Trick or Treat
I have reported in the past (July 24, 2013) on big money buying up swaths of bank owned U.S. residential properties in the last 2 years for buy, hold and flip when capital gains return despite current negative yields. Today Bloomberg is reporting that:
"Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S. is using its experience to replicate the model in Spain where property prices have dropped 40 percent."
A few quotes from the Bloomberg article follow:
The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private.
While Spain traditionally has a lower percentage of renters than the U.S., the (Spanish) government last year introduced measures to increase demand in the rental market by abolishing tax breaks for individual home buyers, passing legislation to protect landlords by speeding up evictions of tenants who don’t pay, allowing owners to raise rents above the annual inflation rate and reducing the duration of leases.
Three years of austerity, unemployment at 26 percent and a drought in mortgage lending are forcing more Spaniards to rent (rather than own) and (banks) to attract foreign funds to invest in the country’s unsold homes, which may total 1.5 million units according to some estimates.
Blackstone (in the U.S.) is now attempting to sell debt backed by the rental payments, the first securitization of its type, with Deutsche Bank AG (DBK) holding a meeting today in New York to market $479.1 million of the securities backed by mortgages on 3,207 properties. Blackstone’s long-term wager is that the homes’ values will rise, positioning the firm to exit at a profit.
Oh, did I mention that the wire services have reported that Spain is officially "out of recession" according to the Madrid-based Bank of Spain: "Gross domestic product expanded 0.1 percent in the third quarter, growing for the first time in more than two years."
Happy Halloween, here's some Wikipedia reading:
...and here is Richard Wilkinson's Ted Talk (2011): How economic inequality harms societies. The hard data on economic inequality shows what gets worse when rich and poor are too far apart; real effects on health, lifespan, even such basic values as trust. "If Americans want to live the American dream, they should go to Denmark".
It's different in Canada
The Economist has a useful user input tool for comparing different real estate markets. This 4 pack looks at the difference between the U.S. and Canadian real estate markets from 1Q 2009 (the pit of gloom) to 2Q 2013 with respect to real values (nominal less CPI) and relative to incomes and rents.
The Canadian real estate market diverged from the U.S. market path after the 2009 interim bottom (chart below) and for the last 4+ years thanks to 1) the government price fixing of interest rates and 2) tax payer funded insurance of high ratio debt to equity financing and 3) credulous buyers willing to bid up prices on the promise of price inflation without the experience of wage inflation; Canada has extended its bull market in housing. If you are looking for negative yield, Canadian real estate fits the criteria.
CLICK TO ENLARGE CHART
"There’s perhaps never been a better time to sit on the sidelines and see how things shape up over the next year from the comfort of your rental condo."
That's a quote from Ben Rabidoux in The Globe and Mail's April 17th post "Is Canada’s condo boom coming apart at the seams?" Here are some snippets with respect to the ballooning inventory level of condos:
Ben Rabidoux is a Canadian analyst and strategist with U.S.-based Hanson Advisors, and author of The Economic Analyst blog.
Pacifica Partners "historical fair value"
Plunge-O-Meter Back Up
Many thanks to Pacifica Partners who sent me updates to their Chart Book. Click on the thumbnail to the left to get their Canadian Home Prices Over Rents Chart and their Price Correction to Historical Average Table. The originals are here and here.
Now that market sentiment has changed and buyers believe that prices will fall, and Realtors are advising their vendors to list their properties at below the last comparable sale, where will prices pool?
There are 3 ways to value property. Comparable Sales, Replacement Cost and by Income. In a falling price market, comps are used by Vendors to get liquid by getting ahead of the selling crowd by pricing below the last compared sale. At this point in the selling cycle only appraisers and developers are looking at replacement cost; in a deflation, input costs fall as well as price (see my real price chart).
The gravitational pull is towards the Income approach. In the absence of capital appreciation (ie: deflation) buyers will step back into the market in a big way when the return on investment becomes attractive.
If we use Pacifica Partner's price correction percentages required to bring Canadian property prices back into "historical fair value" we get valuations that are in the range to what the Plunge-O-Meter has been suggesting, ie: Spring 2005 Prices.
PACIFICA PARTNERS July 2012 Price Less % Correction vs
PLUNGE-O-METER Target of Spring (March) 2005 SFD Prices
Pacifica Partners makes the point:
"Any increase in interest rates to even pre recession levels (which were also historically low) causes Canadian real estate as a whole to appear grossly overvalued."
Plunge-O-Meter says "Interest Rates and Yields are currently negative or pointing at the nadir. If they start to tick up then the Plunge-O-Meter price targets will seem obvious to everyone."
30 Year Buy or Rent
30-YEAR Buy vs Rent Chart (theeconomicanalyst.com & housingbubble.jparsons.net)
There is a time to own and a time to rent.
In Canada, it's Time to Rent through the inevitable mean reversion.
Keep building up cash, it will one day have value again.
Gold is actually outperforming real estate and all other commodities by a wide margin.
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'