June 3, 2017

A Whole World Of Bubbles

A weekend topic starting with an opinion piece by John Coumarianos. “Minneapolis Federal Reserve President Neel Kashkari has recently observed that asset price bubbles are hard to recognize, and, even if recognizable, the Fed shouldn’t do anything about them. Kashkari deserves praise for this, because it isn’t often a Fed official, in a published article no less, addresses arguments about bubbles — including market participants’ and ordinary citizens’ dissatisfaction with the Fed’s failure to forecast them.”

“Unfortunately, Kashkari’s arguments are weak, and with regard to the housing bubble at least, he hasn’t examined the record carefully enough. Besides psychological arguments, data could have clued anyone in. My findings corroborate the argument of asset manager Grantham, Mayo, van Oterloo (GMO). The firm has long defined a bubble as a two standard-deviation event. That definition is arbitrary, but the firm has studied over 40 bubbles, and found that each of them exceeded at least two standard deviations, and all of them reverted back to their long-term mean.”

“It doesn’t inspire confidence that Kashkari and his colleagues at the Federal Reserve haven’t come up with a working definition of their own. If GMO can conduct such a study, why can’t the bank that sets monetary policy in the United States? I have no idea what the Fed should do if it happens to spot the next bubble, but it may command greater respect if it reconsiders the assertion that bubbles aren’t recognizable.”

The Union Tribune in California. “The San Diego County median home price hit $525,000 in April, passing the region’s previous peak reached in 2005, CoreLogic. Housing bubble fears are likely with the new median but home prices would have to rise 40 percent (assuming no income or rent growth) to be as overvalued as much as they were during the last peak, said Rich Toscano, who predicted the last housing crash on his blog Professor Piggington’s Econo-Almanac.”

“‘Homes are definitely expensive when you compare purchase prices to rents and incomes,’ he said. ‘They are the most expensive they’ve been outside the bubble. But, it still doesn’t compare to the expensiveness of the bubble.’”

“Toscano said low interest rates are keeping the monthly mortgage rates somewhat affordable and home valuations high. ‘In theory, for as long as low rates persist, they could keep supporting the prices,’ he said. ‘The big question is if that will continue to happen and the smartest people in the world disagree on that.’”

From Global News in Canada. “A group working on behalf of Vancouver developers is urging the city to build more townhomes and other forms of multi-family housing as a way to boost the supply of affordable homes. But critics say it’s little use building more supply if it’s going to be marketed to overseas buyers. Construction projects seem to be a permanent fixture of life in the city, but new numbers show that despite all the cranes dotting the skyline, Vancouver is experiencing an all-time low for multi-family housing availability.”

“A recent series of ads show several Vancouver condos being marketed in Hong Kong. ‘When you’re pushing supply as the solution, and then you’re ultimately selling it overseas to foreign speculators, it’s really not helping locals, it’s not helping local affordability,’ realtor Steve Saretsky said.”

“According to the UDI, roughly seven per cent of Metro Vancouver sales are to foreign buyers. Tom Davidoff of UBC’s Sauder School of Business suspects that when it comes to presales, the numbers are much higher. ‘When these buildings are complete are we going to see the foreign buyers of the presale units flip their presale assignments to local buyers?’ he said. ‘Are we going to see them rent the units out or are we going to see foreign buyers hold onto empty units?’”

From Vietnam Bridge. “The lack of transparent information about the master plan, infrastructure works is attributable to the current ‘fever’ of land prices in HCM City. ‘We must publicly announce all detail land-use planning’s from commune to district levels and they should be accessible by mobile phone to avoid the land ‘fever’ that occurs periodically,’ Le Van Khoa, deputy chairman of the People’s Committee, told a meeting held middle of last month to try and quell rumours that were giving rise to property price bubbles in outlying districts like Cu Chi, Hoc Mon, Binh Chanh, Nha Be, and Can Gio in the last few months.”

“After the authorities indicated they were determined to forestall land price bubbles, prices immediately fell by 15–30 per cent, even 50 per cent in some places, and, importantly, trading has ground to a halt.”

From Korea Joongang Daily. “The real estate market is nervous about Democratic Party lawmaker Kim Hyun-mee being nominated as Land Minster by the Moon Jae-in administration. As a lawmaker, Kim has consistently blamed the market for exacerbating wealth inequalities in Korea, and opposed measures to stimulate the market. She may try to stabilize it and restrict lending for real estate.”

“Kim was strongly opposed to the Park Geun-hye administration’s decision to ease qualifications for mortgages - particularly the loan-to-value (LTV) and debt-to-income (DTI) ratios - in July 2014, which helped revive a lukewarm real estate market. The LTV ratio was eased from 60 percent to 70 percent while the DTI ratio was raised from 50 percent to 60 percent. The government’s decision to ease the debt limit was extended twice. The easing of the debt cap ends at the end of next month.”

“At the National Assembly last year, Kim argued that the conservative government was responsible for household debt increasing by 564 trillion won ($502.3 billion) between 2008 and 2015. ‘The first priority in recovering our economy is to solve the household debt problem and in order to do so, we have to bring back regulations restricting debt,’ Kim said.”

“In a 2012 debate organized by Kim, she argued that there was a bubble in the real estate market that required limits to mortgages and syndicated loans that apartment investors borrow in groups. In a book Kim published in 2013, she pointed out that many Korean baby-boomers are forced to start small businesses after retiring from office jobs, using their apartments as collateral for loans. When the businesses fail, they lose everything, she wrote.”

“After Kim was nominated to head the Land Ministry, she immediately raised the issue of household debt. During a press briefing, she blamed the easing of the LTV and DTI ratios by the previous administration for today’s mountain of household debt.”

The New Daily. “It’s only natural for Australians to be obsessed with our own property market woes, but there is a whole world of bubbles out there waiting to be popped. Between the global financial crisis and February 2017, median dwelling prices almost doubled (+99.4 per cent) in Sydney, bringing them to $850,000, and in Melbourne (+85 per cent to $640,000), according to CoreLogic.”

“But we should not delude ourselves that a housing crisis is a uniquely Australian phenomenon. Cries of ‘Bubble!’ are ringing out across the globe. Sweden’s central bank boss Stefan Ingves this week issued a warning about sky-rocketing household debt and soaring property prices. Sound familiar?”

“In Switzerland, the cities of Zurich, Zug, Lucerne, Basel, Lausanne and Lugano face similar risks. Then there’s Ottawa, Vancouver and Toronto in Canada – an economy comparable in size and composition to our own. As it has for Australia, the International Monetary Fund (IMF) has told the Canadian government to intervene or risk an economic crash. The IMF has issued similar warnings for Denmark, which is battling soaring prices in the capital of Copenhagen.”

“Most important of all is China. Prices rose 22.1 per cent in Beijing, 21.1 per cent in Shanghai and 13.5 per cent in Shenzen between March 2016 and March 2017, CNBC reported. The warnings are familiar. ‘If young people lose hope, the economy will suffer, as housing is a necessity,’ Renmin University president Wu Xiaoqiu said recently.”

“Hong Kong is fighting bubbles, too. Reports on its property market are full of ‘handsome gains’ and an impending ‘burst.’ Closer to home is Auckland in New Zealand, where prices have also doubled since the GFC. Despite Brexit, the mother country is hurting, too. There are periodic predictions that London will ‘finally burst’ after years of rampant price growth.”

“So what’s going on? The consensus is that these bubbles have been created by a combination of ultra-low interest rates, easy lending, rapid population growth, and an openness to foreign investment. If Australia wants to beat its bubble, perhaps it should look to Singapore. It was fighting rampant prices too until the government intervened and did two things: boosted supply by building a whole bunch of new apartment buildings, and dampened demand by hiking stamp duty and cracking down on foreign buyers.”