The Dirty Little Secret At The Heart Of Our Economy
Some housing bubble news from around the globe. The Wall Street Journal, “Hardly anyone turns up nowadays at a Homex sales center for low-income homes in this dusty town north of Mexico City. Even the lone saleswoman on duty, Carolayn León, says she no longer believes in her employer after several missed paychecks. Scores of new homes in far-flung communities sit empty, while banks have canceled credit lines to some of the country’s biggest housing companies. The National Action Party, which took power in late 2000, ramped up the number of loans handed out by government mortgage agency Infonavit and subsidized companies directly to build homes.”
“During the past 12 years, Infonavit, which is behind 75% of Mexico’s mortgages, handed out 4.4 million loans, double the amount it issued from its inception in 1972 through 2000. ‘It was a very simple and effective way to inject money into the Mexican economic system and make it flow down to the base, to construction workers and carpenters,’ says Oscar Castro, a professor of urban planning at the ITESO Jesuit University of Guadalajara.”
Peru This Week. “To dissuade fears of a housing bubble, economist Jorge González Izquierdo says that housing costs will not increase as much this year as in previous years. While growth rates have risen to 20 percent over the last three years, this year, growth is not expected to surpass 10 percent. The economist was careful to state that this is not an indication that the ‘bubble is popping.’ ‘There will be less demand because credit is being adjusted,’ González said. ‘Financial businesses are going to be more restrictive in their risk evaluations. When mortgage credit falls, so does demand. And what happens to the price of a product whose demand falls? Well, it falls also, but that’s not a bubble.’”
The National. “Controls are required to help guard against the risk of a repeat of the boom and bust cycle in the Dubai property market, Masood Ahmed, the regional director of the IMF said. Dubai residential sales prices rose by 18 per cent in the first quarter of the year compared with a year earlier, according to the property consultants Jones Lang LaSalle. Prices were rising too quickly considering there was a 30 per cent vacancy rate in existing housing stock, said Farouk Soussa, the chief economist in the Middle East at Citigroup.”
“‘We have investor demand coming back into the market, which isn’t necessarily a bad thing … but I have no doubt in my mind that on top of investor demand you also have speculators coming back into the market,’ he said. ‘Where speculative demand exists clearly the lack of end user spells risk to the downside.’”
The Saudi Gazette on Saudi Arabia. “Owning a home has become a far-fetched dream of many, as land and construction costs have sky-rocketed. Mansour Al-Salmi, an economist, said land prices have sky-rocketed due to the continued speculation between realtors and developers. He said that many plots of land are bought, sold and resold at exorbitant prices. In addition, there are many large land schemes that are not developed by their owners, to limit supply in the market, and hence, keep prices high.”
The Haaretz in Israel. “Israel has been experiencing a real estate bubble that included monstrous 60 percent price hikes over the last few years. Developers and contractors, naturally, have no reason to want home prices to drop. The banks who give them credit, but who primarily give credit to home buyers, certainly aren’t interested in being stuck, not to mention the fact that they are making very nice profits in the mortgage market. The ILA, which controls most of the nation’s land, isn’t interested in flooding the market with the treasure it holds. The finance minister and prime minister are enjoying the fact that the 73.4 percent of Israelis who own their own homes believe they are holding on to an asset whose value is increasing, because this leads them to spend more money.”
“In short: This bubble isn’t hurting those whose decisions influence home prices; in fact, under current circumstances, maintaining the bubble is crucial to them.”
MarketWatch on India. “India’s biggest property developer by sales, DLF Ltd., posted its first-ever net loss for a quarter as a sluggish property market added to woes at its insurance and hotel businesses. Higher borrowing costs and fears of job losses amidst an economic slowdown have crimped demand for new homes and offices in Asia’s third-biggest economy. To counter the weak market sentiment, DLF has started new projects to boost cash flow, while selling non-core assets to reduce debt.”
“Demand for real estate in India has also been hurt by commercial banks’ tougher rules on housing loans. Due to repayment defaults, banks are stricter about lending not only to individual borrowers but also to real estate companies. ‘[The company] envisages an uncertain and lower growth environment and hence plans to move to a risk mitigated, steady state business environment by adopting a cautious and conservative approach,’ it said, without elaborating.”
Free Malaysia Today. “Sabah’s past 10 years of vigorous growth spurred by its ‘booming’ real estate sector is heading for a slowdown and among the factors is the recent general election outcome, said a global real estate consultancy here. CH Williams & Talhar managing director Chong Choon Kim said young people who flocked to Kota Kinabalu and urban areas for jobs did not earn enough to pay to compete with the rising prices of houses. ‘Now in KK, over 50% employees earn less than RM2,000 a month; 20% earn between RM2,000 and RM3,500 per month and 20% between RM3,500 and RM7,000 per month. Only 10% earn more than RM7,000 per month.’”
“‘For young people earning RM2,000 per month, they could only afford houses at RM150,000 with a payback period of 30 years,’ said Chong. According to Chong the government’s ‘affordable homes at RM250,000′ was not ‘affordable at all.’”
From Bloomberg. “A 20 percent decline in Hong Kong property prices won’t ‘worry’ the government, TVB news reported yesterday, citing an unidentified government official. Even if property prices fall 40 percent in the long run, the government is confident that there won’t be a large amount of negative-equity cases like in 1998 and 2003, the report said. During the city’s last property crash, real estate values tumbled 70 percent between 1998 and 2003. The number of mortgages in negative equity peaked at the end of June 2003 when the slump ended. Home prices have more than tripled since then, according to the Centaline index.”
Thanh Nien Daily. “The government’s latest measures cannot revive the property market since it is the high-end segment that has a massive inventory while the new policies relate to affordable housing, Pham Sy Liem, vice chairman of the Vietnam Construction Federation, tells Vietweek. There is nothing that can help revive all segments except an economic recovery, he explains. ‘Property developers should learn from this. They have developed projects without careful consideration of the market demand causing a property bubble,’ he said.”
The New Zealand Herald. “It could take three to five years to close the gap between housing supply and demand in Auckland, if left to supply measures alone, says Reserve Bank governor Graeme Wheeler. In a speech to the Institute of Directors in Auckland yesterday Wheeler reiterated the bank’s concern that ‘the current escalation of house prices is increasing the probability, and potential effect, of a significant downward house price adjustment that could result from a future economic or financial shock.’”
“On the demand side, mortgage rates at 50-year lows and now only slightly above average rental yield of 4.5 per cent, combined with the rise in house prices, increased the incentives for renters to buy their first home and home owners to upgrade. As for the Reserve Bank’s ability to influence demand, Wheeler reiterated his reluctance to raise the official cash rate when inflation is low and the exchange rate is high. ‘This is where macro-prudential policies can play a useful role,’ he said. They include quantitative restrictions on low-deposit lending.”
“Such measures had been deployed in Canada, Israel, Korea, Norway and Sweden, he said, and the evidence to date suggested that limiting such loans during periods of quickly rising property prices could reduce credit booms and the probability of financial distress and sub-par growth later. ‘But they are no panacea,’ he said.”
The Herald in New Zealand. “The lament is echoing up and down the country: if only Auckland could build a lot more houses the Reserve Bank could avoid an interest rate hike that hurts everyone else from Kaitaia to Bluff. Reserve Bank Governor Graeme Wheeler even suggested this week a rate cut was possible if a ’supply response’ actually happened to dampen the current surge in Auckland’s house prices.”
“There are real questions about the capacity of New Zealand’s construction industry to build that many houses in that short a time, given so many of our tradespeople have either moved to Australia or Christchurch. Secondly, if the required tripling of building activity actually happened, most expect it would generate its own surge of construction cost inflation, which might of itself take that rate cut carrot off the table or even force rate hikes.”
“But there is a third and as yet un-debated problem with the assumptions holding up the 39,000 consents holy grail. Who will pay to build and buy these homes? If banks do lend on these sorts of buildings it is only with big deposits, which puts them out of reach for many first home buyers and investors. Then there is the bigger issue of how home buyers would finance their purchase, even if the housing development was consented, financed and built for a reasonable price. This is the dirty little secret at the heart of our economy. New Zealand’s households are already up to their eyeballs in debt.”
“So what should the Reserve Bank do, if anything? Its most effective instrument remains the Official Cash Rate and if it is serious about reducing the financial risks of a new housing inflation boom it should put it up substantially and now.”
“By relying on a mythical supply response to contain house price inflation, the Reserve Bank risks repeating its mistakes of 2003-07 when it acted late and let New Zealanders insulate themselves from rate hikes by fixing their mortgages for years, blunting the power of the bank’s one good tool. Right now, as the Reserve Bank and Government talk about holy grails and fret about unintended consequences, banks are offering 2 year fixed mortgages for less than 5%.”
“If Governor Wheeler is not careful he will end up like the Black Knight in ‘Monty Python and the Holy Grail’: a quadruple amputee railing at King Arthur: ‘Just a flesh wound!’”
‘Sweden has a household indebtedness in proportion to household disposable income of 170 percent, a figure that shoots up to 300 percent in Stockholm, said Schellekens. And while the commission’s Sweden office has not said that the country risks a burst housing bubble, there is concern that the current situation could pose long-term macroeconomic problems. It had proved a sore point with the Swedish government last year, when the Commission last published its Annual Country-Specific Recommendations (CSRs). At the same time, high demand and low supply protected Sweden from an exaggerated boom-bust cycle.’
“We are not saying it is an acute problem, as there is such high demand because Sweden doesn’t build a lot of new houses,” Schellekens said. “Yet building more would in the long term reduce the risk of a bubble.”
‘Bank Indonesia is studying whether to impose stricter loan-to-value rules for mortgages in regions where property demand is expanding too quickly, Deputy Governor Perry Warjiyo said. The central bank may tighten the loan-to-value, or LTV, ratios for buyers of second or third properties such as houses and apartments, Warjiyo said.’
‘Southeast Asia’s biggest economy has grown more than 6 percent for 10 straight quarters, boosted by record-low borrowing costs and foreign investment. Bank Indonesia began requiring lenders to demand minimum down-payments for housing and vehicle loans in June last year.’
‘Knight Frank observes a slowdown in India’s most speculative market, the National Capital Region. Is there reason to worry? In terms of price appreciation Gurgaon is a market which has seen very good appreciation. In terms of yearly numbers we have seen around 30 percent rise in terms of numbers in Gurgaon area.’
‘In terms of new Gurgaon area there has been about 50 percent on an average in terms of price rise. On an average last year there have been projects getting launched between Rs 4500-5000. The numbers right now are about between Rs 6,000-6,500 or so.’
‘Now the worrying part is that the NCR residential market has an estimated 140,000 unsold units, out of which 66 percent are concentrated in Noida and Greater Noida. Also there have hardly been any launches off late in the Rs 25 lakh to Rs 50 lakh bracket, which is what had primarily attracted buyers to Noida in the first place.’
“Yet building more would in the long term reduce the risk of a bubble.”
The universal response to the credit/housing bubble; Build more, lend more.
‘Wheeler reiterated his reluctance to raise the official cash rate when inflation is low and the exchange rate is high…Reserve Bank Governor Graeme Wheeler even suggested this week a rate cut was possible if a ’supply response’ actually happened to dampen the current surge in Auckland’s house prices’
That last bit is incredible. They say they want 39,000 new housing units. But if prices fall, here come the lower rates. These central bankers must have a screw loose.
This is what I’m talking about, Ben. The global banking clan wants to keep real estate prices up.
‘The global banking clan wants to keep real estate prices up’
Let’s fly high but have a soft landing, etc. What’s going to happen is already baked in the cake. They’ve had their 15-20 years of party time, with a parabolic rise in money creation the past 5 years. Is there any action now that would undo the bubbles all over the globe? I’m guessing it’s taken a life of its own.
“Anything that is over-valued, will be over-produced.”
“Anything that is over-valued, will be over-produced.”,/i>
BINGO
And of course the price ultimately collapses.
Unless there are restrictions on producing more.
Rental Watch,
You’re untrustworthy. You don’t know what the truth is. Why? Because you continually exaggerate and misrepresent housing in spite of the fact you have a stake in the direction of prices.
What did you pay for the house you bought in 2011?
The truth is pretty clear. We built 20+million too many houses in the US, and continue to build a half a million more each year, that we don’t need. It will take 40 or 50 years at this pace to overcome the unrestricted irrational surplus.
‘Unless there are restrictions on producing more’
True story; Saturday I was driving in Flagstaff and saw a small truck with an open trailer loaded high. They used plywood on the sides to keep it all in. On both sides of the trailer “F@*k California” was crudely written in red paint. But it was written in reverse, like seen in a mirror. Maybe this was so they wouldn’t be pulled over.
“California or Bust” in the rear view mirror.
They were headed east on Rt 66.
Charming folk from Fontana, no doubt.
“They were headed east on Rt 66.”
+1 East!
It’s interesting how many Western citizens, not just Americans and Canadians, are indebted “up to their eyeballs.” Unless a very substantial and continuing increase in wages occurs, the majority of those debts never will be paid back. And there won’t be a substantial and continuing increase in wages as long as the competition consists of robots and Asian slave labor.
Just throwing this out there, but considering how hard humanity is working at making vast portions of the Earth uninhabitable, encouraging a property bubble is just about the stupidest maneuver possible. How can large Chinese cities have the housing prices they do, when simply breathing there is a challenge?
Unless a very substantial and continuing increase in wages occurs, the majority of those debts never will be paid back.
Which is why I suspect that interest rates will be kept low, a la Japan, for a loooong time. So it will continue to suck to be a saver and J6P’s around the globe will be forced into speculating with their meager savings if they want to earn more than 1% on their money.
‘interest rates will be kept low, a la Japan’
Were rates kept low, or were they low because of the deflationary environment? Low rates indicate recession or depression, not a good scenario for real estate prices, as we saw in Japan the past 20+ years.
But they know if they raise the rates that things will unravel in ways they don’t like or want.
I hear what you’re saying about deflation. That’s how things are supposed to work. But we’ve been stuck in a fiction economy for a long time, and I don’t see it changing, regardless of consequences to the little people.
Reality has been suspended because you said so? Really? REALLY?
‘if they raise the rates that things will unravel in ways they don’t like or want’
I look at it differently. Every day rates are artificially low, people are buying houses they’ll walk away from, junk bonds are issued that won’t be paid back. Cities/states continue to load up on debt they can’t possibly service. What will make ‘things will unravel in ways they don’t like or want’ is happening right now and has been happening for years, and now all over the world.
But if interest rates go up and housing prices collapse, won’t the “walk away” exodus be even worse? Wasn’t the whole point of the crazy contortions to prop up the housing market? Sure, at some it will come crashing down, now matter what they do, but if they can kick the can hard enough it becomes someone else’s problem.
‘if interest rates go up and housing prices collapse, won’t the “walk away” exodus be even worse?’
IMO, the longer rates stay low, the more that will walk away. The crash will be worse the longer they do what they’re doing.
‘Wasn’t the whole point of the crazy contortions to prop up the housing market’
That’s a subject of much debate. I personally don’t think the central banks care where the bubbles form, as long as it pumps money into the system.
“Which is why I suspect that interest rates will be kept low, a la Japan, for a loooong time.”
+1 I recently read that if interest rates increased by 2% in Japan that 80% of government revenue would go toward debt service.
Is it safe to conclude at this point that all real estate isn’t local?
Is it safe to conclude at this point that all real estate isn’t local ??
In light of Ben’s superb research I say the answer is yes…
Contributions to this blog prove otherwise. Compare Orange County, CA to Pittsburgh or Detroit. You’d have to be daft to equate their value and movement and rationale.
Sorry, SCDave. It IS all local despite Ben equating SF with Coral Springs - : )
‘It IS all local despite Ben equating SF with Coral Springs’
I don’t even know where Coral Springs is, so maybe you have me mixed up with someone else. As for the local reference, back in 2005 many experts said there couldn’t possibly be a national housing bubble because all markets are local. So how do you explain very similar price movements in so many different parts of the world?
“So how do you explain very similar price movements in so many different parts of the world?”
Stop confusing the Realtards!
Where the hell IS old David Lereah these days? Is he on Eric Holder’s PR staff now?
Holder is Pinocchio’s fluffer.
“Is it safe to conclude at this point that all real estate isn’t local?”
Yes. Never has been, never will be.
Why do governments HATE their citizens and want to have them live in debt slavery forever in order to buy a house?
‘Developers and contractors, naturally, have no reason to want home prices to drop. The banks who give them credit, but who primarily give credit to home buyers, certainly aren’t interested in being stuck, not to mention the fact that they are making very nice profits in the mortgage market. The ILA, which controls most of the nation’s land, isn’t interested in flooding the market with the treasure it holds. The finance minister and prime minister are enjoying the fact that the 73.4 percent of Israelis who own their own homes believe they are holding on to an asset whose value is increasing, because this leads them to spend more money.’
‘In short: This bubble isn’t hurting those whose decisions influence home prices; in fact, under current circumstances, maintaining the bubble is crucial to them.’
Governments just do what the bankers tell them to. No hate involved. Contempt, maybe.
Governments just do what the bankers tell them to. No hate involved. Contempt, maybe.
Makes sense. Government now flows from the bankers rather than the citizens, so the citizens are just a resource to be farmed for wealth. Or sheared as the case may be.
They also make great cannon fodder.
Top of the page Yahoo story right now:
http://finance.yahoo.com/blogs/daily-ticker/housing-recovery-sham-says-guardian-heidi-moore-131443918.html?=vp1
Housing Recovery Is a Sham Says the Guardian’s Heidi Moore
BTW, I posted this lady’s editorial on Friday.
From the article: The so-called housing recovery may be “dubious,” she writes in a recent column: “What looks like a housing recovery to the rest of us, but is, in fact, something of a trap.”
Dubious……
When discussing housing corruption(NAR, NAHB, MBA, Freddie, Fannie, HUD, Obama Adminstration), massively inflated prices, massive losses associated at current prices and gross misrepresentations of input costs to houses, it’s far worse than dubious.
There will only be concerted outrage against corruption when the gravy train stops.
44% Of Mortgage Homeowners Zombified
http://mhanson.com/archives/1269