Why the Real Estate Market Matters for the Entire World

Today’s Morning Morning begins with the observation that Australia is not alone when it comes to self-serving politicians and bureaucrats. The US has plenty too, it seems.

You might recall last year I wrote about former Victorian Planning Minister Matthew Guy rezoning the area known as Fisherman’s Bend near the Melbourne CBD.

That delivered windfall profits as high as 500% to the existing landowners.

Shiver me timbers! Some of them just happened to be Liberal Party folk that coincidentally owned a bit. As The Age reported in November:

Senior Liberal party members and donors including the party’s honorary federal treasurer Andrew Burnes, were among those to reap huge paper profits from one stroke of Matthew Guy’s pen.

Another example has now come by way of New York. This shows you how the economic game is still the same….

How to bank $72 million in profit

I’ve never been to Rivington House on the Lower East Side. Apparently it’s 118 years old. It was also a not for profit healthcare centre. Until recently, the building had a deed restriction on it that limited it to that use.

That put a cap on the building’s value. But if you got rid of the deed restriction, it was money for jam.

And as the Wall Street Journal reports….

In early 2015, the Allure Group, a for-profit nursing care provider, purchased the building for $28 million, and months later paid the city $16.15 million to remove the restrictions that limited the building’s use, records show.

About three months after the city lifted the restrictions, Allure sold the building for $116 million to a residential developer that plans to convert it into luxury condominiums, over the objections of some community leaders.’

This is the kind of graft and corruption that shows you it’s business as usual as far as the economy — and government — is concerned.

Of course, it’s never long before the public wants to get in on the game and get some money for nothing. This is what drives a lot of behaviour when it comes to the economy and politics.

I’ve already mentioned the US is returning to ‘house flipping’, the very thing that brought on the last crisis. It’s estimated 5.5% of home sales nationwide in the US are now flips.

The political class of course always facilitates this by helping borrowers get or handle mortgages to keep the game going. This has happened after every real estate collapse in US history.

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The same old story repeating

In February the Wall Street Journal reported: ‘To broaden mortgage access, the U.S. government wants to revive the market that brought the economy to its knees. But years of effort haven’t succeeded in rekindling it.’

Yep, you guessed it: securitising mortgages from ‘shakier’ borrowers and selling them to the private sector. Should this pick up again, it will of course make mortgages easier to get for Americans.

If it doesn’t happen, the US government might just step in and do it itself. It can use Fannie Mae and Freddi Mac. Their role is buy mortgages from the lenders and bundle them into rated securities.

These were nominally private institutions, but ‘government sponsored’ before 2008. That was until the US government took them into ‘conservatorship’ when they collapsed alongside the housing market.

The US government still isn’t sure what to do with them. The Obama administration released a paper recently that may see them merged into a government owned corporation.

According to the WSJ this company would ‘take over the responsibilities of buying mortgages, wrapping them into securities and guaranteeing investors against default.’

There’s a lot of political action happening in this space.

The homeowners left behind and bankrupt after the last crisis are being dealt with as well. For example, the US Federal Housing Finance Agency has announced a plan to cut the mortgage balances of ‘underwater’ homeowners.

The commercial word wants borrowers too

We also now have the arrival of the ‘Henry’ borrower. That’s an acronym for ‘Higher earner, not rich yet’. What it means is that the US banks are dropping the strict 20% deposit conditions after the 2008 collapse.  Some lenders are going down to 10% or even lower.

The competition for mortgage share is always intense, and every real estate cycle involves new technology to capture market share via new technology.

Hence in the US we now have the arrival of the online mortgage. You go through digital portals when you apply, submit documentation and track the approval progress — all without needing to speak to anyone.

Your takeaway

Here’s why all this is important. Most investors mistakenly believe that the economy is based on the stock market.

It isn’t.

It’s based on the real estate market. I can back that up with conclusive figures, too.

Real estate agent Savills calculated earlier in the year that the value of the world’s residential real estate stock is US$162 trillion.

That’s more than the US$155 trillion in globally traded equities and securitised debt instruments combined.

21% of that global real estate value is in North America — despite only having 5% of the world’s population.

It’s what happens in the real estate market in any Western economy that underpins the movement in that economy.

When it comes to the US, that matters for the entire world because it leads the world up — and down.


Callum Newman

Callum Newman

Callum Newman is the editor of Markets and Money and Associate Editor of Cycles, Trends and Forecasts. He also hosts Markets and Money Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to Markets and Money here.

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