The World Housing Bubble - Part II

Just in case you thought it was over...

Back in March, The Frost Report noted that during the economic crisis of 2006 and beyond, countries around the world drastically lowered interest rates to spur economic growth. Like the Frankenstein monster, the good intentions of these low interest rates have morphed into a hideous mess: a multinational, worldwide housing bubble.

Some economies have already moved from the "we don't have a bubble" stage to the "bubble is beginning to burst" stage, while others are still recovering from the first one. In case you missed the original article or it has faded from memory (see: World Housing Bubble), here is another selection of this year’s headlines to remind you that the problem is far from over.

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THE UK

House price rises ‘unsustainable’ as lending falls
The Times, June 2nd 2010

"Vicky Redwood, Capital Economics’ senior UK economist, said that the data 'continues to suggest that the recent rise in house prices is unsustainable'."

http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article7142355


CHINA

May property sales plunge in Beijing, Shanghai, Shenzhen
Xinhua, June 2nd 2010

"Beijing, property signings slumped nearly 70 percent to 3,357 in May from April, the Shanghai Securities News reported, citing data from the city’s housing regulator. In Shanghai, transactions may have dropped about 70 percent to 2,550 signings, the paper reported, and in Shenzhen, sales fell 62 percent."

http://news.xinhuanet.com/english2010/business/2010-06/02/c_13328894.htm


AUSTRALIA

Interest rate rises subdue housing bubble
The Australian, June 1st 2010

"The Reserve Bank of Australia's rate rises have pricked the boom in housing prices and have also sent lending to businesses skidding into reverse."

http://www.theaustralian.com.au/business/property/interest-rate-rises-subdue-housing-bubble/story-e6frg9gx-1225873746105


KAZAKHSTAN

National Bank Chairman: Kazakhstan Focuses on Economic Recovery
Ministry of Foreign Affairs, May 4rth 2010

"Kazakhstan was one of the first countries to experience the global economic meltdown of credit. As a result, it was one of the first to respond with a comprehensive program to deal with problem sectors, such as banking, financial services and property development — the industries that created an economic ‘‘bubble’’ whose collapse the country is still recovering from."

http://portal.mfa.kz/portal/page/portal/mfa/en/content/news/ASTANA%20CALLING/2010-05-04


KENYA

As Nairobi Property Prices Rise, Home Buyers Suffer Low Returns
AllAfrica, Feb 22nd 2010

"Many people who have taken mortgages to buy rental properties are finding it increasingly difficult to service the loans since rents accrued are not sufficient to cover the monthly mortgage repayments.
At the heart of the problem is the fact that rents in many parts of Nairobi suburbs are facing a property price bubble."

http://allafrica.com/stories/201002221638.html


ISRAEL

Legal Ground: The end of easy mortgages?
The Jerusalem Post, May 28th 2010

"It was predictable that the Bank of Israel would move to cool the residential mortgage market. We have seen what anarchy of easy mortgages could do to a massive established economy like that of the US. Even more so, the collapse of a bank in a small economy such as Israel could be a disaster."

http://www.jpost.com/Business/Commentary/Article.aspx?id=176747


CANADA

House prices to drop: TD
The Globe and Mail, May 5th 2010

"House prices will fall in 2011, TD Bank said Wednesday as it revised its outlook for the Canadian real estate sector."

http://www.theglobeandmail.com/report-on-business/house-prices-to-drop-td/article1557540


TAIWAN

Taipei Real Estate Risks Grow After Record Rally
Bloomberg, May 20th 2010

"Investors should sell Taipei property now, taking advantage of a 21-month rally in prices before the government acts to make real estate more affordable, according to the Taiwan Real Estate Research Center and the island’s largest real-estate brokerage."

http://www.bloomberg.com/apps/news?pid=20601206&sid=a0cIUQ74Wfy0
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After today’s “hot economies” become tomorrow’s “busted economies” and real estate prices return to normal, the world map of economic health will need to be redrawn. Those with developed infrastructure and the ability to raise taxes will fare better, while emerging markets will likely be hardest hit.

If you have a margin account and/or trade international stocks, it would be wise to raise some cash (if you haven't already), to take advantage of bargains as they come available in the next 18 months.

Despite ongoing domestic problems, it is my belief that in a few years the United States - whose massive deleveraging has preceded and superseded all others - will look enviously safe and stable.

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"...in an environment in which the financial sector is prone to excess and the supervisory structure does not respond sufficiently, the interaction of low interest rates and financial vulnerabilities can clearly be dangerous."

Donald Kohn, Federal Reserve Board, 2010

What's Wrong with It?

"What’s wrong with it?” is a question that first-time investors (and some seasoned ones) have a tendency to ask when a stock goes down.

The full question is, “I just bought the stock last week, and now it’s going down! What’s wrong with it?” The actual problem may be the company, it may be the market, or (most likely) may be the question itself.

When a stock drops, the first thing to consider is what the general market is doing. If the market is rising and your stock is dropping, it is likely that something is indeed wrong with the company, especially if the selling continues for more than a few days. On the other hand, if the whole market is dropping and yours is dropping along with it, there is nothing necessarily wrong with the stock you purchased. But, a decision is necessary. And you have to ask yourself a couple of questions before making that decision.

Question One: Has the company changed?

There should be some good reasons why you initially bought the stock. Hopefully, most of these reasons are related to the company behind it. If you bought a stock only because the chart looked good, you’ll likely lose money. If you bought the stock because the company has steady earnings, low debt, great return on equity, reasonable P/E ratio etc., and the chart looked good, you should be just fine. If the reasons you bought the company still apply, strongly consider keeping the stock.

Question Two: What is the state of the economy?

There’s an expression in investing: “Don’t try to catch a falling knife.” If the market begins falling from a peak, and you have reason to believe that the entire market will continue falling for an extended period of time, you should seriously consider selling the stock and buying it back later. No matter how good your stock is, if the entire market is falling, yours will likely fall with it. On the other hand, if you are not 100% sure (I repeat: 100% sure) that the market will be significantly lower a month from now than it is today, keep the stock.

Question Three: What is the state of the industry?

Have their been any rule changes or significant developments that have impaired the moneymaking potential of the business? Have their been any adverse political developments? If there have been changes, find out about them and assess their impact yourself – do not rely on others to do so for you. Emotions tend to run high in such situations, and emotions have no place in investing.

The fact is, stocks of good companies drop all the time. Just because a stock price drops does not necessarily mean that the stock is “bad.” In fact, if the price has dropped significantly, and the company still has all the great qualities that made you buy it in the first place, consider buying more. Many a fortune has been made by purchasing under-priced assets and having the patience to wait.

“What’s wrong with it?” is often just a way of saying; “I’m overwhelmed with the human fear of losing money, and have no confidence in my original decision.” If this applies to you, take a deep breath and re-read this article with your stock in mind. Then make a decision.

If you still feel overwhelmed, sell your stocks and get out of the market, forever. Not everyone was meant to own stocks. To make money in the market, you have to not care about money.
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“I think that if any reader of these chapters is convinced – really convinced – he cannot master the market, a great deal has been accomplished, because the great majority will fail in the market, & it’s worth dollars and cents to them to know it.”

Gerald Loeb, The Battle for Investment Survival

Abouuuuut….Face!

The CREA Gets Real




Just seven days ago, I wrote an article stating that the Canadian Real Estate Association should be ashamed of themselves for their cheery and completely unrealistic assessment of the Canadian housing market (see: CREA to the Rescue).

Today, in a stunning about-face, the CREA "updated" its forecast, admitting that by 2011 a "demand-driven downturn" will push Canadian home prices lower. They even added that the threat of rising interest rates and new taxes caused buyers to jump into the market sooner than they may have otherwise (something I wrote about in April, in Spending 'til it Hurts).

It’s unclear what prompted the CREA to come clean. I’d like to think it was my blog, but more likely they simply realized that a small dose of reality now prevents egg-on-your-face later.

Of course, the CREA is still being idealistic (read "deceptive"). Amongst other nonsense, they insist that Canada’s "conservative lending practices" and mythical "prudent borrowing" will prevent a large price correction; that the two most overpriced markets (Ontario and B.C.) will inexplicably plateau next year after a small drop; and, of course that the current market shows a good balance between supply and demand. But, at least they aren’t encouraging a new wave of oblivious buyers. The CREA has, with its latest press release, gained back a shred of dignity.

I have to give credit where credit is due: the CREA did the right thing. More of the same would be nice.

For the CREA's full press release, see Housing Forecast Revised.
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"Home sales are coming down from the mountain peak, but they will level out at a high plateau -- a plateau that is higher than previous peaks in the housing cycle.”

David Lereah, Chief Economist, National Association of Realtors, USA 2006