Renegade Economists podcast 358
As broadcast on 3CR, Wed 17th September, 2014.
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How to Value a House show notes
336 Burnley St, Richmond. High profile, high profits, $900K in 2 years – nice work if you can get it. Obviously been vacant for years. 1971 calendar covered in cobwebs. View the news story. Summed up in this facebook poster:
Have u ever wondered why renters get pushed out of a property when a property goes to auction?
Its essentially an admission that the new rental price demanded to meet the auction price paid will be above and beyond what the current renter has paid in the past.
Take the case of our colleague, Mr X, who has been living innner melbourne house for a decade. He started off paying $1000 p/m. For the last few years that increased to $1300. Remember the formula for valuing a house:
Monthly rent x 12 months x 20 years
$1300 x 12 months x 20 years = $312,000
Mr X has paid about $150 k over the last 10 years, about half what the place was bought for.
Recent sales in the area indicate this run down property will sell for $700K.
$2916 p/m v $1300 p/m = more than double in rents required to justify the expected price.
Investors have the ability to rent at a discount to this $2,916 because of negative gearing. The more investors lose on the property, the less they pay in tax. Nice incentives eh? They also understand they will enjoy a capital gain in years to come, making up for any short term losses. Read Philip Soos on just how much these negative gearing losses add up to.
Conservative commentators talking bubbles:
Peter Costell – running out of luck
However, if you exclude refinance of existing loans, then a staggering 50% (rounded up) were for investment purposes. This is an absolute record, and represents a 4% uplift from last month. …. The attraction of lifting house prices and low interest rates make property investment for many compelling.
Derivatives and Australian housing
5232.0.55.001 – Assets and Liabilities of Australian Securitisers, Jun 2014
At 30 June 2014, total assets of Australian securitisers were $131.3b, up $2.5b (2.0%) on 31 March 2014.
That equates to 8% for the year.
are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet (usually with an appropriate capital charge). The covered bonds continue as obligations of the issuer (often a bank); in essence, the investor has recourse against the issuer and the collateral, sometimes known as “dual recourse.” However, there exist other variable types where assets come off balance sheet. As of 2012 volume of outstanding covered bonds worldwide was euro2,813 billion, while largest markets were Germany (€525 bil.), Spain (€440 bil.), Denmark (€366 bil.) and France (€362 bil.).
ABS rank Covered bonds as ‘Other’ according to the relevant statistical department. These were listed at $22bn Mar 08 down to $1.3bn June 2013. The last few months they were not reported as volumes were so low. But then we come across this article.
Rental Backed Mortgages Securities
Brazil Covered Bonds Boosting Housing Key to Election: Mortgages
By Filipe Pacheco
Brazil President Dilma Rousseff, who has championed affordable housing since taking office in 2010, is turning to the international bond market for real-estate funds in the final weeks of her re-election campaign.
Finance Minister Guido Mantega said last month that Brazilian banks will be allowed to sell covered bonds — financing pioneered in Europe to fund home loans. Banks can borrow more cheaply using the securities because mortgages provide additional collateral, giving homebuyers lower rates.
Rousseff, 66, frequently touts her signature program, My House, My Life, in a presidential race in which she lags behind her opponent in polls. As the program adds to the budget deficit, now at a seven-year high, the bonds will provide another financing source for banks, which rely on deposits and government loans to provide mortgages.
“It is necessary to create alternative sources of funding for the housing sector and it makes sense for this government to do it while it still is in office,” said Octavio de Lazari Jr., a deputy director at Sao Paulo-based Banco Bradesco SA and president of Abecip, an association of real-estate lenders.
Banks could issue a total of almost 200 billion reais ($89.6 billion) in a decade, according to Alexandre Assolini Mota, a partner at PMKA Advogados in Sao Paulo who specializes in real estate law. The securities probably would draw interest from Brazilian institutional investors such as pension funds, he said.
When Rousseff was a minister under former President Luis Inacio Lula da Silva, she helped create My House, My Life in 2009. The program’s mortgage subsidy reduces rates by half for Brazilians making less than 5,000 reais a month.
After she was elected in 2010, Rousseff, who belongs to the Workers Party, boosted the program’s funding. As of Aug. 15, it has subsidized the purchase of 3.56 million homes throughout Brazil, totaling 222.8 billion reais in funding, according to data from the Ministry of Cities.
… The loans and subsidies from state banks that fuel the housing market are driving up Brazil’s deficit and the debt needed to finance it. The budget gap will expand to 3.9 percent of gross domestic product this year, according to a survey of forecasters by Bloomberg in August.
*** Just like the First Home Owner’s grant, if everyone gets more money, the price of land goes up. Same with lower interest rates. If we have lower debt servitude, that encourages us to bid up the land/ house price. The sellers win either way.
64% of millionaires want to get their money out
Chinese govt investigating how they are getting their money out
On August 17, two weeks before it was announced to the Australian press, the Shenzhen Economic News had a big splash, with the headline “Australian state of NSW no longer requires investment in government bonds for Significant Investment Visa”.
The Deputy Premier had announced to his Chinese audience in Shenzhen that his government would scrap the requirement for overseas investors to buy $1.5m out of a total $5m in government ‘Waratah’ bonds, starting in September.
This week, back on home soil, Stoner announced the change and said it was designed to make it easier for Chinese investors, and to give them more choice.
Earlier this year, analysis from the real estate advisory arm of Korda Mentha showed that the scheme brought in at least $440 million to the Australian economy, or around $4 million per day in 2013 (China’s Great Wall of visa money, 5 February 2014).
Between November 2012 and the end of May 2014, state governments issued 1,145 invitations, while 928 applications were lodged. Just over 90 per cent of those applications came from China.
The figures also indicate that Victoria has been more proactive in approaching Chinese investors, having sent out almost double the amount of invitations as NSW.
****** Prop Council Oz say that 1 foreign investment purchase leads to 4 houses being constructed??? No detail provided on this statement when I contacted the spokesperson.
Rental Backed Mortgage Securities
Listen to our past show on the topic:
In a 2011 report, Morgan Stanley analysts proclaimed that America was experiencing a transition from an ownership society to a “rentership society.” “The combination of falling home prices, limited mortgage credit, continued liquidations and better rental options is fundamentally changing the way Americans live,” says the report, concluding, “We believe this change is only beginning.”
In the final months of 2013, the rate of homeownership dipped to an 18-year low of 65.2 percent, down from a 69.4 percent peak prior to the 2007 financial crisis, according to U.S. Census data.
An In These Times survey of a portion of the 2,500 Blackstone-owned homes in the greater Chicago area suggests high vacancy rates in homes purchased during the past year. Using data from the Cook County Recorder of Deeds, In These Times identified approximately 200 properties in the city’s northwest neighborhoods acquired by Invitation Homes during the past year. In February and March, In These Times surveyed 50 of these properties and discovered only 17 that were occupied.
The University of Missouri-Kansas City’s William K. Black also worries about the impact that investor-owned housing will have on neighborhoods as a whole. He suggests that groups like Blackstone may try to lower their property taxes by reducing the appraisal values for the homes they own—which could drain city coffers. “That’s a big hit in particular areas where they’re buying thousands of homes,” says Black. “You can imagine what that’s going to do to the budget, for things like school districts.”
This scenario is already playing out in Huber Heights, Ohio, where the hedge fund Magnetar Capital LLC bought up a third of all rental properties, then proceeded to apply for the “largest reduction in residential property taxes in the county’s history,” according to Bloomberg. The local school board is fighting to block the reassessment, which could slash up to $800,000 from the education budget.
Rentier: Someone living on a fixed income, such as the French rentes, government bonds. What Keynes called a “functionless investor” in his recommendation for “euthanasia of the rentier” (General Theory, p. 376 1961 Papermacs edition, MacMillan & Company). Property rents and interest are the two major modern forms of rentier income. (See Adam Smith, Economic Rent and FIRE Sector.)
Rentier income: The essence of classical political economy was that no outlay of living or embodied labor is needed to obtain rent and interest. (See Labor Theory of Value.) This analysis offended the vested interests, which sponsored a post-classical reaction by applying the maxim, “If the eye offend thee, pluck it out.” (See Neoclassical Economics.) The ensuing marginal utility theory ignored the wealth addiction that historically has gone hand in hand with rentiers and the tendency for their compound interest demands to approach infinity
Peter Costello has warned of widespread hardship when the property sector’s rapid growth inevitably slows in an economy already manned by nervous consumers whose real wages are falling.
At a property industry event in Sydney on Wednesday, the former treasurer said Australia’s luck was “beginning to run out”, the country had big questions to grapple with in the near future.
“We’ve got anxious consumers who are saving money, with real wages falling in a country where incomes have peaked. And they’re distrustful of the political class where consensus is breaking down. We need to work out how to put things back together.”
Mr Costello’s comments come after Treasurer Joe Hockey earlier this week again dismissed the idea Australia was facing a housing bubble, citing a supply shortage as the key price driver.
Mr Hockey’s comments were made in response to a warning sounded by the Bank for International Settlements labelling Australia’s residential property marked as one of the world’s most overvalued.
The global bank’s assessment harmonises with comments made at the September board meeting of the Reserve Bank of Australia, where board members explicitly highlighted that they are now on high-alert for a potential bubble.
But Mr Costello stopped short of calling Australia’s booming property markets a bubble, instead saying housing prices were growing so quickly because limited supply of land.
Australia’s limited supply of housing is being increasingly snapped up by foreign buyers, who in theory need to apply to the Foreign Investment Review Board to purchase established homes rather than new developments.
But Coalition MP Kelly O-Dwyer this week revealed evidence given to an inquiry into the FIRB revealed these restrictions are not being adequately enforced.
He said the “music” of low, short term interest rates and considerable money printing had to stop, which would cause markets to either tank or return to more normal growth rates.
Mr Costello, who is also chair of Australia’s Future Fund, said property would be an increasingly important investment class as the population ages.
*** “I’m not so sure it’s credit-fuelled,” Mr Hockey said during a forum organised by Bloomberg News in Sydney on Tuesday. “There’s a lot of cash going into property now.” – Does that mean its speculative Mr Hockey?
The good, bad and ugly of RMBS resurgence
By ABC’s Alan Kohler
Once the price of a block of land was about 40 per cent of the cost of a house; now the land cost is 2-3 times the cost of a house.
The mortgage-backed securities market is booming and bodes well for bank competition. But it’s driving house prices higher and making it even harder for first homebuyers, writes Alan Kohler.
After five years of near death, the residential mortgage-backed securities (RMBS) market in Australia is roaring back to life, which is both good and scary.
In 2013, $26 billion worth of RMBS were issued in Australia, which was the most anywhere in the world, according to Deloitte partner Graham Mott. So far in 2014 the market in mortgage securities is still active, with big issues from AMP, AFG, Pepper Home Loans, Heritage Bank and Liberty.
There simply isn’t enough land being released in Australia to match either the demand for housing or the supply of credit.
The result is that instead of being three times the average wage as it used to be, the cost of housing in Australia is 6-10 times the average income. First homebuyers are now totally excluded from home ownership unless their parents support them.
It’s not a bubble – yet – because it’s merely the true forces of supply and demand working (which is the definition of a non-bubble). (??????)
Supply is restricted (of land, not houses) and demand is being fuelled by immigration and the plentiful supply of credit to investors looking to take advantage of negative gearing.
And the rejuvenation of the RMBS market will only increase the supply of credit even further and lower its price.
In other words, the supply of credit for mortgages, both prime and subprime, is only going in one direction – up – and it wouldn’t take another subprime mortgage bubble to produce a glut of cash available to be lent against real estate.
By the far best solution would be a big increase in the supply of serviced land in the outer suburbs of Sydney and Melbourne, but it would be slow and the infrastructure would be expensive – too expensive for the first homebuyers themselves to pay, or for governments for that matter.
Will the Coalition Government regulate the supply of credit or restrict negative gearing? Unlikely.
So it looks like your super will have to go towards buying the kids a house: they’ll never be able to afford one.
WASHINGTON – The historic election of 2008 re-confirmed one truism about American democracy: Money wins elections.
From the top of the ticket, where Barack Obama declined public financing for the first time since the system’s creation and went on to amass a nearly two-to-one monetary advantage over John McCain, to congressional races throughout the nation, the candidate with the most money going into Election Day emerged victorious in nearly every contest.
In 93 percent of House of Representatives races and 94 percent of Senate races that had been decided by mid-day Nov. 5, the candidate who spent the most money ended up winning, according to a post-election analysis by the nonpartisan Center for Responsive Politics. The findings are based on candidates’ spending through Oct. 15, as reported to the Federal Election Commission.