A weekend topic starting with ABC News in Australia. “Ever had that sinking feeling you’re in over your head, that you’ll never be able to get on top of that mountain of debt? And what about interest rates? How on earth would we cope if they ever returned to anything like normal? The good news, at least for those mortgaged to the hilt, is that rates are likely to stay extremely low for a very long time. The reason is that hiking rates would cause way too much pain and possibly trigger a recession even worse than the crisis that shook Western capitalism to its core a decade ago. That’s because central banks globally have boxed themselves into a corner. They literally have nowhere to go.”
“They’ve encouraged so many individuals, corporations and governments to borrow so much, by slashing interest rates to their lowest level in 5,000 years, that any future rate hikes potentially could cause enormous damage. Here at home, it’s all about housing. Real estate now drives our domestic economy and, rather than attempting to cool a runaway market, the Reserve Bank once again is fuelling another boom. It has thrown caution to the wind and is banking on housing as its main weapon to keep our sputtering economy from stalling.”
“Two years ago, our monetary mandarins were fretting about a housing bubble blowing up the economy and successfully engineered a gradual deflation. But as housing prices went south, households stopped spending and the residential construction boom ground to a halt, threatening to push unemployment higher.Even worse, the price declines left thousands of households carrying more debt than the value of their property, particularly in Western Australia.”
“That posed a serious risk to the banking system, given our housing debt has trebled over the past 15 years to around $1.8 trillion.”
From Salon on New York. “For years now, New York City, like London and other major cities, have seen their real estate markets distorted by the super wealthy — ex-dictators, financiers, oligarchs and their ilk — who buy trophy properties not to live in, but for investment. That prompted real estate developers, whose political clout was considerable, to target the affordable neighborhoods where the working class had lived for generations.”
“In 2015 the New York Times reported that the New York City Budget Office had ‘determined that nearly one quarter of the apartments in New York City are not used as primary residences, serving either as pieds-à-terre or investment properties that are rented out to tenants.’ This is turning New York City housing into a luxury good, which really got traction during Bloomberg’s tenure, had consequences. Between 2005 and 2017, according to the New York City Comptroller Scott Stringer, the city lost 425,000 affordable housing units.”
“In December 2013, New York Times writer Andrea Elliot wrote ‘Invisible Child,’ a profile of the daily existence of Dasani, an 11-year-old girl who was homeless. The Times reported that Dasani was one of 280 children at this particular city shelter at the end of Bloomberg reign that were part of ‘a vast and invisible tribe of more than 22,000 homeless children in New York, the highest number since the Great Depression, in the most unequal metropolis in America.’”
“When asked on the radio to comment on the New York Times reporting, Bloomberg conceded the homeless 11-year-old was growing up in ‘very challenging circumstance and fighting some difficult odds.’ He praised the role of her teacher and principal in helping her ‘break the cycle of poverty that she was born into. This kid was dealt a bad hand. I don’t know quite why, that’s just the way god works. Sometimes some of us are lucky and some of us are not.’”
From Swissinfo. “There are enough of them, but in the wrong places – this is the apartment and housing market in Switzerland. In the heart of cities like Zurich, Geneva and Basel, it’s not unusual to find hundreds of people queuing to visit a flat that’s been put up for rent. But in rural areas, it’s more common to find newly built housing developments sitting empty. In peripheral regions of the country, such as cantons Jura or Ticino, entire villages have fallen into disrepair.”
“Even in the economically prosperous region of central Switzerland, new developments sprout up in the rural areas only to remain half empty. Occupants are so hard to come by that landlords try to lure them with offers of months of rent-free living, gift cards, or subsidized train passes. Overall, the number of vacant flats in Switzerland has risen from 56,518 in 2016 to over 75,000 in 2019.”
“And the reason for such a strange development is that there is big pressure to invest, with pension funds, investment funds and private investors all keen to turn a profit. ‘Bonds are no longer interesting, many people have gotten their fingers burned with shares, and if you leave your money in a bank account, you will be charged negative interest,’ says Michael Hauser, a real estate specialist. ‘That’s why some investors think, ‘even if I rent just two flats out of ten, it’s still the least bad way of investing my money.’”
“Not to mention that in recent years, half of the return on real estate has been merely accounting gains resulting from property revaluation. In other words, as long as real estate prices continue to rise in Switzerland, new homes will continue to appear, and developers will build them anywhere. That’s even if constructing in the wrong place is nonsensical, both from an economic standpoint and a sustainable development point of view, says Hauser.”
“‘From an environmental standpoint, it would be wiser to keep your money in the bank than to invest in property that no one needs,’ he says. So what’s in store for the housing market? According to Hauser, the vacancy rate in the rural areas is structural. ‘Of course there will be hardly any vacancy in the cities,’ he predicts, ‘but the prices there will eventually go down.’”
The Irish Times. “It appears as though we’ve got a collective fondness for instability in the property market, something illustrated by a Central Bank letter released earlier this week. It said that 34,000 homes will have to be built each year for the next decade just to meet demand. This year, we’re expecting to build just 21,000. The madness of our property market becomes ever clearer when you learn that we built about 60,000 houses annually in the run up to the crash on average, a figure that fell to just 10,500 a year between 2009 and 2018.”
“You might expect that property prices would be rising, so significant is demand and so lacking is supply. Not so, however, the Central Statistics Office said on Thursday. Prices are rising at a rate of 0.9 per cent a year, the slowest rate of increase since December 2007. In Dún Laoghaire-Rathdown, seen as a bellwether for the wider economy, prices were down 7.5 per cent over the past year.”
The Globe and Mail in Canada. “Wasn’t the middle class in this country supposed to be struggling with the affordability of everyday living? Didn’t we just have a federal election campaign in which parties competed on ideas to help make life more affordable? Let’s take a look at some of the factors supporting the housing market, starting with the employment situation. Until last Friday, when Statistics Canada reported the loss of 71,200 jobs in November, housing appeared to have the support of a strong job market. One monthly jobs report does not make a trend, but it’s still a shock to see jobs disappearing at a level not seen since 2009.”
“Except for the job market, conditions for home buying overall seem to be favourable. But if conditions are so good, why is it widely accepted that the middle class is financially stressed? Why did the Liberal government feel it necessary to make its first act since re-election the introduction of a tax cut that targets the middle class? In this light, it’s hard to see how Canada rates a hot housing market in many cities.”
From Economy Next. “Central bankers around the world adopt poor policies which are leading to political crises, theft of income and the rise of zombie companies, but fail to admit their own mistakes, an economist said. Jim Walker, chief economist at Asianomics Group, said across most of the world, central bankers are keeping interest rates low to induce inflation, which is refusing to rise. ‘…[Y]ou would have theoretically expected a boom,’ he said in Colombo.”
“‘But in the last 10 years, we’ve generated less inflation than we’ve had with double digit interest rates,’ he said. ‘I don’t know of any central banker looking at the performance over the course of the last decade who would say ‘We’ve made a real mess of this’. I see plenty of them patting each other in the back every year and saying ‘Oh, see what a good job we’ve done saving the system. Let’s go out and try this even more’.”
“In the US, up to 2.3 trillion US dollars ‘helicopter dropped’ in to the US credit system by then Fed Chief Bernanke, ended up back in the Fed as the busted credit system failed to transmit the money into the real economy. However money flowed into developing countries with better credit systems, such as Hong Kong causing property prices to rocket and emerging economies with junk ratings to borrow enthusiastically.”
“Classical economists have pointed out that Alan Greenspan, egged on by Bernanke had fired mother of all liquidity bubbles following a ‘false inflation scare’ which ended in the Great Recession. ‘In November 2002 then governor Bernanke and then chairman Alan Greenspan misdiagnosed a benign cyclical dip in the price level,’ explained economist Steve Hanke. ‘Fearing deflation, the Fed panicked, and by July 2003 pushed the Fed funds rate down to a then record low of 1%, where it stayed for a year, allowing a flood of liquidity to hit the economy and the housing bubble to inflate.’”
“The Great Depression also came after the so-called ‘roaring 20s’ bubble fired by the Fed. Critics had blamed the policies and open market operations of the then New York Fed Governor, Benjamin Strong for the bubble, in particular a rate cut from 4.0 to 3.5 in 1927 and injecting liquidity by doubling Treasuries holdings at reserves banks to 600,000 dollars to inject liquidity.”
“Walker said central bankers are suffocating the global economy, which is leading to political ramifications. The next global crisis would be political, due to a snowballing of poor policies, he said. ‘What they are doing is suffocating the global economy and potentially causing massive political disruption and backlash against the ruling elite. That has actually happened all around the world,’ Walker said.”
Even as he was speaking, people were out in the streets in Lebanon as the country’s currency collapsed. Lebanon’s debt which was downgraded to ‘CCC’ earlier from ‘B-‘, has just been downgraded to ‘CC’ by Fitch. In Chile the currency has been collapsing since last year and people are also in the streets. Sri Lanka is suffering an output shock and higher inflation after the currency collapsed last year.”
“Low interest rates also allow unproductive, zombie companies to continue to borrow and stay in business, instead of going bankrupt and closing down, Walker said. Central banking has interfered with the creative destruction which has led to innovative growth of economies in the past, by not allowing for the destruction of zombie companies, Walker said. Poor monetary policy has ‘…allowed these companies to exist, which in turn cause more problems for the economies,’ he said. Walker said economists are bad at learning from their mistakes.”