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The Only Fundamental That Really Matters

A weekend topic starting with The Guardian in the UK. “Few tears will have been shed at recent reports that flats in London’s Centre Point building, where a one-bed goes for a genuinely surreal £1.8m, aren’t shifting. There is a horribly powerful lure in the idea of just blowing it all up and starting again, shaking the property-rich out of their complacency and putting power back in the hands of the priced-out.”

“But while a crash may be an opportunity for a lucky few, at least as long as they can keep their jobs long enough to get a mortgage, it is very far from being the answer. The most dangerous delusion of all, however, is that it doesn’t matter if this mild correction to overheated house prices turns into a full-blown crash, because those who’d suffer most are comfortable middle-aged owner-occupiers who can afford the hit.”

“It’s the youngest and the most painfully overstretched buyers who risk being trapped in negative equity, with loans worth more than their homes, or locked out of cheap mortgage rates. A smart government would be thinking now about how to support them if the worst happens.”

The Daily Telegraph in Australia. “Plummeting home prices in Sydney and Melbourne have dragged the Australian housing market into its biggest slump since the start of the global financial crisis. CoreLogic head of research Tim Lawless said he expected the current downturn to last significantly longer than the one recorded in 2008.”

“‘Back then the market was hit by an economic shock but it quickly recovered because of heavy stimulus from government,’ he said. ‘This time it is a lot different because the economy is doing well and unemployment is generally low. It’s almost all being driven by a change in credit policies and there’s nothing to suggest there will be any intervention (from government).'”

“‘One of the biggest issues for Sydney is that not enough people can afford to get into the market. The price-to-income ratio is just too high. People are also leaving the state for Queensland, so demand is falling,’ Mr Lawless said.”

From An-Nahar. “As the real estate market continues its downward spiral amid turbulent times, Lebanon’s economy might, in the long run, benefit from this drop, leading economist Jihad El Hokayem tells Annahar.”

“Productive sectors, which are the real sectors of any given economy, ‘will tremendously benefit from a decrease in real estate prices given that their operational costs will, by correlation, also decrease,’ he says. ‘A reduction in costs will increase a business’ margin of profits.'”

“To alleviate Lebanese household’s diminished purchasing power, El Hokayem reiterates his call for a decrease in residential rents and household prices which then leads to a higher standard of living as well. ‘If people spend less on rent, their discretionary income naturally increases,’ he says, which then translates to increased spending on other amenities, boosting the service and retail sectors among others.”

“‘The real estate sector shouldn’t have been propped up at the expense of the economy and the productive sector,’ El Hokayem notes, alluding to Banque Du Liban’s unsustainable efforts to maintain the market.”

“‘The drop in real estate could have tremendously benefited Lebanon’s youth and newlyweds, a wide-ranging number of businesses, and the overall health of the economy, but the different policies implemented led us to botch this potential silver lining,’ El Hokayem concludes.”

The Langley Advance in Canada. “Opinion remains divided in British Columbia. Either we’re on the cusp of a massive housing crash, or prices will simply flatten out and we’ll see that fabled ‘soft landing’ so many analysts promised. I don’t put much faith in the notion that real estate will have a soft landing here in Metro Vancouver.”

“I’m sure there are plenty of people ready to reply ‘but the fundamentals are strong,’ but that’s nonsense. The only fundamental that really matters is whether people who want to live in the area can afford to buy homes. They can’t.”

“Worse, we’re building more housing units right now – more than 40,000 annual starts by 2018 – than projected long-term population increases, which is around 30,000 for Metro Vancouver.”

“Prices will go down. It’s already started. But it’s going to take a long time, maybe years, for the air to leak out of the balloon.”

This Post Has 38 Comments
  1. Three comments to the Canadian editorial:

    “I always get a kick out of this sort of nonsense. I remember 1981 very well. My wife and I bought a house in 1983 and paid over 14% for a five year mortgage and thought ourselves lucky. We had friends who paid 22% on their mortgage. Pundits who wish for a large fall in house prices are blissfully unaware of the consequences. Let us postulate a 30% fall in prices. Any one with less than 30% equity will walk away from their mortgage. Thousands and thousands of them. Let us then watch the pundits cry over the resulting depression.”

    “blame the govnmt who created the bubble with cheap credit, the cheapest in canada’s history, not the pundits who look at the picture and give you their opinion. The rate hikes should have come in 3-4 years ago, and the picture would be very different.”

    “Yes… Interest rates have fallen for the past 20 years hence higher house prices. Interest rates are now creeping up and home prices will follow suit…. The OSFI should have acted much sooner and with stronger measures to prevent over leveraging.”

    1. “…The rate hikes should have come in 3-4 years ago, and the picture would be very different.”

      It’s true, but now that the damage is done their (central bankers) “solution” seems to be more cheap money, as if blowing more and more insane bubbles will somehow fix things.

      I realize they’re referring to Canada, but Powell has already blinked, and the stock market just rocketed right back up near all-time highs. I still think he’s leaning towards another rate hike this month, but after that I suspect he’s going to taper off, and that’s not helpful at all.

      The low rates and the cheap money firehose are the problem, not the solution. There is no free lunch, so there will be pain. It’s best to rip the band-aid off now, but I highly doubt they will.

      1. “…now that the damage is done their (central bankers) “solution” seems to be more cheap money, as if blowing more and more insane bubbles will somehow fix things.”

        This is metaphorically described as the ‘hair of the dog’ cure. There’s a belief amongst many drunkards that the best cure for a hangover is another drink of whatever form of imbibement led to your pounding headache.

  2. “There is a horribly powerful lure in the idea of just blowing it all up and starting again, shaking the property-rich out of their complacency and putting power back in the hands of the priced-out.”

    Senator Mitt Romney suggested something similar when he ran for President (something about letting the housing market “bottom out.”) That’s the last time I recall anyone near the White House suggesting the idea taking the government support out of the US housing market.

    1. Romney should have framed it the way the Lebanese professor did above. Don’t we hear all the time how cost burdened everyone is? How low savings are? We are in the biggest apartment construction boom in 40 years and rents have never been higher, nor has the proportion of incomes going towards rents ever been higher. There are 3,400 new empty houses in Orange County that are too expensive for people living there. The entire housing sector is seriously broken and I can’t think of a better place than this blog to at least consider that we might take a different path. Especially since what was done 10 years ago simply landed us back in this predicament.

      1. US Fed must put floor under home prices
        By By Garry Shilson-Josling
        26 February 2008

        Housing prices in the US must not be permitted to continue falling, says the chief investment officer of a fund with $US750 billion of fixed-income assets under management.

        The outlooks for Australia and the US are at two different extremes, said Bill Gross, chief investment officer for US fixed interest funds management giant PIMCO.

        The US economy was financial asset-based while the Australian economy was driven by commodity exports, he told funds management professionals in Sydney through an international video hook-up.

        “And so Australia is doing well, the US is not, really because of the nature of the economies themselves” he said.

        He said the US economy has had “a long wonderful secular run”.

        “Ever since 1981 lower interest rates and in effect accelerating asset prices, whether they’re stocks, bonds or real estate/housing, have led to the continued success of consumption, and indeed over-consumption, in this finance-based economy.”

        But this has come unravelled.

        He said the current situation had not been seen since at least the 1980s and probably since the 1930s.

        “For the first time in decades the totality of US finance-based assets – stocks, bonds, real estate – are going down in price, are deflating,” he said.

        When looking at bonds, Mr Gross includes not just government bonds, whose prices have been firm, but also corporate and mortgage-backed bonds, whose prices have fallen after the sub-prime loans crisis that emerged after the US housing boom fizzled out.

        “It means simply that this finance asset-based economy, which is so dependent on rising asset prices is now beginning to experience a lengthy period of time, over two years in fact, when these asset prices are declining.

        He said the US Federal Reserve had tried to reverse the outgoing tide by reducing interest rates but without success.

        “It’s not working,” Mr Gross said,

        He said bank loan and other market rates are much higher than they were before the Fed starting cutting official interest rates last year.

        “The totality of private credit is higher in yield, lower in price since the Fed began to cut interest rates.”

        It was “paramount” for the Federal Reserve through fiscal policy measures “to in effect put a floor under housing prices in order to stop the deterioration in this asset-based economy”, he said.

        He said it was a “very dangerous situation at the moment”.

        He said the “shadow banking system”, the array of non-bank financing structures multiplying the flow of credit in the economy, was contracting.

        He said all of these financial conduits were suspect in their ability to generate future lending, which was having a substantial effect on all asset prices.

        This would create a negative environment for the US economy and asset prices until either monetary policy or fiscal policy, or a combination of both, put a floor under US home prices.

        He said home prices in the US were declining at an annual rate of seven to nine per cent.

        “This is something that truly cannot be permitted to continue if in fact the US economy is to stay above the line as opposed to below the line,” he said.

        https://www.canberratimes.com.au/business/us-fed-must-put-floor-under-home-prices-20080226-1uru.html

        1. Housing prices in the US must not be permitted to continue falling…said Bill Gross…

          The US economy was financial asset-based while the Australian economy was driven by commodity exports

          Bill, you are a con man. The US used to produce things too, not just buy things up and rent them back to ordinary people. That is not a sustainable “economy”. It will and must end. Just a question of how long you will feel so smug.

          1. Leveraging up in a rising rates environment is a good way to get yourself burned.

            Here’s why Bill Gross’s fund lost a huge $153 million in the first half of the year
            Bloomberg News
            Miles Weiss
            September 13, 2018 1:24 PM EDT

            Bill Gross leveraged up his bond fund through the use of futures during the first half of this year, only to suffer big losses on those tied to interest rates.

            Gross, who as manager of the Janus Henderson Global Unconstrained Bond Fund has struggled to generate returns and attract capital, increased his average futures exposure as much as 13-fold from January through June, according to a filing. The derivative bets may help explain the fund’s turbulence — because while investments in futures can boost potential returns, they can also generate out-sized losses.

            Gross realized almost US$153 million of losses on interest-rate futures in the first half, a significant dent for what was a US$2-billion fund at the time. It suffered several big swings during the first six months of this year, most notably a 3 per cent plunge on May 29. That drop, which was the year’s largest single-day decline by a big bond fund, jarred investors and increased scrutiny of Gross’s stewardship.

      2. Very good point, Ben:
        Extraordinarily high housing costs and historically abysmal US savings rates are inextricably linked. Someone at the Fed must have decided this is a desirable outcome, or else they wouldn’t have put the low interest rate pedal to the metal for an indefinite period of time.

      3. “Especially since what was done 10 years ago simply landed us back in this predicament.”

        Even alcoholics eventually come around to recognizing this drawback of the hair-of-the-dog remedy.

        1. Even alcoholics eventually come around to recognizing this drawback of the hair-of-the-dog remedy.

          There’s a big difference between recognizing the drawbacks of the path you’re on (almost everybody does that) and enduring the pain and work to actually change it (almost nobody does that successfully).

      4. The empty houses are being paid for by someone. The builder is carrying a construction loan that needs to be paid. Sooner or later those houses will hit the market.

        1. ‘Sooner or later those houses will hit the market’

          They are on the market. Have been for months, just not moving.

    2. Trump’s “big, fat, ugly bubble” comment and his criticism of Yellen led me to believe he understood the situation and wanted to get back to fundamentals. For me, that was the driving force behind supporting him.

      After his excoriation of Powell and his plea for low rates, I’m really turned off. It’s a huge disappointment, no different than Obama continuing on the path of middle eastern warfare after promising different.

        1. Call it whatever you want. However, there is not a thing in this world that could have forced me to vote for Hillary.

          We’ll see what candidates the next election produces.

          1. The Atlantic — The Democrats’ White-People Problem:

            “Why not just wait for the white working class to die off?” asked an audience member at last year’s Berkeley Festival of Ideas. I get this question a lot, and I always reply: “Do you understand now why they voted for Trump? Your attitude is offensive, and Trump is their middle finger.”

            https://www.theatlantic.com/magazine/archive/2018/12/the-democrats-white-people-problem/573901/

          2. Name: typo.

            See also — The Suburbs Are Changing. But Not in All the Ways Liberals Hope:

            “There is this idea that if all these suburban areas are blue, that will mean they’re automatically more progressive,” said Lily Geismer, a historian at Claremont McKenna College in California. That’s an indication of something more progressive, she said, but underneath are “still commitments to a lot of kinds of inequality.”

            https://www.nytimes.com/2018/11/26/upshot/suburbs-changing-midterms-democrats-hopes.html

            The reader comments on this one are entertaining.

          3. Call it whatever you want. However, there is not a thing in this world that could have forced me to vote for Hillary.

            Amen. I had no illusions about Trump. But the alternative was a one-woman crime spree who was the epitome of everything I loath about the corrupt, crony capitalist status quo.

      1. Imo, I think what we are seeing is Trump and Powell locked in a contest for who will get the blame for the inevitable crash. Trump wants to make sure the blame lands squarely where it belongs – at the Fed’s feet – and is not fussy if it lands there for the right reason or the wrong reason.

        The wrong reason but current line is that the Fed is crashing the economy by raising rates, whereas we all know the Fed crashed the economy by blowing massive bubbles. But if the crash can be associated with the Fed in popular opinion, even for the wrong reason, that might be a step forward from the current state of affairs. Once established, it may spur people to wonder why rates were so low for so long, or think about how our economy is (mis)managed by unelected technocrats.

  3. “It’s the youngest and the most painfully overstretched buyers who risk being trapped in negative equity, with loans worth more than their homes, or locked out of cheap mortgage rates”
    —————————-
    I have to disagree. It’s the oldest buyers who will be in the most pain when this crash comes. Like I said previously, 40 percent of Boomers have less than $10,000 saved for retirement and the rest see the value of their shack as their ticket to retirement while owning depreciating assets like classic cars or boats. Being a FB is never ideal, but the difference between a FB at 30 years old vs 60 years old is that the youth have time on their side to dig their way out, learn your lesson and prepare for your own retirement.

      1. If this article is accurate, the outlook is actually much worse:

        Are We in a Baby Boomer Retirement Crisis?
        By Barbara A. Friedberg | Updated October 21, 2018 — 8:43 PM EDT

        Baby Boomers born between 1946 and 1964 are heading into retirement in droves (about 10,000 a day). Along with the aging of this iconic cohort come lots of data about their poor preparation for their later years, a calamity that will reach a head in the next ten years. Insufficient preparedness – and lack of financial resources – coupled with on-and-off employment paint a gloomy picture for many retirees.

        Whether or not the world might be encountering a Baby Boomer retirement crisis may not be an easy answer, but there is data that help shed light into that specific generation’s economic situation.

        Baby Boomer Retirement Research

        In March 2016, GoBankingRates published research conducted with 1,504 adults over the age of 55 (4.3% margin of error). About 30% of the respondents age 55 and over claimed to have no retirement savings. An additional 26% reported less than $50,000 saved for retirement. When considering typical benchmarks needed for a successful retirement, 54% of the older Americans in this survey lacked sufficient retirement funds.

        But not all Baby Boomers lack reasonable assets. At the other end of the spectrum, 26% of those age 55 to 65 have balances greater than $200,000. Among the over-65-year olds, 31% had $200,000 or more in their retirement accounts. That’s heartening for them, but this chart paints a gloomier picture of those closest to retirement age:

      2. But how many boomers have a $200-300-500+K house paid off….it may not be so bad looking at at that way.

        1. have a $200-300-500+K house paid off

          I have a $30K house paid off. It is actually much better than having a $300K house paid off. I saved actual money and my taxes are ridiculously low. I’m collecting SS and haven’t spent a dime of my savings in the first year of retirement, but could probably squeak by for the rest of my life on the savings without the SS. It would be a squeak, but I wouldn’t be as poor as I was as a younger fella. I have no debt.

          I live on Main Street in a little village, but am far away from the Mainstream Mania. Thanks to Ben & Company, I saw things differently for the past 12 years and took “a different path” than my fellows. Good luck to them, I wish so many hadn’t sunk themselves in debt expecting to be better off.

          The HBB has been shining a light on reality for way over a decade, for any who would see. Ironically, a lot of our long term blind friends don’t come around anymore.

          How to get out of this mess? Get out of debt personally. Not easy to do for sure, but then you might not get sucked out of the airplane window when it cracks.

          For the country, I hope Mr. Trump will be inspired by Andrew Jackson who’s picture hangs in his office and liquidate the bankers. He is an immature President, but may find his epiphany as I think JFK did.

          1. Just to add irony, I think most of the people who will criticize the Fed (truly a blight and a cancer upon us) are actually hauling the bankers’ water, literally.

          2. I agree my parents signed over a 2 fam house in southern CT to us like 20 years ago, so 1 rental income pays for all the house expenses with enough left over each year to save for a new roof. Its an option a lot of people have, crapola hit the fan in 08 move in with parents they pass the house to you, quite a few on the kids on the street i grew up on did this and are still there today.

        2. Help me understand. Ok, great, some boomers have a house that they own outright and is now worth 100K’s. But how does that put food on their table or pay medical bills? If they cash-out by selling the house, where do they live?

          1. But how does that put food on their table or pay medical bills? If they cash-out by selling the house, where do they live?

            Reverse mortgage?

          2. food on their table or pay medical bills

            How much a month would it take you to get by on food, if you had a lot of time on your hands?

            Well, medical will be handled the old fashioned way!

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