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Are the real estate markets too hot?

Real estate markets are not like stock markets. They are ‘sticky’. It takes time for owners and buyers to realize that the fun is over


The real estate market in the United States looks like it is finally recovering from its disastrous decline. The number of housing starts surged in September to the highest level in four years. Home builder’s confidence rose to a level not seen since the peak of the real estate bubble six years ago. This is certainly welcome news. Home construction always makes up a large share of the gross domestic product (GDP). The number is usually about 5% although in China the number is much higher about 13%.

 

Any improvement though would be good news. The US housing bubble was created by a rise of about 85% in six years from 2000 to 2006. After that the market fell 36%. The market also collapsed about two years after it started to decline. Even though the news in the US is good, there are still problems in many countries. According to the International Monetary Fund (IMF), home prices are still falling in 25 countries of the 54 tracked by the IMF. Leading the way was Ireland followed by the usual suspects: Greece, Portugal and Spain.

 

There are other markets that did not collapse, quite the contrary. The various quantitative easings (QEs) and other stimulus programs created by the US Federal Reserve together with the loose monetary policy in just about every country have had a much broader effect than finally reviving the anaemic US market. Global central banks’ policy of encouraging asset appreciation has been far more successful and dramatic in many other countries. It has pushed stocks, currencies and real estate markets sharply higher.

 

In September after QE3 was announced Indonesia experienced a net inflow of $1.3 billion in bonds compared to an outflow of $540 million in August. South Korea was in a similar position. It had an inflow of $1.4 billion in September verses an outflow of $2.4 billion in August. Many equities markets in Asia have also benefitted from the Fed’s largess. Thailand’s market is up 28% this year. The Philippine market is up 24%. The Indian market has increased by 23% and the Hong Kong market recently reached a 14-month high.

 

Real estate markets in many countries have risen dramatically in the past few years, some to levels that are neither rational nor sane. Hong Kong is a good example. Housing in Hong Kong has benefited from a flood of money coming out of China. Its house prices have doubled and have been labelled “seriously disconnected” from the slowing economy by a high government official. Singapore’s real estate has also risen by 56% from 2009. But these are small markets.

 

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On a slightly larger scale are two commodities countries, Australia and Canada. The commodities these countries produce have benefitted from both the central bank inflation and demand from China. The benefit is reflected in their real estate markets. Like the US, Canada’s real estate market has risen, but just more slowly. The difference is that it continues to rise and is now at 125% of 2000 levels. While this is impressive, it pales compared to Australia where prices have risen 150%. According to one survey, houses in Australia are seriously unaffordable. If these bubbles deflate there would certainly be an impact, but these are still relatively small markets, unlikely to cause problems in the global economy. Also they are still rising, so any collapse might take a bit longer. This may not be true for three much larger markets: India, Brazil and China.

 

In China house prices have risen over 250% since 2009. The problem is so severe that last year the government increased restrictions on the market to rein in prices. But those restrictions are being ignored and prices have begun to rise again.

 

Brazil is another hot market. Real estate markets have risen 90% since 2009. Office space in Rio and San Paulo is the most expensive in the western hemisphere. Prices are also high in India where prices have also risen over 250% in the past ten years.

 

Unlike small markets in Hong Kong, Singapore, Canada or Australia, if the housing prices fell dramatically in any of these larger markets, it would have a far greater impact. The question is whether these dramatic price rises reflect a monetary induced bubble and if so are they in danger of bursting?

 

Perhaps. The prices are certainly high, but more importantly and unlike Canada and Australia they are either declining or rising far more slowly in each of these markets. Real estate markets are not like equity markets. They are ‘sticky’. It takes time for owners and buyers to realize that the fun is over. The other issue is leverage. Like the US sub-prime, the extent to which these markets are leveraged is difficult to determine. Financing and mortgages are often from far different sources. What is clear is that every market does go down. It is simply a matter of time.

 

To read more articles from the same writer, click here.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)

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    User

    COMMENTS

    Hakan

    7 years ago

    US market, especially South Florida market is pretty hot these days. Not much inventory in the marklet

    US sues Bank of America for $1 billion over bad mortgages

    The US government charged Countrywide, the mortgage giant now owned by Bank of America for labelling defective mortgages as good-quality and selling it to state-controlled mortgage financers Fannie Mae and Freddie Mac


    Washington: The United States sued Bank of America for more than $1 billion for allegedly having sold dodgy mortgages to state-controlled mortgage financers Fannie Mae and Freddie Mac, reports PTI.

     

    The government charged that Countrywide -- the mortgage giant now owned by Bank of America -- labelled defective mortgages as good-quality and sold them to the two companies.

     

    The suit says that between 2007 and 2009 Countrywide ran a mortgage origination program called "Hustle" which aimed to quickly process thousands of new mortgages without quality controls and then sell them to Fannie and Freddie.

     

    Hustle caused "over $1 billion dollars in losses and countless foreclosures," Preet Bahara, the US attorney in New York City, said in a statement.

     

    "The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," Bahara said.

     

    "Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill."

     

    "This lawsuit should send another clear message that reckless lending practices will not be tolerated."

  • User

    India ranks 132nd in ease of doing business among 185 economies: WB

    India is ranked 132nd the lowest ranked among BRIC nations as well as below neighbouring Pakistan at 107th and Nepal at 108th, according to World Bank survey. Singapore is the topper followed by Hong Kong and New Zealand


    New Delhi: India continues to be a tough place for doing business even as the country has improved regulator processes for starting enterprises and trading across borders, according to World Bank and IFC, reports PTI.

     

    In terms of ease of doing business, India is ranked 132nd among 185 countries. The nation's position for 2013 is unchanged from 2012.

     

    Singapore is at the top position, followed by 'Hong Kong SAR, China' at second place and New Zealand at third spot.

     

    Other nations in the top 10 are the US (4th), Denmark (5th), the UK (7th), Norway (6th), Korea (8th), Georgia (9th) and Australia (10th).

     

    India is the lowest ranked among BRIC nations. Brazil (130th), Russia (112nd), China (91th) and 'Taiwan, China" (16th).

     

    India is also below neighbouring Pakistan (107th) and Nepal (108th).

     

    Titled 'Doing Business 2013 Smarter Regulations for Small and Medium-Sized Enterprises', the report said that local entrepreneurs in developing countries are finding it easier to do business than at any time in the last ten years.

     

    The ease of doing business in the developing world reflects the significant progress that has been made in improving business regulatory practices worldwide, it added.

     

    "India focused mostly on simplifying and reducing cost of regulatory processes in such areas as starting a business, paying taxes and trading across borders," the report said.

     

    The rankings are based on various factors -- starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

     

    Only on two fronts -- dealing with construction permits and registering property -- India has improved its position in 2013 report compared to 2012. The ranking has remained unchanged in terms of getting credit and enforcing contracts.

  • User

    COMMENTS

    M G WARRIER

    7 years ago

    If the rankings are based on factors like starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency, some amount of decentralization by India may bring about perceptible change in volume of business involving other countries in India, if not a change in the ranking. Ranking in such cases does not make much sense. But to improve business volume, Centre should allow states to play a bigger role. Initially, perhaps there may be need to give some indicative limits for transactions involving inflow/outflow of foreign exchange.

    Harish

    7 years ago

    WB just su___,They change their views on their requinments and terms. They couldn't find the mortgage crisis.

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