A weekend topic starting with Market Watch. “We all know that house prices are rising at a record pace right now, but few realize just how far from normal this is. For the entire 20th century, the annual average increase in home prices was only 0.2 percentage point more than the rise in the cost of living, according to the Case-Shiller home price index. From 1955 to 1998, home prices increased just 0.1 percentage point per year over the inflation rate.”
“Over shorter periods, home prices are extremely volatile, as anyone who remembers the great housing bubble of the 2000s will recall. From 1998 to 2006 (when prices peaked), nominal house prices more than doubled on average. After factoring in the loss in purchasing power due to inflation, real prices rose at an annual rate of 6.9%. Homeowners lost most of those gains over the next six years as real home prices fell at a 7.1% annual rate.”
“Since 2012, home prices have been on a tear, especially in the 18 months since the coronavirus upended the economy. From February 2012 to February 2020, the real rate of return was 4.3% per year. Since the virus hit, inflation-adjusted home prices are up 11.8% annualized. Which means real house prices have been rising about 100 times faster than they did from 1955 to 1998. This is not sustainable. Over time, home prices can’t grow much faster than household incomes.”
From True Jersey. “The red hot residential real estate market is beginning to cool slightly and is expected to continue that trend for the rest of the year. New Jersey has seen four consecutive months where home buying demand is running at a ‘significantly slower pace than last year,’ said Jeffrey Otteau, a real estate economist and president of the Otteau Group. ‘It’s not that it’s collapsing,’ he said. ‘It’s normalizing.’”
“The reason sales are down, he said, is because home prices have risen so much that they’re becoming unaffordable even with low interest rates. Another factor slowing home sales overall is that home prices rose 12% in 2020 and are on pace to rise 17% this year, Otteau said, adding that prices grew an average of about 3% for each of the prior 7 years.”
“‘House prices can only rise as fast as salaries,’ he said. ‘After a few years of that (faster than salary growth) banks won’t lend buyers enough money to afford a house. Anytime home prices go up faster than salaries there must be a correction to follow.’”
The Globe and Mail in Canada. “There was a bevy of promises made during the federal election to address the housing crisis, but scant few that addressed truly affordable housing, say some housing experts. Tsur Somerville, University of British Columbia professor in real estate finance: ‘I think fundamentally what we are talking about is we’re looking for bogeymen, rather than wanting to make hard choices. Building lots of social housing is an expensive, hard choice. Allowing more supply and changing of neighbourhoods is a hard choice. There isn’t a magic-bullet solution that solves a problem in places with rapidly growing house prices, if that stuff is demand driven. We could … cut all house prices, but you’re not going to get re-elected cutting house prices 25 per cent. It would solve one problem and create a whole bunch of others, such as a major recession … bankruptcy … people all of a sudden not having retirement.’”
From Stuff New Zealand. “Slower house price increases and regional price volatility reflect an uncertain market at a turning point, a property researcher says. CoreLogic head of research Nick Goodall said inconsistent sales prices were being seen across markets and this was reflective of uncertainty. ‘This is what can happen at turning points. Buyers ease back, but vendors won’t budge, so sales activity tends to decline without too much immediate impact on prices.’”
“Stretched affordability, tighter lending conditions and rising interest rates which would impact on the number of potential buyers, he said. ‘Investors are facing a much more regulated market and owner occupiers are about to have loan-to-value restrictions further tightened which will impact first-home buyers the most. Simply put, although people might want to buy, fewer people will be able to borrow the amount of money required and this will further reduce market activity.’”
From Daily Mail Australia. “Australians earning average salaries could soon struggle to get home loan approval to buy a house in Sydney or Melbourne under a looming mortgage crackdown that could drive down property prices. Houses in Australia’s two biggest cities are typically selling for more than $1 million which would put them out of reach for a single borrower earning an average, full-time salary of $90,329. Even Australia’s mid-priced home in smaller capital cities and regional areas is now virtually out of reach for someone earning close to six figures.”
“In just one year the proportion of new loans where borrowers owed the bank six times more than they earned before tax soared from 16 per cent to 21.9 per cent, as of June 2021. At that level, borrowers are more likely to be in mortgage stress where they can barely meet their monthly mortgage repayments after paying their other bills and living costs like food and petrol.”
“APRA, the banking regulator, acts to stop the market from overheating and causing a property bubble. It did this in 2017 following a 68 per cent surge in Sydney property prices over five years but this caused prices to fall 15.3 per cent over two years. Apart from a Covid interruption in early 2020, the market surged again and is at record highs. The 20.3 per cent national annual surge was the fastest since June 1989.”
“The last time APRA cracked down on home loan rules, Sydney house prices fell by 15.3 per cent or $160,000 between July 2017 and May 2019. Median prices dived from just over $1million to $880,000. A 15.3 per cent plunge now would see Sydney’s median house price dive by $198,000.”
“‘There are some people getting loans at eight times income at the moment or more – that really is too high on any measure even with low interest rates,’ Digital Finance Analytics principal Martin North said. ‘Without macroprudential controls, that will allow house prices to continue to bubble higher, people are getting much bigger mortgages than previously. ‘We are close to the limit given the current income profile of households relative to the property prices.’”
“Aussie Home Loans founder John Symond said the banks were more likely to tighten lending rules themselves rather than wait for the regulator with price increases geographically widespread. ‘The last thing a bank wants to do is have a problem account and look at the possibility of having to turf people out of their homes,’ he told Daily Mail Australia.”
From News.com.au. “It’s now clear the Evergrande saga has exposed a massive problem facing China today. Evergrande’s spectacular downfall began as China’s real estate market soared, with demand for homes in cities such as Beijing and Shanghai sending prices skyrocketing. The company took out a string of loans and expanded rapidly, snapping up assets and making the most of China’s thriving economy.”
“But when property prices began to drop in smaller cities, and when the Chinese government rolled out measures to curtail over-the-top property borrowing, it left Evergrande in the lurch, with mountains of debt. Leland Miller, the chief executive officer of the consulting firm China Beige Book, said the Evergrande situation proved China’s previous growth model would not survive.”
“‘This is the beginning of the end of China’s growth model as we know it,’ he said. ‘The term ‘paradigm shift’ is always overused, so people tend to ignore it. But that’s a good way of describing what’s happening right now.’”
“‘Evergrande’s struggles have exposed the flaws of the Chinese financial system — unrestrained borrowing, expansion and corruption,’ a recent New York Times analysis of the nightmare reads. ‘The company’s crisis is testing the resolve of Chinese leaders’ efforts to reform as they chart a new course for the country’s economy. If they save Evergrande, they risk sending a message that some companies are still too big to fail. If they don’t, as many as 1.6 million home buyers waiting for unfinished apartments and hundreds of small businesses, creditors and banks may lose their money.’”
The Post Independent in Colorado. “The nation has seen two banking crises since the Great Depression of the 1930s: the Savings and Loan implosion of the 1980s and the Great Meltdown, which hit fast and hard in 2008. In each case, Congress, as well as state and federal regulators responded with new laws and regs to correct the perceived causes. Whereupon all heaved a sigh of relief, grateful that the nightmare was over, and everybody could go back to making money, getting elected, or writing up banks at examinations for various violations.”
“Yet the two recent debacles occurred only about 23 years apart. In the wake of both events, one major piece of legislation, as well as a few minor statutes, were enacted. The big dog law in response to the S&L mess was the Financial Institutions Reform and Recovery Act (FIRREA). The Great Meltdown triggered the passage of the so-called Dodd-Frank Act.”
“Will Dodd-Frank prevent a future spate of bank failures following on, or followed by, a severely retracting economy? Probably not. Here’s why: No law or regulation can eliminate, or even obviate, two indelible elements of the fabric of financial activity: human nature and the law of supply and demand. Both are hard-wired into our particular cosmos. Bank failures will inevitably be a byproduct of a lot of money on the table and the banking business model is quite simply making a profit on the movement of that money, and you can make a lot of money when you convert moving cash into loan assets.”
“When there’s a lot of money on the table, as in the ’80s with the deregulation of the nation’s S&Ls, or in 2008, when the planetary demand for mortgage backed securities (MBS) created a housing bubble, then supply outstrips demand, and the value of the assets backing the loans decreases. Good loans become questionable quickly, average ones become bad assets almost overnight, and the risky deals that looked like good bets morph into losses immediately. When the money’s on the table, everybody jostles for a seat. Most are good borrowers, some aren’t, and then there’s the sprinkling of crooks, just to spice up the fare. That’s the human nature side of the equation.”
“Neither the federal or state governments can write a statute or regulation to repeal the law of supply and demand. And when an economic train wreck approaches, banks are standing smack in the middle of the track. We don’t know where and when there’ll be enough money on the table to trip the supply/demand balance ratio in the wrong direction: Will it be the stock market? Commercial real estate? Once again, residential real estate? Junk bonds?”
“I’ll go back to a lesson I was privileged to receive way back in the last century. The chairman of Aspen Savings was a gentleman named Mike Conviser, a graduate of the Wharton School, who taught me a lot, a little of which I retained. Mike told how, after he graduated from the University of Pennsylvania, he went to work in Manhattan for James Talcott and Co., at that time one of the largest factoring operations in the world. Since he was single and the new guy, his job was to be first on the scene when a deal went bad. He’d get the file from his boss on a Friday and be on a plane Sunday or early Monday to the site of the disaster. Over the weekend, and on the way, he would pore over the file and wonder, ‘How could this deal ever have gone bad. It looks like every contingency was considered and covered.’”
“But, he explained, ‘It was always what nobody thought of or everybody figured couldn’t possibly happen.’ So, I suspect, it will be with the next bank crisis. But we’ll know it when we see it.”