A weekend topic starting with BBN Times. “The amount of wealth in an economy should be related to the amount of income. For example, wealth in real estate will be linked to the income that people have available to pay for housing. The McKinsey Global Institute lays out some facts and offers some possible interpretations. Economic growth has been sluggish over the past two decades in advanced economies, but net worth, which long tracked GDP growth, has soared in relation to it. This divergence has emerged as asset prices rose sharply—and are now almost 50 percent higher than the long-run average relative to income.”
“Increased investment in the post pandemic recovery, in the digital economy, or in sustainability might alter the savings-investment dynamic and put pressure on the unusually low interest rates currently in place around the world, for example. This would lead to a material decline in real estate values that have underpinned the growth in global net worth for the past two decades.”
“We estimate that net worth relative to GDP could decline by as much as one-third if the relationship between wealth and income returned to its average during the three decades prior to 2000. Not only is the sustainability of the expanded balance sheet in question; so too is its desirability, given some of the drivers and potential consequences of the expansion. For example, is it healthy for the economy that high house prices rather than investment in productive assets are the engine of growth, and that wealth is mostly built from price increases on existing wealth?”
The Tacoma Daily Index in Washington. “When it comes to cost, a generation ago, a home cost about three times the average income – in 2021, in most metro areas, that ratio is closer to seven times average annual income. And if you think housing is split between the haves and the have-nots, earned income is even more extreme. If you have a home, in the past few years values have increased by up to 20% (or more) annually in some areas and even in lower priced areas by about 10%.”
“Equity increases, and as it does, those with equity have increased their wealth dramatically, and those without equity are being left even further behind. In neither case is this growth or loss in net worth deliberate or a reflection of moral or financial rectitude. Our housing ‘boom’ (steady increase) in prices has been essentially uninterrupted since 2012 – by far the longest housing boom in US history.”
“As always happens in the fall, housing sales have slowed, or at least (to a degree) stabilized. Bidding wars have largely retreated, and houses stay on the market a bit longer. I think it’s inevitable that housing prices will go down, but when, and by how much is anyone’s guess.”
From Bisnow. “CRE finance firm Walker & Dunlop is run by industry experts who spend their days studying the market to advise their clients. Senior managing director, capital markets, Aaron Appel said he believes that multifamily and industrial, while possibly not overpriced, certainly have rent expectations that investors need to hit to meet their target returns that are astronomical. The words he used to describe 2022 were ‘more of the same,’ and if he had $100M, he said he would put it into Bitcoin.”
The Los Angeles Times in California. “There’s something endearing, even adorable, in the faith shown in the power of a sports arena‘s name. Take the excitement about the rechristening of Staples Center as Crypto.com Arena. The change will take place on Christmas Day. To Kris Marszalek, chief executive of Crypto.com, that will be a red-letter day. ‘In the next few years, people will look back at this moment as the moment when crypto crossed the chasm into the mainstream.’”
“History tells us that naming rights to sports venues signal, at best, a very short-term prominence of the named companies, and at worst a high-water mark followed by a downslide. For the venue owner, they can turn into an embarrassment when the name holder goes bust, or worse.”
“Remember Enron Field? That was the name of the Houston Astros’ ballpark starting in 1999, when the energy company reached a 30-year, $100-million deal for the rights. Three years later Enron was bankrupt, its name synonymous with corporate fraud. The Astros bought back the rights for $2.1 million in 2002. The field is now named Minute Maid Park.”
From Yahoo Finance. “Dottie Herman, vice-chair at Douglas Elliman Real Estate, discusses the ‘crazy’ housing market. ‘I think that you still have a small window where you can still get a little bit less than you could have pre-pandemic, but that’s really narrowing. And the future of, you know, New York City, although it has a few things, a few challenges left, is really going to be even bigger and better– and a little different. A lot of young people who were priced out of New York, they are able to buy now. So it’s all good.’”
From the comments: “Not True. My Manhattan Property is down 25% due to DeBozo, Taxes, Crime, Boarded up Businesses, Hyper-Regulation of SMB’s, Business & Individual/Family Flight to other States, Crime, Homeless & Mentally Ill on every corner.”
“Propaganda piece. chip shortages, supply disruptions, currency issues….it is a Zoros-Faction (that is commissioned by the CentralBunkCortel), coordinated attack on freedom. (look up Joseph Buttigieg… Gramscian-Marxist).”
The Globe and Mail. “Inflation is running at its hottest pace in three decades. So is the rhetoric around it. The U.S. Federal Reserve and other central banks are risking ‘an otherwise-avoidable recession’ if they don’t leap into action and start tightening policy, warns Mohammed El-Erian, the international money manager.”
“Policy makers have learned over the past few decades to hike their key interest rates when prices are rising. The goal is to put a lid on inflation by making it prohibitively expensive to borrow. But that is not happening this time around In fact, if you subtract the inflation rate from the central bank rate to arrive at the real cost of borrowing from the central bank, many countries now seem to be doubling down on their easy money policies.”
“But there is another side to this story that also deserves to be aired. It hinges on the belief that the pandemic has propelled us into unprecedented territory. Never before have countries deliberately shut down huge swaths of their economies while simultaneously showering money on workers and companies. What may be restraining an even more violent market reaction is the conviction that the Fed and the Bank of Canada are not prepared to sacrifice the decades of hard work they have put in building their reputations as inflation fighters.”
The Brisbane Times. “Last week the financial regulator warned banks it might play a part in cooling the sizzling Australian home lending market. On Monday its chairman Wayne Byres appeared to tone down the risk the regulator would further stick its regulatory oar into mortgage lending. For the hordes of bank investors hanging off every word from the Australian Prudential Regulation Authority’s Byres, it was frustrating.”
“It was like watching APRA deftly walking a tightrope between ensuring the stability of the financial system and a disinclination to intervene. A lean one way before restoring balance as the audience oohs and ahhs. And speculation around using debt-to-income or loan-to-valuation tools gained a bit of currency last week when, via a consultation update, APRA asked banks to ensure they had ‘the ability to limit’ lending to riskier borrowers, based on these measures.”
“‘The step we took (is) like buying a little more insurance so that borrowers will not be overextended themselves,’ Byres said. APRA’s response requires it to work out the problem that needs to be solved and then what tools can be employed for different problems, he said. ‘You don’t have to hit everything with a hammer,’ was his analogy.”
From Mortgage Professional New Zealand. “With the Reserve Bank’s next OCR decision due next week, there seems to be a full consensus that we can expect to see another hike, with some commentators even speculating that we may see a ‘double hike’ to bring the cash rate up to 1%. The OCR is currently sitting at 0.50%, having been raised from 0.25% in October. Most major banks say that we can now expect to see a consistent raising of the OCR over the next several months, though it is more difficult to predict where and when it is likely to peak.”
“Sharon Zollner, chief economist at ANZ said that New Zealand is ahead of most major economies, with countries like the US and Australia still firmly on stimulatory settings – something she said needs to be handled carefully, in order to avoid a ‘hard landing.’”
“‘Household debt is now at record highs relative to income, and household debt servicing has not been at record highs though because interest rates have been so low, and that’s more than offset the increase in debt levels,’ she explained. ‘But it is a more fragile situation than in, say, the 1990s, where we had quite low debt but super high, double digit mortgage rates. That was quite easy for the Reserve Bank to ease the pressure on heavily indebted households when trouble struck, just by slashing interest rates. But the OCR now is 1%, and if more trouble were to strike, there would be very little that we could do to ease the pressure on households who in hindsight might have borrowed too much.’”
“‘As interest rates rise, households will become much more price sensitive, and it will become more difficult for retailers to pass costs on,’ she added. ‘That’s not fun for the retailers, but tightening monetary conditions isn’t fun. We caused a boom, and now we’ve got to rein it in and try to avoid a bust.’”