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The Trend Of Guaranteed Profits Almost Every Time May Be Ending

A weekend topic starting with two reports from Executive Magazine. “Coming into 2018, Lebanon’s real estate market was already sputtering. The first wave of concerns was voiced by developers of luxury units. Property sales in this uppermost segment began slowing down around 2011, creating a glut of luxury-grade apartments that industry insiders estimated at a value of no less than $3 billion.”

“The mid-segment of the market came next, with a drop in the sale of $300,000 to $500,000 apartments, which mostly cater to Lebanese expats. Sales performance of that portion of the market began dipping in 2015. The central bank’s decision to close the spigot financing home loan subsidies—a near $2 billion market segment—has brought the market to a standstill.”

“Executive spoke with six developers and real estate asset management firms in September for this report. All of them agreed that today’s demand for housing is practically zero.”

“According to Abdullah Hayek, CEO of construction and real estate services firm Hayek Group, the downside of the boom was an invasion of unprofessional developers. ‘They started building the way they wanted to but not the way they should have,’ he says. ‘Most of them, since they are not professional, bought the wrong land, used inadequate designs and specifications, and incurred higher costs, and therefore wanted to sell at higher rates. That’s why we have a lot of vacant apartments these days. Those apartments were built in that interval.'”

“There have been visual cues that the property market is in a depression, more easily seen in the middle and upper class neighborhoods of Beirut. Walk around the city at night and you’ll see story after story of unlit, seemingly empty, apartments. During the day, the for-sale and for-rent signs tell the same story: There are a lot of vacant apartments in Lebanon’s capital.”

From Middle East Online. “Dark apartment windows vastly outnumber the lit in the quiet night streets of Beirut’s waterfront and central districts, a reminder of Lebanon’s long economic and real estate slump. In a typical example given by one estate agent, the owner of a penthouse apartment in a bustling part of central Beirut this summer dropped the asking price to $2.5 million, having tried unsuccessfully for three years to sell at $3.5 million.”

“Up to 4,000 new luxury apartments lie unsold around Beirut, local real estate advisers Ramco said, and banks have been re-scheduling troubled loans, real estate and banking sources said.”

“This is where the fund, Legacy One, hopes to have an impact, by tapping into demand among Lebanese diaspora wanting a connection to their homeland, at lower prices and with easy investment. Namir Cortas, head of the Real Estate Developers Association of Lebanon, said Legacy began by scouting unsold properties around $2 million, but is now looking in the $500-600,000 range and potentially lower.”

“Legacy Central Chairman Massaad Fares said the developer of a typical 30-apartment building in Beirut might have had 20 unsold for a couple of years, owe a bank around $10 million and need another $1 million to finish construction so existing customers can move in. ‘The bank is pushing him and he needs the money. The developer is really in a challenging position and we come in to save him,’ he said.”

The Asia Times. “Real estate prices in Lebanon freeze or rise, but never fall. That has long been the commonly held view of the sector in this small country on the Mediterranean, long a prime destination for Arabs and the Lebanese diaspora for its mountains and beaches.”

“It was only rational for investments in this services-based economy of limited exports and high imports to be directed mostly towards properties, which have guaranteed profits almost every time. That trend may be ending.”

“In February, the IMF warned that Lebanon’s economic situation was ‘fragile.’ ‘The traditional drivers of growth in Lebanon—tourism, real estate, and construction—remain slow and a strong rebound is unlikely soon,’ the fund said, citing central bank figures that real estate prices declined by more than 10% in 2017.”

“Between the years 2007 and 2011, the Lebanese real estate market was undeniably thriving. However, over the past few years the mythical sector known to subsume and multiply any amount of money thrown its way has been facing increasingly complicated difficulties.”

“Between 2007 and 2010, around 60% of foreign investments to Lebanon were going to real estate and most of that money was coming from the Gulf. The slowdown of the sector began in 2011, with growth in prices decelerating through 2013, followed by a massive fall in demand in 2015.”

“Once investments from the wealthy Gulf states began to diminish, real estate developers found themselves standing on thin air, surrounded by mostly high-end luxury and commercial buildings that very few Lebanese citizens could dream to afford.”

“The national Banque du Liban (BdL) in January of this year introduced housing loans with subsidized interest rates as part of a series of stimulus packages. The stimulus packages included a 278% increase in housing loans and a 112% increase in construction loans. The aim was to give the real estate sector the push it needed to keep the market from crashing.”

“The January stimulus allotted 750 billion Lebanese lira (US$500 million) to cover the population’s housing loan needs for 2018. To the surprise and dismay of the public, by March the package was declared to have been depleted.”

“Lebanon now faces a deadlock. Whichever move the government and BdL make – or don’t – will potentially induce some sort of crisis. 1) Issuing a stimulus package in Lebanese Liras will increase inflation and BdL will lose grip on its famous peg to the dollar (1,500L.L =$1).”

“2) Issuing it in US dollars means it will dip into its dollar reserves which it requires in order to secure the currency value. Already suspected to be at risky levels, that also will mean it loses grip on the peg.”

“3) Not issuing a package at all would mean that people will not be able to purchase properties and the market fails.”

“The fall of the real estate sector will also put the banking sector, and thus the government at risk. According to the IMF, around 90% of the banking sector’s investments are in the real-estate sector.”

“The Lebanese economic model is a full loop: the banking sector invests in government debt to the extent that its share is approximately 60%. In turn, the real-estate sector depends on loans from banks for both construction and buying and selling houses. If the real estate sector was to fall into crisis, the banks would follow suit.”

“The history of the Lebanese economy has marked by the capacity to continuously defer crises, but it is possible it may no longer be capable of delivering this master function.”

“The government can no longer sustain a constant debt accumulation for the banks to invest in. The real estate sector is no longer a viable investment given foreign demand has diminished and the locals can neither afford to purchase properties nor to accumulate any more private debt, as both remittances and gross national income per capita are decreasing annually.”

This Post Has 45 Comments
  1. I’ve been meaning to post this for a couple of weeks. (Two of the articles disappeared from the web at one point). It highlights how common these real estate bubbles are and how they follow similar patterns:

    ‘Lebanon now faces a deadlock. Whichever move the government and BdL make – or don’t – will potentially induce some sort of crisis’

    Easy to get into this situation, not so easy to get out. This is why manias are dangerous and should be taken seriously while there is time to act.

    1. “Easy to get into this situation”

      The problem is, it wasn’t easy to get into this situation. It took a deliberate coordinated program of increasingly extreme measures enacted over several years and most of the world, as you’ve documented so well.

      $4 trillion in QE in the US alone. How much have the ECB, JGB and Chinese debt machine printed? Negative interest rates in Scandinavia. Thousands of MSM articles and flipping tv shows selling the real estate kool aid for years. Lending standards out of the Theatre of the Absurd. Illegal short-term hotels. Negative cap rates. Interest-only helocs. Reverse mortgages. Foreclosure moratoriums. That’s all a ton of effort!

      I know your point was rhetorical. I just hope CBs and policymakers won’t be able to get away this time with the idea that they simply failed to stop a mania, when in fact they engineered one and sustained it for years, deliberately roping in new victims to keep it going.

      1. ALL of it was to protect the moneyed special interests – to keep them from having to realize the losses on their bad bets. They, after all, are the banks, the shareholders, the largest real estate holders, the politicians, et al…

  2. ‘There have been visual cues that the property market is in a depression, more easily seen in the middle and upper class neighborhoods of Beirut. Walk around the city at night and you’ll see story after story of unlit, seemingly empty, apartments. During the day, the for-sale and for-rent signs tell the same story: There are a lot of vacant apartments in Lebanon’s capital’

    Same in Miami, Manhattan, Seattle. And London! How many years now has China had 60 million empty airboxes surrounded by empty infrastructure?

  3. “There have been visual cues that the property market is in a depression, more easily seen in the middle and upper class neighborhoods of Beirut. Walk around the city at night and you’ll see story after story of unlit, seemingly empty, apartments. During the day, the for-sale and for-rent signs tell the same story: There are a lot of vacant apartments in Lebanon’s capital.”

    There are lots of dark-windowed high rise luxury condo towers in downtown San Diego as well, but nobody is discussing them in the MSM.

  4. Has “extreme fear” put your dip buying activity on hold?

    ‘White knuckle’ volatility set to test investors
    By Timothy Moore
    29 October 2018 — 6:52am
    The return of volatility has been a key market theme this year and appears likely to intensify, at least in the short term, from Wall Street to the ASX, which is set to open weaker on Monday.

    The Dow Jones Industrial Average swung wildly on Friday before closing down near 300 points, retesting investors’ tolerance for risk.

    “So much for the typical October strength in equities – a month in which the major US indices historically have gained ground 75 per cent of the time,” Tematica Research chief macro strategist Lenore Hawkins said. “We’ve seen major index support levels broken while earnings beats have been smaller than we’ve seen over the past year with revenue and forward guidance giving investors jitters.”

    Bullish investors who’ve persisted with a buy-the-dip strategy were hit hard last week. CNN’s Fear & Greed Index is now at 7, or “extreme fear”. It was at 53, or “neutral”, a month ago.

  5. The Wall Street analyst who called this stock-market rout sees another nasty drop for the S&P 500
    By Mark DeCambre
    Published: Oct 28, 2018 3:51 p.m. ET
    – Wilson predicts that the S&P 500 may fall to 2,450 or 2,500 in the coming weeks
    – Morgan Stanley analyst Michael Wilson is seeing more ugly action

    There is more pain in the pain trade ahead.

    That is according to Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, who said, during an interview on CNBC midday Thursday, that a then-current market rebound belied a market that is badly damaged and ready to sink further.

    Wilson describes current conditions as a “rolling bear market,” which began in February, and predicted that the S&P 500 index (SPX, -1.73 could fall to between 2,450 and 2,500. That represents a roughly 8% to 10% drop from the broad-market benchmark’s current levels. “And we think we get there in four to eight weeks,” Wilson said.

  6. Housing, stocks, and bonds are all crashing globally, in tandem. There’s plenty of bear food available at the optimal time to fatten up just before another hibernation begins.

  7. Have financial markets ever previously been so heavily dependent on central bank support as in the present episode?

    1. My impression is that at least some central bankers choose to live under the illusion that monetary policy has no effect on the asset markets.

      The Hill
      Opinion | Finance
      October 27, 2018 – 03:00 PM EDT
      A way for the Fed and Treasury to ease stock market turmoil
      By Douglas Carr, opinion contributor 2
      The views expressed by contributors are their own and not the view of The Hill

      The weather on March 9, 2009 was blustery with rain, characteristic for early March in Manhattan. Few filing out of the New York Stock Exchange that evening found their workday any less dismal.

      The market was off another 1 percent, continuing its downward spiral with losses over half since peaking before the financial crisis. Likely no one expected the following day would mark the beginning of the most epic surge in stock market history, a nearly 10-year-and-counting expansion with values more than tripling, uninterrupted by a single bear market with losses 20 percent or greater.

      No less epic than the market’s run were extraordinary, unprecedented efforts by major central banks to provide $10 trillion of monetary stimulus to boost their economies, which most market analysts believe contributed mightily to the stock market streak.

      Such central bank monetary stimulus has now ended. Since April, central banks have withdrawn more money from financial markets than has been put in, and, according to the banks, this will continue next year, primarily from the Federal Reserve.

      Has the Fed’s balance sheet retrenchment contributed to the recent 9-percent stock market decline? Will market pressure continue? Can the Fed reduce the pressure?

      The Fed’s initial quantitative easing monetary stimulus began in response to the financial crisis. From September to December 2008, the Fed’s assets more than doubled from $900 billion to $2.2 trillion.

      Subsequent rounds of quantitative easing from October 2010 to June 2011 and again from October 2012 through December 2014 ballooned Fed assets to $4.5 trillion, five times the pre-crisis level.

      The stock market and Fed balance sheet both plateaued during 2015. In the whole period after the 2008 crash through 2015, stock market indices were almost perfectly correlated with the Fed’s balance sheet.

      The stock market took off in 2016 despite the Fed’s quiescence. In March 2015, the European Central Bank launched a quantitative easing program to stimulate sluggish European growth and ease the euro crisis. From its November 2014 low to today, the ECB has provided $3.0 trillion of stimulus at the current exchange rate.

      As part of Prime Minister Shinzo Abe’s “Abenomics” economic program, the Bank of Japan (BOJ) accelerated its quantitative easing program in March 2013, pumping $3.4 trillion into global financial markets.

      Including the major international central banks, the nearly perfect correlation between the stock market and central bank balance sheets has continued from the financial crisis to this day.

      Even though the Fed only buys U.S. agency mortgage-backed and U.S. Treasury securities, financial markets equilibrate among classes of assets with varying risks and returns, so the Fed’s actions in one sector can flow throughout the markets.

      Important also is that many financial markets may move in synch with the U.S. stock market. Global stock markets and equity, debt and currency markets for developing countries are often closely linked, so central bank actions have worldwide ramifications.

      Looking ahead, the apparent fly in the financial markets’ ointment is the Fed’s balance sheet reduction of $50 billion per month. The ECB will cease adding assets but has no current plan to shrink. The BOJ is expected to continue growing assets around the recent pace of about $25 billion per month.

      The Fed’s goal is to bring assets down from as high as 25 percent of GDP to something resembling its pre-crisis norm around 6 percent. Some economists argue the Fed should maintain a large balance sheet.

    2. The Marketwatch people seem oblivious to the Fed’s punchbowl removal process as a factor in the stock market swoon.

      1. The key reasons behind the stock market’s ugly October fall
        By Mark DeCambre
        Published: Oct 28, 2018 7:16 p.m. ET
        The Dow has lost around 2,140 points, or 8%, since its Oct. 3 all-time high, as of Friday’s close

        Markets are falling fast. But why?

        A few short weeks ago the Dow industrials were on the verge of busting through another psychological milestone at 27,000.

        However, all that momentum has evaporated as a sweeping downturn grips financial markets, sending the Dow Jones Industrial Average (DJIA, -1.19%) tumbling more than 600 points on Wednesday and pushing the Nasdaq Composite Index (COMP, -2.06%) into correction territory for the first time since Feb. 11, characterized as a drop of at least 10% from a recent peak. The Dow has shed about 2,140 points, or 8%, since an Oct. 3 peak, as of Friday’s close.

        Check out how Friday’s’s action in the stock market is playing out

        The Dow and the S&P 500 index (SPX, -1.73%) both wiped out all their hard-fought gains over the past 10 months to turn negative for 2018. The S&P 500 is down 0.6% year to date, while the Dow is off 0.1%.

        So, what happened?

  8. Spooked by Tumult in Stocks, Doubt Fed’s Rate Path
    By Katherine Greifeld
    October 27, 2018, 9:01 PM PDT
    – Confidence in U.S. central bank’s 2019 tightening plans wanes
    – Jobs data could prove reality check for rate-hike naysayers

    The bond market is losing confidence in the Federal Reserve’s policy tightening projections after a punishing stretch for U.S. stocks.

    Traders pared wagers on 2019 rate hikes last week as disappointing corporate earnings helped drag the S&P 500 Index down 10 percent from its record high at one point Friday. Markets are now factoring in fewer than two quarter-point hikes for next year, compared with the three increases that policy makers project.

  9. When Israel and Hezbollah have their next war – and they will, sooner or later – I suspect a lot of prime Beirut real estate will be worth rather less than it is today.

  10. Sorry for off topic: here’s a crazy listing

    https://www.zillow.com/homes/for_sale/3125-Haddington-Dr-Los-Angeles,-CA,-90064_rb/

    DATE EVENT PRICE $/SQFT SOURCE
    10/10/2018 Price change $1,825,000 -7.6% $1,204 Exel Properties
    9/20/2018 Listed for sale $1,975,000 +42.6% $1,303 Exel Properties
    8/20/2018 Sold $1,385,000 — $914 Public Record

    So someone bought this in August of 2018 for $1.385 million. One of the rooms looks like someone set fire on the hardwood floor, and it does not look like any money was spent even in trying to spruce up the place. Yet, it goes back on the market ONE MONTH later for $1.975 (42% increase in ONE MONTH, hey, that’s better than Australia!).
    Now it has a “price cut” so they are “only” asking for $1.825 million.

    This one really defies definition. The only thing it has going for it is that it is in a nice, established neighborhood. But whoever buys it has to carry a mortgage of 10K a month while trying to make the place more livable. I can’t even fathom how a realtor can look at a buyer with a straight face while trying to sell this place.

    1. They’re asking $1,200 per square foot when much nicer properties are asking like $700 (which is still massively bubbly). That dump is not going to sell.

  11. ‘The first wave of concerns was voiced by developers of luxury units. Property sales in this uppermost segment began slowing down around 2011, creating a glut of luxury-grade apartments that industry insiders estimated at a value of no less than $3 billion’

    And that locals can’t afford. It’s been said zillion times that one can’t spot a bubble before it pops. Well I could probably come up with dozen signs and this luxury thing would be at the top of the list. How many cities that exhibited this insanity have crumbled? NYC, Miami, London, Vancouver, Toronto, Sydney, Dubai and now Hong Kong and Shanghai.

    1. “Many people who bought flats in the last couple of months have seen their value decline by as much as 20 per cent”

      20 percent down within the span of two months!? That sounds more like a cryptocrash rate of decline than housing.

  12. It’s deja vu all over again in Boise.

    Bloomberg
    Businessweek
    Boise and Reno Capitalize on the California Real Estate Exodus
    – Sky-high housing prices in the Golden State bring an echo boom—and new neighbors—to other Western states.
    By Prashant Gopal and Noah Buhayar
    October 23, 2018, 5:00 AM PDT
    Julie D’Agostino outside her home in Boise. Photographer: Andy Anderson for Bloomberg Businessweek

    Julie D’Agostino spent 15 years in the San Francisco Bay Area working in tech and considers herself decidedly liberal. Still, she ended up buying a home in a surprising place: deep-red Idaho. The 51-year-old moved to Boise two years ago, attracted to its walkable downtown, lively arts scene, and, most important, cheaper housing. She’s happy there, even though her first winter in 2016 and Donald Trump’s election were a shock.

    “It was like, ‘What have I done?’ ” D’Agostino says, sitting at the kitchen table of the three-bedroom home she bought in May for $259,000. But staying in the Bay Area long-term wasn’t an option financially. “I was already priced out. I didn’t see myself miraculously, suddenly being able to afford it.”

    1. Don’t worry, Julie. You and all your fellow ex-pats from Cali can vote to turn Idaho from a redneck backwater to a progressive paradise!

  13. Have investors lost faith in the China stock market prop?


    Asian stock markets gave up an early lead on Monday, with Chinese stocks leading the declines, amid worries about U.S.-China trade relations and continued tech-stock weakness on Wall Street.

    Down from the start of trading, the Shanghai Composite (SHCOMP, -2.18%) dropped 2.4% and the smaller-cap Shenzhen Composite (399106, -2.02%) fell 0.7%.

    1. Let me try this one, I’ve been learning from Ben.

      Have you tried stamping your little feet? Maybe sending out a tweet?

  14. “U.S. single family homes and condos sold for a median price of $256,000 in the third quarter, up 1.0 percent from the previous quarter and up 4.8 percent from a year ago — the slowest pace of annual home price appreciation since Q2 2016”

    https://finance.yahoo.com/news/u-median-home-price-increases-040100009.html

    Map of cities showing which ones are outliers with home appreciation slowing or going negative (blue cities).

    https://public.tableau.com/profile/darenjblomquist#!/vizhome/Q32018HomePriceAppreciationHeatMap/Dashboard1

        1. Yes. That is the blue color. I think you may be getting confused with annual rates v monthly and quarterly rates. The peak for most areas was around early Summer 2018.

          1. Sorry, I don’t think declining rate of appreciation indicates anything about whether the appreciation is above or below zero. See PB’s comment regarding the calculus.

            Still, it’s an interesting crater map.

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