The IMF Launches “Global Housing Watch”

Housing prices are on the march again across the globe, and the International Monetary Fund (IMF) is concerned. In response, the IMF has launched a site it calls the “Global Housing Watch.”

Here is the introduction:

“Housing is an essential sector of every country’s economy, but it has also been a source of instability for financial institutions and countries. Understanding the drivers of house price cycles, and how to moderate these cycles, is important for economic stability.

 

The new indicators are an important step in assembling country-level data on housing trends in one location, allowing for more transparent cross-country and historical comparisons. The hope is to prompt actions by policymakers to moderate housing cycles.”

Housing has been a natural beneficiary of loose monetary policies. The irony or dilemma in extremely expensive countries like the United Kingdom, Canada, France, and Australia is that overall inflation readings are low. Accordingly central banks are maintaining extremely accomodative monetary policies in these countries. Thus, the traditional brakes for the housing market, higher rates and tighter monetary policy, are absent and nowhere on the horizon. It is no accident that the Bank of Canada and the Bank of England are now talking more loudly about using macroprudential policies to contain housing markets and enforce standard of financial stability. Here are the related recommendations coming from the IMF: 

“We do have a set of policy tools that can help – sometimes these are referred to as “Mip-Map-Mop.” Microprudential (Mip) policies look at an individual bank’s balance sheet, for example to determine if it is making too many real estate loans. But it could be that the individual banks are doing what seems healthy for them, but what the banking system as a whole is doing needs results in an unhealthy growth in lending.

 

So, in addition, macroprudential regulations (Map), operating at the level of the financial sector as a whole, come into play. The most commonly used measures cap how much individuals may borrow relative to their income. These prudential measures are being increasingly used by countries to prevent an unsustainable build-up in debt.

 

Finally, there is the monetary policy (Mop) that involves the central bank raising interest rates if they want to cool off the housing sector. This can be tricky, because sometimes the economy is weak but the housing sector is booming, and raising the interest rate can harm the overall economy.

So, basically, we need to share experience across countries, to look at trends, use our judgment, and apply policies that that may help prevent problems in the housing sector.””

I will be keeping an eye on this website and the twitter hastag #HousingWatch. I expect some revealing and fascinating data to flow through here. Here are the charts posted on the site showing the relative valuations of housing across the globe. I highly encourage the reader to go directly to the website and browse for yourself.  I also hope to write some pieces covering the housing markets in the UK, Canada, and Australia in particular in coming weeks and months.

Note well that the U.S. is NOT in bubble territory (in the aggregate)….

 

 

 

 

 

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Hong Kong Property Market Defies Tame Inflation

The Hong Kong Monetary Authority just published its Quarterly Bulletin on economic conditions in Hong Kong and around the planet. The HKMA concludes that inflation is tame overall:

“Inflationary pressure eased further, as the underlying inflation rate tapered to a year-on-year 3.8% in October from 4.5% in June. The sequential pressure moderated slightly to an annualised 3.1% on a three-month-on-three-month comparison. This reflected waning food price inflation and moderation in price increases for other major CPI components.”

The slowly growing economy is expected to continue to keep inflation at bay. However, this calm surface masks a still roiling property market. Indeed, the HKMA believes the property market is well ahead of the economy given meager gains in income:

“In the property market, the disconnect between housing prices and economic fundamentals appeared to have become more acute. In contrast to tepid income growth, housing prices surged by a cumulative 23.2% in the year to October. Housing affordability deteriorated as a result, with both the price-to-income ratio and the mortgage payment-to-income ratio rising to their post-1997 highs.”

This is likely a matter of cheap money finding a home somewhere. In this case it is the property market. The government has responded to the growing problem with a series of taxes that seem to be moderating demand.

The HKMA places partial blame for inflationary pressures in the property market on the the Federal Reserve’s recent rounds of quantitative easing:

“Risks to inflation have also increased with additional quantitative easing in the US, through its potential impact on global commodity prices and local property prices.”

Note that the HKMA recognizes that QE in the U.S. will drive commodity prices higher. This dynamic is something Ben Bernanke has refused to acknowledge. With the Federal Reserve adding a “stealth” QE4 in the December statement, I will look to commodity prices to catch bids in 2013…and for central banks to work to try to counter-act the moves of the Federal Reserve.


KB Home faces rising input costs

In its latest earnings report, KB Home (KBH) reported rising input costs. Prices for labor, material, and land are all on the increase. In “KB Home ‘On Offense’ As Its Housing Markets And Pricing Power Strengthen“, I reported the following, including quotes from the Seeking Alpha transcript:

“While KBH is bullish about its business, it is wary about its costs. Costs increased about $1,200 a house, but KBH was able to offset that with pricing. I was a bit surprised that business is strong enough that KBH can actually wield some pricing power, passing on increased costs to its customers. Here is how KBH described the source of the cost increases and their likely impact:

‘We are starting to experience higher costs for labor and direct construction materials such as lumber, concrete and drywall. Through the end of the second quarter, the impact of these higher costs has been offset by sales price increases, which we have implemented in a majority of our communities during the first 6 months of the year. We believe incremental price increases can continue to offset any further cost increases for the remainder of 2012, which should not result in margin erosion but maybe a headwind in relation to our margin expansion plans.’

Moreover, land prices are also on the rise. KBH says that land sellers were the first to detect the improvement in the housing market and they are now able to exert some pricing power:

‘While there’s no question the housing markets are getting better, the land sellers figured it out first. So land prices are going up every bit as fast, if not faster, than home prices are.’

These are signs that the housing market is finally starting a sustained recovery, starting in select markets. For more details on earnings for KBH see “KB Home ‘On Offense’ As Its Housing Markets And Pricing Power Strengthen.”


Changes begin to Canada’s mortgage insurance guarantee framework

Two months ago, Jim Flaherty, Minister of Finance, announced that Canada would change its “mortgage insurance guarantee framework” to prevent over-speculation in its housing market. The new rules went into effect yesterday. These rules:

  1. Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
  2. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
  3. Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

Flaherty referenced the recent financial crisis as motivation for taking these proactive steps.

CBC News reports on the changes in “New mortgage rules take effect” and describes the current strength in Canada’s housing market.


Apartment rents are rising

WSJ:

Apartment rents rose during the first quarter, ending five straight quarters of declines and signaling the worst may be over for the hard-hit sector.

Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980.

Reis tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York—all cities that have notched big rental declines in the past year.

Rents increased 1.6% in the first quarter in Miami and 0.9% in New York. The gains came during what is usually a seasonally weak period for apartments and suggested that landlords may have some momentum heading into the peak spring and summer leasing season.

Keep in mind that housing costs currently account for 42 percent of the Consumer Price Index.


No signs of catastrophe in housing market

Scott Grannis at Calafia Beach Pundit notes that the Case Shiller Home Price Index continues to show strength or at least stability in housing prices:

The Case Shiller Home Price Index for 20 major metropolitan markets hit bottom in the second quarter of last year and has been rising gradually ever since. Given the lags used in constructing the index, this means that prices likely hit bottom around March of last year. Even after adjusting for inflation, as this chart shows, home prices are up at a 3% annualized rate over the past 8 months.


Sacramento’s Supply of Resale Homes Drops Below Three Months

Keep Sacramento on the list of cities that is still not seeing a wave of foreclosures overwhelm housing inventory. The Sacramento Business Journal reports:

“Far from becoming Foreclosure City littered with vacant homes — which was what some predicted for Sacramento as the housing crisis struck — the capital region has among the lowest supply of available housing in the nation.

Existing homes listed for sale are in shorter supply here on a per-capita basis than in 18 major metro areas, including Chicago, Dallas and Atlanta. And unlike areas where condo towers proliferate, such as Las Vegas, the Southern California coast and south Florida markets, Sacramento has among the fewest finished-but-vacant new homes in the country.”

These numbers mean that the inventory of resale homes has now dropped below a 3-month supply. Demand from entry-level and first-time buyers has pressured supply (and prices), whereas the market for move-up and high-end homes remains lackluster.