The Housing Bubble

It’s Friday desk clearing time for this blogger. “Sales of existing homes in Canada fell in November from October and year-over-year sales were down as well, the Canadian Real Estate Association said on Monday as it once again trimmed forecasts for resale housing in 2012 and 2013. Canada’s housing market avoided a meltdown in the wake of the financial crisis in 2009, with conservative lending standards given most credit for the market’s resilience. Ultra-low interest rates then helped fuel a post-crisis boom. Scotiabank economist Derek Holt said he believes home resales will continue to soften in 2013.”

“‘The country is at frothy all-time highs for every measure of activity in housing markets and consumer spending, and pro-cyclical housing finance policy that eased too much in 2006-07 has given way to regulatory over-tightening with further lagged negative effects ahead of us,’ Holt said in a research note.”

“Supply and demand are miles apart in the Chinese property market. A slowing economy and increased regulations have led to massive amounts of unsold inventory. China Times reported that the amount of unsold residential property grew to 320 million square meters (79,000 acres) by the end of October, roughly four times the area of Manhattan. It’s up 19 percent compared to last year’s 270 million square meters (66,718 acres). Based on the current transaction volume the housing stock in some regions would take 10 years to be cleared, according to the report.”

“Nie Meisheng, honorary chairman of the China Real Estate Chamber of Commerce, says: ‘Developers fear the overhang of unsold houses. Some large-scale developers have as much as 10 billion yuan ($1.6 billion) worth of unsold stock on their books.’”

“Economist Wu Jinglian, one of the mainland’s best-known advocates of market reform, warned yesterday that excess domestic money supply was creating an increasingly unsustainable asset bubble. Wu, a senior research fellow at the State Council’s Development Research Centre, said the risk of an asset bubble was even greater than it was in Japan before its own bubble burst two decades ago.”

“M2, the broadest money-supply measure, which covers cash in circulation and deposits, stood at 94.4 trillion yuan (HK$116.3 trillion) at the end of September, while its gross domestic product in the first three quarters was 35.3 trillion yuan. ‘Have you ever seen any country in the world like this?’ Wu said, adding that the government was too highly leveraged. ‘The debt level of the government’s balance sheet is too high as the more notes issued actually means more debts.’”

“The Silicon Valley is now leading the nation in its long-awaited housing recovery, according to veteran Bay Area real estate agents. Nationally, Canada remains the largest group of foreign investors in U.S. real estate. But there is ample anecdotal evidence to suggest that the Silicon Valley is bucking the national trend. ‘Just in the last year, we’ve seen a doubling of buyers coming directly from China and they’re pretty much all-cash buyers, usually here for just one week,’ said Ken DeLeon, broker and founder of Palo Alto’s DeLeon Realty. ‘70 percent of the buyers are now Chinese, either American-born Chinese, or coming directly from China.’”

“The Silicon Valley Association of Realtors recently formed a Global Business Council to help its members respond to the growing interest from foreigners, most notably from Asian investors. Council chairwoman Jennifer Tasto recalled receiving 38 offers on a ranch-style home in Palo Alto’s Green Acres neighborhood. Listed for sale at $1,195,000, half of the offers, she said, came in above $1.5 million. It sold for $1,650,000. Following her recent meetings with the delegation from China, SILVAR president Suzanne Yost elaborated: ‘I think they feel it might be time to get their money out of China.’”

“Happy days are here again — almost — in the San Antonio area’s resale housing market. ‘I think we’re getting off to the races again,’ said James Gaines, research economist at the Real Estate Center at Texas A&M University. But Gaines said San Antonio’s housing market is more complex than the numbers indicate. A higher number of investor sales could explain why sales volume is up so much higher than prices: Investors look for good deals on properties that they can rent or sell at a profit.”

“‘We’ve got this low inventory. You’d think it’s a seller’s market, but it doesn’t seem to be working that way,’ he said. ‘How many of those are investor sales?’”

“Improved data collection by a leading distressed property monitoring firm shows a soaring rate of foreclosures in Frederick County in November. For a while, banks had worked for short sales, but for many properties that isn’t viable. ‘Now that they have reviewed their files properly to have a qualified bank officer determine if the loan is truly in default and not eligible for modification or short sale, Maryland will see more foreclosure properties advertised in the newspaper for sale,’ said Patrick McLister, an attorney with Salisbury and McLister in Frederick. ‘The quantum leap in the number of foreclosures in Frederick County last month is evident of that trend.’”

“In New Jersey, it appears most banks have chosen to jump back into foreclosing. The slowdown in filings for much of 2011 led to numerous reports that a lack of foreclosures would distort the housing market, preventing the banks from disposing of under-performing loans While Tom Bias of Sparta has been in his home for 34 years, he acknowledged making a key mistake.”

“‘I never should have refinanced’ with former lender Countrywide, he said. ‘They didn’t even send a loan officer with the paperwork, just some college kid who spread it out on my kitchen table for my signature.’ Bias said. ‘That should have been a warning.’”

“According to a new report from currency specialists HiFX, higher mortgage rates, property tax rises and concerns about the eurozone worries have encouraged homeowners to put their house on the market. The figures suggest that the country poised to see the biggest exodus is Spain, where 45 per cent of British residents are trying to sell their property. ‘Since the housing bubble burst in 2008, property prices in Spain have fallen by a third,’ said Mark Bodega, Director at HiFX, ‘which has had a detrimental effect on the value of second homes. It is no surprise that property owners are fleeing the country as the outlook remains poor, with high levels of unemployment and slow growth.’”

“France is also set to suffer, with just over a quarter of Brits planning to sell up, partly due to the recent increases in capital gains tax and tax on rental income.”

“The appeal by Confederation of Real Estate Developers Association of India (CREDAI) to its members, to consider clearing their inventories by reducing property prices has not augured well with its members in Punjab, who are unwilling to reduce the prices. CREDAI members in Punjab believe lowering of prices to push up the sales of inventories was not possible, since developers already are selling at prices deemed to be rock bottom.”

“Interestingly, as per developers, there are 25,000 flats under construction in the Chandigarh periphery. The members say that as of now only 5,000 flats are there which are ready to move in. Despite piling up of inventory of constructed and under-constructed flats, developers in Punjab seems reluctant of softening the prices. Kulwant Singh, CREDAI President for the Punjab region, says prices already are low amidst downward trend seen in realty market now a days.”

“‘Despite input prices going up, builders have not revised the prices in tandem,’ he said.”

“Bank of Queensland in October became the first Australian bank in two decades to post a loss. The bank suffered a $17 million loss for its 2011/12 fiscal year due to $401 million in costs from unrecoverable loans linked to BOQ’s exposure to the struggling property market in Queensland, where 60 per cent of its loans are written.”

“‘With borrowers better able to meet their mortgage commitments as a result of successive interest rate reductions, including that of last week, we have reason to be optimistic about recovery in the important housing market,’ said Chairman Neil Summerson.”

“‘We now accept that in any given year, there is likely to be a financial crisis in at least one country in the world,’ Stephen Cecchetti, economic adviser to the Bank of International Settlements cheerfully begins a conference speech made earlier this year. The conference, a joint project of the BIS and the Reserve Bank of Australia tackled the perennial, but arguably now more globally urgent, issue of ‘Property markets and financial stability.’”

“According to Cecchetti, ‘… property price booms are much worse than equity price booms. And they are worse in virtually every way. This means that understanding property markets is a key to understanding when financial stability is at risk,’ he says in the speech.”

“John Muellbauer, an applied macro-economist based in Oxford University, points out that a universal approach to the issue is unlikely to work. He offers a couple of ‘multi-equation’ solutions that will appeal to econometricians everywhere. Muellbauer also backs some kind of price-linked property tax - without much hope, though, of its global application. ‘The politics of property are very sensitive, and wealthy elites have a powerful influence,’ he says.”

“Cecchetti notes, however, that some progress has been made in constraining the housing monster with advances in global measurement standards and new policy tools. Curiously, he also says removing banks from the equation might improve the property market equilibrium. ‘The answer, I believe, is that if we could substitute market mechanisms for the bank provision of credit to the property sector, we would have a more stable financial system,’ Cecchetti says.”

“Unfortunately, even if this hypothetical version of debt collateralisation were to be successfully implemented the housing bubble mentality would not completely pop. ‘But we would not eliminate boom-bust cycles and the problems of overbuilding and overconsumption that they create. These real problems are more fundamental than the financial structure itself,’ Cecchetti cheerfully concludes.”