Economic data would probably suggest yes:
"The moves are belated. According to data compiled by real estate consultancy Colliers International, residential prices in 70 large and medium-sized cities across China soared in 2009, with 50% to 60% increases in Beijing and Shanghai. Real estate mania has become so intense that it has spilled over into pop culture. Last year one of the most popular television shows was a weekly drama entitled Wo Ju (literally "Dwelling Narrowness"), which focused on the plight of a young couple who spend two-thirds of their monthly income keeping up the mortgage on a tiny Shanghai apartment. Their tale is all too real. As economist Xie points out, residential prices in China relative to per capita income are far and away the highest in the world. The housing price-to-income ratio in urban China is over 20, which means it takes the average citizen's total wages for 20 years to buy an average dwelling. (By comparison, the highest housing affordability ratio for a U.S. city — Honolulu — is 8.2.)."
Source: Excerpt from article linked to above
At the end it also depends how all the important elements of the Chinese economy develop (GDP growth, per capita income etc.). A housing price-to-income ratio of 10 would be more healthy. Higher income would mean higher labor costs and would have a negative impact on China's competitive position. At the end we will see a cooling down of the Chinese economy. The question is when.
Who ever tells that Fannie and Freddie were not an enhancing element of the US financial crisis..
Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.
That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.
Home sales plunged in December even faster than predicted, deepening questions about whether the housing market can function without ample government assistance.
Sales of existing homes in December fell 16.7 percent from November to a seasonally adjusted annual rate of 5.45 million units, the National Association of Realtors said Monday. read more
"Chinese regulators have told some banks temporarily to halt lending amid growing fears of asset bubbles and inflation. The push to curb credit growth follows frenetic lending activity by Chinese banks that raised concerns about overheating in the economy. The crackdown prompted stock market falls around the world as investors worried about the impact of China’s tightening on its growth. Traders said such concerns added to fears over the outlook for Greece, which is struggling to fund the eurozone’s biggest deficit. See also FT Alphaville on China’s property bubble."
The Economist published great interactive house price charts for various countries. Click here to go to the charts on The Economist website.
The US housing crisis is far from being over. There is the danger of a second slump once rates are rising:
"Figures released last week show that after four months of gains, home prices flattened in October. At that time, low mortgage rates (courtesy of the Federal Reserve) and a home buyer’s tax credit (courtesy of Congress) were fueling sales. That should have propped up prices. But it was not enough to overcome the drag created by a glut of 3.2 million new and existing unsold single-family homes — about a seven-month supply.
The situation, we fear, will only get worse in months to come. Rates already are starting to rise as lenders brace for the Fed to curtail support for mortgage lending as early as the end of March. The home buyer’s tax credit is scheduled to expire at the end of April. And a new flood of foreclosed homes is ready to hit the market."
Source: Excerpt from article linked to above
I found this a quite progressive subject for a study by the IMF.
The paper studies the relationship between lobbying by financial institutions and mortgage lending. It has a focus on the question of how lobbying could have contributed to the accumulation of risk. The authors researched loan characteristics and lobbying expenditures on laws and regulation related to mortgage lending and securitization.
It seems that lobbying lead to less supervision and consequently more agressive behavior. The authors of the study conclude:
"We show that lenders that lobby more intensively on these specific issues have (i) more lax lending standards measured by loan-to-income ratio, (ii) greater tendency to securitize, and (iii) faster growing mortgage loan portfolios. Ex post, delinquency rates are higher in areas in which lobbying lenders’ mortgage lending grew faster, and, during key events of the crisis, these lenders experienced negative abnormal stock returns. These findings seem to be consistent with a moral hazard interpretation whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms. Moral hazard could emerge because they expect to be bailed out when losses amount during a financial crisis or because they privilege short-term gains over long-term profits. With the caveat that overoptimism might also be consistent with some of the findings, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry."
Source: Excerpt from the paper linked to above
The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.
The Treasury Department said Thursday it removed the $400 billion financial cap it will provide to keep the companies from failing. Already, taxpayers have shelled out $111 billion to the pair.
Treasury Department officials said the $400 billion limit would be replaced with a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. read more
It is now more than 2.5 years since the outbreak of the subprime crisis, which consequently ended in a global financial crisis and recession.
I took the time to look back and collected some of the insightful posts and links which relate to subprime and its consequences. The richness of information which can be found on this weblog is impressive:
The subprime mess started to show slowly:
People started to understand and the opinion of early warners was suddenly relevant:
The mess has deeper roots:
Regulation and politics became an issue:
Crises and consequences are researched in depth:
Reinhart and Rogoff:
Michael D. Bordo:
This is a great chart from The Economist.
According to The Economist, a huge overhang of loans needs refinancing:
£35 billion next year alone,
and up to £120 billion more by 2013.
The Economist mentions that things could get worse next year, once we start to leave the low interest period:
"Few of the usual equity investors, such as real-estate investment trusts and private-equity funds, will come in at today’s prices, given how little is on offer and how hard it is to get credit. So the banks are hanging on, able to do so only because low interest rates mean their funding cost is low. Meanwhile, other parts of the economy, especially cash-strapped firms, are being starved of the loans they need. Next year, things could get worse."
It is great that markets help distressed homeowners out of their mess. The fact that bankers allegedly can make profits at the cost of the taxpayer is disturbing and would need further consideration.
As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.
Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers. read more
Guardian.co.uk: Property market hasn't collapsed because banks can't face the truth, by Ruth Sutherland, Lenders are still extending credit to commercial developers because they simply can't afford to crystallise their losses, Nov. 22, 2009
"Commercial property is the dog that didn't bark in this recession. There were widespread expectations of carnage in the market; although there were sharp falls in values earlier on, this has so far not materialised. Quite the contrary in London prime property, which shows every sign of blowing up into a new bubble. But it doesn't take the deductive powers of Sherlock Holmes to work out what is going on – and the banks, inevitably, hold the key to the mystery.
The first thing to say is that the boom in prime London real estate gives a misleading picture of the market as a whole, as does the strong recovery in the shares of big listed companies like British Land, Hammerson and Land Securities.
Activity in the capital is being driven by overseas buyers taking advantage of the weak pound and financing transactions with equity capital, not debt. It is being stoked by a shortage of supply, with an estimated £7bn of capital chasing half a billion's worth of desirable property for sale." read more
The prime property market in London is a market segment per se. Even though the rest of the market has not recovered yet, the price appreciation of prime property does not necessarily have to lead to a new bubble. Prime property is scarce and it can be an attractive investment in the longer term.
In contrary to US residential property where we do not see a shortage of supply in many regional markets. Consequently, prices and rents are still under pressure:
This is a worrisome development. Should it turn out that China has a lot of wasteful investment, growth of the country could be substantially effected. We pointed at this danger on MarketObservation already years ago.
A large bubble is forming in China’s property market as a result of Beijing’s crdit-driven stimulus programme, one of the country’s most prominent real estate developers warned.
Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects. read more
Barry Ritholtz has found some interesting material about rational and irrational excuberance in property markets:
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