April 8, 2016

If You Build A Financial Crisis, It Will Come

It’s Friday desk clearing time for this blogger. “Federal Reserve Chair Janet Yellen on Thursday touted the strength of the United States economy, rebuffing political rhetoric suggesting a bubble is ready to burst. ‘I certainly wouldn’t describe this as a bubble economy,’ Yellen said.”

“Home prices fell in dozens of suburbs across the Boston area in the lead up to the spring market in the first two months of the year, according to The Warren Group. Even as prices fluctuate, buyers are snapping up homes at a pace not seen since the real estate boom/bubble of the mid-2000s. Home prices jumped: 89 percent in Charlestown ($1.1 million); 31 percent in South Boston ($695,000); 18 percent in Roslindale ($492,750); 13 percent in Allston ($407,500). ‘If a slowing does come my guess is the suburbs will likely see it first,’ noted David Crowley, a strategic advisor at One Boston Real Estate. ‘Right now (we are) just not seeing any indicators in the city. Still seeing no let-up in multiple offers and no appreciable increase in inventory year-over-year, which would be a key driver in slowing prices.’”

“Twenty-six towns in the two counties have seen prices fall through the end of February, from posh suburbs to more middle-class communities. Needham’s median price ($1 million) has plunged 23 percent to start the year, Wellesley ($1.2 million) has seen a 4 percent decline, while Belmont ($785,000) has seen a 5 percent drop, The Warren Group reports. Nearly 30 towns on the North and South shores saw prices decline with the start of the year. In Plymouth County, Duxbury ($502,000) experienced a 14 percent price drop, Kingston ($269,000) fell 7 percent, while West Bridgewater ($342,250) took a 10 percent hit, Warren Group stats show.”

“Driving into Karnes County, it is easy to see the empty hotel parking lots, new buildings with few cars in front of them and abandoned housing developments. ‘You would think the vultures are circling, thinking you’re going to die on the vine,’ said a defiant Cotulla City Manager Larry Dovalina. ‘If you didn’t die on the vine in 2008, you’re certainly not going to die on the vine today.’”

“Houses are being sold increasingly quickly and in the Amsterdam-Leiden-Utrecht area and in Groningen city the market is performing well above average, according to the Dutch estate agents’ association NVM. In Amsterdam, house prices have risen 20% while the number of houses changing hands has fallen 2%. ‘The market here is literally boiling over,’ NVM chairman Ger Hukker said in a statement.”

“Developers in central London are offering institutional investors discounts of as much as 20 percent on bulk purchases of luxury apartments as demand from international buyers slumps amid higher taxes and low commodity prices. Many developers traveled to Asia to sell homes in advance of construction and secure cheaper development loans because the down payments made projects less risky. The imposition of higher purchase taxes has now reduced the appeal of the costliest properties, leaving developers wondering how they will secure funding, said Dominic Grace, head of London residential development at broker Savills Plc.”

“‘It is a question everyone is asking, and the truth is no one really knows,’ Grace said.”

“Used home prices in China’s major cities have shown signs of decline after local governments introduced a slew of regulations to tame their markets, the Yangcheng Evening News reported. In Shanghai, the number of prospective buyers has dropped significantly. The local government raised down-payment requirements for second home buyers, which prompted a villa owner to lower his property’s price overnight by about 1.6 million yuan (US$ 247,360) from the original 11.5 million yuan (US$ 1.18 million).”

“Shenzhen’s housing market is also cooling off. A research team with Minsheng Securities estimated that home prices in the city might decline between 20 percent and 25 percent by the end of this year. This view was echoed by local real estate brokers. ‘It has become difficult to sell houses after the Spring Festival,’ said an anonymous broker. He got a monthly bonus of nearly 100,000 yuan (US$ 15,460) last year, but couldn’t strike any deal in March.”

“Hong Kong, which for years rode a wave of cheap capital and China’s economic boom, is as vulnerable now as it was before the 1990s Asian financial crisis as those drivers reverse, according to analysis by Daiwa Capital Markets. ‘If the Asian financial crisis was preceded by a classic credit and housing bubble, we see another one now of a bigger scale,’ the Daiwa analysts led by Mr Kevin Lai, chief economist for Asia excluding Japan, wrote in a note. ‘Money inflows have been unprecedented; we expect this money to leave eventually on the back of global dollar-debt deleveraging.’”

“The head of Australia’s banking regulator says home lending practices during the latest property boom are ‘eerily similar’ to the period before the global financial crisis. Former Treasury secretary, now National Australia Bank chairman, Ken Henry agreed Australia remained exposed to a new global shock. He also revealed that, in scenario planning in the lead up to the Wall Street collapse, the potential meltdown of the global financial system was not seen as a real possibility and that being locked out of financial markets was the main concern.”

“‘We asked ourselves the question: ‘In what circumstances could that worry cause a real problem for Australia? And we came up with one and we thought it was so left field that there was no point worrying about it,’ Mr Henry told the conference. ‘And you know what it was? A meltdown of the global financial system.’”

“A recent analysis by a University of British Columbia professor David Ley says that Canada’s immigration policies purposely greased the skids for millionaires and entrepreneurs from Asia. In this way, Vancouver has become a ‘Hedge City,’ a place to park global cash, much like London, New York, Los Angeles or Sydney. Vancouverites have the median income of folks who live in Reno but a real-estate market akin to San Francisco’s. As a result, many Vancouverites grumble.”

“As you hear argued in Seattle, growth is a headache, but the alternative — recession, stagnation, bust — is much worse. And many people — especially homeowners — are undoubtedly of two minds, writes Sun columnist Pete McMartin: ‘If Metro Vancouver has a Silent Majority, I bet it’s those homeowners who tsk-tsk the insanity of the market but who, in the back of their minds, can’t deny the craven whisper of, ‘Please God, let this market stay hot until I can cash out big.’”

“‘Some large U.S. banks that are big commercial real estate lenders have become cautious to outright moratoriums in terms of construction lending for super high-end residential real estate in New York City,’ said Brian Lancaster, an adjunct professor of finance at Columbia Business School. ‘A combination of lower oil prices, which has diminished the ardor of Middle Eastern and Russian buyers, the slowdown in the Chinese economy, which has had negative effects in commodity countries such as Brazil, and stock market volatility, combined with a large amount of new construction, is causing prices to fall, making lenders more cautious.’”

“The next two years will be ‘interesting’ ones for this market, said Marcus & Millichap’s Peter Von Der Ahe. ‘It is going to be difficult if you are trying to sell a $10 million, $15 million, or $20 million apartment right now.’”

“Man’s long determined history of dabbling in the building of touted towers, surely not for his self-gratification, but rather to bring him closer to God, has rarely been met with benevolence. Consider, if you will, the first known example of such an attempt. Having heeded Noah’s warnings, a postdiluvian band of survivors just couldn’t resist taking a stab at the celestials, raising the Tower of Babel they were sure would be gloriously received.”

“The idea of vengeance being associated with sky-piercing structures seems to have stuck, especially among financial market historians. Analysts at the British bank Barclays originally voiced the idea that if you build it, it will come, as in a financial crisis. That is, every time an erected edifice unseated its predecessor to become the newest world’s tallest building, economically upsetting times tended to follow.”

“It took 80 years after the opening of the Chrysler Building to build the next 49 supertall skyscrapers, defined as 300 meters (984 feet) or more. How on earth, or in the heavens, to put it more aptly, has the hundredth supertall just opened on Park Avenue? It might have something to do with the fact that in the short five years through 2015, a subsequent 50 supertall skyscrapers have been erected.”

“All we can do is sit back and wonder what’s to come. Transaction volumes in the trillions and heights exceeding a kilometer – how do tomorrow’s architects top that? Is man’s vanity so great he will risk an even sharper blow to the glass in that celestial ceiling? If he does, what vengeance might follow? The best we can do is hope future history books don’t include records that give new meaning to that old warning, ‘Look out below!’”