The Housing Bubble

It’s Friday desk clearing time for this blogger. “‘Housing is not a light switch, it isn’t flipped on and off … it’s more like a dimmer switch,’ said economist Elliott Pollack. ‘The lights are clearly coming on but we still got a long way to go.’ Another 40 to 50 percent more to go for housing prices, to be exact, he said.”

“One of the major reasons why the recovery is off to a sluggish start is because 40 percent of U.S. households are not mortgage creditworthy. In Phoenix, about 22 percent of single-family homes are rentals, which Pollack says won’t change anytime soon, and cash investors continue to dominate the market. Then there’s the whopping 39 percent of Arizona homeowners, and 22 percent nationwide, who still are underwater. This has been hampering people’s mobility and thus stifling their ability to move to Arizona, Pollack said.”

“Progress made in the industrial submarket, on the other hand, is misleading because the numbers really only reflect movement of a few major tenants. Smaller industrial space still is lagging and won’t come back until the housing market strengthens, he said. ‘There’s a boom out there somewhere — there really is — but it’s not 2013,’ Pollack said. ‘I believe (20)15 is the boom you’re all going to be waiting for.’”

“Overall U.S. condominium investment sales volume and the average price paid per unit for condo projects reached their highest levels in seven years during the fourth quarter, according to an analysis of preliminary CoStar transaction data. Late last year, condo investment sales quietly began to recover in gateway markets such as Boston, San Francisco and New York. The small thaw in the condo market has even reached Las Vegas, where investors have been buying up a portion of the plentiful distressed properties.”

“A November report on San Francisco housing inventory by the Polaris Group illustrates the dearth of condos in the supply pipeline. Constrained supply isn’t the only reason why the company is debuting its new multifamily division, Trumark Urban, in San Francisco. People are once again recognizing the value of buying versus renting in many urban markets. ‘We are several years post the housing bust, and potential buyers have short memories of all things past,’ noted Michael B. Cohen, multifamily specialist with CoStar’s analytics and economic forecasting company.”

“Chinese visitors are arriving in B.C. just in time to ring in the Year of the Snake – and Vancouver condo developers are getting a boost because of it. But potential Vancouver buyers should put aside fears that affluent offshore buyers will snap up a large share of the condo market, driving up price, said Nic Jenson, a condo marketer for Cressey Developments. ‘Don’t kid yourself. These people do live here, they’ve got family here, they’ve got children here,’ Jenson said. ‘Whether they choose to live here now or use it as a rental…it’s an extremely attractive investment for everyone.’”

“The Chinese year of the Snake registered a steady and robust property market in Sabah, according to Datuk Susan Wong Siew Guen, president of Sabah Housing and Real Estate Developers Association. ‘There is plenty of liquidity in our country’s banking system and as long as the financial institutions continue to provide 90 percent loan margins to the house buyers and the bridging financing to the developers, the property industry market will remain stable and prosperous,’ said Wong. ‘Our house prices are comparatively much cheaper than countries such as neighbouring Singapore, Korea, Japan and Hong Kong and a lot of investors from these foreign countries are coming here to invest,’ she added.”

“It was a good start to the Year of the Snake for Hong Kong’s property market, with strong sales of new homes during the Lunar New Year holiday despite recent cooling measures. ‘Buyers are upbeat about the outlook for the property market as they have already digested the news about the government’s housing measures and don’t think there will be any effective policies in the future,’ said Sammy Po Siu-ming, a director at Midland Realty.”

“Alan Lam, a businessman who often has to travel between Hong Kong and the mainland, was planning to spend about HK$7 million on a three-bedroom unit at Residence 88 for his family. ‘There’s always demand for homes in Hong Kong so it doesn’t really matter when you enter the market,’ Lam said.”

“Another local buyer, a Ms Chan, said she wanted to spend HK$8 million to move into a bigger flat in Yuen Long. ‘I’m not worried about more measures from the government as prices keep rising,’ she said.”

“Transcript of Finance News Network Interview with Professor Warwick McKibbin - Chair in Public Policy at the Crawford School at Australian National University and Former Reserve Bank of Australia Board Member. Lelde Smits: ‘Where do you see the key cash rate moving this year?’”

“Warwick McKibbin: Well it could move anywhere. If there is a crisis in Europe it could well go down. My guess is though that it will probably be more likely to be higher than it is today. And, the main reason is that these asset price movements around the world are beginning to become very concerning. Not just in Australia, but you’re seeing asset prices, particularly houses in Hong Kong and in Thailand, really pushing the central banks to tighten their policies.’”

“‘This is a global asset bubble being driven by very low interest rates in Europe, Japan and the US. And, Australia is not immune from that. And so, I think the Reserve Bank will really decide they have to respond, for example, to the recent increase in house prices in the last quarter of last year [Q4, 2012] which were quite surprisingly high.’”

“A new paper produced by researchers at the Central Bank of Colombia has found the country could be experiencing a housing bubble, according to tests run using a new method for detecting bubbles, developed in a paper by Phillips et al in 2012. The Colombian study is, the authors say, the second application of Phillips et al’s ‘new-fangled method’ after it was used last year in a study of the Hong Kong residential property market, which found ’striking results that significantly contrast with earlier papers on Hong Kong’s housing market.’”

“Spain and Ireland are the only two countries in Europe where house prices have fallen more sharply than in the Netherlands over the past four years, according to Dutch national statistics agency CBS. The drop in the Netherlands was 8.7%, in Spain 15% and Ireland almost 10%. By contrast, house prices in Norway and Estonia rose nearly 8.5%. Meanwhile, housing minister Stef Blok told Elsevier magazine on Thursday he hoped more foreign banks would enter the Dutch mortgage market and beef up competition.”

“In the past they had been surprised by the fact people can borrow more than the value of their homes, and at the popularity of interest only mortgages.”

“In New Jersey, the Trenton-Ewing region outpaced the national median with a 12.6 percent increase. Walter Molony, a spokesman for the NAR, said the 10 percent increase is above that seen in a traditionally healthy housing market, according to data going back to 1968. Normally, home prices increase 1 to 2 percent above inflation. ‘We’re seeing an over-correction in prices, but it’s not alarming,’ he said. ‘If it continued at this pace, though, ultimately, it would affect upward mobility.’”

“‘Our population has been growing faster than overall housing stock, so supply and demand dynamics are very much at play,’ Lawrence Yun, chief NAR economist, said in a statement. He added that more housing construction would be needed to relieve some of the pressure in the market and keep home prices from overheating.”

“Despite an anemic economic recovery, home sales in Connecticut increased in 2012 for the first time in seven years. Economists stressed caution, however, in drawing overly optimistic conclusions from the data, citing stalled job growth and political uncertainty in both Washington and Europe. ‘There is a lot of uncertainty in home prices. People seem to be gaining too much confidence in the rebound,’ Yale professor Robert Shiller told the News.”

“The report comes a year after Connecticut saw record-low home sales combined with a spike in state unemployment. ‘[There is] uncertainty about the outlook for the whole U.S. economy, which has been very slow to recover after the financial crisis, and uncertainties abroad too,’ Shiller said. ‘Congress is on an austerity plan, of the kind that put the U.K. into recession. We may yet eliminate the mortgage interest deduction, and government support for Fannie [Mae] and Freddie [Mac]. New regulations … make it harder for another bubble to gain a foothold.’”

“Shiller encouraged federal and state governments to avoid providing incentives to homebuyers, noting the possibility of a potentially destructive housing bubble. ‘As for encouraging potential homebuyers, I think that should be restricted to low-income homebuyers. We do not need to encourage the middle class back into another housing bubble,’ Shiller said.”

“There is now much media commentary that no sustained and robust recovery is possible until the housing sector recovers (that is, until house prices rise again). This desire to simply reinflate the collapsed bubble would likely yield the same disastrous result again. Another course would likely be more effective: restructuring away from so much dependence on leveraged, expensive, and speculative housing values. We should no more regret the demise of expensive housing than we should the decline of expensive oil.”

“Disciplined buyers — too long unfairly disadvantaged by government policies — are now sitting on trillions in savings that are earning, doing, and financing nothing. This money could clear the housing market, but only at lower, fairer prices. That would finally be ‘affordable housing.’”

“Manias begin in obscurity and pessimism, rise with confidence and imitation, reach a state of euphoria and finally end in tragedy. They often change history in ways that are not foreseeable.”