Facing Shortfalls, Pension Managers Turn to Risky Bets

The graying of the American employee is a math drawback for Farouki Majeed. It’s his job to take a position his means out. Mr. Majeed is the funding chief for an $18 billion Ohio college pension that gives retirement advantages to greater than 80,000 retired librarians, bus drivers, cafeteria staff and different former staff. The issue is that this fund pays out extra in pension checks yearly than its present staff and employers contribute. That hole helps clarify why it’s billions in need of what it must cowl its future retirement guarantees.

“The bucket is leaking,” he mentioned. The answer for Mr. Majeed—in addition to different pension managers throughout the nation—is to tackle extra funding threat. His fund and plenty of different retirement programs are loading up on illiquid belongings resembling personal fairness, personal loans to corporations and actual property.

So-called “various” investments now comprise 24% of public pension fund portfolios, in response to the latest knowledge from the Boston School Middle for Retirement Analysis. That’s up from 8% in 2001. Throughout that point, the quantity invested in additional conventional shares and bonds dropped to 71% from 89%. At Mr. Majeed’s fund, alternate options had been 32% of his portfolio on the finish of July, in contrast with 13% in fiscal 2001.

This technique is paying off in Ohio and throughout the U.S. The median funding return for all public pension programs tracked by the Wilshire Belief Universe Comparability Service surged to almost 27% for the one-year interval ending in June. That was one of the best consequence since 1986. Mr. Majeed’s retirement system posted the identical 27% return, which was its strongest-ever efficiency primarily based on information courting again to 1994. His private-equity belongings jumped almost 46%.

A majority of these blockbuster positive aspects aren’t anticipated to final for lengthy, nevertheless. Analysts anticipate public pension-fund returns to dip over the subsequent decade, which is able to make it tougher to cope with the core drawback dealing with all funds: They don’t have sufficient money to cowl the guarantees they made to retirees. That hole narrowed in recent times however remains to be $740 billion for state retirement programs, in response to a fiscal 2021 estimate from Pew Charitable Trusts.

This public-pension predicament is the results of many years of underfunding, profit overpromises, unrealistic calls for from public-employee unions, authorities austerity measures and three recessions that left many retirement programs with deep funding holes. Not even the 11-year bull market that ended with the pandemic or a fast U.S. restoration in 2021 was sufficient to assist pensions dig out of their funding deficits utterly.

Demographics didn’t assist, both. Prolonged lifespans brought about prices to soar. Wealthy early-retirement preparations and a wave of retirees world-wide additionally left fewer lively staff to contribute, widening the distinction between the quantity owed to retirees and belongings available.

Low rates of interest made the pension-funding drawback much more tough to unravel as a result of they modified long-held assumptions about the place a public system might place its cash. Pension funds pay advantages to retirees via a mixture of funding positive aspects and contributions from employers and staff. To make sure sufficient is saved, plans undertake long-term annual return assumptions to mission how a lot of their prices can be paid from earnings. These assumptions are at present round 7% for many funds.

There was a time when it was potential to hit that concentrate on—or larger—simply by shopping for and holding investment-grade bonds. Not anymore. The extremely low rates of interest imposed by central banks to stimulate development following the 2008-09 monetary disaster made that just about inconceivable, and shedding even just a few share factors of bond yield hindered the purpose of posting regular returns.

Pension officers and authorities leaders had been left with a vexing resolution. They may shut their funding gaps by decreasing advantages for current staff, chopping again public companies and elevating taxes to pay for the bulging obligations. Or, since these are all tough political decisions and courts have a tendency to dam any efforts to chop advantages, they may take extra funding threat. Many are selecting that possibility, including dollops of actual property and private-equity investments to the once-standard guess of bonds and shares.

This shift might repay, because it did in 2021. Beneficial properties from private-equity investments had been an enormous driver of historic returns for a lot of public programs within the 2021 fiscal yr. The efficiency helped enhance the combination funded ratio for state pension plans, or the extent of belongings relative to the quantity wanted to satisfy projected liabilities, to 85.5% for the yr via June, Wilshire mentioned. That was a rise of 15.4 share factors.

These bets, nevertheless, carry potential pitfalls if the market ought to fall. Illiquid belongings resembling personal fairness usually lock up cash for years or many years and are far more tough to promote throughout downturns, heightening the danger of a money emergency. Various belongings have tripped up cities, counties and states prior to now; Orange County famously filed for chapter in 1994 after losses of greater than $1.7 billion on dangerous derivatives that went bitter.

The heightened concentrate on various bets might additionally end in heftier administration charges. Funds pay about two-and-one-half share factors in charges on various belongings, almost 5 occasions what they pay to spend money on public markets, in response to analysis from retired funding marketing consultant Richard Ennis. Some funds, consequently, are avoiding various belongings altogether. One of many nation’s best-performing funds, the Tampa Firefighters and Police Officers Pension Fund, limits its investments to publicly traded shares and bonds. It earned 32% within the yr ending June 30.

It took some convincing for Mr. Majeed, who’s 68 years outdated, to change the funding mixture of the Faculty Workers Retirement System of Ohio after he turned its chief funding officer. When he arrived in 2012, there was a plan below technique to make investments 15% of the fund’s cash in one other kind of other asset: hedge funds. He mentioned he thought such funds produced lackluster returns and had been too costly. Altering that technique would require a feat of public pension diplomacy: Convincing board members to roll again their hedge-fund plan after which promote them on new investments in infrastructure initiatives resembling airports, pipelines and roads—all below the unforgiving highlight of public conferences. “It’s a tricky room to stroll into as a CIO,” mentioned fund trustee James Rossler Jr., an Ohio college system treasurer. It wasn’t Mr. Majeed’s first expertise with politicians and fractious boards.

He grew up in Sri Lanka because the son of a distinguished Sri Lanka Parliament member, and his preliminary funding job there was for the Nationwide Growth Financial institution of Sri Lanka. He needed to consider the feasibility of factories and tourism initiatives. He got here to the U.S. in 1987 along with his spouse, received an M.B.A. from Rutgers College and shortly migrated to the world of public pensions with jobs in Minneapolis, Ohio, California and Abu Dhabi. In Orange County, Calif., Mr. Majeed helped persuade the board of the Orange County Workers Retirement System to cut back its reliance on bonds and put more cash into equities—a problem heightened by the county’s 1994 chapter, which occurred earlier than he arrived.

His 2012 transfer to Ohio wasn’t Mr. Majeed’s first publicity to that state’s pension politics, both; he beforehand was the deputy director of investments for one more of the state’s retirement programs within the early 2000s. This time round, nevertheless, he was in cost. He mentioned he spent a number of months presenting the board with knowledge on how current hedge-fund investments had lagged behind expectations after which tallied up how a lot the fund paid in charges for these bets. “It was not a reasonably image at that time,” he mentioned, “and these paperwork are public.” Trustees listened. They lowered the hedge-fund goal to 10% and moved 5% into the real-estate portfolio the place it might be invested in infrastructure, as Mr. Majeed needed.

What cemented the board’s belief is that portfolio then earned annualized returns of 12.4% over the subsequent 5 years—greater than double the return of hedge funds over that interval. The board in February 2020 signed off on one other request from Mr. Majeed to place 5% of belongings in a brand new kind of other funding: personal loans made to corporations. “Again once I first received on the board, in case you would have instructed me we had been going to have a look at credit score, I might have instructed you there was no means that was going to occur,” Mr. Rossler mentioned. The private-loan guess paid off spectacularly the next month when determined corporations turned to non-public lenders amid market chaos sparked by the Covid-19 pandemic. Mr. Majeed mentioned he added loans to an airline firm, an plane engine producer and an early-childhood schooling firm impacted by the widespread shutdowns. For the yr ended June 30, the newly minted mortgage portfolio returned almost 18%, with greater than 7% of that coming in money the fund might use to pay advantages.

The system’s whole annualized return over 10 years rose to 9.15%, effectively above its 7% goal. These positive aspects closed the yawning hole between belongings available and guarantees made to retirees, however not utterly. Mr. Majeed estimates the fund has 74% of what it wants to satisfy future pension obligations, up from 63% when he arrived. Mr. Majeed is now eligible to attract a pension himself, however he mentioned he finds his job too absorbing to think about retirement simply but. What he is aware of is that the pressures forcing a cutthroat seek for larger returns will make his job—and that of whoever comes subsequent—exponentially tougher. “I believe it’s going to be very robust.”

By: Heather Gillers

Heather Gillers is a reporter on The Wall Street Journal’s investing team. She writes about pensions, municipal bonds and other public finance issues. She previously worked at the Chicago Tribune, the Indianapolis Star, and the (Aurora, Ill.) Beacon-News. She can be reached at (929) 384 3212 or heather.gillers@wsj.com.

Source: https://www.wsj.com/

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“Location Selector”. Willis Towers Watson. “Asset Management 2020 – A Brave New World” (PDF). Retrieved March 3, 2021. OECD For examples, see “Local Government Law Library”. Archived from the original on 6 September 2012. Retrieved 15 May 2011. “The 20 largest pension funds of the globe”. http://www.consultancy.uk. 27 October 2017. Retrieved 2018-03-11. [1] Top 100 Largest Public Pension Rankings by Total Assets Budget of the United States Government, FY2022, published May 28, 2021. Value as of September 30, 2020 Office of Management and Budget Retrieved June 13, 2021 Superannuation Statistics, March 2021. Value as of June 1, 2021. Retrieved June 1, 2021 2020年度第3四半期運用状況 GPIF “Annual Survey of Large Pension Funds and Public Pension Reserve Funds” (PDF). OECD. 2016-04-21. Retrieved 2016-10-28. Budget of the United States Government, FY2022, published May 28, 2021. Value as of September 30, 2020. Office of Management and Budget Retrieved June 13, 2021 Budget of the United States Government, FY2022, published May 28, 2021. Value as of September 30, 2020. Office of Management and Budget Retrieved June 13, 2021 Financial Statements of the Thrift Savings Fund December 31, 2020 and 2019. As of December 31, 2020. Thrift Savings Fund. Retrieved May 14, 2021 “Default”. Retrieved 2020-07-04. “CPP Fund Totals $317 Billion at 2017 Fiscal Year-End”. http://www.cppib.com. Retrieved 2018-02-24. “Page d’accueil”. Caisse de dépôt et placement du Québec | Investisseur institutionnel de long terme | Gestionnaire d’actif. “CalPERS Reports Preliminary 4.7% Investment Return for Fiscal Year 2019-20”. Retrieved 2021-03-03. “The world’s 300 largest pension funds – year end 2014”. Willis Towers Watson. “Performance – Ontario Teachers’ Pension Plan”. http://www.otpp.com. “Current Investment Portfolio – CalSTRS.com”. Retrieved 2021-03-03. https://www.pfzw.nl/over-ons/pers/paginas/kwartaalberichten.aspxhttp://www.emol.com/noticias/economia/2015/01/23/700604/donde-estan-invertidas-las-platas-de-los-trabajadores-en-chile.html Asher, Mukul (22 January 2021). “How the EPFO can improve as India’s largest social security provider”. Moneycontrol. “Annual Announcement of Financial Statements 2020”. “OMERS – 2020 Annual Report Highlights”. Retrieved 2021-03-03. Official WebSite of PREVI – English Version“STRS Ohio’s Impact”. “Assets Under Management & No.of Subscribers | NPS Trust”. “FRR 2012 Annual Report” (PDF). “NPRF”. Archived from the original on 2017-02-10. Retrieved 2020-05-03. “Choose an Industry SuperFund”. Industry Super. http://www.previ.com.br Official Website of PREVI “ΜΕΤΟΧΙΚΟ ΤΑΜΕΙΟ ΠΟΛΙΤΙΚΩΝ ΥΠΑΛΛΗΛΩΝ | Μ.Τ.Π.Υ.”“Official website of Mandatory Provident Fund Schemes Authority”. EPFPFRDA[2]Archived November 2, 2010, at the Wayback Machinehttp://www.csspp.rohttp://pio.rs/eng/“Armed Forces Pension Fund”. 29 USC § 1002 – Definitions | Title 29 – Labor | U.S. Code | LII / Legal Information Institute. Law.cornell.edu. Retrieved 2013-07-18. Federal Reserve Statistical Release, Financial Accounts of the United States, Fourth Quarter 2016Archived 2018-01-04 at the Wayback Machine, see pp.94-99. Values as of December 31, 2016. Federal Reserve Board of Governors. Reported March 9, 2017. Retrieved May 18, 2017

Beyond Evergrande, China’s Property Market Faces a $5 Trillion Reckoning

As many economists say China enters what is now the final phase of one of the biggest real-estate booms in history, it is facing a staggering bill: According to economists at Nomura, $ 5 trillion plus loans that developers had taken at a good time. Holdings Inc.

The debt is almost double that at the end of 2016 and last year exceeded the overall economic output of Japan, the world’s third-largest economy.

With warning signs on the debt of nearly two-fifths of growth companies borrowed from international bond investors, global markets are poised for a potential wave of defaults.

Chinese leaders are getting serious about addressing debt by taking a series of steps to curb excessive borrowing. But doing so without hurting the property market, crippling more developers and derailing the country’s economy is turning into one of the biggest economic challenges for Chinese leaders, and one that resonates globally when mismanaged. could.

Luxury Developer Fantasia Holdings Group Co. It failed to pay $206 million in dollar bonds that matured on October 4. In late September, Evergrande, which has more than $300 billion in liabilities, missed two interest-paying deadlines for the bond.

A wave of sell-offs hit Asian junk-bond markets last week. On Friday, bonds of 24 of 59 Chinese growth companies on the ICE BofA Index of Asian Corporate Dollar Bonds were trading at over 20% yields, indicating a high risk of default.

Some potential home buyers are leaning, forcing companies to cut prices to raise cash, and could potentially accelerate their slide if the trend continues.

According to data from CRIC, a research arm of property services firm e-House (China) Enterprise Holdings, overall sales among China’s 100 largest developers were down 36 per cent in September from a year earlier. Ltd.

It revealed that the 10 largest developers, including China Evergrande, Country Garden Holdings Co. and china wenke Co., saw a decline of 44% in sales compared to a year ago.

Economists say most Chinese developers remain relatively healthy. Beijing has the firepower and tighter control of the financial system needed to prevent the so-called Lehman moment, in which a corporate financial crisis snowballs, he says.

In late September, Businesshala reported that China had asked local governments to be prepared for potentially intensifying problems in Evergrande.

But many economists, investors and analysts agree that even for healthy enterprises, the underlying business model—in which developers use credit to fund steady churn of new construction despite the demographic less favorable for new housing—is likely to change. Chances are. Some developers can’t survive the transition, he says.

Of particular concern is some developers’ practice of relying heavily on “presales”, in which buyers pay upfront for still-unfinished apartments.

The practice, more common in China than in the US, means developers are borrowing interest-free from millions of homes, making it easier to continue expanding but potentially leaving buyers without ready-made apartments for developers to fail. needed.

According to China’s National Bureau of Statistics, pre-sales and similar deals were the region’s biggest funding sources since August this year.

“There is no return to the previous growth model for China’s real-estate market,” said Hous Song, a research fellow at the Paulson Institute, a Chicago think tank focused on US-China relations. China is likely to put a set of limits on corporate lending, known as the “three red lines” imposed last year, which helped trigger the recent crisis on some developers, he added. That China can ease some other restrictions.

While Beijing has avoided explicit public statements on its plans to deal with the most indebted developers, many economists believe leaders have no choice but to keep the pressure on them.

Policymakers are determined to reform a model fueled by debt and speculation as part of President Xi Jinping’s broader efforts to mitigate the hidden risks that could destabilize society, especially at key Communist Party meetings next year. before. Mr. Xi is widely expected to break the precedent and extend his rule to a third term.

Economists say Beijing is concerned that after years of rapid home price gains, some may be unable to climb the housing ladder, potentially fueling social discontent, as economists say. The cost of young couples is starting to drop in large cities, making it difficult for them to start a family. According to JPMorgan Asset Management, the median apartment in Beijing or Shenzhen now accounts for more than 40 times the average family’s annual disposable income.

Officials have said they are concerned about the risk posed by the asset market to the financial system. Reinforcing developers’ business models and limiting debt, however, is almost certain to slow investment and cause at least some slowdown in the property market, one of the biggest drivers of China’s growth.

The real estate and construction industries account for a large portion of China’s economy. Researchers Kenneth S. A 2020 paper by Rogoff and Yuanchen Yang estimated that industries, roughly, account for 29% of China’s economic activity, far more than in many other countries. Slow housing growth could spread to other parts of the economy, affecting consumer spending and employment.

Government figures show that about 1.6 million acres of residential floor space were under construction at the end of last year. This was roughly equivalent to 21,000 towers with the floor area of ​​the Burj Khalifa in Dubai, the tallest building in the world.

Housing construction fell by 13.6% in August below its pre-pandemic level, as restrictions on borrowing were imposed last year, calculations by Oxford Economics show.

Local governments’ income from selling land to developers declined by 17.5% in August from a year earlier. Local governments, which are heavily indebted, rely on the sale of land for most of their revenue.

Another slowdown will also risk exposing banks to more bad loans. According to Moody’s Analytics, outstanding property loans—mainly mortgages, but also loans to developers—accounted for 27% of China’s total of $28.8 trillion in bank loans at the end of June.

As pressure on housing mounts, many research houses and banks have cut China’s growth outlook. Oxford Economics on Wednesday lowered its forecast for China’s third-quarter year-on-year GDP growth from 5% to 3.6%. It lowered its 2022 growth forecast for China from 5.8% to 5.4%.

As recently as the 1990s, most city residents in China lived in monotonous residences provided by state-owned employers. When market reforms began to transform the country and more people moved to cities, China needed a massive supply of high-quality apartments. Private developers stepped in.

Over the years, he added millions of new units to modern, streamlined high-rise buildings. In 2019, new homes made up more than three-quarters of home sales in China, less than 12% in the US, according to data cited by Chinese property broker Kei Holdings Inc. in a listing prospectus last year.

In the process, developers grew to be much bigger than anything seen in the US, the largest US home builder by revenue, DR Horton. Inc.,

Reported assets of $21.8 billion at the end of June. Evergrande had about $369 billion. Its assets included vast land reserves and 345,000 unsold parking spaces.

For most of the boom, developers were filling a need. In recent years, policymakers and economists began to worry that much of the market was driven by speculation.

Chinese households are prohibited from investing abroad, and domestic bank deposits provide low returns. Many people are wary of the country’s booming stock markets. So some have poured money into housing, in some cases buying three or four units without the intention of buying or renting them out.

As developers bought more places to build, land sales boosted the national growth figures. Dozens of entrepreneurs who founded growth companies are featured on the list of Chinese billionaires. Ten of the 16 soccer clubs of the Chinese Super League are wholly or partially owned by the developers.

Real-estate giants borrow not only from banks but also from shadow-banking organizations known as trust companies and individuals who invest their savings in investments called wealth-management products. Overseas, they became a mainstay of international junk-bond markets, offering juicy produce to snag deals.

A builder, Kaisa Group Holdings Ltd. , defaulted on its debt in 2015, was still able to borrow and later expand. Two years later it spent the equivalent of $2.1 billion to buy 25 land parcels, and $7.3 billion for land in 2020. This summer, Cassa sold $200 million of short-term bonds with a yield of 8.65%.

By: Quentin Webb & Stella Yifan Xie 

Source: Beyond Evergrande, China’s Property Market Faces a $5 Trillion Reckoning – WSJ

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Why The World’s Wealthy Have Quietly Moved To Dubai

1

This summer, fresh from the West Coast of the U.S., a tech entrepreneur arrived in Dubai. In tow were his family, their family office and a fleet of 30 luxury cars. Everything a billionaire needs to start a new life in Dubai.

“It’s very safe here for my children. L.A. isn’t what it used to be. Crime has risen since Covid,” says the entrepreneur in his mid-50s who did not want to be named.

Finding a house with space for 30 cars was not easy, says Rohal Kohyar, marketing director of Luxhabitat Sotheby’s International Realty. Eventually a villa on its own private estate was identified. It had a basement that could be converted into a giant garage.

Nor was setting up the family office straightforward. Family offices on this scale manage hundreds of millions of dollars in private wealth, a task that requires a team of around 30 specialists.

“We’ve had to increase the salary for an E.A. (executive assistant) position for it to be attractive for people to come back to the U.A.E.,” says Zahra Clark, head of the MENA region for Tiger Recruitment.

During the pandemic many expats left Dubai for home. But with so many wealthy families now relocating to Dubai, recruiters are having to offer big incentives to lure investment professionals back to the Emirate.

Kohyar estimates 20 billionaires have bought property in Dubai this year, and Luxhabitat Sotheby’s International Realty has seen around a 300% increase in business compared with the same period last year.

According to the Dubai Land Department, the volume of property sales in Dubai increased by 136.5% in August compared to the same month last year. Villa sales were up 124% thanks in part to the sale of several Dh 100 million ($27 million) villas in Dubai Hills Grove area. “Normally we do one or two Dh 100 million ($27 million) deals a year. This year we’ve already done nine of them,” says Kohyar.

Real estate booms have come before, but this time is different, says Kohyar. “Now people are buying these luxury properties to actually live in them with their families.”

And they are in a rush, he says. Buyers are not waiting around for developments to be finished off. “They have to be ready now now.” The rich are suddenly in a hurry.

There is something else happening in Dubai that is different: People are coming from further afield. Kohyar says most of his clients are coming from major European countries, like the U.K., Switzerland and Germany. Of the super-rich setting up family offices in Dubai, Clark says most are from the U.S. and U.K. Other recruiters say there is a heightened interest from Singapore and Hong Kong.

Many were impressed with the way Dubai handled the pandemic. Vaccines were rolled out quickly among Dubai’s three million residents, P.C.R. tests are cheap and available, and the country only suffered a brief lockdown in March and April of 2020. “We’re busier now than pre-Covid. This will continue for as long as Europe, U.K. and the U.S. can’t get things right in how they’re dealing with the Covid situation,” says Clark.

But in reality, the pandemic hit Dubai very hard. Thousands of skilled expats started heading home as jobs dried up, the cost of living spiraled and they worried about being stranded abroad.

Dubai’s rulers suddenly realized the fallibility of their economy. Expats brought with them businesses, wealth and entertainment. Without them, Dubai’s own talented or entrepreneurial youth might follow them overseas.

In an effort to reverse this brain drain, the U.A.E. government started offering “golden visas” to high achievers. The 10-year residency visa was created in 2019, but since the beginning of this year it has been handed out to top students, successful entrepreneurs and award-winning actors.

In July, 45 students who scored more than 95% in their exams were granted golden visas. Raghad Muaiyad Asseid Danawi, a 17-year-old Jordanian student studying at Dubai’s Qatr Al Nada School was among them. “This is a great opportunity for me, my parents and siblings,” she told Khaleej Times.

That same month, the U.A.E. made 100,000 golden visas available to computer coders. Having lost out to Europe, and Silicon Valley, Dubai now wants to establish itself as a tech hub and has a target to establish 1,000 major digital companies over the next five years.

Alongside students and computer coders, the U.A.E. has also been handing out golden visas to actors. Yasmin Abdelaziz, a popular Egyptian actress was given a golden visa in July, joining a trio of Lebanese pop-stars-Najwa Karam, Marwan Khoury and Ragheb Alama-who have already been given the visa.

All of this makes Dubai more attractive for the wealthy. For Dh 10 million ($2.7 million) they too can have a golden visa. And, thanks to a new law introduced in February this year, (Decree Law 19), they can bring their family offices with them.

But perhaps the most enticing thing about U.A.E. for the lack of income tax. When other parts of the world, and especially the U.S. and U.K., are mooting wealth taxes to pay for the pandemic, Dubai suddenly looks much more attractive.

And, if they start moving their businesses or family offices here, they are more likely to stick around, says Kohyar: “This surge right now is more on a personal level, it’s more rounded, and we think this is going to be much more sustainable because people are moving here with their families and with their businesses so they’ll definitely stay.”

Follow me on Twitter or LinkedIn. Check out my website.

I am a freelance journalist with a decade’s experience covering business stories from around the world. When not reporting, I advise governments, businesses and

Source: https://www.forbes.com/

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“Where Dubai property rents have risen and fallen, Q1 2020”. The National. Retrieved 14 May 2020.

The Global Housing Market is Broken, and It’s Dividing Entire Countries

Soaring property prices are forcing people all over the world to abandon all hope of owning a home. The fallout is shaking governments of all political persuasions.

It’s a phenomenon given wings by the pandemic. And it’s not just buyers — rents are also soaring in many cities. The upshot is the perennial issue of housing costs has become one of acute housing inequality, and an entire generation is at risk of being left behind.

“We’re witnessing sections of society being shut out of parts of our city because they can no longer afford apartments,” Berlin Mayor Michael Mueller says. “That’s the case in London, in Paris, in Rome, and now unfortunately increasingly in Berlin.”

That exclusion is rapidly making housing a new fault line in politics, one with unpredictable repercussions. The leader of Germany’s Ver.di union called rent the 21st century equivalent of the bread price, the historic trigger for social unrest.

Politicians are throwing all sorts of ideas at the problem, from rent caps to special taxes on landlords, nationalizing private property, or turning vacant offices into housing. Nowhere is there evidence of an easy or sustainable fix.

In South Korea, President Moon Jae-in’s party took a drubbing in mayoral elections this year after failing to tackle a 90% rise in the average price of an apartment in Seoul since he took office in May 2017. The leading opposition candidate for next year’s presidential vote has warned of a potential housing market collapse as interest rates rise.

China has stepped up restrictions on the real-estate sector this year and speculation is mounting of a property tax to bring down prices. The cost of an apartment in Shenzhen, China’s answer to Silicon Valley, was equal to 43.5 times a resident’s average salary as of July, a disparity that helps explain President Xi Jinping’s drive for “common prosperity.”

In Canada, Prime Minister Justin Trudeau has promised a two-year ban on foreign buyers if re-elected.

The pandemic has stoked the global housing market to fresh records over the past 18 months through a confluence of ultralow interest rates, a dearth of house production, shifts in family spending and fewer homes being put up for sale. While that’s a boon for existing owners, prospective buyers are finding it ever harder to gain entry.

What we’re witnessing is “a major event that should not be shrugged off or ignored,” Don Layton, the former CEO of U.S. mortgage giant Freddie Mac, wrote in a commentary for the Joint Center for Housing Studies of Harvard University.

In the U.S., where nominal home prices are more than 30% above their previous peaks in the mid-2000s, government policies aimed at improving affordability and promoting home ownership risk stoking prices, leaving first-time buyers further adrift, Layton said.

The result, in America as elsewhere, is a widening generational gap between baby boomers, who are statistically more likely to own a home, and millennials and Generation Z — who are watching their dreams of buying one go up in smoke.

Existing housing debt may be sowing the seeds of the next economic crunch if borrowing costs start to rise. Niraj Shah of Bloomberg Economics compiled a dashboard of countries most at threat of a real-estate bubble, and says risk gauges are “flashing warnings” at an intensity not seen since the run-up to the 2008 financial crisis.

In the search for solutions, governments must try and avoid penalizing either renters or homeowners. It’s an unenviable task.

Sweden’s government collapsed in June after it proposed changes that would have abandoned traditional controls and allowed more rents to be set by the market.

In Berlin, an attempt to tame rent increases was overturned by a court. Campaigners have collected enough signatures to force a referendum on seizing property from large private landlords. The motion goes to a vote on Sept. 26. The city government on Friday announced it would buy nearly 15,000 apartments from two large corporate landlords for €2.46 billion ($2.9 billion) to expand supply.

Anthony Breach at the Center for Cities think tank has even made the case for a link between housing and Britain’s 2016 vote to quit the European Union. Housing inequality, he concluded, is “scrambling our politics.”

As these stories from around the world show, that’s a recipe for upheaval.

Argentina

With annual inflation running around 50%, Argentines are no strangers to price increases. But for Buenos Aires residents like Lucia Cholakian, rent hikes are adding economic pressure, and with that political disaffection.

Like many during the pandemic, the 28-year-old writer and college professor moved with her partner from a downtown apartment to a residential neighborhood in search of more space. In the year since, her rent has more than tripled; together with bills it chews through about 40% of her income. That rules out saving for a home.

“We’re not going to be able to plan for the future like our parents did, with the dream of your own house,” she says. The upshot is “renting, buying and property in general” is becoming “much more present for our generation politically.”

Legislation passed by President Alberto Fernandez’s coalition aims to give greater rights to tenants like Cholakian. Under the new rules, contracts that were traditionally two years are now extended to three. And rather than landlords setting prices, the central bank created an index that determines how much rent goes up in the second and third year.

It’s proved hugely controversial, with evidence of some property owners raising prices excessively early on to counter the uncertainty of regulated increases later. Others are simply taking properties off the market. A government-decreed pandemic rent freeze exacerbated the squeeze.

Rental apartment listings in Buenos Aires city are down 12% this year compared to the average in 2019, and in the surrounding metro area they’re down 36%, according to real estate website ZonaProp.

The law “had good intentions but worsened the issue, as much for property owners as for tenants,” said Maria Eugenia Vidal, the former governor of Buenos Aires province and one of the main opposition figures in the city. She is contesting the November midterm elections on a ticket with economist Martin Tetaz with a pledge to repeal the legislation.

“Argentina is a country of uncertainty,” Tetaz said by phone, but with the housing rules it’s “even more uncertain now than before.”

Cholakian, who voted for Fernandez in 2019, acknowledges the rental reform is flawed, but also supports handing more power to tenants after an extended recession that wiped out incomes. If anything, she says greater regulation is needed to strike a balance between reassuring landlords and making rent affordable.

“If they don’t do something to control this in the city of Buenos Aires, only the rich will be left,” she says.

Australia

As the son of first-generation migrants from Romania, Alex Fagarasan should be living the Australian dream. Instead, he’s questioning his long-term prospects.

Fagarasan, a 28-year-old junior doctor at a major metropolitan hospital, would prefer to stay in Melbourne, close to his parents. But he’s being priced out of his city. He’s now facing the reality that he’ll have to move to a regional town to get a foothold in the property market. Then, all going well, in another eight years he’ll be a specialist and able to buy a house in Melbourne.

Even so, he knows he’s one of the lucky ones. His friends who aren’t doctors “have no chance” of ever owning a home. “My generation will be the first one in Australia that will be renting for the rest of their lives,” he says.

He currently rents a modern two-bedroom townhouse with two others in the inner suburb of Northcote — a study nook has been turned into a make-shift bedroom to keep down costs. About 30% of his salary is spent on rent; he calls it “exorbitant.”

Prime Minister Scott Morrison’s conservative government announced a “comprehensive housing affordability plan” as part of the 2017-2018 budget, including 1 billion Australian dollars ($728 million) to boost supply. It hasn’t tamed prices.

The opposition Labour Party hasn’t fared much better. It proposed closing a lucrative tax loophole for residential investment at the last election in 2019, a policy that would likely have brought down home prices. But it sparked an exodus back to the ruling Liberals of voters who owned their home, and probably contributed to Labor’s election loss.

The political lessons have been learned: Fagarasan doesn’t see much help on housing coming from whoever wins next year’s federal election. After all, Labor already rules the state of Victoria whose capital is Melbourne.

“I feel like neither of the main parties represents the voice of the younger generation,” he says.

It’s a sentiment shared by Ben Matthews, a 33-year-old project manager at a university in Sydney. He’s moving back in with his parents after the landlord of the house he shared with three others ordered them out, an experience he says he found disappointing and stressful, especially during the pandemic.

Staying with his parents will at least help him save for a deposit on a one-bedroom flat. But even that’s a downgrade from his original plan of a two-bedroom house so he could rent the other room out. The increases, he says, are “just insane.”

“It might not be until something breaks that we’ll get the political impetus to make changes,” he says. -Jason Scott

Canada

Days after calling an election, Justin Trudeau announced plans for a two-year ban on foreigners buying houses. If it was meant as a dramatic intervention to blind-side his rivals, it failed: they broadly agree.

The prime minister thought he was going to fight the election — set for Monday — on the back of his handling of the pandemic, but instead housing costs are a dominant theme for all parties.

Trudeau’s Liberals are promising a review of “escalating” prices in markets including Vancouver and Toronto to clamp down on speculation; Conservative challenger Erin O’Toole pledges to build a million homes in three years to tackle the “housing crisis”; New Democratic Party leader Jagmeet Singh wants a 20% tax on foreign buyers to combat a crisis he calls “out of hand.”

Facing a surprisingly tight race, Trudeau needs to attract young urban voters if he is to have any chance of regaining his majority. He chose Hamilton, outside Toronto, to launch his housing policy. Once considered an affordable place in the Greater Toronto Area, it’s faced rising pressure as people leave Canada’s biggest city in search of cheaper homes. The average single family home cost 932,700 Canadian dollars ($730,700) in June, a 30% increase from a year earlier, according to the Realtors Association of Hamilton and Burlington.

The City of Hamilton cites housing affordability among its priorities for the federal election, but that’s little comfort to Sarah Wardroper, a 32-year-old single mother of two young girls, who works part time and rents in the downtown east side. Hamilton, she says, represents “one of the worst housing crises in Canada.”

While she applauds promises to make it harder for foreigners to buy investment properties she’s skeptical of measures that might discourage homeowners from renting out their properties. That includes Trudeau’s bid to tax those who sell within 12 months of a house purchase. Neither is she convinced by plans for more affordable housing, seeing them as worthy but essentially a short-term fix when the real issue is “the economy is just so out of control the cost of living in general has skyrocketed.”

Wardroper says her traditionally lower-income community has become a luxury Toronto neighborhood.

“I don’t have the kind of job to buy a house, but I have the ambition and the drive to do that,” she says. “I want to build a future for my kids. I want them to be able to buy homes, but the way things are going right now, I don’t think that’s going to be possible.”

Singapore

Back in 2011, a public uproar over the city-state’s surging home prices contributed to what was at the time the ruling party’s worst parliamentary election result in more than five decades in power. While the People’s Action Party retained the vast majority of the seats in parliament, it was a wake-up call — and there are signs the pressure is building again.

Private home prices have risen the most in two years, and in the first half of 2021 buyers including ultra-rich foreigners splurged 32.9 billion Singapore dollars ($24 billion), according to Singapore-based ERA Realty Network Pte Ltd. That’s double the amount recorded in Manhattan over the same period.

However, close to 80% of Singapore’s citizens live in public housing, which the government has long promoted as an asset they can sell to move up in life.

It’s a model that has attracted attention from countries including China, but one that is under pressure amid a frenzy in the resale market. Singapore’s government-built homes bear little resemblance to low-income urban concentrations elsewhere: In the first five months of the year, a record 87 public apartments were resold for at least SG$1 million. That’s stirring concerns about affordability even among the relatively affluent.

Junior banker Alex Ting, 25, is forgoing newly built public housing as it typically means a three-to-four-year wait. And under government rules for singles, Ting can only buy a public apartment when he turns 35 anyway.

His dream home is a resale flat near his parents. But even there a mismatch between supply and demand could push his dream out of reach.

While the government has imposed curbs on second-home owners and foreign buyers, younger people like Ting have grown resigned to the limits of what can be done.

Most Singaporeans aspire to own their own property, and the housing scarcity and surge in prices presents another hurdle to them realizing their goal, says Nydia Ngiow, Singapore-based senior director at BowerGroupAsia, a strategic policy advisory firm. If unaddressed, that challenge “may in turn build long-term resentment towards the ruling party,” she warns.

That’s an uncomfortable prospect for the PAP, even as the opposition faces barriers to winning parliamentary seats. The ruling party is already under scrutiny for a disrupted leadership succession plan, and housing costs may add to the pressure.

Younger voters may express their discontent by moving away from the PAP, according to Ting. “In Singapore, the only form of protest we can do is to vote for the opposition,” he says.

Ireland

Claire Kerrane is open about the role of housing in her winning a seat in Ireland’s parliament, the Dail.

Kerrane, 29, was one of a slew of Sinn Fein lawmakers to enter the Dail last year after the party unexpectedly won the largest number of first preference votes at the expense of Ireland’s dominant political forces, Fine Gael and Fianna Fail.

While the two main parties went on to form a coalition government, the outcome was a political earthquake. Sinn Fein was formerly the political wing of the Irish Republican Army, yet it’s been winning followers more for its housing policy than its push for a united Ireland.

“Housing was definitely a key issue in the election and I think our policies and ambition for housing played a role in our election success,” says Kerrane, who represents the parliamentary district of Roscommon-Galway.

Ireland still bears the scars of a crash triggered by a housing bubble that burst during the financial crisis. A shortage of affordable homes means prices are again marching higher.

Sinn Fein has proposed building 100,000 social and affordable homes, the reintroduction of a pandemic ban on evictions and rent increases, and legislation to limit the rate banks can charge for mortgages.

Those policies have struck a chord. The most recent Irish Times Ipsos MRBI poll, in June, showed Sinn Fein leading all other parties, with 21% of respondents citing house prices as the issue most likely to influence their vote in the next general election, the same proportion that cited the economy. Only health care trumped housing as a concern.

Other parties are taking note. On Sept. 2, the coalition launched a housing plan as the pillar of its agenda for this parliamentary term, committing over €4 billion ($4.7 billion) a year to increase supply, the highest-ever level of government investment in social and affordable housing.

Whether it’s enough to blunt Sinn Fein’s popularity remains to be seen. North of the border, meanwhile, Sinn Fein holds a consistent poll lead ahead of elections to the Northern Ireland Assembly due by May, putting it on course to nominate the region’s First Minister for the first time since the legislature was established as part of the Good Friday peace agreement of 1998.

For all the many hurdles that remain to reunification, Sinn Fein is arguably closer than it has ever been to achieving its founding goal by championing efforts to widen access to housing.

As Kerrane says: “Few, if any households aren’t affected in some way by the housing crisis.”

By Alan Crawford

Source: https://www.japantimes.co.jp/

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Green Tax Break Syndicated Easements Face IRS Scrutiny

Jack Fisher has raised hundreds of millions of dollars pitching investors on real estate development projects that were never built. Fisher, an accountant-turned-developer, promoted projects such as the Preserve at Venice Harbor, near Hilton Head, S.C., where marketing illustrations showed houses on canals that evoked the famous Italian city. Instead of developing the land, he recruited investors to elaborate deals that provided them charitable tax deductions in return for donating easements for conservation.

The Internal Revenue Service, however, suspects the deals may amount to tax fraud. Fisher is at the center of a criminal probe related to these syndicated conservation easements, according to people familiar with the details, who requested anonymity to discuss a confidential matter. The investigation has already led to tax conspiracy charges against three accountants who worked with him.

A syndicated conservation easement gives dozens of investors in partnerships three choices: to build a specific development project; to hold on to the land and build later; or to donate an easement to a land trust or government, promising to forgo development. The third option entitles investors to charitable tax deductions, based on the appraised value of the land, that can be worth four or five times their investment.

Easements have been used—legitimately, and mostly by family partnerships and individuals like farmers—for decades as part of a federal push to preserve more than 30 million acres of land. Those aren’t the focus of an IRS crackdown. Instead, it’s going after promoters like Fisher who sell deals through brokers, accountants, lawyers, and tax preparers, and who market the projects that generate large tax deductions. The IRS has made these an enforcement priority, suing some promoters to shut them down and criminally investigating others.

California conservation lawyer Misti Schmidt says a typical syndicated easement used by wealthy investors is an “ugly tax-shelter scheme” that relies on grossly overvalued appraisals. “There’s so much money to be made, they just keep doing it,” says Schmidt, a partner at Conservation Partners.

Those appraisals are at the center of the legal fight around syndicated easements. Before an easement donation is made, an appraiser assigns it a value based on its highest and best use. That number is then used to calculate the tax deductions. The IRS often argues that those appraisals vastly inflate the development potential of a property, and that promoters use those valuations to market lucrative tax deductions.

Two of Fisher’s associates, the brothers Stein and Corey Agee, pleaded guilty in December to conspiring to promote fraudulent tax breaks and are cooperating with prosecutors. Although Fisher wasn’t charged or named in the Agee cases, he’s referred to as Promoter A in court documents, the people familiar with the details say. Documents reviewed by Bloomberg confirm Fisher’s role in the deals. Lawyers for Fisher didn’t respond to emails and phone calls seeking comment.

In the Stein Agee case, prosecutors say the deals were “illegal tax shelters that allowed taxpayers to buy tax deductions,” according to the charges. Appraisals were “falsely inflated,” while the conservation option was “always a foregone conclusion.” Many investors signed up after the tax year in which easements were donated, prosecutors say, even though the IRS allows deductions only in the same year a donation is made. Promoter A and others had investors backdate checks and agreements, according to the charges.

“Promoter A’s tax shelters resulted in a massive evasion of taxes,” the charges state. In all, more than 1,500 investors received $1.2 billion in fraudulent tax deductions, prosecutors said. At one point, Promoter A told Stein Agee that he met with several co-conspirators to make sure they were on the “same page” about late investments, according to the charges. Promoter A proposed that Agee could falsely suggest that backdated checks weren’t deposited because they were “lost” on someone’s desk. Lawyers for the Agees declined to comment.

Nationwide, the IRS has challenged $21 billion in tax deductions claimed for syndicated easements from 2016 to 2018, saying it’s auditing 28,000 taxpayers. Former President Donald Trump has donated several easements, including two under scrutiny by New York state authorities.

“The IRS fully supports the benefit of legitimate conservation easements around this country,” IRS Commissioner Charles Rettig told Congress in March. “It has done tremendous things for farmers and others. Our problem is with the abusive syndicated easements.”

The IRS crackdown comes amid a battle in Congress that pits conservation groups and national appraisal organizations against promoters of syndicated easements. Conservation groups want legislation that would bar investors from claiming deductions worth more than two and a half times their initial investment. Promoters have been blocking that fix for years.

“The IRS’s current take-no-prisoners litigation strategy is also going after minor technical flaws that arise in all easements, not just syndications,” says Schmidt, the conservation lawyer. “Legitimate easements are now getting disallowed.”

Fisher, who’s in his late 60s, grew up on a small-town farm in Marshall, N.C., and still speaks in a soft Southern drawl. The son of a truck driver and homemaker, he graduated with a degree in accounting from nearby Mars Hill College in 1974 before joining the IRS. Fisher then became a certified public accountant, worked for Price Waterhouse, and joined a firm that moved him to Atlanta to work with the National Football League’s Falcons.

Later, he took a job at an accounting firm with the Agee brothers’ father, Edward Agee. “I got a lot of good experience,” Fisher testified at a trial after a real estate broker sued him, claiming the developer owed him a commission. Fisher said he met people who “could refer you to business: bankers and things like that.”

He got into development by auditing construction companies, and later began assembling his own investment deals, founding Preserve Communities about two decades ago.

Fisher was adept at raising money, says Anthony Antonino, a real estate consultant who helped with the sale of 800 acres in North Carolina for $14.75 million to entities controlled by Fisher and a wealthy investor. “Jack knows where the money’s at, and he knows how to get it,” Antonino says.

Some of Fisher’s wealthy investors were involved in equestrian events, say people familiar with the matter. His family owned a 40-acre show stable in Alpharetta, Ga., according to a 2013 story in the Atlanta Journal-Constitution. His then-wife, Libba, and two of their children won several titles competing in elite hunter and jumper events, according to records maintained by the U.S. Equestrian Federation.

He was a hands-on developer, says Mark Brooks, a civil engineer who helped Fisher build projects. “He was out there walking the roads and figuring out site lots,” Brooks says. “He was real proud when he did the developments. He felt he was doing things to help out Madison County, which was a pretty poor county.”

He also branched out to the Western U.S., buying a 1,088-acre ranch near Reno, Nev. In late 2018 a Georgia corporation Fisher formed donated an easement covering 812 acres to the North American Land Trust. Investors got $51.2 million in deductions, according to court filings. They put up $10 million, his partner told planners in Nevada’s Washoe County.

Months later, Fisher pursued permission to develop 38 homes on land not covered by the easement. He showed up at a rural advisory board meeting in July 2019 wearing a cowboy hat and flanked by ranch hands, according to a resident. When pressed, Fisher backed down.

“We have no plans to do anything with that property other than to make it part of the ranch,” Fisher said at the recorded meeting. In the face of stated opposition by planners, he withdrew his application.

The Agee brothers, whose father died in 2009, helped promote some of Fisher’s deals. At the proposed Preserve at Venice Harbor development, $179.8 million in tax deductions were claimed by the 390 investors who chose a conservation easement instead of building homes, court documents show. That was more than four times what they put in.

By 2018, less than two years after the IRS began targeting syndicated easements as tax shelters, Fisher was under investigation, the people with knowledge of the matter say. “You have to be very, very careful that these look like real estate investments as compared to, you know, basically a tax shelter,” Promoter A told an agent posing as an investor, according to the charges against Stein Agee.

Fisher continued to work with the Agees through last year, the people say. In November, Promoter A left a handwritten note for Stein Agee saying he’d been “cleaning up the books,” the charges state. About the same time, a video was uploaded to the Preserve Communities Vimeo account.

Fisher talks about his career while viewers see images of forests, mountains, and rivers, and of Fisher himself sitting on a deck, and then feeding a horse. “I hope the people who live in our communities gain a greater connection to nature, to slow down in life, to realize what’s really important,” he says. “We only have so many years here on the planet, and feeling good about what you’ve done with your life.”

— With assistance by Kaustuv Basu, Neil Weinberg, and Elise Young

By: David Voreacos

Source: Green Tax Break Syndicated Easements Face IRS Scrutiny – Bloomberg

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Banks Are Giving the Ultra-Rich Cheap Loans to Fund Their Lifestyle

Billionaire hedge fund manager Alan Howard paid $59 million for a Manhattan townhouse in March. Just two months later he obtained a $30 million mortgage from Citigroup Inc.

Denis Sverdlov, worth $6.1 billion thanks to his shares in electric-vehicle maker Arrival, recently pledged part of that stake for a line of credit from the same bank. For Edgar and Clarissa Bronfman the loan collateral is paintings by Damien Hirst and Diego Rivera, among others. Philippe Laffont, meanwhile, pledged stakes in a dozen funds at his Coatue Management for a credit line at JPMorgan Chase & Co.

In the realm of personal finance, debt is largely viewed as a necessary evil, one that should be kept to a minimum. But with interest rates at record lows and many assets appreciating in value, it’s one of the most important pieces of the billionaire toolkit — and one of the hottest parts of private banking.

Thanks to the Bronfmans, Howards and Sverdlovs of the world, the biggest U.S. investment banks reported a sizable jump in the value of loans they’ve extended to their richest clients, driven mainly by demand for asset-backed debt.

Morgan Stanley’s tailored and securities-based lending portfolio approached $76 billion last quarter, a 43% increase from a year earlier. Bank of America Corp. reported a $67 billion balance of such loans, up more than 20% year-over-year, while loans at Citigroup’s private bank — including but not limited to securities-backed loans — rose 17%. Appetite for such credit was the primary driver of the 21% bump in average loans at JPMorgan’s asset- and wealth-management division. And at UBS Group AG, U.S. securities-based lending rose by $4 billion.

Borrowing Binge

“It’s a real business winner for the banks,” said Robert Weeber, chief executive officer of wealth-management firm Tiedemann Constantia, adding his clients have recently been offered the opportunity to borrow against real estate, security portfolios and even single-stock holdings.

Spokespeople for Howard, Arrival and Laffont declined to comment, while the Bronfmans didn’t respond to a request for comment.

Rock-bottom interest rates have fueled the biggest borrowing binge on record and even billionaires with enough cash to fill a swimming pool are loathe to sit it out.

And for good reason. With assets both public and private at historically lofty valuations, shareholders are hesitant to cash out and miss higher heights. Appian Corp. co-founder Matthew Calkins has pledged a chunk of his roughly $3.5 billion stake in the software company — whose shares have risen about 145% in the past year — for a loan.

“Families with wealth of $100 million or more can borrow at less than 1%,” said Dan Gimbel, principal at NEPC Private Wealth. “For their lifestyle, there may be things they want to purchase — a car or a boat or even a small business — and they may turn to that line of credit for those types of things rather than take money from the portfolio as they want that to be fully invested.”

Yachts and private jets have been especially popular buys in the past year, according to wealth managers, one of whom described it as borrowing to buy social distance.

‘Significant Benefit’

Loans also allow the ultra-wealthy to avoid the hit of capital gains taxes at a time when valuations are high and rates are poised to increase, perhaps even almost double. Postponing tax is a “significant benefit” for portfolios concentrated and diversified alike, according to Michael Farrell, managing director for SEI Private Wealth Management.

Critics say such loans are just one more wedge in America’s ever-widening wealth gap. “Asset-backed loans are one of the principal tools that the ultra-wealthy are using to game their tax obligations down to zero,” said Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies.

While using public equities as collateral is the most common tactic for banks loaning to the merely affluent, clients further up the wealth scale usually have a bevy of possessions they can feasibly pledge against, such as mansions, planes and even more esoteric collectibles, like watches and classic cars.

One big advantage for the wealthy borrowing now is the possibility that rates will ultimately rise and they can lock in low borrowing costs for decades. Some private banks offer mortgages on homes for as long as 20 years with fixed interest rates as low as 1% for the period.

The wealthy can also hedge against higher borrowing costs for a fraction of their pledged assets’ value, according to Ali Jamal, the founder of multifamily office Azura.

“With ultra-high-net worth clients, you’re often thinking about the next generation,” said Jamal, a former Julius Baer Group Ltd. managing director. “If you have a son or a daughter and you know they want to live one day in Milan, St. Moritz or Paris, you can now secure a future home for them and the bank is fixing your interest rate for as long as two decades.”

Risks Involved

Securities-based lending does comes with risks for the bank and the borrower. If asset values plunge, borrowers may have to cough up cash to meet margin calls. Banks prize their relationships with their richest clients, but foundered loans are both costly and humiliating.

Ask JPMorgan. The bank helped arrange a $500 million credit facility for WeWork founder Adam Neumann, pledged against the value of his stock, according to the Wall Street Journal. As the value of the co-working startup imploded, Softbank Group Corp. had to swoop in to help Neumann repay the loans and avert a significant loss for the bank.

A spokesperson for JPMorgan declined to comment.

Still, for the banks it’s a risk worth taking. Asked about securities-backed loans on last week’s earnings call, Morgan Stanley Chief Financial Officer Sharon Yeshaya said they’d “historically seen minimal losses.” Among the bank’s past clients is Elon Musk, who turned to them for $61 million in mortgages on five California properties in 2019, and who also has Tesla Inc. shares worth billions pledged to secure loans.

“As James [Gorman] has always said, it’s a product in which you lend wealthy clients their money back,” Yeshaya said, referring to Morgan Stanley’s chief executive officer. “And this is something that is resonating.”

By:

Source: Banks Are Giving the Ultra-Rich Cheap Loans to Fund Their Lifestyle

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Retail Sales For June Provide An Early Boost, But Bond Yields Mostly Calling The Shots

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The first week of earnings season wraps up with major indices closely tracking the bond market in Wall Street’s version of “follow the leader.” Earnings absolutely matter, but right now the Fed’s policies are maybe a bigger influence. In the short-term the Fed is still the girl everyone wants to dance with.

Lately, you can almost guess where stocks are going just by checking the 10-year Treasury yield, which often moves on perceptions of what the Fed might have up its sleeve. The yield bounced back from lows this morning to around 1.32%, and stock indices climbed a bit in pre-market trading. That was a switch from yesterday when yields fell and stocks followed suit. Still, yields are down about six basis points since Monday, and stocks are also facing a losing week.

It’s unclear how long this close tracking of yields might last, but maybe a big flood of earnings due next week could give stocks a chance to act more on fundamental corporate news instead of the back and forth in fixed income. Meanwhile, retail sales for June this morning basically blew Wall Street’s conservative estimates out of the water, and stock indices edged up in pre-market trading after the data.

Headline retail sales rose 0.6% compared with the consensus expectation for a 0.6% decline, and with automobiles stripped out, the report looked even stronger, up 1.3% vs. expectations for 0.3%. Those numbers are incredibly strong and show the difficulty analysts are having in this market. The estimates missed consumer strength by a long shot. However, it’s also possible this is a blip in the data that might get smoothed out with July’s numbers. We’ll have to wait and see.

Caution Flag Keeps Waving

Yesterday continued what feels like a “risk-off” pattern that began taking hold earlier in the week, but this time Tech got caught up in the selling, too. In fact, Tech was the second-worst performing sector of the day behind Energy, which continues to tank on ideas more crude could flow soon thanks to OPEC’s agreement.

We already saw investors embracing fixed income and “defensive” sectors starting Tuesday, and Thursday continued the trend. When your leading sectors are Utilities, Staples, Real Estate, the way they were yesterday, that really suggests the surging bond market’s message to stocks is getting read loudly and clearly.

This week’s decline in rates also isn’t necessarily happy news for Financial companies. That being said, the Financials fared pretty well yesterday, with some of them coming back after an early drop. It was an impressive performance and we’ll see if it can spill over into Friday.

Energy helped fuel the rally earlier this year, but it’s struggling under the weight of falling crude prices. Softness in crude isn’t guaranteed to last—and prices of $70 a barrel aren’t historically cheap—but crude’s inability to consistently hold $75 speaks a lot. Technically, the strength just seems to fade up there. Crude is up slightly this morning but still below $72 a barrel.

Losing Steam?

All of the FAANGs lost ground yesterday after a nice rally earlier in the week. Another key Tech name, chipmaker Nvidia (NVDA), got taken to the cleaners with a 4.4% decline despite a major analyst price target increase to $900. NVDA has been on an incredible roll most of the year.

This week’s unexpectedly strong June inflation readings might be sending some investors into “flight for safety” mode, though no investment is ever truly “safe.” Fed Chairman Jerome Powell sounded dovish in his congressional testimony Wednesday and Thursday, but even Powell admitted he hadn’t expected to see inflation move this much above the Fed’s 2% target.

Keeping things in perspective, consider that the S&P 500 Index (SPX) did power back late Thursday to close well off its lows. That’s often a sign of people “buying the dip,” as the saying goes. Dip-buying has been a feature all year, and with bond yields so low and the money supply so huge, it’s hard to argue that cash on the sidelines won’t keep being injected if stocks decline.

Two popular stocks that data show have been popular with TD Ameritrade clients are Apple (AAPL) and Microsoft (MSFT), and both of them have regularly benefited from this “dip buying” trend. Neither lost much ground yesterday, so if they start to rise today, consider whether it reflects a broader move where investors come back in after weakness. However, one day is never a trend.

Reopening stocks (the ones tied closely to the economy’s reopening like airlines and restaurants) are doing a bit better in pre-market trading today after getting hit hard yesterday.

In other corporate news today, vaccine stocks climbed after Moderna (MRNA) was added to the S&P 500. BioNTech (BNTX), which is Pfizer’s (PFE) vaccine partner, is also higher. MRNA rose 7% in pre-market trading.

Strap In: Big Earnings Week Ahead

Earnings action dies down a bit here before getting back to full speed next week. Netflix (NFLX), American Express (AXP), Johnson & Johnson (JNJ), United Airlines (UAL), AT&T (T), Verizon (VZ), American Airlines (AAL) and Coca-Cola (KO) are high-profile companies expected to open their books in the week ahead.

It could be interesting to hear from the airlines about how the global reopening is going. Delta (DAL) surprised with an earnings beat this week, but also expressed concerns about high fuel prices. While vaccine rollouts in the U.S. have helped open travel back up, other parts of the globe aren’t faring as well. And worries about the Delta variant of Covid don’t seem to be helping things.

Beyond the numbers that UAL and AAL report next week, the market may be looking for guidance from their executives about the state of global travel as a proxy for economic health. DAL said travel seems to be coming back faster than expected. Will other airlines see it the same way? Earnings are one way to possibly find out.Even with the Delta variant of Covid gaining steam, there’s no doubt that at least in the U.S, the crowds are back for sporting events.

For example, the baseball All-Star Game this week was packed. Big events like that could be good news for KO when it reports earnings. PepsiCo (PEP) already reported a nice quarter. We’ll see if KO can follow up, and whether its executives will say anything about rising producer prices nipping at the heels of consumer products companies.

Confidence Game: The 10-year Treasury yield sank below 1.3% for a while Thursday but popped back to that level by the end of the day. It’s now down sharply from highs earlier this week. Strength in fixed income—yields fall as Treasury prices climb—often suggests lack of confidence in economic growth.

Why are people apparently hesitant at this juncture? It could be as simple as a lack of catalysts with the market now at record highs. Yes, bank earnings were mostly strong, but Financial stocks were already one of the best sectors year-to-date, so good earnings might have become an excuse for some investors to take profit. Also, with earnings expectations so high in general, it takes a really big beat for a company to impress.

Covid Conundrum: Anyone watching the news lately probably sees numerous reports about how the Delta variant of Covid has taken off in the U.S. and case counts are up across almost every state. While the human toll of this virus surge is certainly nothing to dismiss, for the market it seems like a bit of an afterthought, at least so far. It could be because so many of the new cases are in less populated parts of the country, which can make it seem like a faraway issue for those of us in big cities. Or it could be because so many of us are vaccinated and feel like we have some protection.

But the other factor is numbers-related. When you hear reports on the news about Covid cases rising 50%, consider what that means. To use a baseball analogy, if a hitter raises his batting average from .050 to .100, he’s still not going to get into the lineup regularly because his average is just too low. Covid cases sank to incredibly light levels in June down near 11,000 a day, which means a 50% rise isn’t really too huge in terms of raw numbers and is less than 10% of the peaks from last winter. We’ll be keeping an eye on Covid, especially as overseas economies continue to be on lockdowns and variants could cause more problems even here. But at least for now, the market doesn’t seem too concerned.

Dull Roar: Most jobs that put you regularly on live television in front of millions of viewers require you to be entertaining. One exception to that rule is the position held by Fed Chairman Jerome Powell. It’s actually his job to be uninteresting, and he’s arguably very good at it. His testimony in front of the Senate Banking Committee on Thursday was another example, with the Fed chair staying collected even as senators from both sides of the aisle gave him their opinions on what the Fed should or shouldn’t do. The closely monitored 10-year Treasury yield stayed anchored near 1.33% as he spoke.

Even if Powell keeps up the dovishness, you can’t rule out Treasury yields perhaps starting to rise in coming months if inflation readings continue hot and investors start to lose faith in the Fed making the right call at the right time. Eventually people might start to demand higher premiums for taking on the risk of buying bonds. The Fed itself, however, could have something to say about that.

It’s been sopping up so much of the paper lately that market demand doesn’t give you the same kind of impact it might have once had. That’s an argument for bond prices continuing to show firmness and yields to stay under pressure, as we’ve seen the last few months. Powell, for his part, showed no signs of being in a hurry yesterday to lift any of the stimulus.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100 and S&P 500 pits. I’ve also worked for ING Bank, Blue Capital and was Managing Director of Option Trading for Van Der Moolen, USA. In 2006, I joined the thinkorswim Group, which was eventually acquired by TD Ameritrade. I am a 30-year trading veteran and a regular CNBC guest, as well as a member of the Board of Directors at NYSE ARCA and a member of the Arbitration Committee at the CBOE. My licenses include the 3, 4, 7, 24 and 66.

Source: Retail Sales For June Provide An Early Boost, But Bond Yields Mostly Calling The Shots

.

Critics:

Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. The term “retailer” is typically applied where a service provider fills the small orders of many individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele. Shopping generally refers to the act of buying products.

Sometimes this is done to obtain final goods, including necessities such as food and clothing; sometimes it takes place as a recreational activity. Recreational shopping often involves window shopping and browsing: it does not always result in a purchase.

Most modern retailers typically make a variety of strategic level decisions including the type of store, the market to be served, the optimal product assortment, customer service, supporting services and the store’s overall market positioning. Once the strategic retail plan is in place, retailers devise the retail mix which includes product, price, place, promotion, personnel, and presentation.

In the digital age, an increasing number of retailers are seeking to reach broader markets by selling through multiple channels, including both bricks and mortar and online retailing. Digital technologies are also changing the way that consumers pay for goods and services. Retailing support services may also include the provision of credit, delivery services, advisory services, stylist services and a range of other supporting services.

Retail shops occur in a diverse range of types of and in many different contexts – from strip shopping centres in residential streets through to large, indoor shopping malls. Shopping streets may restrict traffic to pedestrians only. Sometimes a shopping street has a partial or full roof to create a more comfortable shopping environment – protecting customers from various types of weather conditions such as extreme temperatures, winds or precipitation. Forms of non-shop retailing include online retailing (a type of electronic-commerce used for business-to-consumer (B2C) transactions) and mail order

Global Boom in House Prices Becomes a Dilemma for Central Banks

Surging house prices across much of the globe are emerging as a key test for central banks’ ability to rein in their crisis support.

Withdrawing stimulus too slowly risks inflating real estate further and worsening financial stability concerns in the longer term. Pulling back too hard means unsettling markets and sending property prices lower, threatening the economic recovery from the Covid-19 pandemic.

Bubble Trouble

Countries seeing surging real house price growth

Source: OECD

With memories of the global financial crisis that was triggered by a housing bust still fresh in policy makers minds, how to keep a grip on soaring house prices is a dilemma in the forefront of deliberations as recovering growth sees some central banks discuss slowing asset purchases and even raising interest rates.

Federal Reserve officials who favor tapering their bond buying program have cited rising house prices as one reason to do so. In particular, they are looking hard at the Fed’s purchases of mortgage backed securities, which some worry are stoking housing demand in an already hot market.

In the coming week, central bankers in New Zealand, South Korea and Canada meet to set policy, with soaring home prices in each spurring pressure to do something to keep homes affordable for regular workers.

New Zealand policy makers are battling the hottest property market in the world, according to the Bloomberg Economics global bubble ranking. The central bank, which meets Wednesday, has been given another tool to tackle the issue, and its projections for the official cash rate show it starting to rise in the second half of 2022.

Facing criticism for its role in stoking housing prices, Canada’s central bank has been among the first from advanced economies to shift to a less expansionary policy, with another round of tapering expected at a policy decision also on Wednesday.

The Bank of Korea last month warned that real estate is “significantly overpriced” and the burden of household debt repayment is growing. But a worsening virus outbreak may be a more pressing concern at Thursday’s policy meeting in Seoul.

In its biggest strategic rethink since the creation of the euro, the European Central Bank this month raised its inflation target and in a nod to housing pressures, officials will start considering owner-occupied housing costs in their supplementary measures of inflation.

The Bank of England last month indicated unease about the U.K. housing market. Norges Bank is another authority to have signaled it’s worried about the effect of ultra-low rates on the housing market and the risk of a build-up of financial imbalances.

Beginning of the End of Easy Money: Central Bank Quarterly Guide

The Bank for International Settlements used its annual report released last month to warn that house prices had risen more steeply during the pandemic than fundamentals would suggest, increasing the sector’s vulnerability if borrowing costs rise.

While the unwinding of pandemic-era is support is expected to be gradual for most central banks, how to do so without hurting mortgage holders will be a key challenge, according to Kazuo Momma, who used to be in charge of monetary policy at the Bank of Japan.

“Monetary policy is a blunt tool,” said Momma, who now works as an economist at Mizuho Research Institute. “If it is used for some specific purposes like restraining housing market activities, that could lead to other problems like overkilling the economic recovery.”

But not acting carries other risks. Analysis by Bloomberg Economics shows that housing markets are already exhibiting 2008 style bubble warnings, stoking warnings of financial imbalances and deepening inequality.

New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard focused on member countries of the Organisation for Economic Co-operation and Development. The U.K. and the U.S. are also near the top of the risk rankings.

As many economies still grapple with the virus or slow loan growth, central bankers may look for alternatives to interest-rate hikes such as changes to loan-to-value limits or risk weighting of mortgages — so called macro-prudential policy.

Yet such measures aren’t guaranteed to succeed because other dynamics like inadequate supply or government tax policies are important variables for housing too. And while ever cheap money is gushing from central banks, such measures are likely to struggle to rein in prices.

“The best approach would be to stop the further expansion of central bank balance sheets,” according to Gunther Schnabl of Leipzig University, who is an expert on international monetary systems. “As a second step, interest rates could be increased in a very slow and diligent manner over a long time period.”

Another possibility is that house prices reach a natural plateau. U.K. house prices, for example, fell for the first time in five months in June, a sign that the property market may have lost momentum as a tax incentive was due to come to an end.

There’s no sign of that in the U.S. though, where demand for homes remains strong despite record-high prices. Pending home sales increased across all U.S. regions in May, with the Northeast and West posting the largest gains.

While navigating the housing boom won’t be easy for central banks, it may not be too late to ward off the next crisis. Owner-occupy demand versus speculative buying remains a strong driver of growth. Banks aren’t showing signs of the kind of loose lending that preceded the global financial crisis, according to James Pomeroy, a global economist at HSBC Holdings Plc.

“If house prices are rising due to a shift in supply versus demand, which the pandemic has created due to more remote working and people wanting more space, it may not trigger a crisis in the same way as previous housing booms,” said Pomeroy. “The problems may arise further down the line, with younger people priced out of the property ladder even more.”

Read More:
A Housing Frenzy Sparks Bidding Wars From New York to Shenzhen

World’s Bubbliest Housing Markets Flash 2008 Style Warnings

Stimulus ‘Pandexit’ Is Next Challenge as Recovery Quickens

As they tip toe away from their crisis settings, monetary authorities in economies with heavily indebted households will need to be especially careful, said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis who used to work for the ECB and International Monetary Fund.

“Real estate prices, as with other asset prices, will continue to balloon as long as global liquidity remains so ample,” she said. “But the implications are much more severe than other asset prices as they affect households much more widely.”

— With assistance by Theophilos Argitis, and Peggy Collins

By:

Source: Global Boom in House Prices Becomes a Dilemma for Central Banks – Bloomberg

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Critics:

A housing bubble (or a housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. First there is a period where house prices increase dramatically, driven more and more by speculation. In the second phase, house prices fall dramatically.

Housing bubbles tend to be among the asset bubbles with the largest effect on the real economy, because they are credit-fueled, because a large number of households participate and not just investors, and because the wealth effect from housing tends to be larger than for other types of financial assets.

References

  • Brunnermeier, M.K. and Oehmke, M. (2012) Bubbles, Financial Crises, and Systemic Risk NBER Working Paper No. 18398
  • see eg. Case, K.E., Quigley, J. and Shiller R. (2001). Comparing wealth effects: the stock market versus the housing market. National Bureau of Economic Research, Working Paper No. 8606., Benjamin, J., Chinloy, P. and Jud, D. (2004). ”Real estate versus financial wealth in consumption”. In: Journal of Real Estate Finance and Economics 29, pp. 341-354., Campbell, J. and J. Cocco (2004), How Do Housing Price Affect Consumption? Evidence from Micro Data. Harvard Institute of Economic Research, Discussion Paper No. 2045
  • Stiglitz, J.E. (1990). “Symposium on bubbles”. In: Journal of Economic Perspectives Vol. 4 No. 2, pp. 13-18.
  • Palgrave, R.H. I. (1926), “Palgrave’s Dictionary of Political Economy”, MacMillan & Co., London, England, p. 181.
  • Flood, R. P. and Hodrick, R. J. (1990), “On Testing for Speculative Bubbles”, The Journal of Economic Perspectives, Vol. 4 No. 2, pp. 85–101.
  • Shiller, R.J. (2005). Irrational Exuberance. 3nd. New Jersey: Princeton University Press. ISBN 0-691- 12335-7.
  • Smith, M. H. and Smith, G. (2006), “Bubble, Bubble, Where’s the Housing Bubble?”, Brookings Papers on Economic Activity, Vol. 2006 No. 1, pp. 1–50.
  • Cochrane, J. H. (2010), “Discount Rates”, Working paper, University of Chicago, Booth School of Business, and NBER, Chicago, Illinois, 27 December.Lind, H. (2009). “Price bubbles in housing markets: concept, theory and indicators”. In: International Journal of Housing Markets and Analysis Vol. 2 No. 1, pp. 78-90.

Chinese Developer Woes Are Weighing on Asia’s Junk Bond Market

https://images.wsj.net/im-189934?width=620&size=1.5

Financial strains among Chinese property developers are hurting the Asian high-yield debt market, where the companies account for a large chunk of bond sales.

That’s widening a gulf with the region’s investment-grade securities, which have been doing well amid continued stimulus support.

Yields for Asia’s speculative-grade dollar bonds rose 41 basis points in the second quarter, according to a Bloomberg Barclays index, versus a 5 basis-point decline for investment-grade debt. They’ve increased for six straight weeks, the longest stretch since 2018, driven by a roughly 150 basis-point increase for Chinese notes.

China’s government has been pursuing a campaign to cut leverage and toughen up its corporate sector. Uncertainty surrounding big Chinese borrowers including China Evergrande Group, the largest issuer of dollar junk bonds in Asia, and investment-grade firm China Huarong Asset Management Co. have also weighed on the broader Asian market for riskier credit.

“Diverging borrowing costs have been mainly driven by waning investor sentiment in the high-yield primary markets, particularly relating to the China real estate sector,” said Conan Tam, head of Asia Pacific debt capital markets at Bank of America. “This is expected to continue until we see a significant sentiment shift here.”

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    It’s the Beginning of the End of Easy Money

Such a shift would be unlikely to come without a turnaround in views toward the Chinese property industry, which has been leading a record pace in onshore bond defaults this year.

But there have been some more positive signs recently. Evergrande told Bloomberg News that as of June 30 it met one of the “three red lines” imposed to curb debt growth for many sector heavyweights. “By year-end, the reduction in leverage will help bring down borrowing costs” for the industry, said Francis Woo, head of fixed income syndicate Asia ex-Japan at Credit Agricole CIB.

Spreads have been widening for Asian dollar bonds this year while they’ve been narrowing in the U.S. for both high-yield and investment grade amid that country’s economic rebound, said Anne Zhang, co-head of asset class strategy, FICC in Asia at JPMorgan Private Bank. She expects Asia’s underperformance to persist this quarter, led by Chinese credits as investors remain cautious about policies there.

“However, as the relative yield differential between Asia and the U.S. becomes more pronounced there will be demand for yield that could help narrow the gap,” said Zhang.

Asia

A handful of issuers mandated on Monday for potential dollar bond deals including Hongkong Land Co., China Modern Dairy Holdings Ltd. and India’s REC Ltd., though there were no debt offerings scheduled to price with U.S. markets closed for the July 4 Independence Day holiday.

  • Spreads on Asian investment-grade dollar bonds were little changed to 1 basis point wider, according to credit traders. Yield premiums on the notes widened by almost 2 basis points last week, in their first weekly increase in six, according to a Bloomberg Barclays index
  • Among speculative-grade issuers, dollar bonds of China Evergrande Group lagged a 0.25 cent gain in the broader China high-yield market on Monday. The developer’s 12% note due in October 2023 sank 1.8 cents on the dollar to 74.6 cents, set for its lowest price since April last year

U.S.

The U.S. high-grade corporate bond market turned quiet at the end of last week before the holiday, but with spreads on the notes at their tightest in more than a decade companies have a growing incentive to issue debt over the rest of the summer rather than waiting until later this year.

  • The U.S. investment-grade loan market has surged back from pandemic disruptions, with volumes jumping 75% in the second quarter from a year earlier to $420.8 billion, according to preliminary Bloomberg league table data
  • For deal updates, click here for the New Issue Monitor

Europe

Sales of ethical bonds in Europe have surged past 250 billion euros ($296 billion) this year, smashing previous full-year records. The booming market for environmental, social and governance debt attracted issuers including the European Union, Repsol SA and Kellogg Co. in the first half of 2021.

  • The European Union has sent an RfP to raise further funding via a sale to be executed in the coming weeks, it said in an e-mailed statement
  • German property company Vivion Investments Sarl raised 340 million euros in a privately placed transaction in a bid to boost its real estate portfolio, according to people familiar with the matter

By:

Source: Chinese Developer Woes Are Weighing on Asia’s Junk Bond Market – Bloomberg

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Critics:

The Chinese property bubble was a real estate bubble in residential and/or commercial real estate in China. The phenomenon has seen average housing prices in the country triple from 2005 to 2009, possibly driven by both government policies and Chinese cultural attitudes.

Tianjin High price-to-income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been held up as evidence of a bubble. Critics of the bubble theory point to China’s relatively conservative mortgage lending standards and trends of increasing urbanization and rising incomes as proof that property prices can remain supported.

The growth of the housing bubble ended in late 2011 when housing prices began to fall, following policies responding to complaints that members of the middle-class were unable to afford homes in large cities. The deflation of the property bubble is seen as one of the primary causes for China’s declining economic growth in 2012.

2011 estimates by property analysts state that there are some 64 million empty properties and apartments in China and that housing development in China is massively oversupplied and overvalued, and is a bubble waiting to burst with serious consequences in the future. The BBC cites Ordos in Inner Mongolia as the largest ghost town in China, full of empty shopping malls and apartment complexes. A large, and largely uninhabited, urban real estate development has been constructed 25 km from Dongsheng District in the Kangbashi New Area. Intended to house a million people, it remains largely uninhabited.

Intended to have 300,000 residents by 2010, government figures stated it had 28,000. In Beijing residential rent prices rose 32% between 2001 and 2003; the overall inflation rate in China was 16% over the same period (Huang, 2003). To avoid sinking into the economic downturn, in 2008, the Chinese government immediately altered China’s monetary policy from a conservative stance to a progressive attitude by means of suddenly increasing the money supply and largely relaxing credit conditions.

Under such circumstances, the main concern is whether this expansionary monetary policy has acted to simulate the property bubble (Chiang, 2016). Land supply has a significant impact on house price fluctuations while demand factors such as user costs, income and residential mortgage loan have greater influences.

References

America’s Failure To Build Is Driving Home Prices Ever Higher

Some progressive groups oppose rezoning New York's wealthy Soho area to allow more housing

Another month, another explosive rise in home prices.  May’s median annual housing price rose 23.6%, a new monthly record.   Buyers are still buying, helped by low interest and mortgage rates.  But since housing construction hasn’t kept pace with demand and economic growth, it will take more housing production to reduce long-term pressure on prices.

The buying pressure in housing markets is setting records.  Although home sales fell slightly in May compared to April, houses aren’t sitting very long on the market.  According to the National Association of Realtors, total housing inventory is down 20.6% from a year ago.  Properties only last on the market for an average of 17 days, and 89% of sales in May “were on the market for less than a month.”

Given this high demand, we’d expect supply to respond.  Ronnie Walker at Goldman Sachs notes housing starts are rising, hitting their highest levels since 2006.  But it isn’t cooling the market off.  But Walker says despite these higher starts, “red-hot demand has brought the supply of homes available for sale down to the lowest level since the 1970s.”

Walker expects a “persistent supply-demand imbalance in the years ahead.”  New construction will come online, and more sellers eventually will enter the market, but his model foresees “home prices grow(ing) at double digit rates both this year and next.”

Tight future markets are confirmed by Harvard’s Joint Center for Housing Studies (JCHS).  In their 2021 report, these experts say “the supply of existing homes for sale has never been tighter,” and is at its lowest level since 1982.

So where are the houses?  What happened to supply and demand?  JCHS notes several reasons for underproduction, but the primary blame goes to restrictive local policies such as single-family zoning, minimum lot sizes, parking requirements, etc.  A 2018 survey of over 2700 communities found “93 percent imposed minimum lot sizes” with 67 percent requiring lots of at least one acre in size and sometimes more, many in suburban towns.

What about big cities?  Despite perceptions that there’s a lot of development in many cities, not much housing has been built in some.  Between 2010 and 2018, jobs in New York City increased by 22% “while the housing stock only increased four percent.”  Jobs in San Francisco and San Mateo counties rose by over 30% between 2010 and 2019, while new housing permits only rose by 7%.

There are strong political biases in these cities against more construction, but other liberal places are re-examining their housing policies, especially single-family zoning.  A New York Times 2019 analysis confirmed that many cities’ land area is dominated by single-family zoning —70% in Minneapolis, 75% in Los Angeles, 79% in Chicago, 81% in Seattle, and 94% in San Jose.  Combined with excessive parking requirements, zoning policy effectively takes land out of production while pushing its price sky-high and preventing multifamily options.

Cities’ anti-development policy means new housing is pushed further out in the metropolitan area, adding to suburban sprawl, longer commute times, and environmental damage.  Ironically, some progressive environmental groups have allied with anti-development forces, with the net result of fostering suburban sprawl.

In New York City, the left Sunrise Movement has joined with many other groups to oppose “upzoning” for higher density and more development in Manhattan’s Soho neighborhood, one of the wealthiest in the nation.  In contrast, Berkeley California, one of the most liberal cities in the nation, has voted to end single family zoning, persuaded by the argument that such policies result in racially segregated neighborhoods and lack of affordable housing for people of color.

But it isn’t just liberal cities that face this problem.  Even though red states like North Dakota, Utah, and Texas lead the nation in home building, a recent study found that only four of America’s 25 largest metropolitan areas “built enough homes to match local job growth.”  And much of that growth was in outlying suburbs, adding to sprawl and pollution.

Urban economist Ed Glaeser locates a good deal of the problem in the rising power of local citizen groups, especially existing homeowners.  Their housing investments often rise in value with scarcity, and they usually like the existing neighborhoods where they reside and don’t want new residents.

This creates an “insider/outsider” problem that limits housing. As Glaeser notes, current homeowners don’t “internalize the interests of those who live elsewhere and would want to come to the city…their political actions are more likely to exclude than to embrace.”  These anti-housing groups often are labelled “NIMBYs”, for “Not In My Back Yard.”

In response, so-called “YIMBYs” (Yes In My Back Yard) are pushing for policies such as relaxed zoning, allowing multi-family housing (at least duplexes to quadplexes) on single family lots, and allowing denser housing near mass transit stops (“TOD”, for “Transit Oriented Development.”).  They are having some success, but anti-development forces are deeply entrenched and politically powerful in many places around the country.

But would more development create not just housing, but add to affordable housing?  What about the impact on low-income and non-white families, who could face rising rents or displacement from gentrification while still not being able to buy a house?  In my next blog, we’ll look at the tangled racial history of housing development and home ownership. Unless renters and lower-income people can be mobilized to support development, NIMBY opposition to more housing will be hard to overcome.

Follow me on Twitter or LinkedIn.

I’m an economist at the New School’s Schwartz Center (https://www.economicpolicyresearch.org), currently writing a book for Columbia University Press on cities and inequality.  I have extensive public sector experience studying cities and states.  I’ve served as Executive Director of the Congressional Joint Economic Committee, Assistant Secretary of Labor for Policy, Deputy Commissioner for Policy and Research at New York State’s Department of Economic Development, and New York City Deputy Comptroller for Policy and Management.  I also worked as Director of Impact Assessment at the Ford Foundation.

Source: America’s Failure To Build Is Driving Home Prices Ever Higher

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Critics:

The United States housing bubble was a real estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.

Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets. In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble “the most significant risk to our economy”.

Any collapse of the U.S. housing bubble has a direct impact not only on home valuations, but mortgage markets, home builders, real estate, home supply retail outlets, Wall Street hedge funds held by large institutional investors, and foreign banks, increasing the risk of a nationwide recession. Concerns about the impact of the collapsing housing and credit markets on the larger U.S. economy caused President George W. Bush and the Chairman of the Federal Reserve Ben Bernanke to announce a limited bailout of the U.S. housing market for homeowners who were unable to pay their mortgage debts.

In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the U.S. housing bubble. This was shared between the public sector and the private sector. Because of the large market share of Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (both of which are government-sponsored enterprises) as well as the Federal Housing Administration, they received a substantial share of government support, even though their mortgages were more conservatively underwritten and actually performed better than those of the private sector.

See also

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