The Housing Bubble

It’s Friday desk clearing time for this blogger. “When rich home buyers don’t have the liquidity to purchase their homes outright, many turn to massive mortgages known as jumbo loans. Jumbo loans exceed the mortgage amount that Fannie Mae and Freddie Mac will purchase from lenders. Many experts blame the financing tactic for helping to enable the housing bubble by encouraging extravagant property purchases. ‘A lot of these borrowers can’t walk into a traditional bank and get a $5-million loan,’ said Brandon Boyd, an executive mortgage consultant with Encinitas lender Drop Mortgage. ‘It’s hard for a bank lender to pull back and understand that income. It’s not irresponsible lending at all — it’s an alternative space, but it’s not the subprime of the past, not by a long shot.’”

“In yet another sign of the weakening ultra-luxury market, former Avon CEO Andrea Jung sold her apartment at Toll Brothers’ 1110 Park Avenue for $17 million — a $600,000 loss on what she paid last year. The unidentified buyers are from Asia and used an LLC for the purchase. The 16-story building at 1110 Park Avenue has just nine units, and it’s one of the buildings where Toll Brothers had previously reduced prices. A unit in the building is currently on the market for $16 million, down from the $20 million it was first asking in 2015.”

“The Scottish property market is now suffering a ’serious slowdown’ and faces the risk of a major price correction as the controversial replacement for stamp duty continues to take its toll, according to Ken McEwan, chief executive of Edinburgh-based McEwan Fraser Legal. Sellers of homes worth more than £1 million are being particularly hard hit according to McEwan with a fall of 40 per cent and there has also been a 25 per cent drop in demand for homes worth over £500,000.”

“Greenland Holdings Corp., China’s fourth-biggest developer by property sales, said it had overdue loans of 457.5 million yuan ($69.2 million) in some units in the northeast province of Liaoning at the end of June, underscoring concerns about the company’s debt problems. The company told Bloomberg News last week its project in China’s northeast faced repayment problems due to the region’s weak real estate market. This isn’t the first time a Greenland unit has had problems repaying debt. Last year, Greenland affiliate Shanghai Yunfeng Group Co. was in default on 2 billion yuan of privately placed notes after the triggering of early repayment clauses, according to a Caixin magazine report.”

“Despite an uptick in interest over the last two months, property prices in Sentosa Cove remained depressed, with a 4,069 sq ft waterfront apartment at Seascape sold at a loss of almost S$4 million, reported The Straits Times. Bought in 2010 by Dyna-Mac Holdings chief executive Lim Tze Jong for around S$12.8 million, the luxury apartment went for S$9 million last month. The $2,212 psf price achieved for the unit was an improvement from $1,524 psf price achieved for a similar unit earlier in the year. Located at the higher level of Seascape, the apartment was sold for S$6.2 million, which translated to an eye-popping loss of S$6.6 million given that it was acquired for S$12.8 million in June 2010.”

“There’s been a drop in the number of Chinese buying up houses in Auckland. QV spokeswoman Andrea Rush says developers are having to drop house prices in Flat Bush and Albany so they can sell them. ‘It’s possible that the crackdown by the Chinese government on the amount of capital allowed to leave the country may be a factor, as it’s now much harder for new migrants or foreign buyers from China to get their cash out to purchase property here.’”

“Ms Rush says whether that market builds back up ‘really depends on the Chinese government.’ ‘The situation has really run parallel with the slowing in the New Zealand market since late last year when [the Chinese Government] did crack down on the slow of capital.’”

“Offshore Chinese investors have helped drive the Australian property market to new heights. But with the tightening of government regulations, that interest is shifting to other attractive markets. It is a similar story at the Sydney-based Linfield Property Agents according to Shan Lin. ‘We found now in the last 12 months our offshore market [has] cooled down big time,’ Mr Lin told ABC’s The Business program.”

“Real estate agents contacted by the ABC are already seeing an increase in nomination sales — where buyers try to sell their off-the-plan properties when it comes times to settle. ‘I can’t deny it,’ Home 789 chief executive Walton Chu said, who operates out of the inner-city suburb of Redfern. ‘For our business we’re ok, but I’ve heard from my agent friends quite a lot of overseas buyers, they struggling to get finance here. So either they would chose just to pay off straight away or rather just say lose [the] 10 per cent deposit and walk away.’”

“Re-reading the hardy perennial book by Charles Kindleberger on ‘Mania, Panics and Crashes’ reminded me of his definition of the historical phases of financial crashes. First, there is a period of ‘displacement,’ which causes speculation, credit and monetary expansion. Second is a phase of overtrading, financial distress and perhaps the exposure of fraud, swindles and malfeasance. This leads to revulsion, mistrust of shady products and intermediaries, and then panic as everyone rushes to the crowded exits without parachutes.”

“A displacement is defined by Kindleberger as ‘an outside event that changes horizons, expectations, profit opportunities, behavior.’ In the South Sea Company bubble of 1720, the displacement was the growth in joint-stock companies in Britain after the turn of the 18th century. It engaged in a huge swap of the national debt for its equity, paying off politicians and investors alike with more issuance of equity.”

“In January 1720, its share price was £128, rising to £1,000 in August, not unlike the price behaviour of some tech stocks and bitcoin in 2017. South Sea share prices were propped up by allowing investors to buy shares on credit. Sounds familiar? Inevitably, as the company could not pay its dividend and investors buying on credit had to force sell, the share prices collapsed back to £100 before the year was out.”

“The displacement in the 21st century is the tech boom, in which everyone thinks that there are fortunes to be made, but no one is totally sure which tech company will be the great winner. Bitcoin fits that displacement/speculative model. The whole purpose of bitcoin is to create private money, outside the purview of the state. It is an asset with no intrinsic value and not the liability of anyone. Hence, its value is totally dependent on finding the next buyer, or perhaps sucker.”

“Writing in 1856, the founding editor of the Economist magazine Walter Bagehot had this view about panics and manias, ‘but one thing is certain, that at particular times a great many stupid people have a great deal of stupid money….At intervals, from causes which are not to the present purposes, the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ’speculation’; it is devoured, and there is ‘panic.’”

“We are in this current state of a liquidity flood, founded on the current monetary logic that debt addiction, like drugs, can be cured by providing more debt at near negative interest rate costs. So we have too much money chasing speculative cyber-wealth. The physicist Isaac Newton, who also lost a fortune in the South Sea bubble, claimed that ‘I can calculate the motion of heavenly bodies, but not the madness of people.’”