The Housing Bubble

A holiday weekend topic starting with Business Insider. “Central bankers are like ‘pyromaniac firefighters’ creating crisis after crisis that they then try to solve, a hedge fund manager and economist has told Business Insider. Daniel Lacalle, a chief economist at Tressis SV and a fund manager at Adriza International Opportunities, told BI in an interview that he blames the 2008 financial crisis on central bankers who don’t understand modern financial markets and are using tools from the 1960s to try and control them. ‘Central Bankers presented themselves as the solution to the problem that they created themselves. I call it the pyromaniac firefighter,’ he said. ‘You create a massive fire and then you present yourself… to stop it.’”

“Lacalle believes that central banks are currently repeating the same mistake that led to the last crisis, creating the next bubble through the ongoing purchase of government debt (now at around $20 trillion). This has pushed up the price of bonds, inflated the value of financial assets, and injected excess money into the economy.”

“‘There is a point where the perception of value from investors starts to crack,’ said Lacalle, ‘The problem of these policies is that we completely obliterate what money is… By making money completely worthless, you basically promote mall-investment and indebtedness. I think central bankers genuinely believe that bubbles created in financial markets are some sort of benign collateral damage,’ Lacalle said, adding that the policies have been a ‘lottery’ for investors but have pushed the rest of the population further into debt.”

From The Daily Mail the UK. “Lee McIntosh loves his flat in Finsbury Park, North London. The one-bedroom property in a council block, which he bought for £233,000 in 2012, was valued at £290,000 two-and-a-half years ago by his mortgage lender, Halifax. Since then, figures from the property website Rightmove show house prices in his area of the capital have risen by more than 15 per cent — in theory adding another £43,500, taking the price to £333,500.”

“So, when Lee’s fixed-term mortgage deal came to an end last month, he thought he’d benefit from the hefty increase in value by qualifying for the bank’s very best fixed-rate deals. But, to his astonishment, Halifax has instead decided that the value of his home has fallen in the past two-and-a-half years. Initially, it claimed the flat is now worth just £278,000 — £12,000 less than the value it gave it two-and-a-half years ago. So Lee, who runs a theatre ticket business, demanded the bank reconsider its decision. Halifax sent out its valuer again, but only bumped up its estimate to £285,000 — still £5,000 below the valuation from the end of 2015.”

“He believes he will now end up paying around £200 more a year. Lee, 36, says: ‘I think it’s an utter disgrace. How can Halifax say my flat is worth so much less than it was in 2016, when house prices have risen?’”

“Experts say Lee is not alone. One of Britain’s biggest mortgage brokers, John Charcol, has seen the number of so-called down valuations — where a lender values a property at less than a buyer believes it is worth — double over the past year. Nick Morrey, product technical manager at the firm, says that staff are dealing with 20 to 30 cases of down valuations each month, with lenders stating that houses are worth up to £100,000 less than their owners believed.”

“‘It is the valuer’s head on the block if the property market dips and the bank is left with lots of loans that are greater than the value of the property,’ says Mr Morrey. ‘When things are as uncertain as they are at present, valuers are going to err on the side of caution.’”

“The surge in down valuations is just one of a growing number of red warning signs flashing over the property market after years of rapid growth, particularly in the South. Houses price growth is trickling downwards nationally, buyers are borrowing record amounts for record lengths of time and estate agents are struggling to shift homes for their asking price. Meanwhile, banks and building societies have started offering 100 per cent mortgages with a twist again in a desperate bid to keep borrowers coming through their doors.”

From ABC News in Australia. “If you’ve ever spoken to a real estate agent, you would know there are only two scenarios when it comes to Australian property. When the market is running hot, you need to get in quick. And when it’s cooling, it’s an opportunity to grab a bargain. Either way, there’s never been a better time to buy.”

“Right now, Australian property is running hot and cold. After nearly six years of either spectacular or frightening gains — depending on whether you own a home — capital city real estate is in reverse, particularly in Melbourne and Sydney. High-end property has been hit hard while less expensive real estate continues to advance. And while the two major capitals are in decline, regional values are not only holding up, they’re stacking on gains. In the three months to the end of April, Sydney, Melbourne, Brisbane and Adelaide all clocked up declines with Hobart the only capital to continue the kind of boom time gains to which we’ve all become accustomed.”

“The reasons? Some analysts argue last year’s crackdown by the banking regulator on investor loans, who mainly use interest-only finance to maximise the benefits of negative gearing, finally is having an impact. But that doesn’t really explain these trends. Tightening investor credit was supposed to take the heat out of the market, particularly at the lower end. Clearly, that’s not happening, at least not yet.”

“There are only two things that keep senior Reserve Bank officials awake at night; China and Australian real estate. RBA boss Philip Lowe has become increasingly vocal about China’s massive debt mountain and the dangers it poses for Australia should it implode. But our housing market is equally as unnerving. Our major banks have a decidedly unhealthy exposure to domestic real estate, with up to 60 per cent of their total loans allocated to Australian mortgages.”

“After being burnt by big business in the 1987 stock market meltdown, they decided en masse that real estate was a safer option and poured trillions of dollars into home loans, which we consumers happily lapped up. The problem is, if Australian real estate declines in any significant way, it will put a serious handbrake on the economy. When the value of your major asset is going backwards, you’re less inclined to spend and less likely to be given credit. That, in turn, weakens the domestic economy which eventually leads to higher unemployment, mortgage defaults and, potentially, a banking crisis.”

“It’s not just the banks who have a vested interest in keeping the property bubble bouncing along. Every layer of government has become addicted to the great Australian dream, which in the past 40 years has transformed from owning your own patch of dirt to making a motza from property. The Federal Government needs rising property prices to maintain a stable economy while state and local governments feed off the enormous fees and taxes it generates.”

“Since the latest boom began in late 2012, a boom deliberately orchestrated by the Reserve Bank to absorb construction workers leaving the mining industry as the resource investment boom wound down, state and local governments have seen property revenues rise by 65 per cent. So the next time you hear a politician talk about the need for affordable housing, don’t believe a word of it. None of them offer any serious solutions primarily because they know there are only two options, neither of which are palatable.”

“Either property prices need to collapse, which would only occur as part of an apocalyptic economic event, or wages need to take off which no major party is likely to endorse. Everything else is just window dressing. When it comes to property prices, population growth has been every federal government’s secret weapon.”

“For years, we’ve been told our skyrocketing housing costs has been a supply problem. Instead, there has been a deliberate effort to keep piling on the demand, just to maintain the illusion of economic growth and to keep the real estate sales clicking over.”

From The Globe and Mail in Canada. “When things go wrong in the housing market, people get angry. So expect to hear a lot of irate commentary on whose fault it is if house prices keep falling in Toronto and other places where people have been making lots of money off the housing boom. The narrative is already taking shape: The introduction of mortgage stress tests for home buyers by the federal government’s banking regulator has ruined the housing market and, in particular, hurt first-time buyers.”

“Allow someone who doesn’t make a living off the sale or financing of real estate to set you straight on all of this. What’s happening in housing is actually healthy. Slowing the market down now lessens the risk of a plunge that would traumatize this country worse than any stock-market crash ever.”

“The stress tests ensure you can afford a mortgage if rates climb well above current levels. In some cities, people are finding that the house they want to buy wouldn’t be affordable if they had to pay a higher mortgage rate. The housing-industrial complex says this is bad – a cruel denial of every Canadian’s right to live the dream of home ownership. Buyers knocked out of the market by the stress test are being saved, not persecuted.”

“In the real estate sector’s blame game, the economy is another victim of the misguided attempt to address soaring home prices. Housing is a pillar of the economy, the argument goes. Constraining it hurts us all if the result is an economic slowdown.”

“Given how far house prices have risen in some cities, a pullback of some sort is pretty much inevitable at some point. We have zero chance of avoiding a situation where the housing sector acts as a drag on the broader economy. Should we still be angry at the mortgage stress tests for triggering a housing slowdown in some cities? Couldn’t we have waited and let things unfold without intervention?”

“No way. There’s a housing mania in this country that has to be stopped before it collapses the entire market. Recent example: A report by CIBC World Markets and Urbanation Inc. found that investors accounted for at least 48 per cent of all buyers who took possession of newly built condos in the Greater Toronto Area last year. At least 44 per cent of those investors with a mortgage are currently in a negative cash flow position, which means rents charged to tenants don’t cover their mortgage payments and condo maintenance fees.”

“This isn’t shrewd investing. It’s desperate speculation that distorts the housing market and adds to the danger of an outright crash in housing that is worse than anything caused by the mortgage stress test. In Toronto and surrounding cities, the mortgage stress tests are doing the important work of protecting lenders and borrowers in overheated markets at a time of rising interest rates. Given how emotionally and financially overinvested we are in housing, it’s natural that some people are angry about this.”