07-14-2016, 09:32 PM
(This post was last modified: 07-15-2016, 01:39 PM by John J. Xenakis.)
*** 15-Jul-16 World View -- After Brexit, London's real estate bubbles are collapsing
This morning's key headlines from GenerationalDynamics.com
****
**** UK residential real estate market hit hard by Brexit
****
![[Image: g160714b.jpg]](http://www.GenerationalDynamics.com/ww2010/g160714b.jpg)
UK house prices, 1991 to present
According to anecdotal evidence collected in a survey by the Royal
Institution of Chartered Surveyors (RICS), indicates that the
residential real estate market in the UK, especially in London, is
crashing.
The findings have to be viewed with caution, since prices increased slightly
in June, albeit more slowly than in the past. Since the Brexit
referendum occurred on June 23, the June prices surveys don't tell us
much.
But the findings that the RCIS announced on Thursday are considerably
more dramatic, because they measure changes in buyer sentiment since
the Brexit referendum:
According to RICS, the South of the UK has been the hardest hit, with
anecdotal evidence suggesting that both the Brexit referendum and tax
changes are having an impact on sentiment.
According to RICS, London remains the only region where respondents
are seeing prices fall, with this largely being concentrated in the
central zones. Near term price expectations are now in negative
territory across the whole of the UK with 27% more respondents across
the UK expecting to see prices fall rather than rise over the next
three months.
RICS points out that only after the initial shock of the Brexit
referendum has passed will we get a clearer picture of how the market
is faring. Royal Institution of Chartered Surveyors (RICS) and Business Insider
****
**** The UK housing bubble may finally be collapsing
****
As the chart at the beginning of this article shows, UK housing prices
are still at bubble levels. As I've written a number of times in the
past, the global housing bubble began in 1996, at the same time as the
"tech bubble," and accelerated in the 2000s, reaching a peak in 2007.
The housing bubble then deflated, causing what we now call "the
financial crisis," but as the above chart illustrates, the global
housing bubble did not fully deflate, and the housing bubble continues
to this day.
According to a UBS report published last year, the global housing
price increase was 130% from 1996 to 2007, but the subsequent price
decline was only 30%. The UBS report blames this on the "gigantic cash
injection" from central banks around the world, through quantitative
easing and, today, negative interest rates. According to the report:
[indent]<QUOTE>"Through quantitative easing, central banks have more
than tripled the global monetary base since 2008. This gigantic
cash injection has lowered real interest rates and slowed the
global housing market corrections that began in 2007. The average
price decline amounted to 30% in real terms. However, this did not
offset the preceding price increase of 130% since the mid-1990s.
The correction was thus milder than in previous cycles, setting
the stage for today’s overheating housing markets.
When inexpensive financing is combined with bullish expectations,
real estate prices eventually uncouple from the real economy. We
have seen this in the current cycle, particularly in the world’s
leading financial centers, where housing prices are now, in many
cases, fundamentally unjustified. The risk of a real estate bubble
in these cities has risen sharply. While it is not always possible
to prove conclusively the existence of a bubble, it remains
essential to identify the signs of one early on."<END QUOTE>[/indent]
According to the report, the world's most expensive real estate market
was London, though Hong Kong is not far behind. Many European cities,
including Geneva and Amsterdam, are overvalued. In the United
States, San Francisco is the most overvalued, with New York, Boston
and Chicago trailing behind.
As I wrote in "25-Jun-16 World View -- Fallout from Brexit: Impact on geopolitics, economics, and stock markets"
, the danger is from a long-term crash because
of a vicious cycle involving forced selling.
It's impossible to predict exactly when the London housing bubble will
collapse, but it's 100% certain that it will collapse at some point,
because every bubble in history has collapsed, usually causing
enormous pain. It's possible that we're seeing the beginning of a
major real estate collapse right now, but it's also possible that
central banks will find a way to pour massive new amounts of liquidity
into the real estate markets to keep the bubble going. After the
"gigantic cash injection" described by the UBS report quoted above,
central banks are not about to stop now. The sky's the limit.
One thing to watch out for is that there is a great deal of resistance
among mainstream economists, politicians, journalists and analysts to
even imagine a collapsing bubble.
We saw this ten years ago, when mainstream financial analysts,
economists and journalists would say, "Housing prices can't go down --
people have to live somewhere!" and "Banks won't foreclose -- it's not
in their interest to do so!" and "These housing construction firms
know what they're doing, and they wouldn't be building houses if it
were just a bubble!" It wasn't until 2009 that mainstream economists
began saying that there had been a housing bubble years earlier. (See
"26-Dec-2015 World View -- 'The Big Short' - an infuriating movie about the financial crisis"
)
So expect the usual slew of excuses from mainstream economists this
time, and don't be surprised if, as usual, they don't have the vaguest
clue what's coming. UBS Global Real Estate Bubble Index (2015-PDF) and Money Week (3-March-2016) and Bloomberg (6-April-2016)
****
**** UK commercial real estate market hard hit by 'Brexit clauses'
****
Since commercial real estate is often used for investments, Britain's
commercial property market is being harder hit than the residential
housing market.
Even before the June 23 referendum, some buyers wrote "Brexit clauses"
into their contracts to purchase commercial real estate in Britain.
These clauses, which are now being invoked, allow buyers to walk away
from deals if the Brexit referendum passed, which it did.
Many commercial real estate investors do not plan to occupy the
properties they acquire, but are purchasing them as investments. This
is particularly true of Chinese property investors, who simply need a
place to park their money.
Because of Brexit, many employees working in London may have their
jobs moved to the continent. This means that there will be empty
offices in London, reducing the value of these buildings to these
Chinese investors.
Until the effects of Brexit are well understood, which may not be for
two or more years, commercial real estate investors are looking for
"safe havens" in other countries. Thus, London's loss could mean
other cities' gain. Realtors in Canada, Australia and the US are
pitching their countries as safe havens, as Chinese buyers view
Britain as too risky. South China Morning Post (Hong Kong) and Reuters
KEYS: Generational Dynamics, Britain, London, Brexit,
Royal Institution of Chartered Surveyors, RICS,
quantitative easing, Hong Kong
Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal
John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
This morning's key headlines from GenerationalDynamics.com
- UK residential real estate market hit hard by Brexit
- The UK housing bubble may finally be collapsing
- UK commercial real estate market hard hit by 'Brexit clauses'
****
**** UK residential real estate market hit hard by Brexit
****
UK house prices, 1991 to present
According to anecdotal evidence collected in a survey by the Royal
Institution of Chartered Surveyors (RICS), indicates that the
residential real estate market in the UK, especially in London, is
crashing.
The findings have to be viewed with caution, since prices increased slightly
in June, albeit more slowly than in the past. Since the Brexit
referendum occurred on June 23, the June prices surveys don't tell us
much.
But the findings that the RCIS announced on Thursday are considerably
more dramatic, because they measure changes in buyer sentiment since
the Brexit referendum:
- New buyer enquiries "declined significantly" in June, with 36%
more respondents reporting a fall in interest. This is the lowest
reading since mid-2008 when the financial crisis was in full
swing.
- The market saw a further decline in sales with a third successive
monthly drop in activity. Respondents expect this trend to continue
with 26% more respondents anticipating a further drop in sales across
the UK over the next three months. This is the most negative reading
for near term expectations since 1998.
- In London, 46% of those surveyed were seeing prices
slashed.
According to RICS, the South of the UK has been the hardest hit, with
anecdotal evidence suggesting that both the Brexit referendum and tax
changes are having an impact on sentiment.
According to RICS, London remains the only region where respondents
are seeing prices fall, with this largely being concentrated in the
central zones. Near term price expectations are now in negative
territory across the whole of the UK with 27% more respondents across
the UK expecting to see prices fall rather than rise over the next
three months.
RICS points out that only after the initial shock of the Brexit
referendum has passed will we get a clearer picture of how the market
is faring. Royal Institution of Chartered Surveyors (RICS) and Business Insider
****
**** The UK housing bubble may finally be collapsing
****
As the chart at the beginning of this article shows, UK housing prices
are still at bubble levels. As I've written a number of times in the
past, the global housing bubble began in 1996, at the same time as the
"tech bubble," and accelerated in the 2000s, reaching a peak in 2007.
The housing bubble then deflated, causing what we now call "the
financial crisis," but as the above chart illustrates, the global
housing bubble did not fully deflate, and the housing bubble continues
to this day.
According to a UBS report published last year, the global housing
price increase was 130% from 1996 to 2007, but the subsequent price
decline was only 30%. The UBS report blames this on the "gigantic cash
injection" from central banks around the world, through quantitative
easing and, today, negative interest rates. According to the report:
[indent]<QUOTE>"Through quantitative easing, central banks have more
than tripled the global monetary base since 2008. This gigantic
cash injection has lowered real interest rates and slowed the
global housing market corrections that began in 2007. The average
price decline amounted to 30% in real terms. However, this did not
offset the preceding price increase of 130% since the mid-1990s.
The correction was thus milder than in previous cycles, setting
the stage for today’s overheating housing markets.
When inexpensive financing is combined with bullish expectations,
real estate prices eventually uncouple from the real economy. We
have seen this in the current cycle, particularly in the world’s
leading financial centers, where housing prices are now, in many
cases, fundamentally unjustified. The risk of a real estate bubble
in these cities has risen sharply. While it is not always possible
to prove conclusively the existence of a bubble, it remains
essential to identify the signs of one early on."<END QUOTE>[/indent]
According to the report, the world's most expensive real estate market
was London, though Hong Kong is not far behind. Many European cities,
including Geneva and Amsterdam, are overvalued. In the United
States, San Francisco is the most overvalued, with New York, Boston
and Chicago trailing behind.
As I wrote in "25-Jun-16 World View -- Fallout from Brexit: Impact on geopolitics, economics, and stock markets"
, the danger is from a long-term crash because
of a vicious cycle involving forced selling.
It's impossible to predict exactly when the London housing bubble will
collapse, but it's 100% certain that it will collapse at some point,
because every bubble in history has collapsed, usually causing
enormous pain. It's possible that we're seeing the beginning of a
major real estate collapse right now, but it's also possible that
central banks will find a way to pour massive new amounts of liquidity
into the real estate markets to keep the bubble going. After the
"gigantic cash injection" described by the UBS report quoted above,
central banks are not about to stop now. The sky's the limit.
One thing to watch out for is that there is a great deal of resistance
among mainstream economists, politicians, journalists and analysts to
even imagine a collapsing bubble.
We saw this ten years ago, when mainstream financial analysts,
economists and journalists would say, "Housing prices can't go down --
people have to live somewhere!" and "Banks won't foreclose -- it's not
in their interest to do so!" and "These housing construction firms
know what they're doing, and they wouldn't be building houses if it
were just a bubble!" It wasn't until 2009 that mainstream economists
began saying that there had been a housing bubble years earlier. (See
"26-Dec-2015 World View -- 'The Big Short' - an infuriating movie about the financial crisis"
)
So expect the usual slew of excuses from mainstream economists this
time, and don't be surprised if, as usual, they don't have the vaguest
clue what's coming. UBS Global Real Estate Bubble Index (2015-PDF) and Money Week (3-March-2016) and Bloomberg (6-April-2016)
****
**** UK commercial real estate market hard hit by 'Brexit clauses'
****
Since commercial real estate is often used for investments, Britain's
commercial property market is being harder hit than the residential
housing market.
Even before the June 23 referendum, some buyers wrote "Brexit clauses"
into their contracts to purchase commercial real estate in Britain.
These clauses, which are now being invoked, allow buyers to walk away
from deals if the Brexit referendum passed, which it did.
Many commercial real estate investors do not plan to occupy the
properties they acquire, but are purchasing them as investments. This
is particularly true of Chinese property investors, who simply need a
place to park their money.
Because of Brexit, many employees working in London may have their
jobs moved to the continent. This means that there will be empty
offices in London, reducing the value of these buildings to these
Chinese investors.
Until the effects of Brexit are well understood, which may not be for
two or more years, commercial real estate investors are looking for
"safe havens" in other countries. Thus, London's loss could mean
other cities' gain. Realtors in Canada, Australia and the US are
pitching their countries as safe havens, as Chinese buyers view
Britain as too risky. South China Morning Post (Hong Kong) and Reuters
KEYS: Generational Dynamics, Britain, London, Brexit,
Royal Institution of Chartered Surveyors, RICS,
quantitative easing, Hong Kong
Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal
John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
