The Housing Bubble

A weekend topic on what could be done about the housing bubble, starting with the Business News Network. “Canada’s federal government is prepared to take further action against skyrocketing Vancouver and Toronto home prices, but Bay Street is split on whether Ottawa should. More than three dozen of the country’s most well-known money managers were surveyed by BNN about whether further intervention is needed to cool Canada’s two hottest housing markets. Only about half – 19 out of 39 regular guests on Market Call and Market Call Tonight – said yes, with 16 saying no, and four warning the government would need to tread carefully.”

“Ottawa has already increased the minimum down payment required for homes costing more than $500,000; although the changes appear to have made little difference with prices in both the Vancouver and Toronto markets continuing to reach record highs. Actions taken thus far, according to BMO chief economist Doug Porter, have largely ignored the most important factor driving Vancouver and Toronto home prices higher: foreign buyers. According to the BNN survey, much of Bay Street agrees.”

“John Kim, portfolio manager at Aston Hill Financial, said there could be ‘unintended consequences’ of intervention into two local markets from a federal level; while Paul Tepsich, managing partner at High Rock Capital, said the risk is even greater. ‘If [Ottawa intervenes in the Vancouver and Toronto housing markets], they will collapse the entire economy as the consumer is way too levered even with house prices climbing,’ Tepsich said.”

The Daily Express in the UK. “Property experts have warned that today’s sky-high prices are only affordable with interest rates at near-zero and that a crash is inevitable, the moment rates start rising. Even normally bullish estate agents are expressing concerns about the sustainability of today’s crazy prices. The market is particularly vulnerable now as new figures show buy-to-let investors are abandoning the market in the wake of Chancellor George Osborne’s aggressive tax crackdown.”

“There are also signs of a slow down in the once overheated prime central London market where prices rose just 0.1 per cent in the year to May, the lowest growth figure since October 2009, according to figures from Knight Frank. The number of active buyers to available properties has halved, it said. Now a new report by economic forecaster Fathom Consulting has warned house prices could plummet by almost half.”

“Prices have surged to average 6.1 times earnings, a ‘whisker’ away from the market’s peak valuation of 6.4 times earnings which it hit just before the financial crisis. By holding base rates at 0.5 per cent since March 2009 the Bank Of England has slashed mortgage repayments and stoked housing demand, according to Fathom. It warned that house prices will need to plummet by up to 40 per cent to come into line with the pre-2000 average of 3.5 times earnings.”‘

“Alternatively, household incomes would have to grow at 10 times their current pace for the next five years. ‘Real mortgage rates will not remain as low as they are today. And when they do rise the fragile arithmetic supporting the elevated house price-to-income ratio will unravel,’ a Fathom spokesman said. ‘All the while ‘lower for longer’ rates of interest are inflating the housing bubble and worsening the inevitable correction.’”

“Haart chief executive Paul Smith warned that trouble is brewing as buyers are abandoning the market due to high prices. ‘There is trouble in paradise as we start to see a big slump in buyer demand.’ Smith, whose company operates estate agencies haart, Felicity J Lord and Spicer McColl, said the nation was ‘near the limit in terms of price rises’ and growth and transactions look set to fall.”

An editorial by Sol Palha. “If you had told individuals before 2009 that we would be living in a negative-rate environment in the near future, most would have treated you like a lunatic. Fast forward a few years and voila, bankers all over the world are embracing negative rates. China devalued the yuan once again, adding further fuel to the already blazing fire. The Fed will have no option but to lower rates and then Jump onto the negative-rate bandwagon.”

“We can already see the ‘all-is-good’ slogan breaking down to ‘it’s-not-as-good-as-we-thought’. And that will eventually change to the slogan: ‘it’s ugly out there’ and we need to lower rates to prevent a catastrophe. The same strategy has been used again and again; it works marvellously so why stop now. The masses have been well trained so there is absolutely no need to change the game plan. Keep the lie simple, repeat it over and over and folks will believe it. Crowd psychology clearly illustrates that the mass mindset is self-destructive.”

“The first experiment was to maintain a low-rate environment; the second was to flood the system with money, which was achieved via QE. The third phase was to get the corporate world in on the act of flooding the markets with money. This was achieved through massive share buyback programs. The next stage is to introduce negative rates to the world to fuel the mother of all bubbles, which is currently underway.”

“Negative rates will lower the cost of mortgages as, in many cases, holders receive a check from their bank for interest payments. Negative rates are already fueling a property bubble in Sweden and real estate prices have surged significantly in the U.K. It’s only a matter of time before the same phenomenon occurs in the U.S. where banks will almost certainly lower lending standards. Barclays, for example, recently announced 0%-down mortgages.”

“Nations will continue to devalue their currencies in a bid to stay competitive. The global economy is weak and only hot money is creating the illusion that all is well. Mass psychology indicates that the masses prefer a sweet lie as opposed to the blunt truth. In that sense, they will get what they desire — a market that looks magnificent from the outside but is rotten to the core.”

“‘The way of paradoxes is the way of truth. To test Reality we must see it on the tight-rope. When the Verities become acrobats we can judge them.’ - Oscar Wilde.”