders continued to add new homes and apartments all while the price of crude was plummeting. The upbeat tone began to change when Houston’s corporate energy giants started announcing huge cuts in spending and jobs. By the end of 2015, Houstonians shopping for homes were finally able to take a breath after several years of a rapidly moving market where properties sold within days or hours.”

“After wavering much of the year, area home sales saw double-digit declines in October and November. The market is expected to continue to soften into 2016 as more energy-industry job cuts are anticipated. There are some new multifamily projects just getting started, but the apartment building boom has largely stalled. Thousands of new units are opening as the economy slows, and at the end of 2015 landlords began offering free rent to help lure residents.”

“‘Look at national data and Denver is clearly one of the better markets,’ says Dave Mandarich, president of MDC Holdings, parent of Richmond American Homes. The demand side today looks nothing like the giddy scene leading into the 2009 collapse, says Brad Arnold, VP with East West Partners. ‘When you look at the bubble in 2008, there were no users, everybody was speculating,’ Arnold recalls. ‘These buyers (now) are 100-percent users. They’re a conservative group and carry very little debt.’ As 10,000 new apartment units come on line, the high end of the apartment market is now widely seen as being overbuilt; ‘but more indicative is what those people are paying in rent,’ notes Arnold.”

“Riding a five-year trend of high absorption levels, developers planned another robust year of new construction in Brickell’s hot condo market. But early signs suggest 2016 might be different. According to the 2015 Owner’s Guide to Brickell & Downtown Real Estate recently released by the David Siddons Group at EWM Realty International’s Brickell office, new preconstruction projects raised Brickell’s condo inventory by 36% in 2015. That resulted in a 14- to 22- month increase in supply, the report states.”

“In such an unbalanced market, EWM’s David Siddons said, continued price escalation is not in the cards. ‘About 80% of Brickell condos are rentals,’ he said. ‘In an average year there might be 1,000 rentals available. If you’re going to inject three times that into the market, the population would need to triple – and that doesn’t happen. So investors will either have to drop the rent or put the unit on the market. Corrections in sales prices will come as a direct result of the rental market investing down.’”

“Miami condo developers depend heavily on South American buyers, said said ISG principal Craig Studnicky, and ‘those sales are probably 75% off of what they were a year ago.’”

“Calgary’s resale housing market will end 2015 with the lowest level of annual MLS sales since 2011. Tanya Eklund, a realtor with RE/MAX Real Estate (Central) in Calgary, said there has been a correction in the local real estate market due to continued economic strife. ‘Many of the current sales would indicate a higher decline than what the average price decline is showing, especially in the luxury market, in which sales are down roughly 61 per cent over last year,’ she said. ‘Continued job loss and wage decline with economic uncertainty factor into this change in real estate prices.’”

“The softening housing market has already started taking its toll on the valuations of new off-the-plan apartments. In a sample size of nearly 2000 off-the-plan properties in Melbourne valued by WBP Property Group between 2014 and 2015, about half of the them are now worth less than what was paid for them. The average loss was about $40,000 or about a 10 per cent loss between the time of valuation and the time of the purchase. Most of the purchases were between late 2009 and late 2015. ‘In real terms, this loss equates to the cost of a typical deposit, which most people take several years to save,’ WBP chairman Greville Pabst said. ‘There will be a number of people who are going to get caught out by the Australian Prudential Regulation Authority changing the goal post. People are going to have deal with falling prices.’”

“The Hong Kong Monetary Authority tightened the loan-to-value ratio to 60 per cent from 70 per cent for flats priced under HK$7 million in February to curb excessive price growth for small flats. The government’s latest 10-year housing supply target is 460,000 units, of which 40 per cent will come from the private sector. Louis Chan Wing-kit, managing director of Centaline Property Agency’s residential department, expected the news would deal a severe blow to home-buying confidence. ‘Why buy today if abundant supply is coming and prices will be lower tomorrow and the day after tomorrow?’ he said. ‘When home prices are falling, people will stay away from buying.’”

“The year 2015 should have been the year of realisation that the days of creating ghost cities with inventory for investors are over. The investor is no more interested in blocking his money with a business where the returns are absymally low. According to market trends the returns in any of India’s major housing market is not more than six per cent today. ‘The market has definitely been lackluster in 2015, and proved to be a huge learning curve for the entire real estate sector. It would be disastrous to hold on to the false beliefs and erroneous calls that have contributed to this somber situation. Many lessons have been learnt, and will hopefully not be repeated,’ says Arvind Jain, Managing Director, Pride Group.”

“He makes less than $1,000 a month in a city where apartments can cost more than $1 million, but even so the Chinese government is pinning its improbable hopes for a property revival on the likes of Liu Jun. The electrician and plumber is a recent addition to China’s 250 million-plus migrant workers. New home prices in the capital averaged 34,925 yuan per square meter in November, according to a survey by the China Index Academy (CIA), which is linked to the country’s biggest property website. Liu dreams of owning a home in the capital, but would have to save for decades before that could come true. ‘I would love to stay in the city,’ he said. ‘But I don’t have the money and so I don’t have any buying plans.’”

“China’s long property boom, driven by credit and government spending, made fortunes for many owners as new districts mushroomed across the country. But several have since become ‘ghost towns,’ and many Chinese cities have a glut of empty and unsold residential property. At the same time developers who took big bets on continuing housing growth still have huge loans to repay.”

“Williston Mayor Howard Klug said it’s the little changes city leaders have noticed that point to how much calmer life became in ‘Boomtown’ toward the end of 2015. City Commission meetings are no longer a ‘three-hour marathon,’ and planning and zoning board meetings have being quieter, too. Klug said the city has learned that at least eight apartment complex projects have been permanently shelved as apartment units that were being rented for $3,000 a month only a year ago sit empty. Many single-family homes that once sold for well above market value are also taking much longer to sell.”

“It all traces back to oil industry layoffs, he said. ‘We have lost quite a few workers up here that were directly employed by the oil industry,’ he said.”

“By now, it’s an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalisation. There is mounting risk of yet another accident on what promises to be an even longer road to normalisation. The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy.”

“As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed’s market-driven tactics.”

“This approach took on added significance in the late 1990s, when Mr Greenspan became enamoured of the so-called wealth effects that could be extracted from surging equity markets. In an era of weak income generation and seemingly chronic current-account deficits, there was pressure to uncover new sources of economic growth. But when the sharp run-up in equity prices turned into a bubble that subsequently burst with a vengeance in 2000, the Fed moved aggressively to avoid a Japan-like outcome – a prolonged period of asset deflation that might trigger a lasting balance-sheet recession.”

“At that point, the die was cast. No longer was the Fed responding just to idiosyncratic crises and the market disruptions they spawned. It had also given asset markets a role as an important source of economic growth. The asset-dependent economy quickly assumed a position of commensurate prominence in framing the monetary-policy debate. The Fed had, in effect, become beholden to the monster it had created. Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy.”

“The longer the Fed remains trapped in this mindset, the tougher its dilemma becomes – and the greater the systemic risks in financial markets and the asset-dependent US economy. It will take a fiercely independent central bank to wean the real economy from the markets. A Fed caught up in the political economy of the growth debate is incapable of performing that function.”

Bits Bucket for January 1, 2016

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