A weekend topic starting with Sheila Bair, the former Chair of the FDIC. “It’s been said of academia that the fights are so vicious because the stakes are so small. The same could be said of fights over bank regulation. Take the current heated debate over banks’ obligations to lend to low and moderate income (LMI) communities under the Community Reinvestment Act (CRA). Regulators are arguing over the right metrics to use in crediting banks with CRA lending. But they are failing to ask the more fundamental question of whether increased debt is really the right way to help financially vulnerable families.”
“I do not discount the importance of these disagreements. The CRA has provided tremendous benefits to LMI neighborhoods. But the problem it was designed to address is not the problem that confronts these communities today. In 1977, the problem was a credit shortage for lower income families. Now, it is the existence of too much credit, often high-cost and aggressively marketed to financially distressed households.”
“With consumer debt once again at historic highs and disproportionately falling on low-income families, the government’s focus should be on helping those families build wealth and reduce reliance on debt. True modernization would focus on this reality.”
“Regulatory missteps during the subprime crisis underscore the risks in the government trying to direct profit-seeking banks to lend to financially inexperienced borrowers. Congress should consider reorienting CRA to wealth building, and away from lending. Let’s reward banks working with their mortgage borrowers to build home equity through regular pay-down of principal rather than giving them credit for cash-out re-financings or home equity loans.”
“Regrettably, CRA is just one example of how government policies continue to encourage borrowing in the misguided belief that debt expands economic opportunity and growth. We have piled $1.5 trillion of student debt on the future of our young people. We continue to provide massive subsidies for other forms of borrowing and further encourage it through ultra-low interest rates. But debt is not a sustainable engine for prosperity. Borrowers can only borrow so much. Eventually it needs to be repaid. A vibrant middle class supported by real wage growth and wealth accumulation is the only path to lasting economic health.”
The Wall Street Journal. “Lenders extended $2.4 trillion in home loans last year, the most since 2006, according to industry research group Inside Mortgage Finance. That was also a 46% increase from 2018. A refinancing frenzy, induced by last year’s trio of interest-rate cuts, fueled the mortgage making and helped steady the industry. Low rates aren’t always entirely good for those first-time buyers. Low rates can also inflate home prices, since borrowers can afford bigger mortgages and might bid more for homes than they otherwise would.”
From Reuters. “U.S. homebuilder PulteGroup Inc forecast full-year home sales above Wall Street estimates. Prices for first-time homes fell 8% to $342,000 in the fourth quarter, the company said, with entry level buyers accounting for 32% of all purchases. ‘Orders and gross margins would likely also benefit from looser lending standards, and we believe that this opportunity will drive multiple expansion across the group,’ Evercore analyst Stephen Kim said.”
The Globe and Mail in Canada. “Nearly 32,000 condos are scheduled to be completed this year, according to Urbanation. That is an unprecedented number of new units with about two-thirds in the city of Toronto and the remaining in the surrounding regions including York. The benchmark price, or the average asking price of a new condo minus the lowest and highest values, rose to a record high of $916,585 last year in the Greater Toronto Area, according to the Altus report.”
“Part of that is driven by investors, said Simeon Papailias, a realtor with Royal LePage Signature Realty who specializes in preconstruction sales: ‘Regular people are seeking ways to grow their wealth and investments.’”
“Three interest-rate increases created uncertainty in the market and sales of new condos and single-family homes declined in 2018. The stress test ‘disproportionally impacted single-family homes because of the higher costs,’ said David Wilkes, president of the industry group Building Industry and Land Development Association.”
“The Altus report shows the average prices for houses and condos converging. While the benchmark price for a new condo climbed over the past two years to $916,585, the benchmark price for a new single-family house fell to $1,088,317 over the same period.”
From Domain News in Australia. “All the initial places in the federal government’s First Home Loan Deposit Scheme have been snapped up, as new borrowers rush to take advantage of record-low interest rates and the renewed vigour in the property market. Jane Slack-Smith, a mortgage broker with Your Property Success, who is otherwise a fan of the scheme, agrees the property price caps are limiting. ‘The people we’re talking to are saying the caps are way too low.’”
“‘On one hand, borrowers don’t have to save as much in a deposit to take out a loan. But they need to borrow the amount they otherwise would have saved. Instead of saving $120,000 and borrowing $480,000 for a $600,000 house, you might only need to save $30,000. But your home loan will be $570,000 — and you are paying interest on the higher amount,’ says financial services firm Pitcher Partners’ client director, Jason Fallscheer.”
“Another potential problem is that in the rush to secure a property, buyers may make ill-informed choices. ‘People may not make well-researched decisions on where to buy,’ says Slack-Smith. This could cause problems down the track when the froth comes out of the property market.”
The Times of London in the UK. “Low interest rates are great for borrowers, and one in particular. From the state’s point of view, it’s magic. It can borrow more and shrink the debt burden in one miraculous go. But what if we look at low rates another way? The cheap money comes from pension funds and savers, who bake in a real-terms loss on every transaction. In the eurozone, where financial institutions have paid €25 billion to the European Central Bank to deposit money on its -0.5 per cent interest rate, the effect is even worse. Lorenzo Bini Smaghi, chairman of Société Générale, and Frank Appel, the Deutsche Post boss, call negative rates a tax.”
“‘Who pays the bill?’ Mr Appel asked at Davos, before answering his own question. ‘The citizens. So it is a hidden tax. If you start with that language, you probably get to different conclusions about what is going on.’”
“Twelve years after the financial crisis, with rates more or less unchanged, it is time to call out easy monetary policy for what it is: a tax on the future. There was never much secret about it, anyway. The defining idea was ‘financial repression,’ to use sub-inflation interest rates to shrink sky-high levels of public debt. Low interest rates do not create growth, they merely borrow it from tomorrow.”
“As Lord King of Lothbury, the former Bank of England governor, wrote in The End of Alchemy: ‘This is a short-term effect. After a time, tomorrow becomes today. As time passes, we will be digging larger holes in future demand. The result is a self-reinforcing path of weak growth.’”
“Cheap money caused the last crisis and is storing up the next. Not in the banks this time, but in the younger generation. Andrew Bailey, the incoming governor, has warned of a looming savings crisis because the young can neither earn interest income nor keep up with ballooning asset prices.”
“Viewed over a lifetime, they have more non-property debt, buy homes later in life and will need larger mortgages that take much longer to repay than previous generations, leaving less time to save for retirement. It is their future that low rates tax, the consequences of which are not yet clear — much as policymakers blithely celebrated the democratisation of debt before the 2008 crisis.”
“Low rates keep growth ticking over now at the expense of future stability. The Bank’s analysis says that low rates dull productivity by silting up the engine of creative destruction and misallocating capital. Global debt levels are higher than ever, too. Cheap money spared us a worse crisis but is now the problem. What may be great for the state will cost us dear.”