April 15, 2017

Doomed To Repeat The Fed’s Mistake

A report from the Gulf News. “It used to be that every year at this resurrectionary season — the blossom out, the sunshine warmer, the grass greener — a thought would rise from the tomb where it had lain buried since the previous autumn: should we live elsewhere? Perhaps all that reading Country Life did was to enchant us with reflections of our notional wealth: that our house, staring across the street at equally ordinary houses, could — thanks to exorbitant London property prices — be exchanged for a yellow-stone 18th-century villa surrounded by ancient oaks and apple orchards in Gloucestershire.”

“Perhaps that was all there was to it — a luxurious daydream. Retirement is an ancient idea. In the words of Sir Roger Gale, the Conservative MP and pension campaigner, the victims include ‘a lot of very elderly, very frail people… [who] have sunk all their disposable income into their properties.’ They are trapped. They cannot sell their homes at the price they paid for them, and they can’t afford the inflated house prices or rents in Britain. A state pension, down in value by 10 per cent since June last year for those in the Eurozone, is what they must survive on. Only the meanest bigot could obtain Schadenfreude from such a pitiful situation, but those of us who stayed put — nervous at the prospect of losing our friends and, in a sense, our lives by moving elsewhere in our sixties — we at least can feel thankful for our wisdom.”

From The Australian. “Perth homeowners are ‘taking very big hits’ in a falling local real estate market that the West Australian Chamber of Commerce warns may get even worse under a national housing affordability package favoured by the Turnbull government. Perth real estate agent Willie Porteous said WA was in a uniquely dire situation. The iron ore-rich state now has the title of mortgage default capital of ­Australia. ‘People can still sell, but they are taking some very big hits,’ he said.”

“The real estate collapse in Perth has reached all price brackets. Mr Porteous said that four years ago he took offers of $9.25 million then $9.5m to the owners of a home in Perth’s dress circle western suburbs but they turned the offers down because they were holding out for $10.75m. Last week, they sold for $6.5m. ‘We had a patch like this in 1983, then again in 88, 89 and 90 but never as bad as this,’ he said.”

“In the southeastern Perth ­suburb of Beckenham, where modest property prices climbed during the construction phase of the resource sector boom, Tina Paramor is preparing to sell in a market that has plunged 20 per cent in the past two years. The 35-year-old’s first foray into the investment property market was a neat three-­bedroom, one-bathroom townhouse close to shops and public transport.”

“The saleswoman for a Perth industrial equipment supplier paid $320,000 for the property ­almost two years ago then invested in a kitchen renovation, but her real estate agent, Charlie ­Bellow, predicts Ms Paramor could lose more than $50,000 counting stamp duty. ‘I am hoping I can break even,’ she said. ‘It won’t put me off ­investing, though this hasn’t been the greatest experience.’”

“Mr Bellow says three years ago in the same area, the median house price was $450,000 and he was clearing about 70 per cent of houses at auction. ‘Some of the properties I was selling were going for over $120,000 above the reserve,’ he said. Now, he said, it was ‘quite regular’ to encounter sellers who would be making a loss.”

From Global News in Canada. “If you’re looking to break the ice at your next Toronto cocktail party, just mention real estate. Every day brings fresh headlines like this: ‘Toronto home prices soar 33.2 per cent year over year.’ The average price of a Toronto home jumped from $688,000 to $917,000 over that period. That’s 11.7 times the median family income in the city.”

“Naturally, this state of affairs brings with it the usual calls to ‘do something about it.’ But the cure could be worse than the disease — partly because we have no idea what the disease really is, or how we got it. Are foreign investors to blame? Domestic investors? Immigrants? The Ontario Municipal Board? NIMBYism? The Green Belt? Low interest rates?”

From Canadian TV. “Vacant homes are such an issue in Vancouver that the city has implemented a tax in effort to encourage owners to rent unused spaces. But it seems that the problem is not contained by the city’s borders. Recent census data shows there are thousands of unoccupied residences in the suburbs. Last year, 66,719 homes in Metro Vancouver were deemed ‘non-resident’ occupied, according to Statistics Canada. Research has shown most of those homes identified by that term are actually empty.”

“But the problem is spreading, a Simon Fraser University city program director says. In Surrey, there were 11,195 homes deemed non-resident occupied in the 2016 census. There were 5,829 in Burnaby, 4,021 in Richmond, and 3,068 in Coquitlam. Some municipalities saw dramatic increases last year: 27 per cent in North Vancouver, 35 per cent in White Rock and 79 per cent in Delta. White Rock and North Vancouver are among the suburbs with the highest percentages of non-resident occupied homes.”

The Vancouver Sun. “The City of Vancouver is finally admitting that they cannot build their way out of the housing affordability crisis. The supply myth has been driving ever-escalating amounts of market housing, but affordability is getting worse, not better. The city now says that ‘we have plenty of supply — what we need is the right supply.’”

“The problem is that they don’t seem to know what the right supply is, other than it needs to be affordable. And they do not know how to achieve that affordability. So it still falls back to the same old doctrine.”

“By engaging with limited interest groups and insiders, the city has set emerging directions before broader public input. This is putting the cart before the horse. The focus of the emerging directions is of course reflecting that feedback, which is — the same old response — more supply. But none of the income levels identified as needing housing options will likely be able to afford the proposed new housing options.”

“Cambie Corridor condos are abundant, but they are not affordable. Pre-sales advertise starting at $1.55 million for a two bedroom plus den and $2.15 million for a 2 bedroom and den. And many units are vacant as recently confirmed by the 2016 census.”

“The industry must be pleased that the same supply myth continues to be applied even though the city admits it doesn’t work. More expensive market supply will not make things more affordable. It will, in fact, continue to intensify the affordability crisis as millennials are demo-victed from their older housing and priced out of Vancouver. How many more times will the city do the same things expecting different results?”

The Business News Network. “Gluskin Sheff Chief Economist David Rosenberg is taking Bank of Canada Governor Stephen Poloz to task for staying on the sidelines and not hiking interest rates. In an interview on BNN, Rosenberg said there’s nothing wrong with prudent caution, but Poloz is going overboard by not aligning monetary policy to the current level of growth.”

“‘Let’s face facts: you don’t have to be the biggest bull in the world, and I certainly am not, to see that nominal GDP growth in Canada is between three and four per cent. I mean, that’s not strong, but it doesn’t warrant a 0.5 per cent policy rate,’ he said. ‘You have measures of inflation between one and a half and two per cent, and the bank is keeping the overnight rate at 0.5, and saying it’s going to keep it there until probably early next year at the earliest?’”

“Rosenberg said the low benchmark rate is aggravating housing conditions, which he has characterized as a bubble in Toronto. ‘As long as you keep [nominal] rates negative for this long, and it’s already been eight years, it fosters bubbles in other parts of the economy. Housing is usually a principal candidate,’ he said. ‘Just go back to when the [U.S. Federal Reserve] kept real rates negative for so long in the last cycle, and look what happened to their housing market.’”

“Rosenberg said the Bank of Canada may be doomed to repeat the Fed’s mistake if it chooses not to take action. ‘There’s a risk for the Bank of Canada here, in my opinion, of ultimately moving rates up too little, too late, much like the Fed did,’ he said. ‘We have a Taylor Rule for Canada which measures where the policy rates should be. [It’s] nowhere near 0.5 per cent. At a minimum, it should be 2.5 per cent right now. When you have a central banker talking about speculative excess in the housing market, you’ve got to start looking in your own backyard because part of that excess is leverage, and part of that leverage is being deployed because real rates are as negative as they are.’”