Wednesday, May 27, 2009

Just Dropped In

I woke up this mornin' with the sundown shinin' in
I found my mind in a brown paper bag, but then...
I tripped on a cloud and fell eight miles high
I tore my mind on a jagged sky
I just dropped in to see what condition my condition was in

Nouriel Roubini's newsletter [different link with more and different information] reminds us that there may be silver linings but the cloud is still damn big. For some reason the dark lyrics of the Kenny Rogers' classic played in the background of my mind, along with "It ain't over til it's over..."

Today we take a look at the health of residential and commercial property markets around the world. Slowing economic activity and a credit crunch contributed to a decline in housing activity, prices and construction in most major economies. Eastern Europe and the Baltics, as well as the U.S. and UK, have endured some of the sharpest declines. In many countries, not only in the U.S., the bottom of the property markets still seems far off, with sales, prices and starts forecast to continue declining, albeit at a slower pace, through much of 2009.

In fact, many European economies (and Canada) tend to have housing cycles that lag behind the U.S. by about 2-3 years, suggesting that their declines could also persist beyond a U.S. housing stabilization. Sounder lending standards and lower incentives to invest in residential property in some countries may allow them to avoid the depths of the U.S. property correction but others may suffer more severely. The liquidity resulting from quantitative easing has contributed to a slower deterioration of the housing markets. Yet with high inventories in many markets, it may take some time to absorb the excess. This will continue to erode the value of asset-backed securities and banks' balance sheets and defer the revival of construction activity, a major driver of growth.

The decline in retail trade and contraction of the financial sector has worsened the commercial property outlook. Commercial vacancy rates are on the rise in almost all major centers in Europe and North America and net effective rates have declined by 25-30% in major cities in Asia, suggesting that new investment is unlikely as these cities try to absorb overcapacity in retail and hotel trade. Meanwhile, still tight corporate debt markets pose obstacles for corporate finance. Despite the weak fundamentals, REITs and other property investments have benefited from the renewed risk appetite and have been climbing off late. These property investments might well be vulnerable to any reversal of risk appetite.

Despite the ongoing global meltdown I still hear loud voices preaching with stiff-backed righteous indignation about the beauties of the "free market" and the horrible effects of "government interference." Many still advocate pulling the TARP rug from under the whole house of cards and letting the chips fall where they may. Curiously, the same crowd that embraces fear as the glue that holds together a political, military and philosophical value system reveals no hint of fear when discussing the need for improved regulatory oversight. It reminds me of the good old boys here in Georgia who complain about motorcycle helmets and seat belts. "Hell, if I want to take the chance at becoming a vegetable after an accident it ain't none of anyone else's business."

Yeah, right. So for those who think no one else is affected, Roubini goes on....

United Kingdom

The housing sector is one the most important factors affecting the economic slump in the UK, which is similar in many ways to the difficulties facing the U.S. economy. The latest data on the UK housing sector continues to be mixed but some analysts are tentative to call the bottom in Q2 2009...

Western Europe

The European housing cycle lags the U.S. cycle by about 2 years but the extent of house price increases, as well as the extent of over-construction, exceeds the U.S. experience in many countries. Starting from the mid-1990s, house prices in the UK, Spain, Ireland, Scandinavia and France exceeded the price increase in the U.S. whereas construction as a percent of GDP expanded to unsustainable levels, especially in Spain and Ireland. This severe construction overhang in the latter countries will take several years to unwind thus retarding a return to balanced growth as suggested by the strong housing-consumption correlation in these countries...


The Australian housing market downturn is likely to be milder than in the U.S., UK and EU in 2009. Australia's house price correction had a head start going back to 2003. Furthermore, housing demand from migrants to the commodities-rich west and the chronic housing shortage in eastern Australia will keep prices from stabilizing back at pre-boom levels unless Australia fails to avoid a deep recession. Indeed, building approvals and housing loans to owner-occupiers began to recover since October 2008 after the government doubled grants for first-time purchases of homes until December 2009. Mortgage interest rates fell to their lowest level in four decades after the Reserve Bank of Australia cut the overnight cash rate 425bp within a year to 3% in April 2009, the lowest since 1960. Tax cuts, government handouts and lower petrol prices will also raise the affordability of housing....

New Zealand

New Zealand's housing market is in worse shape than Australia's but is also likely to avoid as deep a correction as in the U.S. and Europe. The Reserve Bank of New Zealand has cut 575bp since July 2008 to 2.5% in April 2009 but longer-term, fixed mortgage rates have recently begun to rise again due to expectations of a quick recovery and higher interest rates. Fiscal policy has been laissez-faire towards the recession, opting merely for tax cuts as the government would rather not stand in the way of the economy's structural adjustment...

Central and Eastern Europe

Like other parts of the world, property prices in most of Central and Eastern Europe (CEE) have taken a beating and further price falls are expected in 2009 and 2010. In addition to tight credit conditions and economic contractions across the region, collapsing demand from Western European buyers is also having a negative impact on prices....


Despite government investment, Russian construction activity, which previously boosted growth, has fallen in 2009, given the contraction of credit and reduced affordability of housing following the drop in real wages and increase in real interest rates. Banks curbed lending to developers who had begun delaying projects in mid-2008 as higher project costs limited profits...

Middle-East and Africa

Slowing growth, tighter liquidity and some slowing of supply shortages has reversed the Middle East property boom of recent years, raising the risk of a bust in countries most reliant on external credit. Almost all markets are witnessing price correction, lower sales and slowdowns - if not cancellations - in real estate and construction projects as speculative buying is falling, in the face of financing difficulties....


Asia has witnessed sharp real estate correction led by the Asian Tigers, plus China, India and Vietnam. All these markets saw declining home and office prices and rentals, lower sales and rising vacancies. Prices are approaching fundamental values and slowing construction activity might somewhat close the estimated excess supply. But further price and rental correction are imminent. This because household and corporate demand will remain subdued in 2009 despite policy measures such as interest rate cuts and fiscal incentives as well as attractive discounts offered by realtors. Slowing or contracting consumer spending and rising job losses in most economies are hitting residential and retail markets....

I left Canada and Brazil off the summary because they were the only two economies whose wounds seemed more superficial than critical. Dare I suggest that better central control and oversight may have had something to do with their being spared the blood-letting that seems still to be affecting the rest of the world economies? When I allow myself to wonder what might be happening if the GOP were in control it blows my mind.

Someone painted "April Fool" in big black letters on a "Dead End" sign
I had my foot on the gas as I left the road and blew out my mind
Eight miles outta Memphis and I got no spare
Eight miles straight up downtown somewhere
I just dropped in to see what condition my condition was in

I said I just dropped in to see what condition my condition was in
Yeah yeah oh-yeah


Deron S. said...

I respect your position, but we must never lose sight of the fact that both viewpoints have significant positive and negative aspects (otherwise they wouldn't both have survived this long).

The downside to the massive government intervention is the fact that it shifts responsibility from individuals to the government. Look no further than the welfare and Medicaid systems for evidence. They are fraught with abuse by people who, by every indication, should have been able to move off government assistance.

Let's call it like it is. Much of the anger of Liberals should not be directed at the GOP. It should be directed at capitalism. This is not a Republican vs. Democrat issue. It is a Capitalism vs. Socialism issue. That goes far deeper than politics. This country could survive under either scenario, but we need to put the discussions in the right context.

Hoots said...

Whatever. Me and the rest of the world are probably wrong.

My experience with Medicaid and welfare include far more cases of need than abuse. My wife and I were foster parents years ago, and now one of our children is following the same path. Abused and neglected children are not the cash cows that popular myth-making would have you believe. Pick any family services agency in America and check it out for yourself. Better yet, get yourself certified as a foster parent. (You don't have to follow through... just experience the training, hear the case workers and see the videos.) After that you can speak with authority.

Both my parents were Medicaid beneficiaries. In Dad's case (he died first and had to be in a nursing home) my mother was permitted to keep the house, car and $5000 in other assets. When her turn came, she was not allowed to have ANY assets other than $2000 in a bank account. She was allowed pre-paid funeral expense up to $10,000. She had paid less than that several years ago and we were required to furnish a statement of current value from the funeral home to validate that it did not exceed the allowed amount. We also had to sign an "estate recovery" form letting us know that after her death the state was obligated to seek restitution for Medicaid expenses from any assets that she left when she died.

Of course thirty years in the food business managing the working poor gave me further exposure to the business end of welfare, but don't get me started.

As for partisan politics, all I know is that as far back as I can recall party differences about welfare, the Dems have been fer it and the GOP agin' it.

Deron S. said...

The problem is, we can't explain the abuse and fraud away by citing real cases of need. It's the classic example of a campaign strategy designed to paint conservatives as cold, hate-the-poor machines. My argument was not that Medicaid and welfare shouldn't exist. The argument is that they are poorly managed and too large, as most large government programs become. I deal with the Medicaid program on a daily basis, so I assure you that I have authority on that particular issue.

In America, we've created these "camps" called Democrats and Republicans. If we channelled the passion we have for defending our positions (neither of which is THE answer) into developing real solutions, we might actually make some progress at tackling the big problems facing us.

The fact that both Keynesian and laissez faire schools of thought have survived shows that both have enduring merits. The trick is to pull the best of both into a good hybrid system. Unfortunately, there are strong forces at play pulling us into the D & R camps that doesn't allow the level of compromise we need.

I mean really, what were you trying to achieve when you said "When I allow myself to wonder what might be happening if the GOP were in control it blows my mind." You and I both know that for the last few years we had a balanced gov't with a Republican executive branch and a Democrat legislative branch. How do you feel about their performance?

Hoots said...

Your larger point about Keynesian and laissez-faire apptoaches is well taken. Both schools have merit in abstract philosophical terms. The problem comes when elected representatives place more importance on getting reelected than taking actions that may take two or three election cycles to show results. Why else would they include "sunset" provisions? Or post-date unpopular changes until after the next election?

I think the phrase "balanced gov't with a Republican executive branch and a Democrat legislative branch" may be an oxymoron. And their performance? I give them low marks more because of the wars in Iraq and Afghanistan than domestic issues. Despite Americans having historically low income tax rates for twenty-five years, they got yet another reduction in 2001 which is set to expire at the end of this year. Wonder why? Could the election cycle have anything to do with it?

Speaking of which, part of Obama's campaign rhetoric included veiled suggestions that he planned to end those "tax breaks for the wealthy" a year sooner, but after the election the revenue stream looked so good he decided to let it flow as scheduled. Kinda like talking about dieting until it's time to order dessert.

Getting back to that laissez faire business, for which regulatory controls are anathema, both parties were feeding at the trough while that was also in full swing during the reign of "balanced government." So all in all the balanced government approach gets very poor marks from me.

I came across a shocking number a few weeks back that the top one percent of Americans controls (depending on what source you cite) between twenty to thirty-eight percent of the country's wealth. To me that is a shocking statistic, particularly when the other end of the distribution curve is taken into account: the bottom forty percent survives (again, depending on which source is cited) on one percent of the total.

Modern financial systems leave no room for the biblical principle of leaving gleanings for the poor. Our first instinct is to withhold what crumbs they find, especially through "fraud and abuse." A blame-the-victim mentality tells us that if they would just make better decisions and change their habits they would be more self-sufficient.

Which is true, of course, as far as it goes. But at the same time we wonder why so many young people decide to enter the non-taxed, super-lucrative fields of retailing illegal drugs and/or sex.

vietnamcatfish said...

Just dropped in to see what condition your condition was in. Loved that song back in the day. Very psychedelic and from Kenny Rogers no doubt. Wonder if he sings that one in concert. vc