The State of Real Estate

[Anthony]

Hi my first post here.

Things not so good in New Zealand http://http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10602365&pnum=0

Party's over and debts called in for property kings
4:00AM Saturday Oct 10, 2009
By Anne Gibson

One day, it seems, they have the best clothes and are seen about town with the best-looking models, behind the wheels of the raciest cars.

Now they are crumbling under their creditors and even hocking their bling on the internet.

This week, Starline Group's Jamie Peters announced his bankruptcy after putting his name to about $1 billion worth of development work.

He's the developer who was selling his belongings on the internet a while back, including Cartier and Rolex watches, furniture and even his garden palms.

[Condors]

Welcome Anthony,

That's interesting as I am bout to move to NZ, (though not Auckland). Luckily I won't be reliant on the property game.

Do you live in NZ?

[Condors]

Here in the UK where I live at the moment, there is all sunshine and lollipops. Quantitative easing and low interest rates have been edging prices up again.

The real economy is still suffering however. I can't help feeling there is a disconnect in reality somewhere. Is the economy genuinely recovering? Austrian economists don't thinks so.

The UK press is pretty full of bullishness at the moment, with the odd bear popping up now and then.. like this one from the other day:

http://http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/6271517/House-prices-have-further-17pc-to-fall.html

House prices 'have further 17pc to fall'
The recent rises in house prices will prove to be a false dawn because of the broader problems facing the British economy, Fitch Ratings said yesterday.
 
By Angela Monaghan
Published: 10:34AM BST 08 Oct 2009
Comments 39 | Comment on this article

Photo: AP
The ratings agency predicted that house prices in Britain would fall by around 30pc in total from the October 2007 peak, indicating that they have a further 17pc left to fall. The current average house price of £162,000 is 13pc lower than that peak, Fitch said.
Rising unemployment, which will peak next year and remain at that level into 2011, as well as a low wage inflation and poor credit availability, will drag on house prices, the report said.

“Despite the fact that a global economic recovery is under way, the economic fundamentals do not augur well for a sustained strong recovery in the UK housing market,” said Alastair Bigley at Fitch.
Both Halifax and Nationwide have reported house price rises in recent months but Mr Bigley said they were being driven by a lack of supply in the market and cash-rich buyers, which was not sustainable.
Fitch says the UK’s average house price-to-income ratio is likely to come down to below the long-term average, as it did during the early 1990s' recession. The ratio is currently “significantly higher” than the long-term average.
“A 30pc fall from the peak of October 2007 would bring this ratio back in line with the long term average,” said Brian Coulton, head of global economics at Fitch.
The report also warned that recent signs of easing in credit availability were only likely to be temporary. It said that as unemployment continued to rise, the rates of mortgage arrears and repossessions could rise, which would in turn prompt mortgage lenders to tighten lending criteria. etc etc

I have to admit to being a bear over the medium term, but the result may depend on what happens with the inflation/deflation argument.

[Condors]

Hi my first post here.

Things not so good in New Zealand http://http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10602365&pnum=0

Anthony,

Some more interesting things coming out of New Zealand.

The Kiwis are recognising the negative impact of property speculation and the drag it causes on "productive" investment.

I like how they are thinking.

http://http://www.nzherald.co.nz/personal-f...ectid=10602457

...investors should expect moves against property.

I don't think policy shifts will be directed against owner-occupied houses - New Zealand's home ownership rate has declined over the past decade and no one wants to see it fall further.

However, there is already a groundswell against property speculation and those who own rental property should be wary...

I don't think the Government will impose a capital gains tax - government agencies know this will not permanently suppress property values.

However, the Tax Working Group, Treasury, the Inland Revenue and others in Government have rental property tax in their sights.

One of the Tax Working Group's ideas is a tax based on the Risk Free Rate Method (RFRM)....


...But by itself, it will not do enough to permanently shift New Zealand investment behaviour away from houses. That will take improved capital markets and encouragement of other investments.

A RFRM tax poses difficulties: investors would have to value their properties each year. Who would be used to do these valuations? And there would be a disincentive to repay debt as that would increase equity and therefore tax to pay.

But if not this tax, there will be another. At present, on aggregate, no tax is collected from property investment even though it is a $200 billion industry and there is determination to do something about rising property values.

This is not a time to have all your wealth tied up in residential rentals. With low yields and talk of new taxes, the risk at present is on the downside.

[Anthony]

Welcome Anthony,

That's interesting as I am bout to move to NZ, (though not Auckland). Luckily I won't be reliant on the property game.

Do you live in NZ?

No I live in Arizona USA just liek to keep an eye on whats happening around the world.

New Zealand is a nice place though I envy you.

[Condors]

Anthony,

Here is an interesting article in Citywire today:

http://www.citywire.co.uk/personal/-/blogs/money-blog/content.aspx?ID=363536&re=7268&ea=199083

Are house price rises really a good thing?

By Tony Bonsignore | 14:28:47 | 21 October 2009
There is, one could reasonably argue, a not-so-hidden agenda at work when most media outlets, economic commentators and politicians talk about house prices.

And that agenda is a pretty simple one: house price rises good, house price falls bad, and a house price crash disastrous.
This message is implicit in most media coverage of the 4,752 different house price surveys released every month, as well as much comment on the state of the broader economy.

House prices, indeed, sometimes seem to be used as a shorthand for the strength of the broader economy, or at the very least as a leading indicator of an economy on the way up.

The government and the Bank of England, meanwhile, seem to subscribe wholeheartedly to this view, in the process doing everything in their power to re-inflate house prices - from stamp duty holidays, to leaning on banks to go easy on distressed borrowers, to massive quantitative easing programmes designed to stimulate greater and cheaper mortgage credit.

At one level this spin is understandable, given the high level of home ownership in this country and the fact that millions of households have come to rely on ever-increasing home equity as a way to closing their spending gaps and funding their lifestyles.
The spectre of negative equity, too, looms especially large in this country, threatening as it does the prosperity of the housing and construction markets, with all the subsequent knock-on effects.

Others, however, argue that house prices should be viewed as part of the problem rather than the cure, which takes us neatly on to a fascinating paper issued today by the National Institute of Economic and Social Research.

The think tank argues that house price increases effectively represent a redistribution of wealth to land and property owners from the landless and propertyless, at the same time doing little to increase the productive potential of the economy.

What’s more, not only do house prices benefit landowners, but these landowners are typically older folk, which creates a ‘powerful intergenerational transfer’ of wealth.

The ultimate effect of rising house prices, then, is to reduce the living standards of the young and poor to boost those of the old and wealthy - especially if this is engineered deliberately as a way of wiping out the national debt.

The so-called ‘inflation tax’.

In NIESR’s own words:
‘The discounted value of the consumption that people who do not own land and future generations have to give up matches the increase in the consumption of the (old) people who happen to own land at the time that its price rises.’

‘The importance of these points is that, to the extent that policymakers are concerned about the burden of government…they should be concerned about any economic circumstances, whether the direct result of government policy or not, which transfer resources from future generations to the present.

‘In particular, those who hope to see the economy supported by a buoyant consumption on the back of a recovery to house prices and believe that this is somehow preferable to the economy being supported by budget deficits are living a dangerous and remarkable delusion.’

In other words then, relying on rising house prices as a way of stimulating economic recovery is robbing the young to pay the old - and lying about it in the process.

The paper asks starkly:

‘Do today’s old and older people expect that today’s young people resent the burden of high house prices even though they know that their parents enjoyed a comfortable retirement as a result?

‘Or that they mind financing the costs of the welfare state, knowing that the need for it arises because their parents did not choose to save adequately for their own retirement?’

‘Only in the event that these questions can be answered negatively can a case can be made for burdening the future.’

So what do you think then, are house price increases robbing the young and poor – and future generations – to pay for the consumption of the old today? Is the government deliberately trying to engineer this scenario, motivated by short term political considerations? And is there any other choice?

Thoughts - from the young and old, landowners and landless - please.

[Grinder]

I've long believed the goverment has used real estate as a tool to manipulate the economy and unfortuanately most of us are prone to adhere to societal norms by acting like pawns in their game of chess.

[Condors]

The Brits believe the housing slump is over, but here is an article from the FT that is somewhat incredulous:

House prices still horribly out of kilter with real life
By Louise Lucas
Published: October 31 2009 02:00 | Last updated: October 31 2009 02:00
Cancel all dinner invitations; cut off the phone. House price braggers are once again out in force, fuelled by a high-octane diet of positive data and rash cash.

UK house prices have now risen six months in a row , with the Nationwide House Price Index edging up 0.4 per cent in October. Home loans are at an 18-month high. Funds, sniffing value in mothballed developments and potential regeneration sites, are falling over themselves to pick off bargains. In addition to Legal & General Property, one of the largest institutional property fund managers, and Aviva, the insurance group , boutique funds are springing into action. The latest comes courtesy of John Hitchcox . The founder of Yoo , a UK-based development and design group, has raised some £200m of equity and debt.

This is boosterish stuff. Not only are real estate veterans calling the bottom of the market by piling in, they are also erasing some of the excess supply scarring the landscape - either by buying assets off the banks or simply helping market them. Excess supply is, in any case, a lesser burden than was the case in previous recessions, thanks to rock-bottom interest rates. The final comfort factor for bulls: prices are still some 13 per cent below the October 2007 peak and everyone knows that peaks exist to be breached.

What the optimists conveniently forget is that much of the positive data has a darker side. Yes, demand is rising as homes and mortgages become cheaper. But the data are also flattered by thin supply; once more sellers jump on the bandwagon, price rises become less assured. October's more modest price rise may be an early indication. Prices are still horribly out of kilter with real life. Homes cost two-thirds more than they did in 2001, but wages are just one-quarter higher. The UK is not out of recession and unemployment has further to run, which will inevitably damp demand. And not all houses are selling like hot-cakes. Mr Hitchcox need only look at former flame Elle Macpherson. The supermodel's Notting Hill home took a year to sell and the price was dropped by £2m.