It was only yesterday that I discussed and analysed the impact of the 60 billion Euros a month QE (Quantitative Easing) program of the European Central Bank. Later that day ECB President Mario Draghi gave himself and his colleagues a slap on the back by describing it thus.
In addition, there is clear evidence that the monetary policy measures we have put in place are effective.
Whilst confettigate occurred soon afterwards I do not think that the protestor who shouted “end the ECB Dicktatorship” was protesting this point,sadly. After all Mario was fulfilling one of the themes of this blog by shamefully attempting to take the credit for the economic boost to the area provided by the fall in the price. Perhaps with the Brent Crude Oil benchmark surging through the US $60 level he felt he had better be quick before it fades away!
However more quietly there was another impact on the day which was a further fall in bond yields as for example the ten-year yield of Germany has now fallen to 0.1% and in some ways even more extraordinarily the equivalent for France is 0.29%. Yesterday I pointed out that this was likely to be causing asset price inflation. So let us now also factor in the preceding efforts at QE from the Federal Reserve, Bank of Japan, Bank of England and Swiss National Bank (via investing its foreign currency reserves) and look at an impact of this.
As bond yields fall in so many places investors looking for an income find it ever harder and they have to look elsewhere. This is symbolised in a way by the fact that the time it has taken me to write a paragraph the German ten-year yield has fallen to 0.09%! In such an environment bricks and mortar are something which investors can turn to as they appear physically at least to be an oasis of stability. But what happens if a tidal wave of cash heads in its direction? MSCI have pointed out some consequences. From the Financial Times.
Globally, property generated total average returns of 9.9 per cent in 2014 thanks to rapid capital value appreciation, MSCI found — the best performance since 2007 and the fifth consecutive year of increasing returns.
Okay so happy days for existing investors as well as hinting at how we got into our current malaise. You will not be surprised to read about the leaders of this particular pack.
UK real estate returned 17.9 per cent in 2014 while the US returned 11.5 per cent…..In London returns topped 20 per cent……..sharp price rises in Dublin drove the total return in its real estate markets to hit a record 44.7 per cent — the best performer of all world cities in MSCI’s analysis.
Celtic Tiger mark two anyone?
But there is more.
MSCI found listed real estate companies had also significantly outperformed the world’s booming equity markets. Globally equities generated a 10.4 per cent return, but property stocks returned 19.5 per cent.
So the equity markets which of course are seeing their own QE boost with new high after new high being reported are being left behind by global property markets right now.
Yield and Rent
In essence this is the driving force as places which used to provide it such as sovereign bonds no longer do. So is it all about the rent? The catch is that whilst it is doing well when compared to a plummeting bond yield the outright position is much less cheery.
This is particularly the case in the US, where investors’ returns from rental income are now lower than before 2008, when a crash in massively overleveraged property triggered an international banking slump.
What could go wrong? Also the US is by no means alone.
Most global markets are at or close to historic low [yield] levels,
Of course faced with such a situation there is an inevitable response.
People are moving up the risk curve into riskier locations and taking on higher levels of debt and more challenging development activity.
To get a proper bubble we need for there to be substantial flows of money into that area from new and sadly usually credulous investors so what signs of that can we see?
the voracious spending — dubbed a “wall of capital” — has now spread out into riskier markets…….European QE was likely to boost real estate prices further, Mr Hobbs warned. “QE is sucking in real estate capital because debt finance is so cheap,” he said.
In the past year investment cash has poured into continental Europe — particularly the periphery — MSCI found.
Just under a year ago a sports shop on the Kings Road in Chelsea closed and it did so due to this. From the Evening Standard.
Michael Conitzer, who runs the shop, said he can no longer afford the rent, which was raised by 50 per cent at the review last year to more than £700,000.
My custom of the occasional T-Shirt and shorts purchase was clearly never going to finance that! But if we travel to a land down under to coin a phrase we see the same thing according to the comments to the FT article.
In a suburb of Melbourne, in the high street and across the lane from a railway station, there is a shop that was brand-new 5 years ago and that has remained empty ever since. The asking rent was too high. Now, it has two adjoining shops that are also empty. (Alfred Nassim).
It got this reply from across the atlantic.
In a suburb of New York City, many of our favourite local restaurants have closed down over the last several years – the reason given by the owners was invariably: “rent increases, can’t make ends meet”. (User_7995).
Not Everybody Agrees
The OECD compiles a price to rent database and concludes that whilst there are countries with severe imbalances (New Zealand heads the list) overall the situation is actually undervalued. Mind you it shows Ireland as undervalued as we wonder how last years surge in prices in Dublin will impact the next set of data.
Also Jonathan Gray of Blackstone disagrees but then you could argue that he has a vested interest here.
Blackstone,the world’s largest private real estate investor,,,,,,Mr Gray just made a $26.5bn bet on the global property market.
There is much to consider here as we observe central bankers pumping up the volume in terms of providing liquidity and wonder where the hammer will fall? Of course consumer inflation measures are invariably neutered in this area as they mostly exclude asset prices. Thus asset price gains are presented as an increase in wealth and expected to increase economic output. For those who own property some of that is true as house price growth in the UK for example, has in the last couple of years has exceeded wider inflation and wages by quite a margin. But what about those who do not own property? Either they are left out or they face even higher prices and so they are not richer but are poorer. This leads to a generational issue as the asset rich are mostly older and the asset poor mostly younger. Accordingly my view is that this is more of an asset and wealth transfer than an increase in it.
But if we return to the QE reducing yields issue then we find ourselves mulling this from Germany. The numbers are for institutional property investment.
The rental yield, including sunk costs, works out around 3%, with tax breaks if you hold for 12 years.
Or a bond yield fast heading to zero. Again what could go wrong?
Once this plays out and these matters invariably take longer than you think which market will central bankers pump up next? As to a musical accompaniment whilst you are thinking this through let us try Joe Walsh of the Eagles.
So I’m floating on a bubble while the world goes down the drain.
Slipping on the soap, running out of rope,
But all and all I can’t complain,
And that’s the rub according to the rules of the game.
The world’s going down the drain,
When the bubble bursts you might as well drink the cork and pop the champagne.
When the bubble bursts, the world goes down the drain.