January 22, 2016

Symptoms Of The Cause Of World Economic Bubbles

It’s Friday desk clearing time for this blogger. “With the stock market sliding and oil prices in the tank, homebuilders meeting in Las Vegas are trying to stay focused on the good news about their industry. But the plunge in securities prices and fretting about the economy have builders looking over their shoulders and whispering the ‘R’ word – recession. ‘We are on recession watch,’ economist Brad Hunter with housing analyst Metrostudy told a room full of builders. ‘We don’t see any immediate signs of a recession.’”

“David Crowe, chief economist with the National Association of Homebuilders, is worried that the recession talk could influence the economy if it continues. ‘I do fear that we could talk ourselves into it,’ Crowe said. ‘With this violent stock market behavior people start getting a little frightened. But I just do not see the catastrophe people are trying to make out of this,’ he said. ‘But if you get enough people worried about things, they stop buying cars and houses.’”

“Dean Martin scans a snowy, 75-acre site bordering the Boise River in Eagle and sees an ideal spot for luxury apartments with $900-per-month rents for one-bedroom units and $1,300 for three-bedrooms. Pacific Partners is part of a surge of apartment developers seeking to fill the void created when the Great Recession dried up apartment construction in the Treasure Valley. Few of the new apartments on the market are marketed to low-income tenants. Martin says he would like to develop projects in Boise and Meridian as well.”

“But he says such projects would have to come online in the next year — quickly in the developer world — before new apartments already under construction hit the market and sponge up the record-high demand for rentals. ‘Beyond projects currently being built or in planning — like ours — we’ll start to head to full capacity or oversupply,’ he says.”

“Look up at the New York City skyline — way up, 100 stories or so — and you can’t help but notice that the changes over the past few years have been remarkable. But now, the buying frenzy may officially be over. Last week the United States Treasury Department announced that it would begin closely monitoring all-cash sales of ultra-luxury condos in Manhattan and Miami for any sign of financial crimes such as money laundering. ‘It couldn’t come at a worse time,’ said Miami realty analyst Peter Zalewski. ‘The market’s starting to show signs of reaching a peak, supply is starting to outpace demand, and right now as foreign currency is plummeting against the dollar and buyers are hard to find, this is sure to be a death knell.’”

“The effects of FinCEN’s announcement won’t be felt for another few months, they say. But for Zalewski, the writing is on the wall. He said that there has long been speculation in the Miami market that of the billions of dollars in cash pouring into the real estate market there from overseas, some of it would be tied up with criminal enterprises. ‘There’s crazy stuff going on in this town fairly regularly,’ he said, recalling a story of Ukrainians trying to sell surface-to-air missiles at a Miami strip mall, ’so something probably happened that we’re not aware of. This is just one of the pitfalls and thorns of this community.’”

“Stockholm’s residents have been saying for years that house prices in the Swedish capital are far too high. Now, buyers are signaling they’ve had enough. After rising 17 percent over the past year, prices in central Stockholm fell 1 percent in the three months through December. ‘While it’s not the entire explanation, surely a lot of people believe that prices have risen too much,’ said Jens Magnusson, an economist at SEB. ‘It could partly be about psychology, that it doesn’t feel good to take the big loans required, but also about reality,’ namely of reaching one’s limit at the bank.”

“‘If you’re convinced that the property deal you’re about to do will be profitable, you’ll be prepared to enter with a lot of money and big loans,’ Magnusson said. ‘If you’re less sure, you don’t want to go in with as much money and will be prepared to pay less for the same object.’ The upshot is that household expectations ‘become self-fulfilling and the more people who believe in falling prices, the more likely it is that that is what will happen.’”

“New home sales have fallen to their lowest level in more than a year, dropping for the third month in a row, according to Housing Industry Association figures. Sales fell 2.7 per cent in November, according to the latest data, pushed lower by a 15.1 per cent fall in apartment purchases. HIA chief economist Harley Dale blamed the fall on ‘a confluence of factors.’ ‘The lagged effect of slowing population growth, an uptick in variable mortgage costs, overreach on the part of APRA’s credit controls, and an easing in property price growth in Sydney and Melbourne are all in play,’ he said.”

“Others, including CLSA analysts, have suggested a ’sharp pullback’ in Chinese buyer demand could translate into weaker apartment demand and lower dwelling approvals.”

“In August 2014, when the housing market here was on a tear, a two-bedroom condominium in one of the most expensive neighborhoods went up for sale at £3.25 million ($4.64 million), a 67% premium to its purchase price six months earlier. Now, demand is slowing not just in London, but in prime housing markets around the world. Luxury housing in London became one of the world’s hottest assets. But ‘the frenzy is gone completely,’ said Manish Chande, senior partner at U.K. real-estate firm Clearbell Capital LLC. About 18 months ago ‘everything was going like hot cakes. Today it’s the total opposite,’ Mr. Chande said.”

“Since the late 1990s, I’ve been amused and intrigued by the striking correlation between world’s-tallest-building projects and economic woes. It was the completion of Malaysia’s Petronas Towers coinciding with the 1997 Asian crisis that first hooked me. That followed similar links in 1970s New York and Chicago, where the World Trade Center and Sears Tower were completed amid fiscal crises, stagflation and the breakdown of the Bretton Woods monetary system.”

“According to the council on Tall Buildings and Urban Habitat, the world just reached the 100 super-tall-skyscraper mark (defined as buildings 300 meters and higher). Most interesting is how quickly the projects are popping up –- both literally and figuratively. It took 80 years to get to the first 50 super-tall buildings from 1930 to 2010, but just five years to add the next 50. The next 50 of the future could be completed in even less time. What does this say about the state of the global economy today and where it might be heading?”

“‘Of course, the building of record-setting skyscrapers does not cause world economic crisis,’ explains Mark Thornton of the Ludwig von Mises Institute, which espouses the Austrian school of economics. ‘The records are merely symptoms of the underlying cause of world economic bubbles: sustained artificially low interest rates by central banks.’”

Bits Bucket for January 22, 2016

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