Mish's Global Economic Trend Analysis

Global Housing Bubble - Based on Ratio of Price to Rent, Which Countries are the Bubbliest?
Seattle's "Actuarial Valuation" of City Pension Plan Sinks to 62% Funded; I say it's Far Worse
UK Roundup: Average Salaries Drop; IMF Downgrades Forecast; Pension Plans Forced to Address Liabilities; Home Prices Drop

Global Housing Bubble - Based on Ratio of Price to Rent, Which Countries are the Bubbliest?

Posted: 10 Jul 2010 07:58 PM PDT

Inquiring minds are wondering where the biggest housing bubble is.

In what should be no surprise, the Economist rates Australia #1, followed by Hong Kong, Spain, Sweden, France, and Great Britain. Supposedly, US home prices are undervalued and Japan (having gone through decades of deflation), the most undervalued.

The Economist made its determination on the basis of price-to-rent.

Please consider Housing Froth and Stagnation.

In recent months several countries have experimented with measures to cool bubbly property markets. Yet since The Economist's global round-up of housing markets was last published in April, house-price inflation has accelerated in some of the very countries where the authorities have intervened to slow its rise.

Asia has been at the forefront of such interventions. In February Singapore's government raised down-payment requirements and imposed stamp duties on all residential properties sold within a year of purchase in a bid to curb speculation. Despite these steps prices in the island nation rose by nearly 40% in the year to the end of the second quarter, after a rise of just over 25% in the year to the end of the first quarter. Singapore has overtaken Hong Kong to become the frothiest housing market among those we monitor.

House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009. More concerning, however, is our analysis of "fair value" in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track. A frothy property market was one of the reasons for the Reserve Bank of Australia raising interest rates six times between October and May.

In judging Singapore the "frothiest" the Economist is looking at rate of change. I would call Australia the "frothiest" based on valuation.

Spain surprised me because I had assumed the economic implosion might have washed more of its bubble out.

However, my friend Bran, who lives in Spain and emails me nearly every day says "If all the unsold property were released at prices that would move the units, 50% is not far off, and it could be more than that. Moreover, 50% isn't even harsh at ground level when you have seen prices go much more than double in a few years."

In Canada, the bubbles are where the most people live.

The US is misleading because some markets are hugely overvalued while others are approaching reasonable valuations. Florida has without a doubt crashed and in vast sections of sparsely populated Midwest farmland, the bubble never expanded much in the first place.

Thus, averaging out the US (or Canada) is not is not the best way of looking at things.

Addendum:

Mike in Toyko writes

Hi Mish,

Love the blog.

We bought a beautiful house in Tokyo in 2005 directly from the original owner. He had paid $3.5 million dollars for the house when it was new during the peak of the so-called bubble economy in 1989. We bought it from him at the fire sale distressed price of $800,000.

Because we bought it directly from the original owner, we didn't have to pay any sales tax and saved 5% right there.

Well, that's been 5 years ago. This is a fairly posh neighborhood and next door, two dinky brand new homes were built a over year ago that were on the market for about $1.6 million dollars... They didn't sell at all. In fact, I never really saw any people coming to look at them at all.

Yes, Tokyo is expensive, but would you pay $1.6 million dollars for a two-bedrrom house that has no yard or garden and the floor- space is about as big as a typical American two-car garage?

Finally, I heard the real estate company and builders just wanted to get rid of these lots as they continually cost money to keep them "new" and they sold the houses for about $700,000 each.

Maybe Tokyo or Japan's housing prices are 30-some percent undervalued, but you wouldn't guess it by the lack of new home construction and the "For Sale" signs that sit in front of these homes for over a year...

Best,

Mike in Tokyo

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Seattle's "Actuarial Valuation" of City Pension Plan Sinks to 62% Funded; I say it's Far Worse

Posted: 10 Jul 2010 11:13 AM PDT

A new Seattle report says the city will have to increase pension contributions to keep its plan solvent. Please consider Seattle's retirement investments plunge deeply.

The City of Seattle will have to substantially increase the amount of money it pays into its employees' retirement system to cover future obligations because its related investments took big hits during the economic meltdown, according to a report presented to the City Council Friday.

This situation will put further pressure on a city budget that is already fracturing.

As of Jan. 1, 2008, the city's retirement "actuarial valuation" funding ratio was 92.4 percent, the report said. That's the ratio of the assets the city had compared to what it owes for benefits earned by employees. As of Jan. 1 of this year, the funding ratio had dropped to 62 percent - mainly because the city's stock market holdings tied to retirement accounts dropped 20 percent and other factors.

The study prepared for Seattle by Milliman says the city will have to increase its retirement contribution rates make sure its retirement plans are fully funded. Workers and the city contribute to the plan, but rate hikes for employees are limited to 2 percent, said the report.

City Councilman Mike O'Brien said it's unrealistic to wait and hope that a Wall Street surge solves the city's retirement funding problem.

O'Brien said City Councilmembers, who will consider the matter in earnest during fall budget talks, will have to determine whether 1 percent bumps are enough to right the retirement ship.

City of Seattle Pension Results

Inquiring minds are digging into the City of Seattle Pension Plan Funding Report.

An increase in contribution rates is needed to maintain actuarial balance.

Employees and employer share rate increases, but rate increase for employees is limited to 2.00% (10.03% total).
As of January 1, 2011, employer rate increase needed is 6.97% of payroll.
Total employer portion would increase from 8.03% to 15.00% of payroll.

Worse Than It Looks

Note the huge increase in payroll funding. Also note that the study was done on January 1, 2010. The stock market is now down on the year. Thus, it is highly likely that 62% is actuarially overstated .

Is the city going to raise taxes or cut services to make that payout? Will it be enough?

Stop Digging More Holes

The first thing Seattle needs to do is stop digging holes. Defined benefit plans need to be scrapped for all new hires and the city should privatize every conceivable service.

Yet that only stops new bleeding. It does not address current bleeding.

Misguided Rate-of-Return Assumptions

A huge (and widely ignored) problem with actuarial projections is forward rate of return assumptions. Seattle is assuming 7.75% per year annualized returns.

That is not going to happen, at least not the way these asset alligators invest - 100% long, 100% in, 100% of the time.

I have pointed out the massive structural problems time and time again. Rather than 7.75% returns, the stock market is not likely to be higher than it is today, five years from now in my estimation.

It is simply unrealistic to expect those rates of return when 10-year treasuries are sitting at 3%, unemployment will be structurally high for a decade, boomers are headed for retirement underfunded and looking to downsize spending plans, housing is in the gutter, there is no driver for jobs, and attitudes towards consumption and spending have changed for good.

Most simply do not understand the ramifications of the Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge.

This is not 1980 where falling interest rates supported the economy. There is no internet boom coming like we saw in the 1990's. There is not another housing or commercial real estate boom like we saw from 2002-2007 waiting in the wings.

Instead the Fed is struggling to gain traction at a time short-term interest rates are at zero percent and no way to go lower.

To top it off overleveraged consumers still struggle to pay down debt. The Fed and Congress acted to pump $2 trillion into the economy and unemployment rate still hovers near 10%.

This is not a good time to have net equity exposure, yet all of the asset alligators and pension plans are hugely in equities. More pain is coming and few are prepared for it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

UK Roundup: Average Salaries Drop; IMF Downgrades Forecast; Pension Plans Forced to Address Liabilities; Home Prices Drop

Posted: 10 Jul 2010 12:55 AM PDT

Things look pretty grim for the UK judging from a series of articles by the Daily Mail. Let's take a look.

Average Salaries Drop

Workers pay the penalty for recession as average annual salary drops £2,600 in just SIX months

The average annual salary has dropped by more than £2,600 in the last six months, it emerged today.

New figures reveal employers are still exercising caution, with wages falling across the board from £28,207 to £25,543 - a difference of £2,664.

Salaries in the financial sector appear to have suffered the most - those offered at the point of entry have dropped by almost £12,000.

The figures show that where young bankers could have expected to start on £52,174.43 six months ago, they will probably earn closer to £30,127.60 now.

Will wage deflation morph into outright deflation? Why not?

Property Prices Drop

House prices fall for third month in a row - but Bank keeps rates on hold... again

Property prices fell for the third month in a row during June as the housing market recovery showed further signs of faltering.

The average cost of a home dropped by 0.6 per cent during the month, following a 0.5 per cent slide in May and a 0.1 per cent decline in April, according to Halifax.

The figures, which follow a raft of recent gloomy data on the housing market, will further stoke speculation that the house price recovery is running out of steam.

This is not even a start of what is going to happen. Canada, Australia, the UK, and China all have property bubbles that are about to burst wide open.

New Pension Rules

Brussels threatens final salary pension as EU plans to force firms to cover liabilities

Final salary pension schemes in the private sector could be wiped out by controversial rules drawn up by Europe.

Under new proposals published yesterday, firms will be forced to plough even more money into schemes to cover future liabilities.

They will also have to invest more in the ultra-safe bonds and gilts markets, rather than shares and equities, which carry a greater risk but can give a better return.

The collapse of final salary pension schemes in the last decade has been partly due to the British Government ordering private firms to plough more assets into their occupational schemes.

Around 2.6 million workers in Britain have these gold-plated benefits, formally known as 'defined benefit' pensions.

Marc Hommel, a pensions partner at accountants Pricewaterhouse Coopers, said the number 'will quickly diminish to zero'.

The controversy surrounds the European Commission's green paper which it claims is about creating 'adequate, sustainable and safe European pension systems'.

But it is proposing tough new 'solvency' rules which would cripple many company pension schemes, if they were introduced in the UK.

In a two-pronged attack, they would force firms to plough more cash into their pension funds, and place tough restrictions on how they can invest their money.

In particular, they would have to invest more money in bonds and gilts, and less in shares, which could cut the investment return, placing them under even more pressure.

At present, around 50 per cent of UK pension funds' money is invested in equities, more than any other European country. The so-called ' Solvency II' rules currently apply to insurers, but the green paper says it could be 'a good starting point' for pension funds as well.

IMF Downgrades Britain

British economy dealt fresh blow as IMF downgrades UK growth forecast

Chancellor George Osborne has been dealt a fresh blow today after a respected international economic thinktank downgraded its forecasts for the British economy.

In one of the biggest downgrades it has made to any developed economy, the International Monetary Fund lowered its 2011 growth forecast for Britain from 2.5 per cent to 2.1 per cent.

The prediction is also below forecasts for the Treasury from the Office of Budget Responsibility (OBR) of 2.3 per cent growth next year.

In contrast to the gloomy outlook for the UK economy, the IMF said the global economy is recovering faster than expected.

The IMF raised its 2010 world growth forecast to 4.6 per cent from 4.1 per cent in April and boosted estimates for the United States and China.

In spite of the downgrades, the IMF is likely too optimistic when it comes to UK GDP.

In regards to the rest of the world the IMF is insanely optimistic. People are going to be shocked by the severity of the pending global slowdown.

Expect to see a series of downgrades as the year wears on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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