September 4, 2015

Many People Can’t Afford To Price Aggressively

It’s Friday desk clearing time for this blogger. “Almost half of single-family houses in the New York and Washington metropolitan areas are losing value, a sign that buyers’ tolerance for high prices in many large U.S. cities may be reaching a limit, according to a new index created by Allan Weiss, co-founder of the Case-Shiller home price indexes. More properties also were in decline in Los Angeles, Chicago, Phoenix and Miami. A steady rise in U.S. home prices since the bottom of the market combined with weak income growth has made housing less affordable, especially in big cities. ‘What happens in any bull asset bubble such as what we’ve seen is you run out of buyers,’ said Chris Whalen, senior managing director at Kroll Bond Rating Agency Inc. and an advisor to Weiss. ‘It’s hard to get deals done if the bottom third can’t get a mortgage.’”

“New home starts and sales in the Houston area are falling and the supply of new homes that have been completed but remain unsold is up dramatically, a new report from Metrostudy shows. The inventory of competed homes is the most concerning aspect of the market right now, said Scott Davis, Houston regional director for Metrostudy. ‘We’ve been in an extremely abnormal market from 2012 to 2014 when we had constrained lot supply and exceptional job growth,’ Davis said.”

“On the north side, there are too many houses being at the high-end of the market, Davis said. Many buyers can’t afford the higher prices. ‘For someone looking at a $600,000 to $800,000 home, there are over 300 locations in Houston where they can buy a new home in that price range,’ Davis said. ‘Buyers have a lot of options.’”

“Over the last three years, more than 3,800 rooms have been made available for U of A students who want to live off campus, doubling the number previously available, and more are on the way. There are concerns from private homeowners who lease their buildings to students. ‘It’s just the over saturation, fortunately for the students they have a lot to chose from but unfortunately for the properties there is so much competition which then trickles down to those individual homeowners,’ said Teresa Klinger, Senior Program Coordinator for Off-Campus Housing.”

“City officials say they aren’t able to physically keep count of Indianapolis’ climbing number of abandoned homes. ‘We recently had our quality of life team go out into the city and one of the biggest, single things we saw were vacant and abandoned homes,’ said Julie Fidler, housing and services specialist for the Indianapolis Department of Public Safety. ‘It’s not only a quality of life issue, it’s an attraction of nuisance because people who commit crimes may use those abandoned homes as the bases of their operation.’”

“Throughout the 10 months Mireille Blanchard’s Moncton home was for sale, only few potential buyers came to view the house. She’s noticed that there are a lot of For Sale signs in her downtown neighbourhood. Blanchard pulled her house off the market this earlier this week. ‘There’s one house that I noticed, they dropped their price by $40,000, and it’s still not sold. And we’re not prepared to lower our price so no, we’re not going to sell.’”

“Realtor Kari McBride, president of the New Brunswick Real Estate Association, says Blanchard’s plight is common. McBride says the reason behind the slow sales is ‘the housing market is in a state of oversupply.’ She finds many people, especially those who have only owned their home for three to five years, either aren’t able to sell their home, or are having to come down in price, sometimes losing money on their investment. ‘If you are in that bracket of home sellers, which many many people are, that they can’t afford to price aggressively or they don’t have the money to put in the updates the buyer’s looking for, then those are the houses that we’re seeing on the market for six, eight, 10, 12 months at a time,’ she said.”

“An estimated 362,000 homes in Baja California have been abandoned by their owners and another 60,000 are at risk of abandonment, according to the national director of El Barzón, a Mexico nonprofit founded to assist consumers in economic trouble. Thousands of abandoned homes dot sprawling, high-density developments in the eastern reaches of Tijuana and elsewhere in Baja, creating insecurity among the homeowners who have managed to hold on to their property. ‘A home that once put a roof over the heads of a family today provides shelter to kidnappers, drug dealers, and robbers,’ noted Martha Rueda, state coordinator for El Barzón in Baja California, in an El Sol interview.”

“The value of unsold apartments across the top seven cities of the country at the end of June has been estimated at a whopping Rs 4 lakh crore, with few signs the inventory will be cleared anytime in the next four years. At 7.5 lakh, the number of flats in the mid-priced range is virtually the same as it was at the end of March, this year, which means sales have come to a standstill. In addition, there are 50,000 luxury apartments, priced at an estimated Rs 1 lakh crore, lying unsold in Mumbai alone.”

“Despite the large number of flats going abegging, however, some 37,000 flats in the mid-priced segment were launched in the three months to June, roughly half the number opened up for buyers in the March quarter, data from PropEquity shows. Mudassir Zaidi, national director, Knight Frank, says builders have realised there is little point in launching new properties since that would only pressure prices further. ‘The pace of recovery in housing sales is far slower than earlier anticipated and the high inventory is not coming down in a hurry,’ Zaidi observed.”

“In a critique published in April, the global body that monitors the proceeds of crime, the Financial Action Task Force, said Australian real estate was an attractive destination for dirty money. In its April report, FATF said ‘large amounts are suspected to be laundered out of China into the Australian real estate market … Of great concern is that Australia has not brought real estate agents within the AML/CTF [counter-terrorism finance] regime.’”

“The Australian Federal Police restrained just $13 million in residential property in the 2013 financial year. But as concerns over some eye-popping property sales mount, more action may be looming. The AFP is investigating $80 million in property transactions from one group of Malaysians with links to a government investment body, including the sale of a student accommodation block in Melbourne for $22 million — almost $5 million more than its estimated market value.”

“Real estate agents are worried they will face an onerous compliance burden if they are brought within the anti-money laundering regime. But Malcolm Shackell, a partner in PwC’s forensic services division, said it might also cause headaches for the Australian money laundering regulator, Austrac, which already has 14,000 businesses to monitor. ‘You bring in the real estate industry and all of a sudden that doubles, triples,’ he said.”

“Spare a thought, if you will, for a Mr Qi, of China. He invested some £100,000 in shares in May, just before the stock-market bubble burst. He has lost £40,000, at least on paper. His dreams of making enough on the stock market are, for now, dashed, and he will have to postpone his plan to buy his own home. I do not know what the Mandarin for ‘negative equity’ is, but Mr Qi is feeling the effects of it, as are many more Chinese private investors. Reports tell us that the only way Mr Qi can find some relief from the stress is to have a good old-fashioned foot massage. There will be a good deal of foot-rubbing going on in China right now.”

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September 3, 2015

The Increasingly Common Notion That A Bubble Is Forming

The News Press reports from Florida. “Single-family-home permits spiked up sharply to 2006 levels in Cape Coral in August. Even the recent turmoil in the stock market and the global economy hasn’t deterred prospective home owners, said Bob Knight, president of Cape Coral-based Paul Homes. ‘There’s still movement forward to do the houses,’ he said. ‘The people who are talking to us aren’t even bringing it up. The key will be that it will last as long as they’re able to sell their homes up north.’”

The New York Daily News. “Most real estate developers dread stock market volatility. This one’s making bank off of it. Rather than converting the building into a high-end boutique condo, like almost every other developer has done with their properties in recent years, development giant Thor Equities, headed by Joe Sitt, decided to keep it as a rental. ‘A lot of people are renting while they wait for the market to soften a little bit,’ said the project’s listing broker, Karen Stone of Town Residential.”

“The buyers that Stone describes can comfortably afford to buy a luxury condo but they’re opting to try to outsmart the market, which has become flooded in recent months with uber luxe condo units, by holding onto their cash for just a little bit longer. Their reluctance to buy stems from the increasingly common notion that a bubble is forming in the very top end of the market. With global demand for luxury product being called into question in light of the economic volatility in countries such as China and Greece, they suspect that a long-awaited correction in the market may soon come to their aid — making that apartment they’ve been eying a whole lot cheaper.”

“‘No one wants to go in their pocket when the market’s down 500 points,’ said Andy Gerringer of the new development firm the Marketing Directors. ‘Our economy is dependent and psychologically driven by the stock market. When there’s uncertainty, people freeze. They end up staying on hold to watch the way the wind is blowing.’”

The San Francisco Business Times in California. “Justin Fichelson, one of the stars of Bravo’s ‘Million Dollar Listing San Francisco,’ weighed in on a hot topic these days: the direction of the Bay Area housing market. Given the over-sized role that new startup-driven wealth plays in Bay Area housing prices, Fichelson says it’s possible a slower pace of appreciation due to turbulence in tech stocks could actually spur more sales. (So strong is the tie between Wall Street and the fortunes of the Bay Area that a real estate agent once asked to share his outlook for Bay Area luxury home values responded, ‘You’re asking me to predict the stock market.’)”

“‘We’re definitely slowing down. Instead of seeing 30 percent appreciation, home owners may see 10 to 15 percent appreciation,’ Fichelson said, echoing Zillow’s assessment last week. ‘Initial public offerings have definitely seen a slowdown. There are not as many buyers writing checks for multi-million-dollar homes — so the high-end luxury homes will take a bit longer to sell and will most likely see some price reductions.’”

From Montana Public Radio. “The construction sector in Montana’s oil patch counties has been strong throughout the oil boom, but University of Montana economist Patrick Barkey is hesitant to predict how long that may last: ‘From the data we have, we don’t yet see any catastrophic impacts of the decline in oil prices from where they were a year ago - cut by anywhere from 50 percent to 60 percent - but really that reveals the inadequacy of our data. We are certainly hearing plenty of reports of construction projects being halted and of workers moving, but we haven’t yet seen them show up in the data. We expect some of them will be.’”

The Philadelphia Inquirer in Pennsylvania. “The developer of the luxury Parke Place townhouse project in the 1300 block of Bainbridge Street has filed for Chapter 11 bankruptcy protection but says he remains ‘100 percent committed’ to completing the work there. In an interview, Donovan Clarke, of Clarke Real Estate Development L.L.C., of Philadelphia, attributed his decision to file for Chapter 11 reorganization to a ‘timing issue’ with his lender.”

“Since Clarke unveiled the project in November 2013, three of Parke Place’s 22 4,300-square-foot units have gone to settlement, all in 2014. Those townhouses sold for $1.1 million, $1.12 million, and $1.225 million, according to Trend Multiple Listing Service. Three other sales are pending, for $1.25 million, $1.299 million, and $1.4 million. Five more townhouses are either temporarily off the market or withdrawn from the market, Trend MLS data show.”

“The units feature the open floor plan desired by young urban buyers and empty nesters. Mickey Pascarella, of Keller Williams Real Estate in Center City, said prices in Hawthorne range from $155,000 for studio-sized condos to $800,000 for a single-family home with parking. Clarke’s townhouses, though larger than many, are priced about 40 percent higher than the average, Pascarella said. ‘It was unfortunate this happened,’ Clarke said of his problem with Parke Place, ‘but I believe we have found a partner with whom we can get this done.’”

The Pioneer Press on Illinois. “When David Schuster put his home in Highland Park on the market earlier this year, he naturally hoped it would move quickly. As months passed without any nibbles, Schuster concluded that the appearance of a long-vacant house next door was putting off prospective buyers. Neighbors say the home has been empty for more than 3 years without any signs of an effort to market the property. ‘This house is holding our community hostage,’ Schuster told the Highland Park City Council in July. ‘I know this isn’t the only house that has been abandoned for a period of time, but I’ve been told by [city officials] that it is one of the longer ones in the neighborhood.’”

“But city administrators say they can’t force lending institutions to speed up the foreclosure process or sell homes that have become bank-owned after foreclosure sales. ‘They want to hang onto that property until prices recover sufficiently,’ said Joel Fontane, the city of Highland Park’s director of community development. ‘This is the shadow inventory that is being held back and slowly unwound. There are just too many of them for these banks to be willing … to just dump the properties on the market and take the hit.’”

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September 2, 2015

Money Tied Up That They Can’t Afford To Lose

The Vancouver Sun reports from Canada. “Buyers from mainland China and a dwindling supply of high-end detached homes are driving Vancouver’s luxury real estate market, with has seen an 80-per-cent increase this year compared to 2014 in the number of sales over $3 million. ‘Mainland China is churning out millionaires at quite a huge rate, and many of them like Vancouver,’ said Wayne Ryan, managing broker at RE/MAX Crest Realty Westside. ‘At this point, it’s all anecdotal, but the reality is we’re finding it’s between 70 and 75 per cent (of buyers.)’”

“More condo buyers are investors, too. ‘A lot of international investors will say, Vancouver’s a very safe market, so they’ll park their money here. That’s why you hear so much discussion about these apartments sitting vacant,’ Ryan said. ‘Because money isn’t an issue — it’s not as if they need to rent them on Airbnb.’”

The Globe and Mail. “Toronto’s condo sector is shaping up to have one of its strongest years on record, dispelling fears that Canada’s largest housing market is ripe for a correction. Builders sold nearly 11,000 condo units in the first half of 2015, the third-best year on record, according to research firm RealNet Canada Inc. Most of the sales activity has been among presales, thanks to 55 new projects that developers launched in the city this year.”

“But buyers have also been snapping up units in projects wrapping up construction, helping to absorb the large surge in completed but unsold units, which had soared to four times their historic norms at the start of the year. Of 453 condo projects in active development, at least 140 are offering some kind of incentive, said Phong Ngo, RealNet manager of new homes research. ‘We’ve been seeing more incentives than previously and things that we haven’t really seen in the past, like the rental guarantees and cash back,’ he said. ‘In the past, it was more on material things, like free appliances and upgraded countertops.’”

“Such tactics helped developers eat through their backlog of unsold inventory in existing projects in order to focus on launching new ones. Urbanation senior VP Shaun Hildebrand estimates the market could see another 14,000 to 16,000 condo units launched in the second half of the year, typically a quieter time for the market.”

The Montreal Gazette. “It’s more affordable to buy a house in Quebec than it has been in nearly a decade, according to an RBC report. ‘While Montreal’s pricing environment remained soft in the second quarter due to fairly loose supply-demand conditions in some market segments, material improvement in affordability in the past year helped re-energize resale activity in the area,’ said. ‘A high inventory of recently built, but still unoccupied condos continues to be a considerable issue for the market.’”

The Winnipeg Sun. “The affordability of bungalows and condos in Manitoba went up slightly in the second quarter of the year, according to RBC Economics. ‘A main challenge for the province continues to be the plentiful supply of homes available for sale — many of them condos — in the Winnipeg market, although the second quarter witnessed some improvement with new listings falling modestly,’ said Craig Wright, RBC’s chief economist, in a press release. ‘Some of the recent absorption issues in the condo market are a result of a wave of new multi-unit completions in Winnipeg last year.’”

The Star Phoenix. “Despite lower housing market activity in the past year, housing affordability actually decreased for single-detached homes in Saskatchewan in the second quarter, while improving slightly for condos, according to RBC. Condos have been in oversupply for a year to 18 months, especially in Regina, which has caused the affordability index there to improve to 24.5 per cent in the second quarter and slightly ahead of the 30-year average of 24.2 per cent.”

“‘On the supply side, there was a bit of an overshoot and the market is adjusting,’ said Robert Hogue, senior economist with RBC.”

The Calgary Herald. “The Calgary Real Estate Board said MLS sales totalled 1,643 in August, down 27 per cent from a year ago. The average MLS sale price in Calgary slid 1.9 per cent last month to $466,570, though the median price edged up 0.5 per cent to $422,500. ‘Thirteen months into the oil downturn combined with additional layoffs and political uncertainty will now push sellers to begin to adjust their prices downward if they wish to move their property,’ said Don Campbell, senior analyst with the Real Estate Investment Network.”

“New listings fell by 12.7 per cent in August to 2,733, while active listings were up 12.1 per cent to 5,146 at month’s end. The apartment (condo) sector was particularly hit hard in August with sales down nearly 39 per cent from a year ago. The average sale price dropped by 10.5 per cent.”

“Jyoti Gondek, director of the Westman Centre for Real Estate Studies at the University of Calgary’s Haskayne School of Business, said there is data to indicate homeowners won’t move unless they can get a job that offers similar or higher wage than what they have. ‘When you look at the impact of the labour market on housing it gets difficult for homeowners to pick up and leave and go elsewhere for a job if there isn’t one available,’ she said. ‘So we tend to see a lot of people who are in ownership situations try to ride their unemployment or they’ll go into a different field. They may accept something at a lower wage. They may even go part-time or try a business from home.”

“‘They’ll try a lot of different options because they’ve got money tied up in their home that they can’t afford to lose.’”

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September 1, 2015

Starting To Get Nervous About Prices

CNBC reports on Colorado. “Houses have been flying off the shelves for the past six months, but the sales pace is starting to slow, and could in fact decelerate more dramatically in some of the hottest markets come winter. Real estate agents and homebuilders say they are starting to see more buyers balk at high prices and shy away from bidding wars. ‘We definitely saw a bit of a cool toward the end of July. People started to get nervous about rising prices,’ said Jill Schafer, an agent at Kentwood Real Estate in Denver.”

The Boston Globe in Massachusetts. “For several years, wealthy Chinese have been snapping up homes in high-end neighborhoods from Cambridge to Wellesley, while institutional investors, such as some of China’s big insurance companies, have provided financing for pricey condo towers under construction. There is anecdotal evidence of some pullback. Patty Chen, a Wellesley entrepreneur who helps Chinese investors find houses in the Boston area, said she has seen some would-be buyers hold off this summer. ‘Some are nervous because of the stock crash,’ Chen said. ‘I think we are in a ‘buffer period’ where Chinese just want to wait out the volatility.’”

The Midland Reporter Telegram in Texas. “Warren Ivey, a Midland Realtor with the Texas Association of Realtors, said buyers are still hesitant because of the oil economy but still want to move out of rentals and into a home. Ivey said that there is still no pattern for why sellers are offloading their homes. While the number of homes on the market are nearly 70 percent higher than the same time last year, they are still below the year’s peak of 533 homes on the market in March, according to the PBBOR’s figures.”

“‘Some of our buyers, in the past, when they make an offer on a home, and they discover that they got beat out because there were three other offers on a property. When that happens to them, they get discouraged, and, a lot of times, they say never mind, I don’t want to play that game,’ Ivey said. ‘So with this increase in inventory, this might be enough to push those people back into the home buying market.’”

From Michigan Live. “Ann Arbor’s annual fall housing shuffle is in full swing, with University of Michigan students flocking back into town and other renters beginning new apartment leases. But even with the start of the fall semester just around the corner, many apartments near downtown and campus are still available to rent. Landlords who are used to having fall leases signed long before now say this is a new phenomenon, and some are lowering prices to stay competitive.”

“‘It doesn’t take a rocket scientist to figure out there’s been an unbelievable increase in the supply of downtown apartments in the last few years,’ said Jason Costello, co-owner of Cabrio Properties, which has about 350 rental units in Ann Arbor. ‘It’s certainly quite a different landscape out there than it has been in the last few years for sure. We’ve reached — or probably surpassed — a saturation point of rental housing in Ann Arbor, both in the downtown area and campus area, but also just throughout the city in broader terms.’”

The Florida Times Union. “One sits on the river in San Marco, the other on the ocean in Ponte Vedra Beach. So one has docks, the other a beach. And they’re both for sale, the only two homes in Northeast Florida listed at more than $10 million. Owner Don Brindley listed the Ponte Vedra house in April and admitted there hasn’t been a lot of interest. ‘It’s a pretty small group that can afford to live out here,’ he said. ‘“It’s really a matter of luck. It could be day one, it could be year two. I’m motivated, but I don’t have to sell. I don’t owe anything on it. I can stay here until the day I drop dead.’”

“James Mussallem said he had the same problem McAfee did when it came to comparing recent sales. Still, he’s reduced his price from when he first listed it last year at $14.85 million. He had it listed with a real estate firm then. Now he’s selling it himself. ‘I interviewed brokers and asked them what’s the most expensive home they’ve sold,’ he said. ‘They $1 million, $2 million, $3 million. I sell paintings for $10 million, $20 million,’ he said. ‘I’m used to selling expensive items to rich people.’”

WIVB 4 in New York. “Local leaders expanded their ‘bank shaming’ initiative, Friday, taking aim at a ‘zombie property’ in West Seneca. The property has been vacant for about 5 years, but Town Councilman William Hanley said, there is no shortage of interest. ‘We all know somebody that would love to purchase one of these houses. For the banks to sit on them just to help their bottom line is a shame.’”

“Town officials said West Seneca is a hot real estate market, and with about 90 vacant properties in town, Town Supervisor Sheila Meegan said zombies are killing the American Dream of home ownership. ‘It is a missed opportunity for another young family to come in and enjoy this community. It is an easy fix, and that is why we don’t understand the banks’ posture.’”

PBS News Hour. “Founded in 1920, National Bureau of Economic Research is a private nonprofit research organization devoted to objective study of the American economy. The following summary was written by the NBER and doesn’t necessarily reflect the views of Making Sen$e. We will tell you, however, what the takeway is: The U.S. foreclosure crisis, so commonly referred to subprime mortgage crisis, was not in fact, just a subprime event. While it began that way, it became a much broader phenomenon and mainly included prime mortgages. The findings suggest that effective regulation cannot just focus on restricting risky subprime contracts.”

“There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.”

“The authors’ key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.”

“None of the other ‘usual suspects’ raised by previous research or public commentators — housing quality, race and gender demographics, buyer income, and speculator status — were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.”

“The authors’ findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.”

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August 31, 2015

Investors Are The First To Exit

The Calgary Herald reports from Canada. “According to the Calgary Real Estate Board, MLS sales in the Calgary apartment category this month, to Thursday, have fallen 38.1 per cent compared to the same period a year ago, with 245 transactions. The average sale price has dipped nearly 11 per cent, to $296,304. ‘If you own property in Calgary and are worried about your home’s value, it’s probably just best to wait this energy recession out and apply prudent debt management practices to your personal finances – reduce or consolidate high interest debt, make your payments on time and in full, and try to build up some emergency savings in the event that unemployment comes knocking.’ Lesley-Anne Scorgie, founder of MeVest and a bestselling author on personal finances.”

“Corinne Lyall, CREB’s president, said typically the condo market is going to be affected quicker than the detached market. ‘I think it’s because there’s more inventory available in the condo market,’ she said. ‘And there’s more choice for buyers looking in that housing segment and plus there’s not only resale inventory but as well new product available and being built currently.’”

The Cape Breton Post in Canada. “Janey Forrest has been trying to sell her three-bedroom Westmount home overlooking Sydney harbour for the past 18 months. Forres moved to Cape Breton from Mission, B.C., in December 2007, after visiting a friend in the area. She said she fell in love with the island and its low housing prices compared to the B.C. lower mainland. ‘I didn’t come here to buy a house. I just came here to visit for five days, and on the fifth day I bought this house,’ Forrest said. ‘I looked around (Sydney) and I saw what the costs were, and at that time in 2007 there was not one house for sale here. Every house I looked at had several offers on it, so I ended up buying this one.’”

“Sydney realtor Mary Ann MacCormick said it has become a classic buyers’ market, and that means sellers must remain patient as people looking to buy weigh their options. ‘For example, I may show (a client) 15 houses instead of five because there’s so much variety out there that they can choose from,’ said MacCormick. ‘And people with houses for sale have to be patient and do everything they can to make their houses appealing.’”

The Strait Times in Singapore. “Prices of completed private apartments were unchanged in June and last month although this could represent a temporary lull before they drop further. These properties are still about 3 per cent lower than a year ago and 9.8 per cent below their peak in July 2013, according to flash estimates for the NUS Singapore Residential Price Index (SRPI). Prices of small units are down 2.9 per cent year on year and have fallen about 9.5 per cent from an August 2013 peak. ‘Shoebox apartment rents and prices will be on the general downward trend, as the number of such completed properties grows, especially in suburban areas,’ said R’ST Research director Ong Kah Seng.”

From DNA India. “Here’s the big proof that real-estate prices in Mumbai are falling. A 13,000 sq ft sea-facing duplex apartment in Palm Beach Road in Navi Mumbai has been sold for Rs 12,500 per sq ft against the Rs 20,000-Rs 25,000 per sq ft quoted a few months earlier. ‘At Palm Beach, most apartments fall in the luxury segment. If rates are plummeting in this segment, it means property rates are likely to slide further. Because high-segment houses always face the first hit,’ said Pankaj Kapoor, MD, Liasea and Foras, a property research firm.”

“Kapoor said that the holding capacity of developers cannot stretch beyond a certain period. They have to pay high interests to banks, he said. ‘Investors are the first set of people to exit during a downfall. Currently, most investors are exiting because there is no significant growth or appreciation in the property market.’”

The Wall Street Journal on Brazil. “Not long ago, Brazil stood as the leading example of how a developing nation could rise toward global prominence on the force of a China-driven commodity boom. Now Brazil is looking like a symbol of something else: resource-rich nations’ habit of ending their booms with spectacular busts. ‘We went from Brazil mania to Brazil nausea,’ said Marcos Troyjo, a former Brazilian diplomat who leads a Columbia University center studying emerging markets. ‘We are looking at a lost decade, where growth stagnates, inflation is high, and, most sadly, a decade where you’ve learned nothing.’”

“China has caused turmoil in many places, but none more so than in this prime supplier of commodities to a country whose once-voracious appetite for them has dimmed. At the height of Brazil’s boom, movies and taxis in downtown São Paulo were more expensive in dollar terms than in New York. Many of Brazil’s problems were homegrown, though, said Alexandre Schwartsman, a former Brazilian central-bank official: ‘We managed to produce this recession ourselves.’”

The New Zealand Herald. “China, until this year, had been by far New Zealand’s biggest export destination, but a staggering 77 per cent decline in the value of whole milk powder exports put Australia back in the top slot in the year to March. JBWere investment strategist Bernard Doyle said the effect of Chinese capital flows could prove pivotal for property prices here and in Australia, where Chinese investment has played a part in the strength of both markets. ‘There is no doubt in my mind that if Chinese capital flows were to get crunched, it would have implications for our housing market,’ he said.”

The New York Times on China. ” In recent days, an advice column has circulated widely on China’s most popular social media phone app. It is aimed at young Chinese urban professionals. Its nuggets of wisdom include: ‘Work hard at your job so you are the last to be laid off’ and ‘In an economic crisis, liquidity is the number one priority.’ Many young middle-class Chinese who grew up during the nation’s glittering boom years, when double-digit growth was the norm, are suddenly confronting the shadow of an economic slowdown and even hints of austerity.”

“They are talking of canceling vacations and delaying weddings and even selling recently purchased apartments to have cash on hand. Those who have lost money in the ongoing stock market crash are especially anxious. One Chinese woman who posted Lin’s column on her WeChat account said it ‘echoed the zeitgeist.’ She had tried to sell an apartment but said, ‘Now I think I might hold off until the market recovers a bit.’”

“Gao Yike, 25, who works at a real estate company in the northeastern provincial capital of Harbin, said in a telephone interview that the project management department laid off employees in April. He said a growing number of midlevel and senior executives were leaving the real estate industry for technology companies and housing sales at his company were notably worse than last year. Gao had also lost half of his initial investments in the stock market. ‘The golden age of the real estate market has come to an end,’ he said.”

Bits Bucket for August 31, 2015

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August 30, 2015

A Problem With The Great Monetary Experiment

A weekend topic on recent financial markets and the housing bubble. The Los Angeles Times. “Seven years ago when the housing bubble burst, it nearly took down Wall Street and the entire U.S. economy. This week, the concern was the reverse: That the prospect of an extended dive in the stock market, or even continued volatility, might spook buyers and sellers in Southern California’s housing market. Christian Lander put an offer on a Glendale house last week, before the stock market started falling. He’s proceeding as planned, because he’s investing for the long term and doesn’t want to react to fluctuations in the market. But Lander worries that other buyers may take a different view — because he’s a seller too, looking to unload his two-bedroom condo in Koreatown.”

“‘I am just hoping it won’t freak people out that this is a bad time to buy,’ he said.”

“George Pagano, a real estate agent with Immel Team Luxury Real Estate who specializes in coastal south Orange County, said his buyers are assuming that the stock drop-off is temporary and are not changing their intentions. But some sellers have been more willing to trim their asking prices from levels he considered unrealistic. This week, the owners of a five-bedroom house in Laguna Niguel reduced their asking price by $505,000, down to $3.9 million. ‘They are taking our advice to lower their expectations,’ he said.”

“Tom Berge Jr., president of the West San Gabriel Valley Assn. of Realtors, has had a different experience. He said three or four Chinese business owners looking to invest in homes have raised concerns to him over economic turmoil in China. But it wasn’t because they might no longer be able to afford local real estate. ‘Their fear is the government is going to limit the money that can freely move out of China,’ he said.”

Interest in New Zealand. “Last week I gave a presentation about the ‘big picture’ to a gathering of government officials in Wellington. I talked about China’s economy and financial market volatility, rather on-the-money topics given this week’s global stock-market meltdown! What’s unusual about this situation is that in the past large developing countries – and China is the largest – grew quickly and steadily. They provided a buffer during the business cycles of the developed world. The news out of China suggests that buffer is not as robust as it once was. It can’t keep acting as a sponge for the rest of the world’s economic over-spill.”

“New Zealand doesn’t seem particularly well-equipped to understand, prepare for and benefit from developments in China. Economists could do a much better job than they seem to be doing. We lack a good understanding of China. And that leads on to a second problem. We don’t understand how China affects us. There is a common pattern to the capital flows from China – the capital isn’t just flowing into stock markets and bank deposits in other countries (these are usually popular because they’re well regulated and it’s easy to cash up again) but into property.”

“As a country, we’ve been caught napping. We need to move beyond a focus on dairy prices and exports. What about unprecedented capital flows from China? Are the flows permanent or just hot money? Are we making the best use of the money? What are the social consequences of escalating house prices and how can we mitigate those?”

From Reuters. “The venerable Wall Street firm of Lehman Brothers went belly-up seven years ago. Since then, the Federal Reserve has engaged in an extensive monetary campaign involving near-zero interest rates combined with the central bank’s large-scale purchases of bonds. This experiment has delivered the weakest U.S. rebound on record while spreading what author Brendan Brown calls a ‘monetary plague’ into the furthest reaches of the global economy.”

“A recent study of historical periods of deflation by the Bank for International Settlements from 1870 to the present day finds only a weak connection between deflation and economic output. The BIS makes another important point: there appears to be a much stronger connection between a collapse in asset prices, in particular real estate busts, and economic growth than between deflation and output. The BIS argues that a bursting bubble produces a large immediate loss of wealth, albeit wealth of an illusory nature, while deflation simply redistributes a much smaller amount of wealth from debtors to creditors.”

“This points to a key problem with the Fed’s ‘Great Monetary Experiment,’ namely that it has inflated asset prices to unsustainable levels. Bernanke hoped that by making people feel richer, higher asset prices would induce them to spend more. After a run of good years, however, U.S. stocks have approached bubble valuation levels. Given the dollar’s role as the global reserve currency, Fed policy has also pushed down interest rates around the world, thus stoking real estate booms from Beijing to Vancouver.”

“In the wake of the global financial crisis, low U.S. rates also fueled a global carry trade, as yield-hungry investors poured into emerging market debt. At the same time, corporate borrowers in these developing nations availed themselves of low U.S. rates by borrowing in dollars, thus creating a potentially dangerous asset-liability mismatch.”

“The trouble is that asset prices – whether stocks, bonds or property, both in the United States and abroad – are now vulnerable to any future normalization of interest rates – just as the housing bubble and the subprime mortgage crisis followed from the Fed’s attempt to exit the Alan Greenspan easy-money era.”

The Indian Express. “Global markets were surprised by China’s devaluation of its currency, the renminbi, but they shouldn’t be. This is one of the inevitable outcomes of the bursting of its stockmarket bubble and Beijing’s lacklustre efforts to save the bubble as an engine of growth for a slacking economy. Besides losing face and wasting Chinese taxpayers’ money, the government has paid dearly for its misplaced faith in the power of the state.”

“It is unclear whether Chinese leaders realise this, but their expensive attempt to support a bubble has been a huge distraction from their real top priority — implementing difficult structural reforms to sustain Chinese economic growth. Instead of investing their time and energy in financial de-leveraging, squeezing out excess manufacturing capacity and reorienting the economy away from investment to consumption, Chinese leaders now find themselves helplessly watching the erratic gyrations of stock prices.”

“While the scale, timing and haste of Beijing’s operation may shock many, it does not come as a surprise to sceptics who have always doubted the CPC’s commitment to reforms. They have watched this bad movie many times before. Every time the party has to choose between wielding the power of the state or relying on market forces, it has consistently opted for the former. In this light, China’s decision to devalue its currency should not come as a surprise at all. As strong believers in the power of the state, Chinese leaders firmly believe they can fight the invisible hand. All it takes is strong political will. We can only hope that they will be proven wrong this time.”

Bits Bucket for August 30, 2015

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