The Housing Bubble

A weekend topic on central planning and the housing bubble, starting with Bloomberg. “Central bankers are starting to see promising results from one of the recent additions to their monetary policy toolbox. Lending curbs to stem financial risk — so-called macroprudential limits — have helped slow risky borrowing and temper property price bubbles in countries from New Zealand to Canada, a host of financial stability reports showed this week. While there hasn’t been uniform success — Hong Kong’s housing market shows no signs of cooling — it’s given central banks some breathing space to be more gradual in tightening monetary policy.”

“‘If you think about lessons from the global financial crisis, macroprudential is one of the key lessons,’ said Steven Bell, chief economist at BMO Global Asset Management in London. ‘It was a tool of counter-cyclical credit tightening, and I think that’s going to be a permanent feature.’”

“Global policy makers aren’t off the hook yet. Stricter financing rules may have curbed excesses, but household debt remains high in many countries, say analysts at Citigroup Inc. The Swedish Financial Supervisory Authority said in its financial stability report that housing and debt risks are still elevated, even though capital and lending requirements for banks have been raised for years in order to stem risk.”

From Canadian Mortgage Trends. “More than 1,200 mortgage professionals from across the country descended upon Niagara Falls for Mortgage Professionals Canada’s annual National Mortgage Conference. OSFI’s new B-20 mortgage rules dominated discussions. Former Prime Minister Stephen Harper critiqued the current government’s implementation of recent mortgage rule changes by saying, ‘[When in government] we did our consulting with industry members before announcements, not after.’”

“‘The percentage of homes being done at 30 years [amortization] has gone up materially in the last six months,’ said Mark Aldridge, CEO of MCAP. He added that he believes the bigger issue is not the impact on new buyers, but instead those renewing their mortgages who have never missed a payment, but won’t be able to qualify under the 200-bps stress test. ‘You’re stuck at that bank. And believe me, the banks have the data, so they can charge 20 bps, 30 bps more on customers who have nowhere to go… In the interest of financial stability, we push competition to the side and it’s going to be consumers, it’s going to be probably 20% of mortgage consumers out there, that suffer from that.’”

From Fairfax Media in New Zealand. “Business confidence has taken another tumble, falling to the lowest level in more than eight years. The ANZ business outlook survey found a net 39 per cent are pessimistic about the economy over the coming year, a 29 point fall since October. The latest survey is the first of its kind to be taken since the new Labour-led Government was formed.”

“‘Uncertainty around changing Government policy, a softer housing market, and difficulty getting credit are likely culprits,’ ANZ chief economist Sharon Zollner said. ‘The economy is at a delicate juncture as migration, construction and housing run out of steam as growth drivers. Zollner said while it was the first survey of its type that ANZ had conducted since Jacinda Ardern became prime minister, ‘it would be too simplistic to ascribe the full move to the change of government. There is a lot else going on. The softening in house price inflation is one obvious factor that shouldn’t be overlooked (particularly its importance for the retail sector), as is the reported difficulty of getting credit.’”

From Channel News Asia. “The recent wave of collective sales and an increase in land prices prompted the Monetary Authority of Singapore (MAS) to sound a note of caution on the local property market. In its latest annual review of financial stability, the central bank said that these recent developments could bring about risks to the ’sustainable conditions’ in the market.”

“Industry observers said the warning from MAS follows a similar call for prudence from National Development Minister Lawrence Wong earlier this month. It also comes on the back of new rule changes, – a sign that some analysts interpreted as authorities beginning to cast a watchful eye on the collective-sale fever. Ms Christine Li, research director at Cushman & Wakefield, noted that several en bloc sales launched since last year involve huge sites, where the number of units in the new projects may be three or four times that of the existing units. While the market is nowhere near oversupply for now, this ’spike’ in the number of new homes at each site may pave the way for a supply glut further down the road, Ms Li added.”

From Quartz on China. “China has a master plan to oust the US as preeminent global superpower—and this time it just might work. That’s according to the Washington Post’s David Ignatius, citing two Pentagon briefs. ‘There’s an eerie sense in today’s world that China is racing to capture the commanding heights of technology and trade. Meanwhile, under the banner of ‘America first,’ the Trump administration is protecting coal-mining jobs and questioning climate science,’ he concludes. ‘Sorry, friends, but this is how empires rise and fall.’”

“The ‘China is taking over the world’ meme is a perennial one. As usual, this argument overlooks what’s happening within China’s borders. That includes: a credit-driven growth model that has left debt growing faster than the economy, the continued dominance of inefficient state-owned enterprises (SOEs) at the expense of dynamic private firms, and a fiscal system that depends on a housing bubble to sustain it.”

“More foreboding is the intensifying of the Party’s control of digital networks and personal information, and the spread of China’s tightly sealed internet into Africa and central Asia. Major vehicles for this ‘internet sovereignty’ strategy are the Chinese tech companies once praised as the embodiment of dynamism and innovation. Whether swearing fealty to Xi boosts the global competitiveness of Tencent, Alibaba, and the others may be revealing.”

“Even that campaign, however, works not by seizing the reins of the existing global order, but rather by expanding the reach of Xi’s central-planning regimes. The core problem for China is: Power doesn’t guarantee competence. And Xi’s handling of the domestic economy in the past half-decade suggests a dearth of the latter.”

From City Journal. “The Republican tax-reform plan, if adopted, would put on the chopping block some cherished tax deductions—perhaps none more so than the $80 billion mortgage-interest deduction (MID) on residences, which mostly benefits affluent homeowners. As the various bills under consideration propose, the deduction should be pruned or eliminated—not just because it is inequitable but also because it distorts the housing market.”

“The effects on home prices vary by city, but there’s good evidence that cutting back the MID would lower prices in high-cost areas, where newcomers find it difficult to move nowadays. Benjamin Harris, who served as chief economist for former vice president Joseph Biden, wrote in a doctoral dissertation that abolishing the MID ‘would lead to a 28 percent decline in metropolitan-area housing prices in cities where the average taxpayer buying a new house is in the 35 percent tax bracket.’”

“Not surprisingly, the homebuilders lobby—among the hardiest of Washington swamp creatures—is fighting the proposal. In a moment of candor, however, homebuilding industry executive, Glenn Kelman, who heads the national real estate brokerage firm Redfin, told the New York Times, ‘The current tax code favors people who are buying a home versus the rest of America,’ he said. ‘As a captain of industry, I would prefer more tax breaks to help people buy houses, but as a citizen, I realize someone has to pay.’”