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In the World’s Best-Run Economy, House Prices Keep Falling…Read this PM @Najib_Razak Pls

February 6, 2014

In World’s Best-Run Economy, House Prices Keep Falling — Because That’s What House Prices Are Supposed To Do.

Eamonn Fingleton

Eamonn Fingleton, Contributor (FORBES)

When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke’s experience was different. In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. The officials had the seller’s number because he had previously promised  to renovate the property and had failed to follow through.

As Locke, a retired historian, points out, the Goerlitz authorities’ attitude is a striking illustration of how differently the German economy works. Rather than keep their noses out of the economy, German officials glory in influencing market outcomes. While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices, a fundamental principle of German economics is to keep housing costs stable and affordable.

It is hard to quarrel with the results. On figures cited in 2012 by the British housing consultant Colin Wiles, one-bedroom apartments in Berlin were then selling for as little as $55,000, and four-bedroom detached houses in the Rhineland for just $80,000. Broadly equivalent properties in New York City and Silicon Valley were selling for as much as ten times higher.

görlitz 1994Goerlitz: picturesque — and tightly controlled. (Photo credit: chrisbulle)

Although conventional wisdom in the English-speaking world holds that bureaucratic intervention in prices makes for subpar outcomes, the fact is that the German economy is by any standards one of the world’s most successful. Just how successful is apparent in, for instance, international trade. At $238 billion in 2012, Germany’s current account surplus was the world’s largest. On a per-capita basis it was nearly 15 times China’s and was achieved while German workers were paid some of the world’s highest wages. Meanwhile German GDP growth has been among the highest of major economies in the last ten years and unemployment has been among the lowest.

On Wiles’s figures, German house prices in 2012 represented a 10 percent decrease in real terms compared to thirty years ago. That is a particularly astounding performance compared to the UK, where real prices rose by more than 230 percent in the same period. (Wiles’s commentaries can be read here and here.)

A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis. The ultimate driver is a  central government policy of providing financial support to municipalities based on an up-to-date and accurate count of the number of residents in each area.

The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

Meanwhile demand for owner occupation is curbed by German regulation. German banks, for instance, are rarely permitted to lend more than 80 percent of the value of a property, thus a would-be home buyer first needs to accumulate a deposit of at least 20 percent. To cap it all, ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

How does all this contribute to Germany’s economic growth? Locke, a prominent critic of America’s latter-day enthusiasm for doctrinaire free-market solutions and a professor emeritus at the University of Hawaii, notes that a key outcome is that Germany’s managed housing market helps smooth the availability of labor. And by virtually eliminating  bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space.

In the  German system moreover,  house-builders  rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders like Pulte Homes, D. R. Horton, Lennar, and Toll Brothers. German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.

Locke is the co-author, with J.C. Spender, of Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance, a book I highly recommend.

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3 Comments leave one →
  1. truthseeker permalink
    February 7, 2014 12:55 pm

    All Hell Will Break Loose & The Dominos Will Start Falling

    Today one of the most highly respected fund managers in Singapore warned King World News that all hell is going to break loose and the dominos are going to start falling. Grant Williams, who is portfolio manager of the Vulpes Precious Metals Fund, also spoke about what this will mean for investors around the world and also what kind of surprise to expect from the gold market.

    Eric King: “What about the turmoil around the world, Grant? How bad do you expect this to get?”

    Williams: “Eric, we’ve seen some pretty big moves here, particularly in Japan. We’ve also seen some big moves in other Asian markets as well. We’ve got political unrest in Thailand, and we also have a currency crisis all over the region….

    “So it looks very, very shaky. Hot money has flowed into these markets and it is always a lot easier to get big sums of money into something then it is to get it back out again.

    But all of this is a direct result of the Fed tapering. These guys at the Fed have insisted on this mantra that ‘tapering isn’t tightening,’ which is absolute nonsense. Of course a taper is tightening and we are seeing the effects of that here in Asia where there is the sucking sound of liquidity being drained out. Yes, we have seen a wobble in the Dow, but the real pain has been felt here in Asia.

    But the most worrying thing that I have seen in the past couple of weeks were the comments made by the central bank governor of India, who essentially said, ‘Look, the cooperation between the world’s central banks is now gone and it’s every man for himself.’

    And that’s going to turn into a problem by itself because if we don’t have these coordinated and unified interventions, actions, and interest rate policies that we’ve had, things could get very squirrelly, very quickly, in all kinds of places that most people aren’t even looking at. This is how all hell starts to break loose.

    We had the Asian currency crisis in 1997 and that started with the Thai baht, but it spread to all kinds of places that no one saw coming. It really feels like if the central planners are not extremely careful that we could be on the edge of another one of those catastrophic situations. Something may happen in a tiny little market somewhere and it may start a whole lot of dominos falling.”

    Eric King: “It sounds like you expect more dominos to fall, Grant.”

    Williams: “It’s hard to see how they don’t, particularly if you have lost this cooperation between the central banks. This cooperation has been so important for the stability of the entire global financial structure. If in fact that cooperation has been lost, it’s very hard to see how they will stop these dominos from falling.

    The key to keeping the system afloat has been the coordinated actions. If you get these central bankers going their own way, that is a recipe for all hell breaking loose. We’re seeing capital controls already in parts of South America — that’s only going to spread. We are also seeing chaos and capital controls in the Ukraine.”

    All of these independent actions are starting to create more and more friction for the inner working of the financial system, and that’s exactly what will precipitate a breakdown. These disastrous events that countries and individuals thought they were isolated from are going to become more and more commonplace.”

    Williams had this to say regarding gold: “We had a tremendous fall in Comex gold inventory in January, and this was ahead of the busy delivery month of February. So this demand for physical metal continues. These type of things will matter at some point.

    If you look at one of the currency charts of an Argentinean currency, clearly something that had been going wrong for a long, long time suddenly mattered to people. We also saw an ETF that was denominated in Brazilian real lose 90% of its assets in a week. Now, no one can tell me something happened in Brazil that day which meant there should be a 90% collapse. It’s just something that didn’t seem to matter, all of the sudden mattered.

    I think something similar is going to happen with gold. One day people are going to want physical gold and it’s suddenly going to matter because they can’t get it — they can only get paper. When that happens, you will see a massive reset higher. The fact that it hasn’t happened yet doesn’t mean it won’t. When the chaos really breaks loose around the world, it won’t matter if people bought physical gold at $1,500 or $1,250, they will just be glad they own it.”

    IMPORTANT – KWN will be releasing interviews all day today with Grant Williams, Eric Sprott, William Kaye and many others.

    IMPORTANT – Powerful entities do not want people to have access to the news that KWN provides. As a result we have had a constant interference with the news feed on our home page. Simply reload the home page until you receive the news feed, or go straight into the KWN blog. You may need to clear your cache in order to see the latest news story. KWN readers can simply google “how to clear cache” if they are unfamiliar with how to do this.

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/2/7_All_Hell_Will_Break_Loose_%26_The_Dominos_Will_Start_Falling.html

  2. truthseeker permalink
    February 7, 2014 1:00 pm

    The Horrifying End Game & The Coming Big Crash

    Today the man who has been one of the most accurate in the world at calling movements in the gold price spoke with King World News about the horrifying end game and the coming “big crash.” William Kaye, who 25 years ago worked for Goldman Sachs in mergers and acquisitions, also warned KWN about forthcoming financial seizures and how this will dramatically impact people around the world.

    Kaye: “While the carnage in the emerging markets has been intense, what we have seen in major Western markets has not been that big of a deal. But if we look out to 2015 and beyond, it’s likely to be very ugly for the West. We are extremely bearish just because the fundamentals in our view are bearish….

    “But eventually the ‘Bernanke Put’ is likely to be replace by the ‘Yellen Put.’ I think if things do get markedly worse than what we’ve seen, if mid single-digit losses in Western markets turn into double-digit losses, you are going to see much more aggressive action by the major central banks.

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/2/6_The_Horrifying_End_Game_%26_The_Coming_Big_Crash.html

    Then, we will have to see how the markets respond to that. But if they respond the way they have since 2009, you could also get another spike higher, certainly by the second quarter, that could touch or even slightly exceed the prior highs before Armageddon sets in.”

    Eric King: “KWN has been warning for years that all of this money printing was not going to do anything for these economies. It just creates misallocation of capital and asset bubbles. The reality is that the world financial system is going to implode if it stays on its current course.”

    Kaye: “Well, that right. Everything the central bankers are doing around the world is not making things better — it’s making things worse. One of the ways it’s making things worse is by disconnecting financial markets from economic reality. That’s a major problem.

    At some point that disconnect gets resolved, whether it’s later this year or 2015. I am confident that I can see the medium-to-longer-term outlook here: You simply can’t continue policies that are destructive to real economies. You also cannot continue with destructive policies that are damaging to employment and real incomes.

    In the US, for example, we are back to labor participation rates that were last seen when the United Sates was in a deep recession in 1977 to 1978. This was the last time that labor participation rates were as poor as they are now in America. That’s when I was at Goldman Sachs, so I have a pretty clear recollection of that time period.

    It was incredibly difficult for people graduating from top colleges to find a job during the late 1970s. Well, that’s exactly where we are once again in the United States. So the propaganda being issued from the United States government and the mainstream media that the US is on a recovery path is an outright lie.

    If you look at Europe, in much of Europe the situation is even worse. So all these disastrous central bank policies have accomplished is to markedly increase the net worth of the super-wealthy, and impoverish virtually everybody else. And this simply can’t continue. You cannot have policies persist that create such disturbing imbalances.

    And if we look at what they are doing over in Japan, ‘Abenomics’ is destroying the purchasing power and the savings of its own population. This should be a crime. But what Japan is doing, just like the Western nations, is leading to a global situation that is entirely untenable. In a way, we can throw in China as well with it’s shadow banking fiasco.

    But the reality is that the debt bubble is just way beyond the Rubicon. There is just no way that any sensible measures can be taken globally to deal with the immense debts that have accumulated and continue to be accumulated around the world. So we are going to reach that point of reckoning, whether it’s this year or 2015. But my guess is that the ‘big crash’ is going to occur in 2015.

    And as soon as interest rates are reset to a level that approximates anywhere close to an historic norm, the citizens of the world are going to be subjected to financial seizures that are going to make 2008/2009 look like a warm up act. That’s the end game.”

  3. truthseeker permalink
    February 7, 2014 1:16 pm

    Billionaire Sprott – Expect A Terrifying Shock To The System

    With global stock markets getting a bounce after a turbulent start to 2014, today billionaire Eric Sprott warned King World News that investors around the world need to brace themselves for a terrifying shock to the global financial system. The Canadian billionaire also lashed out at the central banks for their failed policies. Below is what Sprott, Chairman of Sprott Asset Management, had to say in Part I of this remarkable interview series.

    Eric King: “Eric, what is the big threat going forward? What has you worried here?

    Sprott: “The big threat to the financial world is the realization that all of these actions by central banks have created nothing….

    “Even when I look back to the US and how we came out of 2008 — we’ve got an extra 20 million people on food stamps. There are no real signs of real growth here. I just think that people will figure out that we have all been boondoggled on this thing, to believe that something positive is happening, when in fact very, very negative things have been happening.

    The Fed’s balance sheet has blown out. We never did restructure the banking system. We see that the European banks would have to raise $1 trillion in certain circumstances. And I can just imagine if they actually came to market (for $1 trillion) what the prices of the bank stocks would do — they would just collapse because I don’t think there is $1 trillion that wants to go into European bank stocks.

    So all of the problems that we had in 2008 are still around, except magnified now. So that’s the big concern — that we all find out it was just a big Ponzi scheme and the market breaks. It’s the same decision I had to make back in 2000, before the Nasdaq crash, when I thought, ‘Boy, it looks like the Nasdaq is going to crash. What am I going to do?’ The obvious conclusion was you’ve got to own hard assets — things like gold and silver.”

    Eric King: “Eric, how close do you think we are to where they (the central planners) are going to hit the wall with the money printing? You finally get to a point where you can’t have an impact on an economy at all (with the money printing). Are we getting close to that?”

    Sprott: “You hit the wall, Eric, when problems in the banking system are allowed to manifest themselves — where some bank finally realizes, ‘Hey, we don’t have any capital here and we just can’t keep going on pretending that we are solvent when we are insolvent.’ And as we see this constant deterioration in the economic data, I think it will become apparent to everyone that things aren’t working.

    If stocks start going down, of course it imperils all paper assets, and the banking system owns nothing but paper assets. My biggest concern in the financial arena has always been that the banks end up with problem loans. In Spain something like up to 25% of all loans are problem loans. You just know there is no way for the banks to survive without the support of the central banks, and these central banks are getting extended here. There is only so much they can do.

    So you will see something (shocking) in the financial system — maybe it’s in the stock market, maybe it’s some bank going down. The valuations are bearing no relationship to what the underlying fundamentals are today, so something is going to break somewhere along the line.”

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/2/6_Billionaire_Sprott_-_Expect_A_Terrifying_Shock_To_The_System.html

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