January 26, 2016

Over-Reliance Upon One Asset Does Not Make It Immune

Investors Business Daily reports on China. “China’s capital outflows jumped in December, with the estimated 2015 total reaching $1 trillion, underscoring the scale of the battle facing policymakers trying to hold up the yuan amid slower economic growth and slumping stocks. ‘The immediate trigger for a pickup in capital outflows toward the end of the year was the People’s Bank of China’s poor communication over its shift in currency policy,’ said Mark Williams, chief Asia economist for Capital Economics Ltd. in London, who previously worked on China issues at the U.K. Treasury. ‘Outflows are likely to remain strong because the People’s Bank still has not been able to generate confidence among investors that it knows what it’s doing or that it’s able to achieve its policy objectives.’”

Stuff in New Zealand. “Crashing stockmarkets and a crackdown on cash leaving China could disrupt plans for development and investment in New Zealand. Economist Shamubeel Eaqub said the outflow of foreign investment from China was ‘massive’ in 2015, but new rules and regulations would rein it in. ‘They’ve really tightened up in terms of letting money leave the country,’ he said.”

“The impact is already being felt. Late last year, Chinese investor He Run International pulled the plug on a proposed $80 million dairy factory development in Otorohanga. Minority local shareholders were told the plan fell over due to the stock market crash in China, and restrictions on withdrawing funds. ‘We suspect the funding issue was the biggest issue because of what is occurring in China with the stock exchange and the flow of money out of China. It is nearly impossible to get any funds out to do what they wanted to do here in New Zealand,’ local investor David Carey said.”

“Massey University’s Yuanfei Kang, a senior lecturer in the School of Management, said the extent of any capital restrictions would be linked to the fortunes of China’s economy. ‘If the economic situation becomes worse, further measures will be taken,’ Kang said.”

The Singapore Business Review. “The supply glut won’t ease anytime soon. Developers will have to grapple with an intense oversupply of new homes over the next three years, according to a report by Maybank Kim Eng. ‘Together with the net increase in executive condominiums (ECs) and public housing, we forecast an annual net increase of 41,400 homes for the next three years. This is double the 21,800 in the past decade,’ Maybank Kim Eng said.”

The Strait Times on Australia. “Australia’s surging property prices have led to spiralling mortgages and left the nation’s households ranked as the most indebted in the world, prompting concerns that the market is in a bubble. Most analysts are forecasting a ‘cooling off’ period, saying the nation’s 15-year run of soaring home prices will finally end due to stagnant rental yields and low affordability. An expert on Australia’s real estate economics, Dr Nigel Stapledon from the University of New South Wales, said the market appeared to have finally peaked last year and had begun to slow.”

“Dr Stapledon said a lot of apartment blocks are due to be completed and come onto the market in Sydney and Melbourne this year and in 2017, which will significantly add to supply. Also, he said, the end of Australia’s mining boom has dampened the economy and slowed immigration growth, which has affected demand for housing and rentals. ‘I don’t think policymakers have any reason to stop a reversal,’ Dr Stapledon said. ‘State governments should continue to re-zone and open up land for housing. What is the problem with prices dropping? If houses lose a chunk of their recent gains, it is a good thing.’”

The Peninsula Qatar. “Qatar’s real estate prices softened a bit during the final quarter of 2015 compared to the previous quarter, after hitting a record peak in November 2015. ‘These are interesting times for Qatar,’ said DTZ Qatar’s new Residential Agency Head, Bashir Jama. ‘On one hand, developers have tended to be drawn towards the upper and prime housing sector, whereas the real opportunity presents itself in the demand/supply gap in the lower end of the housing market. The difficulty is the price of land; developers focus on the higher end markets as the high-end market is perceived to provide higher returns.’”

From Letting Agent Today in the UK. “Typical rents in Scotland are down from £757 per month to £747 according to Citylets - just as the Private Housing (Tenancies) (Scotland) Bill is being considered, with a provision for rent caps. Average rents in Aberdeen have fallen 15.9 per cent over the last year, largely because of oil price falls dragging down the local economy. ‘We generally report on what we have seen but it isn’t hard to foresee annual growth for Scotland tending towards zero later in 2016. Aberdeen has further to fall’ warns Citylets founder Thomas Ashdown.”

The Western Morning News. “It is interesting how the Brits’ fascination with property has evolved over time. At present prices, UK residential property is now ‘worth’ about £5trillion (£5,000 billion) and about 65% is owner occupied. Commercial property, all those shops, factories, offices, plant is ‘only’ £400billion. The London Stock Exchange, which includes multinational giants with most of their assets and income overseas, is only worth £2.25trillion. British Government Bonds are £1.5trillion. There is approximately £700billion of cash on deposits held by individuals.”

“It is interesting how something in which we live – and costing us considerable upkeep – has become so significant in terms of our societal structure. I am very alarmed at the excessive price levels of the average ‘home’ but our governments must be concerned that so much of our economics are impacted by what is happening in housing – and the confidence of those who own it. We should all never forget that over-reliance upon one economic asset, a simple box in which to live, however pretty or comfortable, does not make it immune from irrational excess and frankly, the figures are all out of kilter regardless of the lack of enough new homes being built and the insatiable demand for them – apparently (but never forget that all the people here at the moment do have somewhere to live).”

“However, in reality, the order of asset values should perhaps be: stock market (the base of all our commerce), residential property, commercial property, government bonds. You can see the model requires some considerable re-balancing but perhaps a doubling of the stockmarket is more unlikely than a halving of the value of homes (though the latter would still constitute significant ‘value’ though I shouldn’t wish even to countenance what that would mean for the economy and bad debts). Sadly though, this may be the necessary adjustment required to return to ‘normality’ so watch-out as each could indeed arise.”

“Yes, indeed, what we think we know – and like – is property, so do I. However, that leads to excessive emotional dependence upon a judgement where we don’t ever want to be wrong and of course, we live in one too and feel snug about the thought of making money whilst we sleep as these things always go up, don’t they.”

Bits Bucket for January 26, 2016

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