‘The Big Hype Is Over’
Reuters reports on the comparison of international housing bubbles. “For anxious investors wondering whether the U.S. economy risks being seriously wounded by a housing market downturn, Australia’s experience of the past three years holds a potentially valuable lesson.”
“If anything, the Australian boom was far bigger than that in the U.S., with average house prices doubling between 1996 and 2003. Four interest rate increases over 2002 and 2003 took the wind out of housing, but the resulting slowdown was remarkably modest by historical standards.”
“Mike Buchanan and Michael Vaknin, economists at Goldman Sachs..looking at the experience of Australia and the U.K., concluded that, while they were relevant for the U.S., the wrong lessons were being learned. They argued that a downturn in housing would have a far greater impact on U.S. consumption than in Australia since American consumers had largely used equity withdrawn from their homes to fund spending.”
“While Australians had withdrawn just as much equity as Americans, equal to about 10 percent of disposable income, they spent far less of it.”
“Just as importantly, Australia’s housing market peaked right as the country began to benefit from the global commodity boom. What it gets for its exports compared with what it pays for imports, has climbed over 30 percent since 2002. That was the biggest rise in half a century and has percolated right through the economy.”
“Company profits have surged. Since more than half of adult Australians own shares, that has been a boon for personal wealth and cushioned the blow from a flat housing market.”
“Clearly the same could not be said of the United States, the world’s largest net consumer of energy. There, a string of budget deficits had lifted the U.S. national debt to $8.5 trillion, 13 times Australia’s annual economic output.”
“‘The global commodity boom came just as the housing market was tipping over and saved Australia from a likely recession,’ said Su-Lin Ong, senior economist at RBC Capital Markets. ‘What will save the U.S. as their housing market turns? Consumers are in debt up to their eyeballs and fiscal policy is maxed out,’ she warned.”
The International Herald Tribune. “Red-hot property stocks in Germany might be headed for the deep freeze. A rush of private equity funds into German real estate, adds up to a bubble, according to the money manager Heiko Bienek. ‘The more a wave is rising, the more dramatically it will break,’ said Biene.’The first U.S. private equity funds who were the main drivers of the property boom in Germany are looking for the exit.’”
“‘The recent real estate spending spree of private equity investors was based on too much fantasy,’ said Robert Mazzuoli, an analyst with Landesbank-Rheinland-Pfalz in Mainz, Germany. ‘Now it seems companies like Fortress want to cash out as fast as possible.’”
“Share prices have begun to decline. Colonia shares are down 35 percent from their high spot for the past year, Adler is 43 percent lower and Franconofurt is 41 percent lower. ‘The big hype is over,’ said Matthias Born of Allianz’s Deutscher Investment Trust in Frankfurt.”
‘a string of budget deficits had lifted the U.S. national debt to $8.5 trillion, 13 times Australia’s annual economic output.’ ‘The global commodity boom came just as the housing market was tipping over and saved Australia from a likely recession,’ said Su-Lin Ong’
Many here have pointed out the likelyhood that it was this spending binge in the US that propped up other housing bubbles. More news just in:
Builder confidence in the condominium housing market weakened significantly in the second quarter of 2006, as sales continued to retreat from the record-high levels seen last year, according to results from the National Association of Home Builders Multifamily Condo Market Index* (MCMI) released today. ‘Investors and speculators had been a big factor driving sales and production at the height of the condo boom and they have been pulling out of the market,’ said NAHB Chief Economist David Seiders.’
‘Federal Reserve Bank of Chicago President Michael Moskow said the central bank may need to resume raising interest rates to reduce inflation and ensure that expectations for higher prices don’t get out of hand. ‘The risk of inflation remaining too high is greater than the risk of growth being too low,” Moskow said in prepared remarks to the McLean County Chamber of Commerce in central Illinois. ‘Thus, some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time.’
I doubt that the US spending binge caused these other housing bubbles, because some of them are far older than the current US housing/spending maddness. The Dutch housing bubble started in the early nineties, and by 1995 several EU countries already had a serious housing bubble. But maybe US consumer spending helped to keep the other housing bubbles going a few years longer.
It didn’t cause them, but it did help prop them up. When AUS’s bubble plateaued, they didn’t have to worry about a big macro impact on their economy, because the US/China kept sucking up the commodities.
However, if the US bubble plateaus, what will keep them on the plateau? Answer? Nothing.
Are we in a recession already? Paul Farrell seems to think we are on the way, if not already there. To his ten reasons, I would add the massive media-fueled collective denial about the economic situation we face, which implies a worse outcome when denial turns to acceptance.
———————————————————————————-
PAUL B. FARRELL
Tipping point pops bubble, triggers bear
Ten warnings the economy, markets have pushed into danger zone
By Paul B. Farrell, MarketWatch
Last Update: 8:18 PM ET Aug 21, 2006
ARROYO GRANDE, Calif. (MarketWatch) — You heard the pop! Forget the happy talk. We just crossed that crucial tipping point, popping the bubble, signaling a bear. Why? The Fed halted interest rate increases.
That’s bad news, says economist Gary Shilling. Check the historical data: “With only one clear exception in the mid-1990s, central bank ease since the mid-1950s means the economy is in a recession, or will be within a few months.”
My filing cabinets are bulging with all kinds of early-warning signals screaming that we’ve passed the tipping point. A few are deafening: One by the CEO of Countrywide Mortgage. Another by the CEO of Toll Bros. Then hedge fund losses drove us to pull together a total of 10 warnings that signal the popping of the bubble and the start of a recession and a bear market.
http://tinyurl.com/kksmp
According to the money manager Heiko Bienek. ‘The more a wave is rising, the more dramatically it will break.
Amen brother, and we are surfing down the face of a monster wave. When the water is all sucked up, all that’s left is hard bottom.
Like this one? scroll down the page a bit
http://www.brokenmasterpieces.com/archives/001381.html
Laird Hamilton made this wave at Teahupo’o, so I don’t think it’s a good comparison. We need a photo of a insane wipeout.
I know. I have about 5 DVDs of that wave. The water was very shallow under it though and it had a razor sharp reef, which is where the analogy came in.
Some recent Teahupo’o footage with Laird and company. Scroll down about 5 videos.
http://www.surfline.com/video/index_clips.cfm?cat=ncl
It’s a beautiful wave, isn’t it.
it’s a monster wave, but certainly not in Germany … of all places. They must have the smallest housing bubble in the world (in fact, I think it’s an inverted housing bubble in most of the country).
There is a recent bubble in German REITs (like most REITs in the world) and the properties that they use for speculation (usually rental properties as far as I know). This is mostly based on some changes in tax laws, similar to what happened in the UK 2-3 years ago. There certainly is NO housing bubble for normal German homes.
Also similar to the US when Donald Ragan (Sec Treas under Regan), former Merrill exec changed the tax laws in ‘86. RE crashed, stocks boomed.
Germany doesn’t have REITs.
There was a recent crisis in the German property fund market due to the redemption structure and the fact that German property valuations are about as much use as a chocolate teapot.
You are right that Germany doesn’t have a resi bubble, but the article also highlights the amount of spec PE cash piling into the resi fractionalisation market.
Regards,
Loafer
And this one will be like The Wedge at Newport Beach, a vicious dumper savagely pile-driving the market into mere inches of water. We’re gonna be eating sand.
hello from germany,
compared to the rest of the worl we have nothing close to a bubble. we have had a little bubble in some very small property stocks. but they are very very small and have no impact on the market.
the only part is with the private equity buying a few hundret thousand rentals in the past 2 years.
it will be interesting to see what will happen when they will take the propertyportfolios public. this will be for germany huge ipo´s.
some of them are betting thet they will take the excit when the reits are coming in 2007.
the private equity firms have loaded the propertys with debt as far as the eye can see. thanks to deutsche bank etc.
i hope that the ipo will fail. then we will see a little bit of fear
some of the massivcreditlines were sold in the biggest cbs transactions in the history of europe. so some banks reduced their exposure.
http://www.immobilienblasen.blogspot.com/
one problem with the article.. when they said:
“If anything, the Australian boom was far bigger than that in the U.S., with average house prices doubling between 1996 and 2003″
the forget to point out that in california since 1990, home prices have gone up roughly 800%.. houses/condos in CA are now worth 8 times what they were in 1990.
california has 20% of the population of the US, and something like 35% of the total housing dollars spent per year. they are in a bubble unlike anything in recorded history in any country on earth.
the crash will be spectacular.
or maybe i’m wrong and this 500sqft house in CA is really worth 825 thousand dollars because someone installed a granite countertop in the kitchen.
http://sfbay.craigslist.org/sby/rfs/197372561.html
Do I have to feed the squirrels?
In Netherlands there are several regions where house price gains are now over 1000% (starting to count from 1990 or so). The gain in the national average is smaller (+500% or so, depending on what source you use) but that is because of seriously flawed statistics that severely understate individual home price gains. And I don’t think that the CA average homeprice is up by 800% over this timeframe either; so really, CA is not that very-very special … I’m sure there is or was similar madness in other corners of the globe.
IMO some US marksts were already out of whack with rents in the 90’s.
Right–that comparison of Aus to US tends to hide the instability in California, where prices are now 2.5-3X what they were just 5 short years prior. The unsustainable situation in bubble zones far outweighs any positive spin from a national average.
Actually, it’s 1900 sq. ft., not 500.
———-
Sorry, that post was meant for the CL ad further up the blog. Must be getting close to Miller time…
I think the article makes an excellent point… a soft landing might be possible in ideal circumstances - high interest rates that could be lowered, a booming economy, consumers with little debt, etc. But right now in the US we’ve got every factor working against us as a result of trying to dig our way out of the 2001 recession with another bubble and reckless borrowing.
And this is where it gets interesting. The Goldman economists think Fed fund rates will be cut by the end of 2006. Problem is, that will rock an already nervous market for the US dollar and bonds. If the 10 year bond gets driven up as a result, we could see much higher mortgage rates, not lower.
Ben, that is the point I try to make to the sheep here in FL that rate cuts will not save/restart the housing party. Housing is done……..PERIOD!!!!!
sure interesting. Helicopter Ben thinks he can get away with lowering the Fed funds rate together with some extra manipulation of the bond market. At least the bond guys (like Bill Gross) are following him in this direction.
Also, it is difficult for the dollar to crash if the major competitors (euro and yen) are forced down with it. The ECB has made it very clear that they will not allow the Euro to climb over 1.30 dollar; the BOJ will probably not allow their Yen to climb much more vs. the dollar either. That leaves gold as the yardstick and we know that Helicopter Ben thinks he can manipulate this market down as well.
“sure interesting. Helicopter Ben thinks he can get away with lowering the Fed funds rate together with some extra manipulation of the bond market. At least the bond guys (like Bill Gross) are following him in this direction.
Also, it is difficult for the dollar to crash if the major competitors (euro and yen) are forced down with it. The ECB has made it very clear that they will not allow the Euro to climb over 1.30 dollar; the BOJ will probably not allow their Yen to climb much more vs. the dollar either. That leaves gold as the yardstick and we know that Helicopter Ben thinks he can manipulate this market down as well.”
We certainly are getting close to the point where the music stops……….
What did Nero do as Rome was burning?
Oh yes………..fiddled
After the latest Australian rate hike, the central bank chief said that they didn’t have any choice. It was neccesary to control inflation. I think the ECB is more hawkish on inflation as well. China had an unexpected hike the other day, too.
Of course like everything else these days, inflation has also been manipulated. Here is a nice summary of the sneaky things our government will do to try to tell us everything is ok when clearly it is not (from Financial Sense):
http://tinyurl.com/doggf
regarding ECB and inflation: they are even more dovish than the FED, but they may sound more hawkish in the speeches (they have to, with the memories of the Weimar hyperinflation and some similar episodes). But it’s better to look at what they are doing.
Actual inflation (not the heavily manipulated CPI) and money supply growth in the EU are the same or a bit higher than in the US and it has been like that right from the start of the ECB. But interest and mortgage rates in the EU are far lower than in the US. With rate hikes in 0.25% babysteps every three months and mortgage rates almost totally ignoring the increasing ECB rates, it could take at least 10 years before the ECB comes even close to a ‘tight’ policy. And I’m sure the earliest signs of a stagnating economy will have them abandon any further rate hikes.
Not necessarily. If Fed thinks we’re on the brink of a deflationary recession, then their rate pause/cut is simply a lagging parameter of what’s already happening - long yields dropping.
Mortgage rates, however, don’t have to follow the 10-year benchmarks - they can decouple depending on the risk quality. In other words, we can potentially see a scenario of high real mortgage rates on the background of low inflation or deflation. In other words, pretty much like the 90’s but probably very amplified.
Consumers are in debt up to their eyeballs and fiscal policy is maxed out,’ she warned.”
- Can anyone say ‘Bankruptcy’
I find it ironic that they past those new bankruptcy laws last year.
Set the interest rate trap, … lure them in, ….GOTCHA!
not sure if ironic is the word for it. maybe sadistic?
irony can have a hard edge
No, it’s ironic, because it happened right after the elections, in which the poor voted for the rich.
Does anyone have a summary of the salient changes for BK laws? ie, how will this affect housing?
Kind of like this? scroll down the page a bit
http://www.brokenmasterpieces.com/archives/001381.html
Behold:
Tuesday, August 22, 2006
July single-family home sales drop at sharpest rate in 11 years
Sales of single-family homes in Massachusetts declined in July at the sharpest rate for a single month since 1995, and condominium sales dropped off at the fastest pace since 2003, according to a report released today by a firm that tracks real estate transactions.
Single-family home sales dropped nearly 27 percent and condo sales fell 23.5 percent, offering fresh evidence that the state’s housing slump isn’t about to end soon. But The Warren Group urged people not to read too much into numbers from a single month.
http://www.boston.com/business/ticker/2006/08/july_singlefami.html
Actually to get the wave analogy correct (I am a surfer) you have to measure the period in between the waves.
The longer the period between one peak to the next the more power the wave has.
Yes, longer period waves tend to crest (rise) higher than short period waves.
This housing bubble is in a 17 year period 1989-2006. In my book that is a fairly long period.
How long was it between Katrina and Rita? We had a lot of people riding those girls, only the boards were their front doors!
as for timing, I think we can safely say that the credit bubble started nearly 20 years ago, in 1987 when Alan Greenspan took control at the FED.
The worldwide housing bubble is the most obvious byproduct of this credit bubble - but it is clear that in many countries / regions the housing bubbles are much younger, and some even had crashes in the last 15 years. The credit bubble is global, but the housing bubbles are to some extent local. It was only in the last years that the local housing bubbles merged into a global property bubble, thanks to foreign speculation, equity locusts etc.
Nhz,
I meant to ask you what do you think about Eastern Europe’s
RE property markets.
Like this property for example:
http://tinyurl.com/gb567
Heck, if you’re going to have an alligator anyway, why not have a really BIG-ass gator?
Nice property for this price by Dutch standards, I think it would cost 10-20 times more over here (but I don’t think there is anything similar for sale here, so difficult to say). For that price you can get a very boring house in the Netherlands. On the other side, 5-10 years ago you could still find similar castles in France (far more attractive for most EU buyers) for half that price.
Moravia is the ‘cheap’ part of the Czech republic; no doubt that by local standards the property is ridiculously overpriced. Also, I don’t know if you can really own such properties, because many ot those countries have strange laws regarding foreign investment. Eastern Europe still has plenty of room for appreciation compared to current prices in ‘Old’ Europe. In some parts of Eastern Germany for example, you can buy a good quality home for a few thousand euros.
I live in the Czech Republic, in Prague. Olomouc is a nice little town, but there isn’t much out that way. You are looking at a 2-3 hour drive to the nearest airport (Vienna or Bratislava). There is some new industrial growth in Moravia, but average salaries there are less than $1,000/month pre-tax. After tax salary is more like $700/month. Unemployment in the region is 10%+. Yes, there are people in Czech who can afford a $700k house, but they don’t live way the heck out there - they live in Devicka in Prague, where the houses go for $1-2 million.
So, you can buy it, but who are you going to sell it to? Talk about illiquid assets…
“If anything, the Australian boom was far bigger than that in the U.S., with average house prices doubling between 1996 and 2003. Four interest rate increases over 2002 and 2003 took the wind out of housing, but the resulting slowdown was remarkably modest by historical standards.”
I’m sorry but “bigger” how?
In LA, house prices doubled in most areas between 2000 and 2005. Specvestors, no-doc financing, I/Os, ARMs, low interest rate HELOCs….the works have caused this waking economic catastrophe. I lived in south Sydney from 2002-2004 for a job assignment and can assure you that by no way did the Aussies spend their invisible wealth at the consumption rate of my fellow Americans. The Aussies didn’t feel the need to because their lifestyle didn’t require a matching Hummer to go with the 20 foot Glastron motor boat they could never afford. Not so here in the US. Since I returned to LA over a year ago, I’ve witnessed several of my neighbors upgrade from their Camrys and Saturns to Lexuses and Mercedes. Meanwhile they’re all still living in the same modest homes in the very same lower to mid-middle class neighborhood.
This is gonna get extremely ugly and I’d be lying if I didn’t say I was honestly afraid to see how this is going to affect the lives of the people whom I share the same streeet with.
I know what you mean - Over the last two years I guy I work with, who makes apx 50K/yr, has purchased a brand new, fully loaded corvette and a suped-up truck with all the bells and whistles. The two toys cost him 100K, money obtained from refinancing his 180K home (1999 value) which he claims is now worth 750K. He’s living the “money for nothing and the chicks for free” dream..
Only in America!!
I lived in Oz this past year. Nice four bedroom, office canal home the owner thought was worth 1.2 million US$. It has been for sale for two years and it rents for $1,600 US per month. That means after expenses around 1.25% rental rate of return. Once the USA goes Ozzie market is toast.
My daily rant, so please excuse!!! I can’t believe all the sheeple and talking heads that now see the coming debt crisis. What Kool Aid have they been drinking? This is going to be one helluva a recession when this wave crashes and the spend now, pay later party is officially over. Best Buys and Targets for everyone at 99% off the entire store and building! Of course, it’ll be cash only since credit cards will be maxed out and HELOCS will all be heading toward foreclosure. UGH! This is going to get real ugly!
The IRS is hiring private debt collectors to collect up to $1.4b. This should reduce chances of bail out for FB’s.
http://news.yahoo.com/s/ap/20060822/ap_on_go_ot/irs_debt_collection
Oodles of FB’s will fall through the IRS cracks. I see this every week. (Well, not FB’s per se, but all sorts of other tax scoff-laws),
Actually, it’s 1900 sq. ft., not 500.
More related links:
‘Should the U.S. housing market bog down in an anticipated slump, its Canadian counterpart is likely to be in for a softer landing thanks to lower interest rates and a different attitude to home financing, observers say.
‘When you take a look at the new home construction numbers, we’ve been running at the 200,000-plus level for a number of years - this will mark the fifth such year - and it’s felt that generally this is in excess of what long-run demographic demand is,’ said Brent Weimer, senior economist with the Canada Mortgage and Housing Corporation.’
‘Auckland’s housing market has become the weakest in New Zealand, a new measuring system claims. ‘The strong down-turn phase is still to come in my eyes,’ ANZ chief economist Cameron Bagrie. ‘Certainly, the Reserve Bank doesn’t think the housing market is in a strong downturn stage yet. It’s coming though.’
Average sales in prices in New Zealand are still climbing. And with the Central Bank broadcasting the message of far lower rates within 1-2 years, it is likely that homeprices will keep climbing for some time to come. But this market sure is overextended, problems with (too many) apartments in Auckland started more than a year ago.
‘China has a problem that seems enviable: It’s sitting on a mountain of cash. It has amassed nearly $1 trillion in foreign currencies in just a few years by becoming the exporter of choice for all kinds of manufactured goods.’
‘Qing Wang, a Bank of America economist, said this is a tremendous threat to the government in managing its monetary policy. The newly created yuan slosh through the domestic economy, leading to a rash of investment in wasteful domestic industrial projects and a huge asset bubble that has built up in real estate. If it bursts, that could upset the country’s fragile banking industry.’
“…the Australian boom was far bigger than that in the U.S., with average house prices doubling between 1996 and 2003.”
Not bigger than my ‘hood — prices here tripled between 1998 and 2005.
in my neigborhood in the Netherlands, in the 1993-2006 timeframe, the lowest appreciation (some very unattractive properties) has been around +500%; most homes are now 800% to 1100% more expensive than 10-15 years ago. Wages are up only about 50% over the same period (about the same as official inflation). But well, what else can you expect in the country of the tulip mania…