Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'housing market'

Tag Archives: housing market

Chinese “1%” Threaten Lawsuit Against Canada For Shutting Visa-For-Cash Scheme | Zero Hedge

Chinese “1%” Threaten Lawsuit Against Canada For Shutting Visa-For-Cash Scheme | Zero Hedge.

When Canadian authorities scrapped their ‘investor visa’ scheme a month ago, we warned that the nation was removing a critical pillar of support for its real-estate bubble market. However, with an estimated 45,000 Chinese millionaires still in the queue, the wealthy hoping to get their cash out of China are not happy. As The South China Morning Post reportsa group of wealthy mainlanders has criticized the Canadian government for scrapping its investor visa scheme and are threatening legal action if the decision is not overturned – arguing “we had set aside a lot of money to meet the investment requirements and over the years passed up on many opportunities… A refund of our application fees will not make up for all the preparation put in.”

The Canada real estate bubble is alive (and well enough for now)…

Deutsche Banks’s house-price-to-rent index says Canada has the most expensive housing market in the world – 60% over-valued…

 

Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. “

As it’s home price index hardly missed a beat while the US plunged… (different scales but point is to illustrate drastic difference when financial crisis started – and where the liquidity went…)

 

But the scrapping of the visa scheme threatens to remove a key pillar from that:

The scheme has allowed nearly 100,000 wealthy Hongkongers and mainland Chinese to move across the Pacific since 1986.

But as The South China Morning Post reports, the Chinese are not happy,

A group of wealthy mainlanders has criticised the Canadian government for scrapping its investor visa scheme and are threatening legal action if the decision is not overturned.

More than 10 people who had applied for the visa met with reporters in Beijing yesterday to air their grievances. The group said they had wasted years of time, effort and money preparing to move to North America.

An estimated 45,500 Chinese millionaires who were still in the queue for visas will have their applications “eliminated” and their fees returned.

“We have set aside a lot of money to meet the investment requirements and over the years passed up on many opportunities,” he said.

Moving to Canada has been a dream of mine since witnessing what happened in 1989 as a student over there on this main thoroughfare,” he said, pointing to a road passing Tiananmen Square where the crackdown on pro-democracy demonstrators took place.

I thought Canada was a place that underpins justice, trust and democracy, but the abrupt, unilateral decision to scrap the scheme has left us very, very disappointed,” he said. “A refund of our application fees will not make up for all the preparation put in.”

Larry Wang, the president of the immigration consultancy firm that organised the meeting with reporters, said he would help applicants take legal action if the decision was not overturned.

“A sovereign country, of course, has the right to make such a move, but it’s unfathomable how a democratic and human-rights-respecting country like Canada just cut off applications like that, without regard to those who’ve been preparing for the move for years,”

In other words, we want to get our money out of this controlled nation and are upset that we were not higher on the list… especially now that we see local authorities starting to tamp down the bubble of local real estate that we have previously speculated in…

Chinese "1%" Threaten Lawsuit Against Canada For Shutting Visa-For-Cash Scheme | Zero Hedge

Chinese “1%” Threaten Lawsuit Against Canada For Shutting Visa-For-Cash Scheme | Zero Hedge.

When Canadian authorities scrapped their ‘investor visa’ scheme a month ago, we warned that the nation was removing a critical pillar of support for its real-estate bubble market. However, with an estimated 45,000 Chinese millionaires still in the queue, the wealthy hoping to get their cash out of China are not happy. As The South China Morning Post reportsa group of wealthy mainlanders has criticized the Canadian government for scrapping its investor visa scheme and are threatening legal action if the decision is not overturned – arguing “we had set aside a lot of money to meet the investment requirements and over the years passed up on many opportunities… A refund of our application fees will not make up for all the preparation put in.”

The Canada real estate bubble is alive (and well enough for now)…

Deutsche Banks’s house-price-to-rent index says Canada has the most expensive housing market in the world – 60% over-valued…

 

Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. “

As it’s home price index hardly missed a beat while the US plunged… (different scales but point is to illustrate drastic difference when financial crisis started – and where the liquidity went…)

 

But the scrapping of the visa scheme threatens to remove a key pillar from that:

The scheme has allowed nearly 100,000 wealthy Hongkongers and mainland Chinese to move across the Pacific since 1986.

But as The South China Morning Post reports, the Chinese are not happy,

A group of wealthy mainlanders has criticised the Canadian government for scrapping its investor visa scheme and are threatening legal action if the decision is not overturned.

More than 10 people who had applied for the visa met with reporters in Beijing yesterday to air their grievances. The group said they had wasted years of time, effort and money preparing to move to North America.

An estimated 45,500 Chinese millionaires who were still in the queue for visas will have their applications “eliminated” and their fees returned.

“We have set aside a lot of money to meet the investment requirements and over the years passed up on many opportunities,” he said.

Moving to Canada has been a dream of mine since witnessing what happened in 1989 as a student over there on this main thoroughfare,” he said, pointing to a road passing Tiananmen Square where the crackdown on pro-democracy demonstrators took place.

I thought Canada was a place that underpins justice, trust and democracy, but the abrupt, unilateral decision to scrap the scheme has left us very, very disappointed,” he said. “A refund of our application fees will not make up for all the preparation put in.”

Larry Wang, the president of the immigration consultancy firm that organised the meeting with reporters, said he would help applicants take legal action if the decision was not overturned.

“A sovereign country, of course, has the right to make such a move, but it’s unfathomable how a democratic and human-rights-respecting country like Canada just cut off applications like that, without regard to those who’ve been preparing for the move for years,”

In other words, we want to get our money out of this controlled nation and are upset that we were not higher on the list… especially now that we see local authorities starting to tamp down the bubble of local real estate that we have previously speculated in…

Did Canada Just Pop It’s Housing Bubble? | Zero Hedge

Did Canada Just Pop It’s Housing Bubble? | Zero Hedge.

The Canadian economy is rolling over and their recent jobs situation is worse than the US (and it’s always cold weather-y up there?!) but the last great pillar of the ‘recovery’ in Canada is perhaps about to get crushed. As the WSJ noted recentlyCanada’s housing market is the most expensive in the world (60% over-valued by historical standards) and one simple reason explains it – Canada has been very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market. Until now… As SCMP reports, Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986. Soft landing?

Deutsche Banks’s house-price-to-rent index says Canada has the most expensive housing market in the world – 60% over-valued…

Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. ”

As it’s home price index hardly missed a beat while the US plunged… (different scales but point is to illustrate drastic difference when financial crisis started – and where the liquidity went…)

Via The South China Morning Post,

Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.

The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.

The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.

The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires.Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.

In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.

For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.

Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.

A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.

Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.

All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.

The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.

So, the Canadian government is looking a liquidity-splooging gift-horse in the mouth and saying “no, thanks” – an impressive decision to take given the potential weakness in the real economy… we’ll see how long it takes for the decision to be unwound or altered…

China’s Households “Massively” Exposed To Housing Bubble “That Has To Burst” | Zero Hedge

China’s Households “Massively” Exposed To Housing Bubble “That Has To Burst” | Zero Hedge.

The topic of China’s real estate bubble, its ghost cities, and its emerging middle class – who now have enough money to invest and have piled into houses not stocks – and have been dubbed “fang nu” orhousing slaves (a reference to the lifetime of work needed to pay off their debts); is not a new one here but, as Bloomberg reports, the latest report from economist Gan Li shows China’s households are massively exposed to an oversupplied property market.

 

The Chinese have piled their savings into real estate…

 

not stocks (like Americans)…

 

 

But the inevitable bursting of the bubble is a problem the PBOC can’t run from forever…

Via Bloomberg’s Tom Orlik,

China’s households are massively exposed to an oversupplied property market according to a new survey by economist Gan Li, professor at Southwestern University of Finance and Economics in Chengdu, Sichuan and at Texas A&M University in College Station, Texas.

 

A 2013 survey of 28,000 households and 100,000 individuals provides striking insights on the level and distribution of household income and wealth, with far reaching implications for the economy.About 65 percent of China’s household wealth is invested in real estate, said Gan. Ninety percent of households already own homes, and 42 percent of demand in the first half of 2012 came from buyers who already owned at least one property.

 

“The Chinese housing market is clearly oversupplied,” said Gan. “Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.” When it does, the hit to household wealth will have a long term negative impact on consumption, he said.

China’s household income is significantly higher than the official data suggest. Average urban disposable income was 30,600 yuan in 2012, according to the survey. That’s 24 percent higher than in the National Bureau of Statistics’ data. These results suggest official statistics may overstate China’s structural imbalances, which shows household income as an extremely low share of GDP.

Many wealthy households understate their income in the official data. China’s richest 10 percent of urban households enjoy an average disposable income of 128,000 yuan per capita a year, according to Gan’s survey. That’s twice as high as the same measure in the NBS report. The poorest 20 percent get by on about 3,000 yuan, pointing to significantly greater wealth inequality than in the U.S. or other OECD countries.

The wealth disparity helps explain China’s imbalance between high savings and investment and low consumption. Rich households have a significantly higher savings rate than poor households. The wealthiest 5 percent save 72 percent of their income, compared with the national average of 36 percent and 40 percent of households with no savings at all in 2012.

The solution to boosting consumption is income redistribution,” said Gan. “Compared to the U.S. and other OECD countries, China has done very little in this area.” The survey also provides insights into China’s widespread informal lending. A third of households are involved in peer-to-peer lending, according to Gan.

Zero-interest loans between friends make up the majority. Interest, when charged, is typically high, averaging a 34 percent annual rate. That underscores the usurious cost of credit for businesses and households excluded from the formal banking sector.

 

And yet the bailout of one trust product has the world declaring that China is fixed again!??

The Second Subprime Bubble Is Bursting, Gundlach Warns | Zero Hedge

The Second Subprime Bubble Is Bursting, Gundlach Warns | Zero Hedge.

Back in the years just before the previous housing bubble burst (not to be confused with the current, even more acute one), one person did the math on subprime, realized that the housing – and credit bubble – collapse was imminent, and warned anyone who cared to listen – almost nobody did. That man was Kyle Bass, and because he had the guts to put the money where his mouth was, he made a lot of money. Fast forward to 2014 when subprime is all the rage again and the subprime bubble is bigger than ever: it may comes as a surprise to some that in 2013, subprime debt was one of the best performing fixed income instruments, returning a whopping 17% in a year when most other debt instruments generated negative returns. And this time, while Kyle Bass is busy – collecting nickels (each costing a dime) perhaps – it is someone else who has stepped into Bass’ Cassandra shoes: that someone is Jeff Gundlach.

From Bloomberg:

“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash. Those residences are a sign of an uneven U.S. recovery, which has left blighted neighborhoods in cities from Los Angeles to Detroit and about 8 million borrowers still owing more on their mortgages than their homes are worth.

But while warning on yet another subprime implosion is nothing new, and many have done it in the past, why this time may be different and far more timely, is because seriously delinquent borrowers are literally soaring, up from 7% in 2012 to 32% currently!

A measure of losses on mortgage debt rose last quarter for the first time since 2011, Fitch Ratings said in a report yesterday. The reversal was driven by an aging pool of loans in the foreclosure process, particularly in states such as Florida and New Jersey which give added legal protections to homeowners against repossessions. 

About 32 percent of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7 percent from the beginning of 2012,according to Fitch analyst Sean Nelson.

“These timelines could still increase for another year or so,” Nelson said, leading to even higher losses because of added legal and tax costs, and a greater potential for properties to deteriorate.

This means that the capacity of lenders to absorb losses is rapidly declining as inbound cashflows slow to a trickle. And not only that, but loss severities, or how much a lender will lose in case of default are also grinding higher:

Loss severities on subprime debt, tied to risky mortgages that inflated the housing bubble, increased to 75.9 percent from 74.1 in the last three months of the year. The severities — a measure of losses suffered on a liquidated loan — peaked at 77.1 percent in early 2012 from 12.8 percent at the end of 2006, during the property boom.

Gundlach isn’t the only one:

“In 2013, we were very bullish on subprime,” said Anup Agarwal, head of mortgage-backed and structured products at Pasadena, California-based Western Asset  Management. “It was overall a big winner and you saw that reflected in prices.” Agarwal, whose firm managed $443 billion in fixed-income assets as of Sept. 30, has in the past six months turned more negative on subprime and started shifting money into Alt-A securities.

One William Street Capital Management LP, a hedge fund firm with $2.7 billion in assets, is expecting reduced losses as home prices continue to rise, according to a letter sent to investors this month. The investment firm said increased regulations have added to costs for firms that deal with troubled mortgages.

For subprime prices to make sense, recoveries must improve but won’t because of the backlog of loans, Gundlach said.

Gundlach’s take home message is simple:

“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, the time it’s taking to liquidate defaulted loans and shares of homebuilders that have dropped 14 percent since reaching a high in May. D.R. Horton Inc., the largest builder by revenue, fell 1.9 percent to $21.54 at 9:43 a.m. in New York trading, extending its drop since May to 22 percent.

The money manager has cautioned investors before about avoiding subprime. In 2012, he said investors can’t assume the “lines will head south” speaking about loss severities for loans and then last year, referred to the debt as being stubborn.

Alas, warnings in a centrally-planned system in which only what the head of the Fed does matters, are lost on everyone: such was the case with Bass, such will be the case with Gundlach for the simple reason that the ever fainter music is still playing, and those whose money comes from furiously shuffling worthless assets back and forth, must dance. Plus by now everyone knows that by the time people actually do listen, it is always too late.

Canada Should Consider Ending CMHC Mortgage Insurance: IMF » The Epoch Times

Canada Should Consider Ending CMHC Mortgage Insurance: IMF » The Epoch Times.

People walk past homes for sale in Oakville, Ont., in this file photo. The IMF says CMHC mortgage insurance exposes the government to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital. (The Canadian Press/Nathan Denette)

People walk past homes for sale in Oakville, Ont., in this file photo. The IMF says CMHC mortgage insurance exposes the government to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital. (The Canadian Press/Nathan Denette)

 

Further measures should be considered to encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.

International Monetary Fund

The International Monetary Fund says Ottawa should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp.

The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 percent for the country next year.

Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.

Some analysts have credited the system for providing much-needed confidence in Canada’s housing sector during the 2008–09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.

The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.

“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.

“We suspect the fact that banks may benefit from government-backed insurance on mortgages … it sort of makes it easier for banks to do mortgages than other kinds of lending which, presumably, we think, is going to be more useful for the real economy.”

CIBC deputy chief economist Benjamin Tal says he believes the advice may be appropriate for the U.S., particularly prior to the crisis, but not necessarily for Canada, where the mortgage securitization market is a relatively small slice of the financial pie. CMHC can carry a maximum of $600 billion mortgage loan insurance on its books.

“In this case size matters,” he said. “It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy” by contributing to low borrowing rates and liquidity.

The Washington-based financial institution said further measures should be considered to “encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.”

It cautioned, however, that if any structural changes are made, they should be gradual to avoid unintended consequences.

The IMF report, released Wednesday, forecasts that Canada’s economy as a whole will start benefiting next year from a pickup in the U.S. economy, leading to greater demand for Canadian exports and renewed business investment.

In essence, the scenario is identical to the one predicted by the Bank of Canada, which also sees growth rising from the current 1.6 percent level to 2.3 next year.

A slightly more positive estimate was issued Wednesday by the Ottawa-based Conference Board of Canada, which is projecting Canadian real GDP will grow 1.8 percent in 2013, 2.4 percent in 2014, and 2.6 percent in 2015—assuming strong growth in the United States.

The Bank of Canada forecast holds that the risks are balanced—meaning there is as much chance the projected growth rate will be higher as lower.

But the IMF warns, however, that the risks to its outlook are primarily on the downside. The main reason, it says, is that it might be wrong about the U.S. economy rebounding in 2014.

“Renewed political standoff (in the United States) over spending appropriations and the debt ceiling and a faster-than-expected increase in long-term rates in the context of exit from quantitative easing could negatively affect the U.S. recovery and hence demand for Canadian exports,” the IMF said.

“Protracted weakness in the euro area economic recovery and lower-than-anticipated growth in emerging markets would also hurt the prospects for Canada’s exports, including through lower commodity prices,” it added.

On the domestic front, the IMF said the long period of low productivity growth and strong Canadian dollar may have left a deeper dent in Canada’s export potential, especially in the traditional manufacturing base, limiting the economy’s ability to benefit from the projected strengthening in external demand.

Cardarelli stressed the importance of investing in the energy sector, an industry that he said would have a significant impact on the organization’s economic forecasts in the future.

“We really feel that the system is stressed in terms of the transportation capacity—the ability of moving these resources out of Alberta, British Columbia, and Saskatchewan,” he said at a news conference in Toronto.

Among other things, the IMF recommends that Canada’s central bank hold off raising interest rates until there are firmer signs of a sustained transition from household spending to exports and investment, something bank governor Stephen Poloz has signalled he intends to do.

And it warns the federal government that it need not be so fixated on balancing the federal budget in 2015 if there is no meaningful pickup in economic activity.

That is likely to fall on deaf ears, however. Finance Minister Jim Flaherty said this week he is confident he will eliminate the deficit in 2015 and bring in surpluses after that.

With files from The Canadian Press

Average Canadian house price up 10% to $389,119 – Business – CBC News

Average Canadian house price up 10% to $389,119 – Business – CBC News.

Owning a home in Canada has become more costly, with the average price in December rising 10 per cent to $389,119, compared to a year ago.Owning a home in Canada has become more costly, with the average price in December rising 10 per cent to $389,119, compared to a year ago.
Bankers disagree on housing bubble

Bankers disagree on housing bubble 2:59

The average price of a Canadian home increased 10.4 per cent to $389,119 in December, compared to the same month in 2012.

The Canadian Real Estate Association (CREA) released data Wednesday showing that a total of 457,893 homes changed hands in Canada last year, an increase of about 0.8 per cent from 2012’s level.

“Absent further mortgage rule changes,” CREA’s chief economist Gregory Klump said, “sales in 2014 may surpass the annual total for 2013 if demand holds steady near current levels as strengthening economic and better job growth offset the impact of further expected marginal mortgage interest rate increases.”

As has been the case for some time now, CREA says the large jump in prices was largely due to what was happening in Canada’s most active and expensive markets.

Broad gains

Sales activity in December 2012 in Toronto and Vancouver was abnormally low, which dropped the national average at that time.

“Removing Greater Vancouver and Greater Toronto from national average price calculations cuts the year-over-year increase to 4.6 per cent,” CREA said.

CREA says the average price can be misleading, as it can be too easily influenced by individual factors.

The realtor group says its MLS Home Price Index “provides a better gauge of price trends because it is not affected by changes in the mix of sales activity the way that average price is.”

That index shows home prices rose 4.31 per cent over the past 12 months. Gains were seen in all housing types.

The index was led by an 8.7 per cent gain in Calgary and a 6.3 per cent gain in Toronto.

Vancouver’s market index posted a second straight increase of 2.13 per cent after declines for much of the time between late 2012 and late 2013.

oftwominds-Charles Hugh Smith: Janet Yellen, the Nation’s New Chief Slumlord

oftwominds-Charles Hugh Smith: Janet Yellen, the Nation’s New Chief Slumlord.

Janet Yellen’s role as the nation’s slumlord is masked by her apparent distance from the Fed’s money spigot and the resulting institutional ownership of the nation’s rental housing stock.

Please welcome the nation’s new chief slumlord, Janet Yellen. The previous top slumlord, Ben Bernanke, has retired from the position of Chief Slumlord (i.e. chair of the Federal Reserve) to the accolades of those who benefited from his extraordinary transfer of wealth from the many to the few.

Why is the chairperson of the Fed the nation’s top slumlord? Allow me to explain.We only need to understand two facts to understand the Fed’s role as Slumlord.

1. Rental housing has long been a decentralized, locally owned industry. Over 90% of rental properties under 50 units have historically been owned by individuals or couples: the nation’s landlords have historically been Mom and Pop, middle-class folks who saved capital and used those savings to buy a single-family home or small apartment building (duplex, triplex, four-plex) as an investment that they own and manage.

Very few amass a huge portfolio of properties, as few have the income or assets (i.e. the collateral) to leverage the purchase of dozens of rental properties.

Buildings up to four units qualify for conventional mortgages; small rental properties are not considered commercial properties like strip malls or large apartment complexes.

This diverse, local ownership provided a wide spectrum of residential rentals. The wider the variety of rentals and owners, the greater the diversity of prices, locales and requirements. This is the essence of free enterprise: sellers (landlords) and buyers (renters) agree to price and conditions in a dynamic, open and adaptive marketplace.

2. No Mom and Pop real estate investor can compete with financial institutions who can borrow unlimited sums of money from the Federal Reserve at near-zero rates of interest.

Let’s start by asking what happens to the price of real estate when mortgages fall from 8% interest to 4%: prices basically double, because buyers can “afford” to pay more at low rates of interest.

When conventional mortgage rates are 8%, a rental that costs $200,000 requires a 30% down payment in cash (because the buyers are not owner-occupants) or $60,000. The simple interest on a $140,000 mortgage is about $11,200 annually. (Let’s use simple annual interest for simplicity’s sake.)

At 4%, the price can double to $400,000, with a 30% down of $120,000 and a mortgage of $280,000, and the mortgage accrues the same $11,200 in annual interest.

Declining interest rates push real estate prices higher.

At first glance, this doubling in price doesn’t seem to affect the cost of ownership. But that is deceptive; consider how many households can scrape up $120,000 in cash compared to the number who can scrape up $60,000. The higher the price, the bigger the down payment required. The higher the down payment, the fewer the number of households who can accumulate that much cash.

To households that live paycheck-to-paycheck, both sums are out of reach. But a significant number of middle class households could accumulate $60,000: such a sum could come from a family house that was sold and divided amongst the offspring, for example, or a Solo 401K that allows the retirement fund to own real estate, or from saving $5,000 a year for 12 years.

The Federal Reserve’s Zero Interest Rate Policy (ZIRP) was designed to push real estate prices higher. The Fed’s public justification was “the wealth effect”: the idea was that as the family home increased in value, homeowners would begin to borrow and spend more money due to their increased home equity.

The second Fed goal was to increase home sales by lowering mortgage rates, theoretically enabling more marginal buyers to buy a home. But since prices rise as mortgage rates drop, this goal is mooted unless marginal buyers are also given a free ride on down payments and qualifying income, i.e. offered near-zero down payments and no-document mortgage qualification processes.

But zero interest rates and unlimited liquidity don’t just push real estate prices higher–they give institutions with access to the Fed’s nearly-free money an unbeatable advantage over Mom and Pop real estate investors.

Imagine being able to borrow $400,000 at 1% with zero collateral. You can now buy the rental property for cash, and pay only $4,000 in simple annual interest. And you didn’t have to put up a dollar of actual collateral to buy the property.

Consider the huge advantages you now have over the competing Mom and Pop bidders. Sellers typically prefer cash offers, so your cash offer (of Fed money) is more attractive than Mom and Pop’s loan-based bid.

If the price jumps to $500,000, Mom and Pop are blown out of the water: they don’t have the additional $30,000 cash required as collateral.

Thanks to the Fed, you don’t need any collateral. You can borrow $500,000 as easily as $400,000, and the increase in annual interest is trivial: a mere $1,000.

Now consider the operating costs: you have a $7,000 annual advantage because you have access to the Fed’s nearly-free money. Mom and Pop have to pay $11,200 in simple annual interest, while you pay only $4,000. A property that is break-even to Mom and Pop reaps you a $7,000 annual profit, just because you can borrow money from the Fed for next to nothing.

Now multiply the $400,000 and the $7,000 by 1,000. Now you can buy $400,000,000 of rental properties and skim $7,000,000 in annual profits, just from the advantage of having access to the Fed’s quantitative easing (QE) nearly-free money.

Any advantages you can accrue from economies of scale from owning tens of thousands of rental properties are also yours to keep, courtesy of the Fed.

Now you understand why Janet Yellen is the nation’s new top slumlord. Her policies of unlimited liquidity, QE and zero interest rates directly enable financial Elites to beat out Mom and Pop rental housing investors and buy tens of thousands of rental properties at will.

Access to free money and near-zero interest rates gives institutional buyers a built-in advantage over Mom and Pop rental property owners: no collateral and free profits from super-low rates available to those closest to the Fed’s QE money spigot.

Institutional ownership turns the rental housing stock into a Fed-enabled financial monoculture. Individual Mom and Pop owners may not require a credit check, or they might not raise the rents very often; the odds that you will be treated as a human being are higher because the scale of the operation is small and local.

To Fed-enabled Institutional landlords, you are an income stream to be skimmed.You will be processed and managed remotely, and variations are not allowed, as they mess up the profit machine.

Fed-enabled Institutional landlords may or may not hire competent, responsive managerial firms to manage their thousands of properties: from the point of view of Fed-enabled Institutional landlords, the lower the costs, the larger the profits. One way to lower costs is to not respond to tenant complaints or requests for service. Another is to hire the lowest-cost (and likely understaffed) management firm.

Janet Yellen’s role as the nation’s slumlord is masked by her apparent distance from the Fed’s money spigot and the resulting institutional ownership of the nation’s rental housing stock. But guess what, Chairperson Yellen: we’re not fooled. Your phony facade of “progressivism” doesn’t mask your real role as the nation’s top slumlord.

UK Property boom/bust: Episode 546 — RT Keiser Report

Episode 546 — RT Keiser Report.

January 07, 2014 11:30
Download video (211.07 MB)

In this episode of the Keiser Report, Max Keiser and Stacy Herbert discuss the Ka-Boom! and Ka-Bust! economics of extinction in the UK property market as Thatcher’s slow-motion housing time-bomb ticks away under the British economy, where demand continues to outstrip supply by a factor of 2-to-1 and where one woman being forced out of social housing complains: “I’m sure if they had their way, they would kill us. I really believe that.” In the second half, Max interviews Liam Halligan of the Telegraph about austerity, extinction economics, bitcoin and all those towns up North, of which Max can only name three.

%d bloggers like this: