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A Ppecial Report on Property-Bricks and Slaughter

By Michele Payne,2014-09-17 03:43
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A Ppecial Report on Property-Bricks and Slaughter

    A special report on property Towers in Kuala Lumpur (1998), great height has

    usually coincided with big trouble. Bricks and slaughter

    Mr Lawrence’s theory is not perfect, but it feels Property is widely seen as a safe asset. It is ar-right. Property moves in cycles, and the more ambi-guably the most dangerous of all, says Andrew tious the scale of construction on the way up, the Palmer steeper the drop on the way down. A sharp turn in Mar 3rd 2011 | from the print edition the property cycle is a serious matter. The five big

    banking blow-ups in the rich world before the latest ; crisis (Spain in the 1970s, Norway in the 1980s and ; Sweden, Finland and Japan in the 1990s) had prop-

    erty at their heart. Banking crises in the developing

    world have also tended to happen at the peak of

    housing booms or just after a bust in prices.

     In this special report

    ; ? Bricks and slaughter ?

    ; Own goal

    ; When the roof fell in

    ; A world apart

    ; Prime numbers

    ; The old and the new

    ; Building excitement

    ; Between a rock and a living space

    THERE are plenty of candidates, from the ghost ; Offer to readers

    estates of Ireland to the foreclosure signs on Ameri-; Sources and acknowledgments

    can homes. But as a symbol of the property cycle Related items

    that still distorts the world economy, the Burj Khali-; A special report on property: Own goalMar 3rd 2011

     fa in Dubai (pictured above) takes some beating.

    The world’s tallest building is literally built on sand.

    Related topics Its height, at half a mile (838 metres), violates a ; United States basic rule of commercial property: when land is ; Dubai plentiful, build outward to use up as much of it as ; Fannie Mae possible. The building opened in January 2010, just ; Property prices weeks after the emirate announced a standstill on ; Financial markets debts largely incurred on glitzy property projects.

    Not all booms are alike. There were many reasons Its name was hastily changed from Burj Dubai to

    for the housing bubble that has now burst, from Burj Khalifa to honour the ruler of Abu Dhabi for

    huge amounts of global liquidity seeking high re-sending bail-out funds to its fellow emirate. A year

    turns to the rise of private-label securitisation. But on, tourists cluster at its base to take photos or to

    it is striking how often property causes financial visit the observation deck; inside, many of the flats

    trouble. “We do not want to fight the last war,” says lie empty.

    one European banking regulator, referring to prop-Dubai’s record-breaker is also a powerful emblem erty busts, “but the fact is that we keep fighting the of forgetfulness. According to Andrew Lawrence of same war over and over.”

    Barclays Capital, the construction of exceptionally

    Markets remain horribly fragile. Dud commercial-tall buildings is a reliable indicator of economic

    property assets clog banks’ balance-sheets. House crises in the making. From the time the first sky-

    prices in America and several European markets scraper went upthe Equitable Life Building in

    are still falling. This special report will argue that New York, in 1870to the completion of the Em-

    the effects of property booms and busts can be pire State Building (1931) and the World Trade

    made less damaging, but that the asset itself is inhe-Centre (1972) in the same city and the Petronas

    rently unsafe. Another rich-world bubble may be

    unlikely in the near term, but things feel very dif-or more of the value of the property. Most had no

    ferent in emerging markets. In China in particular, way of bringing down their debt short of selling the

    the worry is about another bubble that could shake whole house. Gearing in commercial property was

    the world economy. And even in developed markets, lower but in the boom years it still regularly

    property, which many people regard as stable, will touched 80-85% (it is now back to 60-65% for new

    always be prone to volatility. borrowing in the rich world).

    With only a small sliver of their own capital to pro-

    tect them, many owners were quickly pushed into

    negative equity when property prices fell. As bor-

    rowers defaulted, the banks’ losses started to erode

    their own thin layers of capital. “Banks are leve-

    raged and property is leveraged, so there is double

    leverage,” says Brian Robertson, who runs HSBC’s

    British and European operations and used to be the

    bank’s chief risk officer. “That is why a property

    crash is a problem for the banks.”

    Property bubbles almost always start because fun-

    damentals such as population growth, interest rates

    and economic expansion are benign. A shrinking

    population weighs on Germany’s housing market, for example, and a rising one underpins long-term

    confidence in America’s. These fundamentals ex-Why is property so dangerous? One obvious answer

    plain why many market participants are able to is the sheer size of the asset class. The aggregate

    persuade themselves that huge price rises are justi-value of property held by American households in

    fied and sustainable. Chastened regulators now talk the peak year of 2006 was $22.7 trillion, their big-

    about a presumption of guilt, not innocence, when gest single asset by a wide margin (pension-fund

    prices look frothy. That is because property mar-reserves were next, at $12.8 trillion). Working out

    kets are inefficient in several ways which make it the figures in other countries involves much more

    more likely that they will overshoot. guesswork. Back in 2002 this newspaper reckoned

    that residential property in the rich world as a

    Cycle paths whole was worth about $48 trillion and the com-

    For the lenders, property is attractive in part be-mercial sort $15 trillion: if you allow for property-

    cause it attracts lower capital charges than most price changes in the intervening period, the current

    other assets. That makes sensethe loan is secured values, even after the bust, would be $52 trillion

    by a tangible asset that will retain some value if the and $28 trillion (see chart 1), or 126% and 67%

    borrower defaultsbut it can also lead to overlend-respectively of the rich countries’ combined GDP in

    ing. Indeed, one of the bigger ironies of the proper-2010. Whatever the precise number, property is so

    ty bubble was that lenders and investors probably big that when credit conditions loosen it is likely to

    thought they were being relatively prudent. Capital absorb a lot of the extra liquidity; and when some-

    charges are higher for commercial property than thing goes wrong the effects will be serious.

    for homes but banks can still be seduced by the

    apparent stability of a real asset producing predict-An even bigger reason to beware of property is the

    able cash flows. “Commercial real estate is often a amount of debt it involves. Most people do not bor-

    borrower of last resort,” says Bart Gysens, an ana-row to buy shares and bonds, and if they do, the

    lyst at Morgan Stanley. “It tends to be willing to degree of leverage usually hovers around half the

    absorb a bit more debt if and when banks and debt value of the investment. Moreover, when stock

    markets want to provide it.” prices fall, borrowers can usually get their loan-to-

    value ratios back into balance by selling some of the

    Collateralised lending offers a degree of protection shares. By contrast, in many pre-crisis housing

    to the individual lender, but it has some unfortu-markets buyers routinely took on loans worth 90%

nate systemic effects. One is the feedback loop be-haps, Warren Buffett) can push up a company’s

    tween asset prices and the availability of credit. In a share price by buying its stock at an inflated price, boom, rising property prices increase the value of but the price of residential property is set locally by the collateral held by banks, which makes them the latest transactions. The value of any particular more willing to extend credit. Easier credit means home, and the amount that can be borrowed that property can sell for more, driving up house against it, is largely determined by whatever a simi-prices further. The loop operates in reverse, too. As lar house nearby sells for. One absurd bid can push prices fall, lenders tighten their standards, forcing up prices for lots of people.

    struggling borrowers to sell and speeding up the

    As prices rise, property is arguably more likely than decline in prices. Since property accounts for so

    many other asset classes to encourage speculation. much of the financial system’s aggregate balance-

    One reason is that property is so much part of eve-sheet, losses from real-estate busts are likely to be

    ryday life. People do not gossip about the value of synchronised across banks.

    copper and tin, but they like to talk about how Borrowers, too, contribute to the inefficiency of much the neighbour’s house went for. They watch property markets, particularly on the residential endless TV shows about houses and fancy them-side. Some people think that renting will enjoy a selves as interior designers, able to raise the price renaissance as a result of the crisis (see article), but of their home with a new sofa and artful lighting. few expect a wholesale, permanent shift in attitudes. Eventually the temptation to take a punt on proper-Unlike other assets, housing is seen both as an in-ty becomes overwhelming. “Speculation is a bit like vestment and something to consume. In its latest sex,” says Robert Shiller of Yale University, a long-

    survey of consumer attitudes in July 2010, Fannie standing observer of speculative bubbles. “People Mae, one of America’s two housing-finance giants, who have lots of sex are not approved of but they found that Americans wanted to buy houses for a are thought to live life with gusto. People eventually range of reasons, from providing a safe environ-decided to try for themselves.”

    ment for their children and having more control

    Even the risk-averse may well respond to rising over their living space to making a financial return.

    prices by entering the market. Everyone needs In China there is another item to put on the list: for

    somewhere to live, and many want to own their many young men owning a property is a prerequi-

    own homes. The amount of space that people need site for attracting a wife.

    increases predictably over time as they find part-This mixture of motives can be toxic for financial

    ners and have children. James Banks, Richard Blun-stability. If housing were like any other consumer

    dell and Zoë Oldfield of Britain’s Institute for Fiscal good, rising prices should eventually dampen de-

    Studies and James Smith of RAND, an American mand. But since it is also seen as a financial asset,

    think-tank, find that this gives people an incentive higher values are a signal to buy.

    to buy early in order to protect themselves against And if housing were simply a financial investment, the risk of future price increases that would make buyers might be clearer-eyed in their decision-houses unaffordable.

    making. People generally do not fall in love with

    Another reason for momentum in property markets government bonds, and Treasuries have no other

    is the fact that there are no short-sellers. If you use to compensate for a fall in value. Housing is

    think property is overpriced, it is difficult to profit different. Greg Davies, a behavioural-finance expert

    from that view. As Adam Levitin of Georgetown at Barclays Wealth, says the experience of buying a

    University Law Centre and Susan Wachter of the home is a largely emotional one, similar to that of

    University of Pennsylvania pointed out in a recent buying art. That makes it likelier that people will

    paper on the causes of the housing bubble in Amer-pay over the odds. Commercial property is a more

    ica, it is impossible to borrow the Empire State rational affair, although hubris can play a part:

    Building in order to sell New York real estate short. there is nothing like a picture of a trophy property

    HSBC probably came closest by selling its Canary to adorn a fund manager’s annual report.

    Wharf tower in London for ?1.1 billion ($2.18 bil-Once house prices start to rise, the momentum can lion) in 2007 and buying it back from its debt-laden build up quickly. No single individual (except, per-Spanish owners for ?250m less in late 2008the

    greatest short sale in the history of property, says rate the safety of various investments, two-thirds of one observer. Some investors infamously did make the respondents in the Fannie Mae survey classed money from betting against American subprime homeownership as a safe investment, compared mortgages, but their real achievement was to find a with just 15% for buying shares. Only savings ac-way of doing so, by buying up credit-default swaps counts and money-market funds, both of which that paid out when mortgage-backed securities enjoyed an explicit government guarantee during soured. the financial crisis, scored higher than homes.

    Homeowners who were “under water” on their There have been attempts to create instruments mortgages (ie, they owed more than their proper-that allow property to be hedged or shorted. Mr ties were worth) were just as sure as everyone else Shiller himself has been involved in launching de-that housing was a safe investment. rivatives linked to home-price indices for both large

    and small investors, but with limited success to If the Burj Khalifa shows that memories of property date. Commercial-property derivatives, however, cycles are short, the Fannie Mae survey suggests are gaining ground. that some of the lessons are never taken on board

    at all. Given the state of residential property around Such products are conceptually appealing but face the rich world, perhaps the victims are suffering several obstacles. Some are common to all financial from post-traumatic amnesia.

    innovations: new products lack enough liquidity to

    from the print edition | Special reports lure buyers in, for example. Others are more specif-

    ic to property. Individual properties and neigh- bourhoods differ, which makes it hard to construct

    accurate hedges. Government interventions to

    shore up the housing market add an extra element

    A special report on property of unpredictability. And since house-price cycles

    tend to last for a long time, says Mike Poulos of Own goal Oliver Wyman, a consultancy, it can be expensive to

    sustain a short position. Renting is becoming more popular, but only up

    to a point

    Up, up and away with the fairies Mar 3rd 2011 | from the print edition The effects of buying a home when prices are rising

    are insidious. A 2008 paper by Hugo Benitez-Silva, ;

    Selcuk Eren, Frank Heiland and Sergi Jiménez-;

    Martín used the Health and Retirement Study, a “THE psychology of the consumer has changed 180? biennial survey of Americans over the age of 50, to from the bubble,” says Ric Campo, the boss of Cam-

    compare people’s estimates of the value of their den Property Trust, an American real estate in-homes with actual values when a sale took place. vestment trust (REIT) specialising in multi-family The authors found that homeowners overestimate residential blocks. If homeownership was the the value of their homes by an average of 5-10%. American dream before the bust, lots of people are Those who had bought during good times tended to now waking up to the benefits of renting. Until the be more optimistic in their valuations, whereas bubble got going, the “move-out rate” (the percen-

    those who had bought during a downturn were tage of Camden’s tenants leaving their apartments more realistic. Expectations of higher prices explain each year to buy a home) was about 12-14%. That why bubble-era buyers were more willing to buy rose to a peak of 24% when, as Mr Campo puts it, risky mortgage products and take on ever greater the banks started lending to anyone who could fog quantities of debt. The amount of mortgage debt in a mirror. It is now down to around 10%. America almost doubled between 2001 and 2007,

    to $10.5 trillion. An analysis of relative returns from home-

    ownership and a portfolio of other investment as-The rich-world buyers of today ought to be more sets by Eli Beracha of East Carolina University and realistic about the future value of their homes, but Ken Johnson of Florida International University attitudes are deeply entrenched. When asked to suggests that for most of the past 30 years it would

    Financial services ; have made economic sense for Americans to rent

    rather than buy. Their study necessarily makes lots The social rationale for encouraging Americans to of heroic assumptionsmost notably, that renters buy their homesthat ownership makes for more will be utterly disciplined about investing the cash engaged citizens whose children do better at they save by not buying a home. Still, it is a useful schoollooks weaker than it did. A 2009 paper by corrective to the widely held belief that renting is a David Barker of the University of Iowa and Eric waste of money. Miller of the Congressional Budget Office points out

    that many of the “benefits” of home-ownership dis-

    appear when other variables, such as employment,

    are controlled for. In a separate piece of work,

    Grace Bucchianeri of the Wharton School of Busi-

    ness found little evidence that homeowners were

    happier than renters.

    Whether any of this justifies talk of a “rental nation”

    is doubtful. America’s home-ownership rate has

    dropped from 69.2% at its peak in 2004 to 66.5% in

    the fourth quarter of 2010. That is its lowest rate

    since 1998 but still a long way from that of Germa-

    ny, which was only 46% in 2007. Switzerland’s fig-

    ure is even lower.

    These gaps reflect entrenched differences. Some of

    them are cultural. “A commute of an hour is unac-

    ceptable in Germany,” says Sascha Hettrich of King

     Sturge, a property adviser in Berlin. That pushes

    people toward the rented apartment blocks which Political rhetoric in favour of home-ownership has

    predominate in city centres, especially when, as in fallen silent. Other countries have achieved the

    Berlin, rents are very low. Other factors are institu-same or higher rates of ownership as America

    tional. German mortgage lending is a pretty con-without destructive government subsidies (see

    servative affair, making it hard for people to get chart 2). Plans to wind down Fannie Mae and Fred-

    onto the ladder without lots of cash to put down. die Mac, the government-sponsored mortgage

    And German tenants get plenty of protection from giants, are now on the table. If more people rent,

    their landlords. Leases are open-ended and rent house prices should become less volatile.

    increases are controlled by a system pegging rents

    to those charged for comparable properties. Con-In this special report

    ; Bricks and slaughter servative investors feel safe in the knowledge that ; ? Own goal ? demand for properties is high and income is stable. ; When the roof fell in

    ; A world apart In America the crisis marks a structural change for ; Prime numbers a swathe of consumers who should not have bought ; The old and the new properties in the first place and will not be able to ; Building excitement in future. But home-ownership rates are unlikely to ; Between a rock and a living space drop much more, not least because lower prices ; Offer to readers have made houses more affordable. Messrs Beracha ; Sources and acknowledgments and Johnson reckon that, unusually, buying just

    now makes more financial sense than renting. In a

    speech last September John Paulson, a hedge-fund Related topics

    manager who made billions betting against the ; Berlin

    ; Germany housing market, urged people to get back into the ; United States market: “If you don’t own a home, buy one. If you ; Credit services own one home, buy another one, and if you own

two homes buy a third and lend your relatives the

    money to buy a home.” Assuming you have the cash.

    from the print edition | Special reports

A special report on property

    When the roof fell in

    Housing will be a drag on the rich world’s re-

    covery for the foreseeable future

    Mar 3rd 2011 | from the print edition

     ;

    Around much of the rich world, hopes that housing ;

    markets would be well on the road to recovery by

    now have been disappointed. Not everyone is glum.

    Renters are not bothered by falling prices, and the

    cash-rich are still having a high old time (see article).

    But for most people property is a source of worry.

    In America the bounce caused by a temporary tax

    credit for first-time buyers has long since faded.

    The latest S&P/Case-Shiller home-price indices

    (which take in figures up to December 2010)

    showed that prices had fallen in 19 out of 20 cities

    covered month-on-month, and that the composite Walls of worry

    index had declined by 2.4% year-on-year. Eleven PROPERTY can cause huge problems, but the sector markets, including Miami, New York and Seattle, hit also traditionally leads economies out of recession. their lowest levels since prices first started falling Housing is far bigger and more important than in 2006.

    commercial property. Residential investment,

    In this special report which is driven by new housing starts, makes up a

    ; Bricks and slaughter large chunk of the volatile bit of the economy. That

    ; Own goal means changes in residential investment have a

    ; ? When the roof fell in ? disproportionate impact on rates of GDP growth. It ; A world apart has played a big part in driving previous post-war ; Prime numbers American recoveries, and many assumed the same ; The old and the new would happen this time round. Things have not ; Building excitement worked out that way (see chart 3). ; Between a rock and a living space

    ; Offer to readers

    ; Sources and acknowledgments

    Related items

    ; A special report on property: A world apartMar 3rd 2011

    Related topics

    ; Property prices

    ; Residential property

    ; Property industry

    ; Homebuilding

    ; Construction industry Even so, there is a limit to governments’ willingness

    to take on more risk. Fannie and Freddie have been Misery index fighting with the banks about poor-quality loans In Britain a strong start to 2010 also weakened as they originated and then passed on to the agencies. the year went on. Figures from Nationwide, a lend-The FHA has gradually been tightening its insur-er, showed a 1.1% year-on-year fall in prices in ance criteria. Add in the fallout from the “robo-January, the biggest slide since August 2009. In signing” scandal, in which banks were accused of Spain the IMIE index showed a fall of 3.9% in De-using flawed and possibly fraudulent foreclosure cember, taking prices back down to levels last seen processes, and mortgage approvals will stay slug-in 2005. For sheer awfulness nothing can touch gish. Ireland, where prices dropped by 10.8% in the

    fourth quarter and the rate of decline increased. Much as these demand-side factors dampen the

    housing market, the supply side arguably has an It comes as no great surprise that many markets are even bigger effect on prices. Work on the relation-still struggling. A common thread in many rich-ship between housing supply and bubbles by Ed-world economies is uncertainty about the future. ward Glaeser of Harvard University and Joseph Policymakers may worry about the effect of hous-Gyourko and Alberto Saiz of the Wharton School ing problems on unemploymenthomeowners in suggests that places with relatively elastic supply negative equity may not be able to move in search have fewer bubbles, of shorter duration, than those of jobsbut the more important effect runs the where the supply is more restricted. other way. Changes in hiring rates are an excellent

    predictor of homeowners falling behind with their Dearth and homes

    mortgage payments. Fears about sovereign-debt In many respects the recent boom bears this out. crises, the effects of austerity programmes and job Differences in supply constraints can explain much security make it far less likely that people will take of the striking disparity between American states, the plunge on buying a new home. from the modest run-up in prices in Texas, where

    land is easily available, to the huge surge in places Another common feature is a squeeze on mortgage like Nevada, where land-use regulations are tighter. finance. The private market for securitised mort-

    gage loans remains very subdued. Banks have bela-But elasticity is not always a good thing. When the tedly tightened credit standards, particularly for housing market can respond to demand by adding first-time buyers, who lubricate the housing market to supply, there is a greater risk of overbuilding. In for everyone else. According to recent research in theory, booms in elastic markets do not last for long Britain by the Home Builders Federation, a trade because as new housing becomes available it puts group, the average first-time buyer aged 30-39 pressure on prices, puncturing expectations of fur-would now have to save 35% of his or her pay after ther appreciation and popping the bubble. For the tax every month for five years to scrape together a 1996-2006 cycle in America Messrs Glaeser, Gyour-deposit. Many are turning to the bank of Mum and ko and Saiz find that places with more developable Dad for help. land did have shorter booms.

    In America the government has rushed in to take up But when it comes to the biggest house-price bub-the slack. Fannie Mae and Freddie Mac, which buy ble in history, theory does not get you very far. In home loans from lenders, and the Federal Housing some places the boom was big enough and irration-Agency (FHA), which insures them against default, al enough to suppress price signals from lots of new between them routinely guarantee more than 85% supply. Instead, availability of land simply fed spe-of new home loans. FHA-insured loans are particu-culative activity, which has made the popping of the larly important for first-time buyers, who need to bubble much more painful.

    put down a deposit of only 3.5%. The market is so

    dependent on these agencies that the government In a report last December the Bank of Spain reck-will not be able to withdraw its support any time oned that the country has a glut of 700,000-1.1m soon (which is one reason to expect the winding unsold homes, which will continue to weigh on down of Fannie and Freddie to be slow in coming). prices this year. Bernstein Research estimates that

these unsold houses will take four to five years to

    clear, and even that may be too optimistic given

    high unemployment, the threat of a sovereign-debt

    crisis and fewer immigrants. It could have been

    worse: Spanish banks have repossessed huge

    amounts of land that had not yet been built on, and

    residential-mortgage standards are rather conserv-

    ative. But the oversupply means that prices will

    keep falling. They have dropped by only 16% from

    their peak in real terms, and Bernstein reckons the

    eventual fall will be more like 30%. Ghosts of Ireland’s boom

    Ireland’s building boom also went over the top. The Mixing vacant and unfinished properties with occu-government relaxed planning laws, the banks threw pied ones drags down the value of everything. The money at anything involving cement, and investors bust also gives developers very little incentive to gobbled up houses in the expectation that prices resolve disputes over maintenance. Clongriffin is could only go up. An Irish government report last one of a number of north Dublin developments in-October into the country’s “ghost estates” identified volved in legal cases over buildings contaminated more than 2,800 housing developments where con-with pyrite, a mineral that crumbles as it oxidises. struction had been started but not completed. Be-

    Clongriffin may also have the wrong sort of proper-tween them these estates had planning permission

    ties for this stage of the cycle. During the boom for 180,000 units, which roughly translates into a

    much of the construction activity was in flats. De-new residence for one in every 25 Irish people.

    velopers liked them because they could generate A lot of properties were sold before the market more revenue from a single plot of land. First-time soured, so the report found only 33,000 finished buyers saw them as a way to get onto the housing homes remained empty, not the hundreds of thou-ladder, perhaps hoping to trade up to a house later. sands forecast earlier. But even if the overall num-But prices have now fallen so far that buyers can ber of unsold units is not as bad as feared, it does skip the flat and go straight to a family home. not capture the full effects of oversupply.

    Clongriffin’s unsold units will probably find buyers Take Clongriffin, a huge mixed-use development in the end, thanks to its location. Two-fifths of Irel-north of Dublin. The location is good, about 15 mi-and’s population lives in greater Dublin and the nutes from the city centre. Flags extolling “Dublin’s country has one of the highest proportions of 25-new town centre” hang from lamp-posts outside the 45-year-olds in Europe, most of whom will want to local railway station, which opened in 2010. There own their homes. But lots of the excess was in more are some shops on the main street, and cars in rural areas. Marie Hunt of CB Richard Ellis (CBRE), many of the driveways. But the overall impression a property consultancy, points out that in such is bleak. Many shops are unoccupied, lots of apart-places even an oversupply of 20 homes can make a ments lie unfinished and there is no sign that work big difference.

    is continuing. Hoarding surrounds large tracts of

    Only in America undeveloped land.

    Oversupply can take many forms. America’s big

    housing worry is its huge “shadow” inventory—

    homes whose owners are seriously behind with

    their mortgage payments or in foreclosure and

    which will eventually come onto the market. Even

    though American house prices are now back at fair

    value (ie, the ratio of house prices to rents is back to

    its long-run average), this pipeline of distressed

    properties is putting prices under continued pres-

    sure.

    their houses, giving priority to mortgage payments

    over all other forms of debt. But Andrew Jennings of

    FICO, the company behind America’s FICO credit

    scores, reckons that 25-30% of defaults are now

    premeditated. He says that many borrowers, often

    nominally lower-risk ones, prepare for default by

    making more credit inquiries and taking up other

    loans. The practice is more widespread in the many

    American states where lending is “non-recourse”,

    meaning that lenders cannot come after a default-

    ing borrower for any debt left over when the prop-

    erty is sold.

    In Europe’s frothier markets unpaid debt hangs

    around the necks of borrowers, giving them a big-

    ger incentive to tough it out in their homes. Specul- ative purchases also made things worse: people are It also helps explain why America has suffered such more likely to give back the keys to homes they are a sharp fall in prices after the bust despite peaking not living in. The report of the Financial Crisis In-lower than many other countries (see chart 4). quiry Commission pointed out that by the first half House prices are generally “sticky” on the way of 2005, the peak year for housing sales, more than down, in part because people are averse to selling one in every ten house sales in America was for an at a loss. But America’s bust has brought waves of investment or a second home.

    distressed sales, forcing prices down rapidly.

    Housing, flat Around a quarter of borrowers are now in negative

    Whatever the reasons, the number of properties equity. “The big question is not how fast prices rose

    that have gone into negative equity and into forec-but how fast and how much they fell,” says Eric

    losure is much greater than expected. A system set Belsky of the Joint Centre for Housing Studies at

    up to deal with 500,000 foreclosures a year is now Harvard University.

    running at about 2m a year, says Michelle Meyer of One explanation is that unemployment in America Bank of America Merrill Lynch. Just how bad this rose more sharply than in other rich economies, glut of unsold houses will get is very hard to say. It and even creditworthy borrowers cannot cope with depends, above all, on the unemployment rate. But a sustained loss of income. But the initial drop was it also depends on the speed and outcome of the down to causes more specific to housing. The most foreclosure process and on the efficacy of official obvious culprit was the extraordinary laxity of interventions. The experience to date has been un-America’s mortgage-underwriting standards in the inspiring. A government programme to modify later stages of the boom. With very little equity in mortgages, giving struggling homeowners a subsidy their homes to protect them from a drop in prices, on their payments, has had $50 billion allocated to lots of high-risk borrowers quickly became sub-it, but so far only $1 billion of that has been spent. merged when the bubble burst. Housing boffins Many of those who have had their mortgages mod-regard negative equity as the best predictor of de-ified wind up defaulting again.

    fault, which is why they take loan-to-value ratios

    Sean Dobson, the chairman of Amherst Securities, is very seriously. It is also what saddles banks with

    more bearish than most. He argues that some losses when homes end up in foreclosure.

    11.5m American homes (out of 125m in all) remain A related issue is the amount of “strategic default-at risk of ending up in foreclosure, and that princip-ing” in America: the number of people choosing to al forgiveness for borrowers under water is the walk away from their homes. Its prevalence can be only option: “You are not going to create new buy-

    exaggerated, but it has still come as a surprise. Be-ers for 11m homes, short of legalising every illegal fore the crisis the conventional wisdom had been immigrant and forcing them to buy a house.”

    that people would do whatever they could to stay in

Others are less apocalyptic, particularly as Ameri-

    ca’s recovery gathers pace. But the pipeline of dis-

    tressed homes heading for the market will keep

    prices down for some time yet. Sandipan Deb of

    Barclays Capital reckons that the number of such

    properties probably totals around 4m-5m. He says

    that prices will fall by 6% or so in 2011 and will

    then languish for a while before gradually recover-

    ing. That may be just what policymakers want. “The

    objective of the government is to make sure that

    distressed stock does not hit the market suddenly,”

     says Mr Deb. Modifying home loans may not avoid

    defaults altogether, but it should at least space CONCEIVED during the boom and taken over by its them out. lenders after the bust, the Icon Brickell has become

    the most visible symbol of Miami’s property renais-Despite the woes, America’s system of long-term, sance. The Philippe Starck-designed condominium fixed-rate mortgages at least ensures that borrow-complex is, depending on taste, either hugely so-ers do not have to worry about interest rates. Many phisticated or utterly naff. The columns at the base European countries have adjustable-rate mortgages of the building are shaped like Easter Island statues that move in step with changes in official interest (see picture); tables and chairs sit voguishly in the rates: two-thirds of the outstanding mortgages in water of an outdoor pool; the walls of an enormous Britain, for example, are of this kind. Much as Euro-spa are lined with books wrapped in white paper. pean borrowers have been helped by ultra-low in-It’s seductively ridiculous. terest rates so far, they will also be exposed to ris-

    ing costs when rates go up again. With house prices The complex had been largely pre-sold, but when in Europe having fallen less far, austerity threaten-the bottom fell out of the market buyers refused to ing higher unemployment and inflationary pres-pay up. Units are now being marketed at heavily sures prompting hawkish talk about tighter mone-reduced prices. Sales, at around 60 units a month, tary policy, the continent’s housing markets look are running at twice the expected level, says one more likely to suffer new shocks than America’s. agent. The main source of demand is cash-rich in-

    ternational buyers, most of them from Latin Ameri-from the print edition | Special reports ca. Local agents say Venezuelans are the most ac-

     tive buyers, followed by Brazilians. A special report on property International money is flowing to other properties

    in the city, too. Figures from the Miami Association A world apart of Realtors, a trade group, show that sales of con-

    dominiums in Miami in 2010 were more than 40% International buyers are still splurging on resi-

    up on the previous year. “The foreign and, especial-dential property

    ly, the Latin American buyer has been a big factor in Mar 3rd 2011 | from the print edition the remarkable turnaround in sales velocity,” says

    Jubeen Vaghefi of Jones Lang Lasalle (JLL), a prop-;

    erty consultancy. ;

    In this special report

    ; Bricks and slaughter

    ; Own goal

    ; When the roof fell in

    ; ? A world apart ?

    ; Prime numbers

    ; The old and the new

    ; Building excitement

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