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The Surging Housing Market: Is Another Price Bubble in Formation?

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There is no doubt that the post-pandemic rebound has been stronger and far quicker than expected. The befuddled Fed and the booming stock markets signify a new normal as inflationary pressures define the reality of an economic turnaround. However, while inflation seems transitionary in nature, the spiraling demand is breaking records across a vast array of markets. None of the markets, however, compare to the underdogs of trade: the Real Estate Market.

The surge in the housing market is phenomenal, to say the least. Nationwide, the housing prices have spilled into double figures relative to yesteryear. The peak demand appears more stellar when compared to the aftermath of the Financial Crisis of 2008. While the pandemic is a completely different shock in contrast, today, the median home price in the United States is closing in on $350,000; double the level a decade ago. While such an exponential rush of price is often problematic, the reality is much safer than a distress signal. And while it is true that the housing costs are rising more rapidly than the mean earnings in the economy, the housing market is certainly not in a bubble.

The house prices have paced significantly since the pandemic struck last year; gaining weight due to higher savings being poured into a market with a relatively fixed supply and a secure store of value in a period of uncertainty. As the Fed embarked on a generous spree of pumping stimulus worth $120 billion via the extensive open market purchase of Mortgage-backed securities, the fixed mortgage rates plummeted to a record low level. Coupled with a floor threshold drop in the interest rates and the excess savings garnered through hefty unemployment benefits and rent support, the mortgage rates plunged well below the targeted 3%. Such attractive mortgage rates along with forbearance on mortgage and student loan payments (courtesy of the pandemic) helped the colossal demand to gain traction.

However, while the demand picked up, the housing supply perished as construction faced impediments in the form of intermittent lockdowns, price shocks in the lumber market, and a sticky recovery in the labor market. Moreover, the bottleneck of the housing supply was further narrowed as the mean houses on sale dropped since last year, primarily due to the foreclosure Moratorium on the mortgage payments driven to avoid a panic in the housing market during the pandemic. It is safe to admit that the economy and the elements thereof performed beyond the expectations of even the most sage economists of our time.

The housing demand was further edged by the less-than-subtle shift of employment to a completely virtual setup. Such an extended period of leisure and convenience of connectivity allowed the urban population to relocate to suburbs and smaller cities. According to the reports, the apartment dwellers of megacities apparently paid more than the listed price to gain ownership (a smaller sum compared to the sky-high prices in the metropolis). Such poor bargains added fuel to the already incendiary market as about three-forth of the houses were sold an estimated 10-15% above the historical list prices.

While the demand surge is astonishing, the mechanics driving the price hike are quite simple to comprehend. And therefore, the housing market could hardly be compared to the infamous housing bubble that led to the financial crisis a decade ago. For starters, a price bubble inflates when the sole intention of the surging demand is driven by an incentive to sell the property to make a profit off a bullish market. In reality today, the houses are being purchased under relatively tighter mortgage underwriting protocols. Reports show that majority of houses being flipped today are by investors making a profit on renovation rather than a surging market. Moreover, while the market is surely overvalued, a housing crash is not imminent since the job market is on a rebound as unemployment rates have noticeably dwindled over the past few months. Coupled with a stronger economic recovery, mortgage defaults hardly seem on the cards. However, a price correction is quite imminent.

As the Federal Reserve has insinuated inflation as a worrisome byproduct of a pacy economic boom, the Fed could be expected to cut the Asset purchases in the following months. Coupled with normalization in the interest rates, the mortgage rates would eventually rise while adjusting the house prices along with the housing demand. However, the expected activity and measures won’t take effect in a fortnight and would certainly not cool off such an overheated economy without any impact being felt throughout.

The housing market remains extremely supply deficient: a major obstruction in the line of recovery. Freddie Mac, a Federal Mortgage Corporation, estimated a need for almost 3.8 million new homes to meet the surging demand by the culmination of the last fiscal year. However, the recently passed bipartisan Infrastructure bill completely eliminated the $326 billion portion of Biden’s original plan to provide affordable housing across the United States. Thus, while a modest price correction is expected to blow off without any considerable damage to the broader economy, the markets are apparently out of sync with the traditional estimates gauged by the experts.

An emerging threat is the spread of the Delta variant of the Coronavirus. If the mutated virus manages to render the vaccinations futile, the infections could ultimately push the United States into another bout of lockdowns. Leading alongside would be unemployment. This time, however,  the wave would be accompanied by a legitimate housing bubble. The Fed would have no option but to stall the foreclosure again, pump more stimulus, and face another round of investor theatrics. And with no plan of a competing supply in the short run, the housing market could plausibly morph into a nightmare quite familiar to the financial world.

The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.

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Economy

China’s economy showing resilience and potentials amid headwinds

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Since the beginning of this year, the increasingly complicated international environment and weakened global economic recovery, as well as sporadic but multiple local outbreak of COVID-19 pandemic caused harsh impacts on China’s economic development.

Affected by both domestic and external unfavorable factors, China’s economic performance in the second quarter was less ideal than expected, which has resulted in some negative rhetoric against China’s economy on some media. In this case, I would like to share some views on China’s economy and its prospects:

First, China’s economy managed to grow in the second quarter despite downward pressure. In the second quarter of this year, the impacts from a new round of COVID flare-ups and other unexpected factors steeply increased the downward pressure on China’s economy, and major economic indicators tumbled in April.

However, the Chinese government responded with resolute and swift actions. We put stable growth higher on the agenda, held ground against a massive stimulus, worked to front-load the policies set, and introduced and implemented a policy package for stabilizing the economy. The effects emerged immediately. In May, the decline in major economic indicators slowed.

In June, the economy stabilized and rebounded. Major indicators picked up fairly fast and returned to the positive territory. As a result, the economy registered a positive growth in the second quarter. The gross domestic product (GDP) of China in the first half year was 56,264.2 billion yuan, up by 2.5% year on year at constant prices. In terms of specific economic indicators, industrial production was steadily recovered and the total value added of industrial enterprises above designated size grew by 3.9% year on year in June which is 3.2% higher than in May. The service industry production index also increased from -5.1% to 1.3%. The total retail sales of consumer goods bounced back from -6.7% to 3.1% in June demonstrating market sales improvement and fast growth in retail sales of goods for basic living.

Exports went up by 22% which is 6.7% higher than the previous month. By ensuring supply and price stability in the market, focusing on grain and energy production, and overcoming the impacts of imported inflation, the consumer price is also generally stable and the employment improved. 

Second, China’s economy is expected to recover gradually and maintain steady growth. The risk of stagflation in the global economy is on the rise these days, thus raising the concerns of instability and uncertainty in China’s economic growth. However, China’s economy has strong resilience and great potentials and the fundamentals sustaining China’s long-term economic growth remain unchanged. With the implementation of a series of policies and measures to stabilize growth, China’s economic performance is expected to gradually improve. First, a major economy like China always has enormous resilience.

We should be aware of the considerably large scale of China’s economy and its advantages for having a solid material foundation and a huge domestic market. Second, the potentials of demand recovery are significant. Chinese government is determined to stabilize investment, accelerate the issuance and use of special-purpose bonds, speed up major projects construction, and encourage infrastructure investment. We expect to see further consumption recovery as the offline consumer services are reviving and the government policies to boost consumption are coming into effect.

Moreover, China’s foreign trade sustained great resilience. In May, China’s total import and export volume increased by 9.5% year-on-year, 9.4% higher than the previous month; and 14.3% in June, 4.8% higher than that in May. Third, there is a concrete foundation for production to rebound. Following the steady recovery of production, the industrial and supply chains have been gradually smoothed, and the promoting effects of key industries such as automobiles and electronics will further strengthen. And the service industry turned from a decline to an increase in June as the pandemic situation improved.

In addition, the promising recovery of transportation industry will also be of great help for the further production boost. Fourth, innovation will provide new momentum for economic growth. Under the pandemic, traditional industries have accelerated their transition and expansion towards digitization and intelligentization, meanwhile new industries continue to develop steadily and rapidly. Fifth, China’s macroeconomic policies are consistent and precise. The positive effects of policies such as large-scale tax refunds, issuance and use of special-purpose bonds, and increased financial support for the production will emerge, which will contribute to the steady recovery and growth of the economy.

Third, China’s economy has been deeply integrated into the global economy, and opening-up is one of China’s fundamental national policies. China cannot develop in isolation from the world, and the world also needs China for its development. Affected by factors such as the COVID-19 pandemic and the Ukraine crisis, the global industrial chain, and supply chain are disturbed. As a result, many countries are stuck in multiple crises in terms of food and energy. Rising prices have forced major economies to tighten their economic policies, and pushed the world economy into a substantial risk of stagflation. China, as the largest developing country in the world, has profound developmental potentials and can certainly provide a strong impetus for the global economic recovery.

China will deepen high-level opening-up, stay committed to free trade and fair trade, and help keep the two wheels of multilateral and regional trade cooperation running in parallel. Continued efforts will be made to foster a market-oriented, world-class business environment governed by a sound legal framework, and ensure foreign enterprises’ equal access to unlimited sectors in accordance with law in order to realize mutual benefit amid fair competition. China is ready to strengthen international cooperation against COVID-19 and willing to make its COVID control measures more targeted and well-calibrated under the premise of ensuring safety against the pandemic. We will steadily optimize the visa issuance and COVID testing policies and keep resuming and increasing international passenger flights in an orderly manner, and prudently advance overseas commerce and cross-border travel for labor services, so as to better promote personnel exchanges and China’s cooperation with the world.

In the first half of this year, the bilateral trade between China and Iran increased dramatically, consolidating China’s position as the top trading partner of Iran. We are sure that the steady recovery and growth of China’s economy will provide more opportunities for countries around the world including Iran. In the second half of this year, China will hold a number of exhibitions like the 7th China-Eurasia Expo, the 22nd China International Fair of Investment and Trade, the 132nd Canton Fair, and the 5th China International Import Expo which are great chances for Iranian merchants to learn more about China’s market and conduct cooperation with China. China will actively implement the Global Development Initiative and all countries around the world, including Iran, are welcome to benefit from China’s economic development, promote high-quality Belt and Road cooperation through greater openness and cooperation in trade, investment and other fields. In this way, we will be able to collectively build a community with a shared future for mankind.

From our partner Tehran Times

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Economy

Seventh Package of Sanctions against Russia Presents Unaccounted-for Risks

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The seventh package of the European Union sanctions against Russia in connection with the events in Ukraine will be remembered for its ban on the import of Russian gold, the expansion of export controls, as well as its list of blocked individuals and organisations. However, an important new feature hasn’t been thoroughly discussed. In Art. 9 Council Regulation EU No. 269/2014, a rule was introduced that sanctioned individuals are required to report to the competent authorities of an EU country about their assets in the jurisdiction of the European Union. The deadlines are stringent. Reports must be submitted before September 1 of this year. Those who are slapped with sanctions in the future must report within six weeks. In addition, blocked persons are obliged to cooperate with the competent authority in the verification of this information.

Let’s recall that the essence of blocking sanctions is that the assets of individuals and organisations that fall under them in the EU are frozen. In other words, they formally remain the property of such persons, but their use is forbidden. These assets may include bank accounts, real estate, capital goods, vehicles, etc. In addition, blocked persons are prohibited from providing “economic resources”. This essentially means a ban on most economic relations with them.

What is the meaning of this new feature? Most likely, the EU authorities want to facilitate the search for the assets of blocked persons. They specify that the sanctioned individuals themselves should do this “legwork.” If they refuse to comply by reporting their assets, then according to Art. 9 of the said Regulations, their actions will be regarded as circumvention of the sanctions regime. In turn, violation of the Regulations may lead to criminal liability and the confiscation of property obtained as a result of the circumvention of the sanctions. Article 15 of the Regulation obliges Member States to develop criminal prosecution measures for violation of the EU sanctions regime, as well as to take all necessary measures to confiscate the proceeds of such a violation. In other words, by failing to report their assets in the EU, blocked persons risk being sued, facing criminal charges, or losing their property.

The West has actively discussed the confiscation of the assets of blocked Russians since February 2022. Work on legal mechanisms is underway in the United States. In Canada, the forfeiture framework has been approved by the Senate.

Now that the seventh package of sanctions has been adopted, a similar mechanism is now being seen in the EU, albeit in the context of circumventing sanctions due to failure to provide information.

It is not yet clear how these rules will be applied. However, the existing legal mechanism may well be interpreted by the member countries in a way that is detrimental to the sanctioned individuals. To date, 110 legal entities and 1,229 individuals have been targeted by EU blocking sanctions over the Ukrainian issue. While not everyone has property in the EU, for others, the value of the assets may be huge, and attempts to confiscate or prosecute will inevitably cause new political tensions. For example, within the framework of the seventh package, Rossotrudnichestvo, which has a network of Russian centres of science and culture in the EU countries, was blocked. The same applies to the Russkiy Mir Foundation and its Russian Centres in the EU countries. It can be assumed that Sberbank and a number of other blocked Russian banks, enterprises and individual entrepreneurs have assets in the EU. Access to their property should be blocked by EU authorities anyway. The new rules of the seventh package also add the risks of confiscation in the event of a lack of reporting within the specified timeframe or a refusal to cooperate with the competent authorities.

The experience of the crisis concerning transit to the Kaliningrad region has shown that the authorities of individual member states can interpret EU sanctions very broadly. It cannot be ruled out that the new features of the seventh package will receive similarly broad interpretations. It is necessary to be ready for a scenario where the property of individuals and structures in the EU is confiscated, as well as their criminal prosecution in certain EU countries for violating sanctions legislation.

From our partner RIAC

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Economy

The Assembly Lines of Grand Eurasia

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The changing landscape of the global economy in recent years is increasingly characterized by a more active role of developing economies in building their own platforms for economic cooperation. In the process of assembling these platforms for the Global South one of the key issues is the algorithm of the aggregation process in Eurasia — the two other continents of the Global South already have their pan-continental platforms, namely the African Union and the African Continental Free Trade Area (AfCFTA) in Africa as well as CELAC in Latin America. In case a comprehensive pan-Eurasian platform for developing economies were to be formed this would open the gateway to the completion of the assembly of platforms that span the entire expanse of the Global South.

As is the case with the expansion of the BRICS grouping, the building of the Grand Eurasia as a platform for the region’s developing economies can proceed either along the formation of a core and its gradual expansion or via an “integration of integrations” route, whereby all of the main regional integration blocs of the Global South in Eurasia are brought together. There is also the possibility that both these tracks could be pursued simultaneously.

In the scenario involving the formation of the Eurasian core for the Global South, the main question is its composition and the resulting scenarios of further expansion. One possible modality would be the RIC (Russia-China-India) serving as a core, with further additions focusing on the largest Eurasian economies such as the G20 countries from Eurasia — Saudi Arabia, Indonesia or Turkey. This route would clearly result in the assembly process being slow and lacking connectivity to other smaller developing economies of the continent.

Another possible format for the Eurasian core could be the Shanghai Cooperation Organization (SCO) or its more extended version of SCO+. Such a core would have the benefit of comprising all of the largest economies in Eurasia (Russia, China, India), while leaving open the possibility of smaller economies joining this Eurasian “circle of friends”. Despite the more inclusive approach to forming the Eurasian platform, the country-by-country approach to expansion would still leave the assembly process too slow and ad hoc.

The only real way to expedite the construction of Grand Eurasia is via the “integration of integrations” scenario that may involve the aggregation of Eurasia’s leading regional integration arrangements (and their developing institutions) represented by developing economies.

Such a platform of developing economies across the expanse of Eurasia can bring together such regional arrangements as: South Asian Association for regional Cooperation (SAARC), ASEAN, Gulf Cooperation Council (GCC), Eurasian Economic Union (EAEU) as well as the Shanghai Cooperation Organization (SCO). In the case of SCO there may be the possibility to resort to an extended SCO+ format which would involve the addition to SCO of those Eurasian economies that are outside of the main regional integration arrangements. The resulting SAGES platform may represent the main assembly line for economic cooperation among the Eurasian developing economies that is based on the mechanism of “integration of integrations”.

Still another possibility would be an assembly process modelled on the UN, which would involve the creation of a forum for all the developing economies of Eurasia with a Eurasian Security Council represented by the largest economies of the continent (G20 members (China, India, Russia, Saudi Arabia, Indonesia, Turkey) as well as possibly Iran). Another possibility in this UN-type scenario is the SAGES Economic Council that brings together the main regional blocs of Eurasia as a more inclusive version of the UN Security Council.

In the end, there are multiple possible trajectories for the assembly process of the Grand Eurasia — the most attractive appears to be the “integration of integrations” track as it appears to be more expeditious and inclusive. At the same time, there are also risks and challenges involving this scenario as the domain of “integration of integrations” remains largely unexplored across the terrain of the Global South. In this respect, there may be important synergies in the innovation process of “integration of integrations” along the Eurasia track as well as the BRICS+ route that represents a global rather than regional platform for the cooperation across regional integration arrangements. The Global South is approaching a crucial point in its economic development, whereby a common platform for cooperation across all developing economies may represent the most important gateway to economic modernization in decades.

From our partner RIAC

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