June 29, 2018

The Global Binge On Cheap Finance Is Our Modern-Day Debacle

It’s Friday desk clearing time for this blogger. “The Credit Union of Colorado has revived a loan product that disappeared following the housing crash a decade ago — the zero-down conventional mortgage. Reaction to its return will likely range from first-time homebuyers wondering what took so long to survivors of the foreclosure crisis asking why did they awaken a financial beast better left for dead. ‘We are looking for a way for individuals to get into the market right away rather than having to save up a down payment while the prices are going up,’ said Doug Schneider, vice president of marketing at the credit union.”

“Lou Barnes, a mortgage industry veteran with Premier Mortgage Group in Boulder, said there is a reason why zero-down loans went away, along with a host of other riskier loan products that contributed to the housing crash. ‘If you can’t save, what are you doing buying a home with nothing down? … Rolling out stuff like this has marked cycle tops,’ he warned.”

“In West Roseville, many new homes are going up and new neighbors are moving in. Realtor Jose Chavez said new housing developments are popular for homebuyers, but recently they’ve been all too inviting for the those who are not welcome. ‘Since May we’ve had 13 construction site thefts. Twelve have been in the west side of town where all the homes are being built,’ said Rob Baquera with Roseville PD. Baquera made the connection between new homes and thefts. ‘This is a trend we see more and more just based on the fact there are a lot of homes on the market,’ Baquera said.”

“Police said vacant homes are attractive to criminals. ‘Criminals are seizing the opportunity of not many neighbors being around. They are going into the houses in the middle of the night and pulling out appliances and selling them,’ Baquera said. But Chavez said there are ways to try to prevent this crime from happening. ‘Stage the home. Make it look like someone is living there,’ Chavez suggested.”

“The Minnesota Land Planning Act mandates that each of the 105 municipalities in the seven-county metro area undertake a decennial comprehensive plan update. This radical land-use experiment will cost Minneapolis our most affordable homes, because developers are in the business of maximizing profits. Free to build where they want (instead of where the city should encourage greater density), developers will tear down the lowest-priced homes. Additionally, the role of speculators will invariably overshadow house investment by single-family homeowners. This paper recently chronicled hundreds of vacant and boarded houses in the city. One speculator alone owned 87 vacant residential properties on the North Side.”

“The former CEO of Saks just sold a condo at Faena House for $7.9 million, nearly half of its original asking price. Fair Properties LLC, which is managed by Stephen Sadove, sold the condo in Miami Beach according to property records. Sadove bought the condo from the developer for $8.1 million in September 2015 and then tried to flip it for $14.5 million, or about $3,500 per square foot, the same month he closed on the unit. Sadove is one of many high-profile buyers who have tried to flip their condos at the ultra-luxury 42-unit building.”

“What works in Toronto and Vancouver won’t work everywhere else. That’s the message the Association of Regina Realtors CEO Gord Archibald wants to communicate to the federal government. As a result of people leaving the marketplace, demand for property in southern Saskatchewan is decreasing even further. ‘In Regina, we’ve got supply levels and the number of active listings on the market at all time highs and we’re seeing already weak demand being dampened through these rules.’”

“The slump in London house prices is accelerating with the market now falling at its fastest pace for almost a decade, new figures reveal. Prices have now been in reverse for four consecutive quarters and have not dropped at this pace since Autumn 2009 when the market was still reeling from the impact of the financial crash. However, some property experts said the situation on the ground on London is even worse than the Nationwide figures suggest.”

“Property buyer Henry Pryor said: ‘Nationwide is giving us the equivalent of the weather ten days ago. The real picture is that the housing market is far more perilous than it was for sellers negotiating deals in June. I would say prices are down five per cent year on year in London. I have just agreed a deal for a property in Maida Vale that was on at £2.25 million in 2016 for £1.7 million.’”

“In 2016, when the majority of developers and households remained confident, casting aside the possibility of property prices dropping, Chief Financial Market Strategist Jihad El Hokayem went against mainstream analysts and rang alarm bells, predicting a ‘two for the price of one’ free-fall. Two years on, and El Hokayem is of the belief that the situation is much more dire than what he initially thought. Today, El Hokayem is adamant that if prospective buyers wait longer, they’ll snatch three properties for the price of one in 2020.”

“El Hokayem’s logic hasn’t wavered since and is based on the most basic economic theory, that the market is oversupplied and demand is shrinking, with all signs pointing towards a downward spiral. How did Lebanon find itself in this predicament? Witnessing the real estate market stagnating, with developers scrambling to find buyers, billions of dollars were injected for subsidized housing loans of up to LBP 800 million for a single apartment, with a ’significant share being handed out to affluent individuals who did not need this help, leaving minimal funds for people who were really in need.’ The spiral could have been avoided, maintains El Hokayem, ‘if developers acknowledged the truth and adjusted their prices, sold their inventory at lower prices, and deposited the funds in the bank.’”

“These concerns are fueled as Lebanese buyers who purchased a property through an installment plan, begin to realize that their investment value is gradually dropping, prompting them to ponder the possibility of relinquishing ownership of the property only to buy it later at a lower price. ‘If someone bought an apartment valued at $200,000 two years ago and is now valued at $120,000, what’s to stop him to him from forgoing the $30,000 he already paid and give the apartment back to the bank?’ he asks. ‘It feels a lot like the subprime mortgage crisis of 2008, but on steroids, due to the lack of transparency.’”

“The Chinese property industry’s bad year keeps getting worse, sending bonds of some developers to record lows and triggering fresh concerns about a major pillar of the world’s second-largest economy. Tighter financing constraints, a state campaign to rein in real estate prices and a tumbling yuan are battering the sector just as it faces an unprecedented wall of maturing offshore debt. The worry is that defaults will jump and economic growth will take a hit. Real estate accounts for about 20 percent of China’s gross domestic product, when both direct and indirect contributions are considered, according to Bloomberg Economics.”

“‘Private developers will face the toughest ever repayment pressure in the third quarter,’ said Zhang Hongwei, a research director at property consulting firm Tospur. ‘Builders will make big cuts to prices in exchange for cash income.’”

“Is the current period of falling prices a temporary dip, or does it foreshadow something else more dramatic? Is the long bubble about to turn into the cataclysmic crash so frequently forecast by the doom-mongers? ABS numbers earlier this month confirmed Sydney’s six-year house price party ended in March. Unlike just 12 months ago, developers such as Sydney-based Ceerose are now unable to sell units and are turning landlord and renting them out instead.”

“Those who bought in the latter stages of the boom could soon be facing negative equity. Despite banks increasingly forcing buyers to put down larger deposits to satisfy the concerns of regulators, falling prices mean their homes may already be worth less than they borrowed. Former Reserve Bank board member Warwick McKibbin told The Australian Financial Review this week that it was past time for the central bank to begin preparing households for higher interest rates.”

“‘If the argument is ‘we can’t raise rates because if we do we could make the housing market a lot worse’, or prick some other asset bubble and cause a shock – if that’s the problem – it’s better to raise rates now than wait six months,’ he says.”

“Many banks are already being forced to pay more for the money they lend households. Smaller lenders like Bank of Queensland, AMP Bank, and ME Bank this week announced plans to hike their mortgage rates by up to 40 basis points. Bigger lenders are facing the same pressures, but may be reticent to draw attention through mortgage rate hikes amid the banking royal commission. Peter Sheahan, director of institutional markets at Curve Securities, likens what is happening in money markets around the world as the US Fed unwinds its crisis-era monetary policy stimulus to the late 1980s, when Australian farmers and corporates ran into serious trouble borrowing low-interest rate Swiss francs without hedging the currency.”

“‘We are seeing another period in history where it proves to be dangerous to borrow too much money in a foreign currency,’ he says. ‘The adjustment phase can be seen in our own domestic funding problems that are emerging.’ Australian banks rely heavily on US dollar funding sources, which are becoming more costly. ‘The global binge on cheap USD finance is our modern-day foreign currency debacle,’ he says.”

“Much of this is likely to play out in coming months, say money market experts, coinciding with more negative headlines out of the nation’s biggest property markets as prices drop. A big unresolved question for state governments, regulators and the Reserve Bank is whether these adjustments lead to a wider panic. That has always been the Reserve Bank’s biggest concern throughout the whole post-GFC cycle; that an eventual fall in property prices that were bid up to unsustainably high levels topples consumers into a defensive crouch.”