A weekend topic starting with the Vancouver Sun in Canada. “‘The real-estate development business is very much about market timing,’ said Arny Wise, who spent his career planning and developing scores of housing projects in Toronto and Vancouver. ‘They want to time it so their development goes to market when the market is good. They don’t want to sell into a crappy market,’ said Wise, who does not condemn developers’ practice of aiming to sell houses when prices are riding an inflationary wave. Like other businesses, he said, developers are out to earn profits.”
“But since politicians in B.C. and Ontario are maintaining that building a massive amount of new housing supply is the solution to lowering astronomical prices, Vancouver-based Wise said they need to recognize reality — ‘There is no reason to expect developers to accomplish a social good unless (politicians) force them to.’”
“University of Sydney professor Cameron Murray found that developers don’t necessarily build more housing faster after politicians soften rules and hike zoning density to encourage them to do so. ‘The amount of zoned supply in a region is unrelated to the rate of new housing supply,’ Murray writes. ‘Housing developers routinely delay housing production to capitalize on market cycles.’”
“The Ontario premier is backing a task-force recommendation to build more than 1.5 million homes in the next decade. But a Bank of Montreal economist, Robert Kavcic, said the target is impossible and ill-conceived, in part because ‘most of this supply will come to completion after demand has rolled over and the millennial-led demographic boom has peaked, saturating the market for a long, long time.’”
“Both Kavcic and Wise believe the overpriced housing bubbles of Toronto and Vancouver are due for a crash.”
The Corner EU. “The Spanish system lends itself to great confusion. It is therefore difficult to diagnose. This situation has been dragging on since the recent real estate bubble and the poor handling of the ensuing crisis. Perhaps as a consequence of the doctrine of deregulation. But this situation continues to be favoured by the existence of an ineffective regulatory framework, based on the elusive principle that it is not the actions of the present that should count, but the forecasts of the future.”
“The short-term economic and political costs of turbulence were thus avoided by giving priority to maintaining a semblance of stability, without taking into account that problems that are not addressed when they arise tend to grow faster than possible improvements in the context. The current regulatory capital concept collapses the concept of equity, the basic indicator for measuring insolvency, and considers capital as a non-content component such as goodwill and deferred tax credits.”
“Moreover, the regulations continue to base the valuation of assets on legal default and not on the debtor’s ability to pay, which is no longer checked by supervisors. All in all, the information provided by institutions in terms of capital and results may be debatable or highly questionable.”
“But perhaps the most worrying consequence of this framework is that a large part of the bad assets may not be provisioned and may remain on banks’ balance sheets or be shifted to investee special purpose vehicles. As a result, in addition to the possible losses that they entail, they give rise to new current losses. Because they do not generate income but their financing does entail costs.”
“As a result, the accounts of some banks show an NPL ratio of 4% or 5%, which does not reflect the real quality of the assets, thus leading to highly insufficient provisions. They also show excellent capital ratios, which are misleading. The best analyst could be wrong, because if he analysed bad information he came to superficial or wrong conclusions. As the computer scientists say ‘garbage in, garbage out’. We have the recent example of the fictitious accounts declared by the failed savings banks. And, of course, the drama of Banco Popular, whose resolution revealed a loss greater than its capital, when just a month earlier its own accounts showed a highly positive net worth.”
“Regardless of the uniqueness of the practices described here, one wonders whether they can be understood in the economic context of our country. Because we are still recovering from the severe slump caused by the pandemic and many companies and sectors are facing serious problems that may have been covered up by the ‘life-saving’ measures and the huge abundance of liquidity, problems that may emerge when these measures expire and liquidity on the markets is significantly reduced.”
From Radio New Zealand. “The Reserve Bank’s quarter percentage point rise in the official cash rate may have put an end to the one ‘saving grace’ in the housing market. CoreLogic chief property economist Kelvin Davidson said while the OCR would ‘definitely’ keep moving up, the housing market itself was in slowdown. ‘If the OCR goes up another two or three percentage points that could easily pass through to mortgage rates of pushing 6 percent.’”
“Although many people were insulated by fixed rates for now, homeowners should prepare to re-fix at a higher interest rate, Davidson said. ‘People with mortgages need to remember the bank has already tested them at a higher service rate anyway and often that service rate is actually well above 6 percent. It’s not panic stations yet but people obviously need to be prepared for higher mortgage costs.’”
“About half of loans were due to be re-financed over the next 12 months, he said. ‘Lots of people are fixed and that gives them some insulation but there’s also a lot of loans rolling off this year so on one hand, yes you’re fixed, but that fixed period doesn’t last very long.’”
The Sydney Morning Herald in Australia. “Property price growth in Melbourne and Sydney has stalled, as affordability constraints and higher fixed-interest rate mortgage rates start to bite and crimp demand. Westpac’s economists, in a report released this week entitled Calm before the storm, said the property price boom is showing clear signs of slowing. They are expecting a ‘broad-based correction phase’ to begin later this year and into 2023 and 2024, as interest rates rise.”
“‘Deteriorating affordability has continued to weigh on buyer sentiment but interest-rate considerations have yet to really impact,’ the economists said. ‘With affordability already stretched in many markets, rate rises will have a direct impact on the borrowing capacity of buyers and their ability and willingness to sustain high prices.’”
From Barron’s. “Daryl Fairweather is the chief economist at Redfin. Imagine an island ruled by a benevolent queen. When a famine threatens the island’s prosperity, the queen uses her power to save the economy. It works. But before the islanders can live happily ever after, the queen must decide what to do with her power, which she has pledged to use without favor on behalf of all her subjects. How can the queen let go of her reins on the economy while minimizing the harm done to her citizens during the transition?”
“This fable can help us understand the Fed’s predicament when it comes to unwinding the $2.66 trillion mortgage-backed securities portfolio that it accumulated while saving the housing market from collapse in 2009 and preventing a potential collapse in 2020. Like the queen in our fable, the Fed faces difficult choices about how to withdraw its extraordinary intervention in the economy. Housing prices have spiked during the pandemic, increasing 30% in just two years.”
“The Fed is in a similar predicament to the queen, and has to decide whom to favor, the borrower or the banker. The Fed would like to get out of the MBS market. It only intervened in 2020 to ensure the housing market would remain steady, but now demand for homes is far outpacing supply. Investment bankers have made it clear that they want the Fed to stop buying MBS and get inflation under control.”
“Like the island’s banker, investment bankers are concerned there is too much money chasing unprofitable investments. If true, this could cause runaway inflation or asset bubbles. However, as the Fed winds down its MBS purchases and raises the federal funds rate, every potential homeowner who wasn’t able to lock in a low monthly mortgage payment on a home will have missed their chance.”
“During the pandemic it has largely been the wealthy who have benefited from cheap debt. It is unfortunate that just as many Americans are getting back on their feet, the Fed will be making homeownership less attainable, but it can at least soften the blow by moving slowly. I am certain the Fed, like the queen, wishes it could remain neutral, but that’s impossible now.”