Are Property Cycles Predicable?

I catch up with Phillip J Anderson, the author of “The Secret Life Of Real Estate And Banking”.

We discuss his view that property cycles are highly predicable if you spot the right patterns.

If he is right the current market ructions are not the next big fall, but a mid cycle dislocation.

https://www.amazon.com.au/Secret-Life-Real-Estate-Banking/dp/0856832634

Thanks to George for setting this show up.

Let’s Throw Some Money About – The Property Imperative DAILY 12 March 2020

Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…

UK Banks Offer Mortgage Repayment Holidays

Several UK mortgage lenders have announced loan repayment holidays to support homeowners affected by coronavirus. Via Homes and Property

Royal Bank of Scotland said it will defer mortgage payments for up to three months to affected borrowers.

The state-backed bank is 62 per cent owned by the taxpayer and has announced the emergency measures to support customers who might lose their jobs or see their income decline if they cannot work due to illness or lockdown.

A spokeswoman for RBS said: “We are monitoring the potential impact of coronavirus across all our customers to ensure we can support them appropriately through any period of disruption. We have a strong track record in working with our customers who are affected by disruption outside of their control.”

TSB also said borrowers could have mortgage repayment holidays for up to two months.

UK Finance said all its members were putting measures in place to support borrowers affected by the virus. Stephen Jones, the industry body’s chief executive said: “All providers are ready and able to offer support to their customers who are impacted directly or indirectly by COVID-19, which could include offering or increasing an overdraft or allowing repayment relief for loan or mortgage repayments: asking for help early is key.

“We would encourage customers who think they may be affected to contact their provider as soon as possible to discuss the support available to them.”

Miles Robinson, head of mortgages at online broker Trussle, said: “Self-employed and gig economy workers might be concerned about their income becoming more unstable, at least temporarily, which may affect their ability to pay the bills at the end of the month.

“The good news is that mortgage lenders don’t live under a rock. They know that coronavirus is causing severe uncertainty. They’re also aware that as a result of the outbreak, some customers might be unable to make their monthly mortgage repayments.”

UK lenders adopted similar measures in the 2009 recession.

US Cans European Flights

President Trump is suspending flights from Europe for the next 30 days because of the virus, a decision likely to ripple throughout the global economy. The president said such travel restrictions would apply to “trade and cargo,” but the White House later clarified that goods from Europe would still be able to enter the country. Via The Hill.

Trump said he will “soon be taking emergency action [to] provide financial relief … targeted for workers who are ill, quarantined, or caring for others due to coronavirus,” without specifying how he would do so.

The president also said he would instruct the Small Business Administration to extend low-interest loans to businesses in coronavirus hot spots to overcome steep declines in activity, and would ask Congress to approve a temporary payroll tax suspension that has fallen flat among lawmakers.

Trump also did not address a several issues that Democrats consider essential to any coronavirus aid plan, including provisions to expand unemployment insurance and ensure that low-income children don’t miss meals due to school closures. The House is set to vote on a bill with those measures and others, including federal paid sick leave, on Thursday in a bid to force the Senate to pass the legislation quickly.

More than 1,000 cases of coronavirus have now hit the U.S.

Earlier, President Trump insisted the U.S. is not suffering through a financial crisis in an Oval Office address to the country about the coronavirus outbreak on Wednesday. 

“This is not a financial crisis. This is just a temporary moment of time that we will overcome together as a nation,” Trump said. 

Dow Jones industrial average futures plunged after Trump’s address, projecting a loss of more than 800 points when markets open on Thursday. 

$17.6 bn Spend To Try And Dodge The Recession Bullet

So now we know the Government has parked the quest for a surplus, at least in the short term, with a $17.6 billion economic stimulus package announced today – this is less than 1% of annual GDP. It is much higher than the back-grounding at $10 billion – indicating the seriousness of our economic predicament.

But it is 2.3% of quarterly GDP and with the additional funding of around $5 billion running across the next two financial years, the total is closer to $23 billion.

The Government will pump $11 billion into the economy between now and July, which is more than the $10 billion Rudd used in the GFC stimulus, with more to come beyond. It is designed to be temporary.

The package includes one-off cash payments for welfare recipients, money to help keep apprentices in work and tax relief for small businesses.

More than 6 million welfare recipients, including pensioners, carers, veterans, families, young people and job-seekers will get a one-off cash payment of $750 from March 31. The biggest beneficiaries will be pensioners. These one-off payments will cost the Government $4.8 billion.

They are hoping these recipients will rush out and spend, so while the March quarter is a write-off they are hoping to avoid two negative quarters. But of course the passage of the virus is unknown.

Casual workers who contract the virus, or had to isolate themselves would be eligible for a Newstart welfare payment, while out of work. People will face an assets test before receiving the money, and the typical wait time to access the payment will be waived.

Nearly 700,000 small and medium businesses will receive cash payments of between $2,000 and $25,000 to help pay wages or hire extra staff at an estimated to cost $6.7 billion. The stimulus package also includes $1.3 billion in support payments to keep apprentices in their jobs amid fears the spread of the coronavirus could have a crippling effect on employment.

Medium and big businesses will be encouraged to buy equipment and other investments through an extension of the instant asset write-off. This is currently restricted to companies with turnovers of up to $50 million, for maximum investments of $30,000. But this will be significantly lifted, allowing companies with turnovers of up to $500 million to make assets write-offs of up to $150,000. Now they can claim a tax break for what they spend, though the question is whether they will, due to confidence, and available supply.

The Government yesterday had allocated $2.4 billion for a health package, including 100 pop-up coronavirus fever clinics and a new Medicare item to deliver health advice remotely.

The stimulus games begin – just remember it has to be paid for as the debt is ratcheted up…

Chicago Mercantile Exchange To Shut On Virus Fears

CME Group announced on Wednesday night it will close its Chicago trading floor in a precautionary move due to the coronavirus outbreak. 

CME Group says its exchanges offer the widest range of global benchmark products across all major asset classes based on interest ratesequity indexesforeign exchangeenergyagricultural products and metals. The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform.

The closing will take effect on Friday “at the close of business,” CME said noting that no coronavirus cases have been reported at the Chicago Board of Trade trading floor. 

CME said floor traders in Chicago will receive an “additional q&a” on Thursday “related to the execution of certain floor products, procedures and protocols and other floor-related practices.”

Presumably trading will continue via electronic platforms despite the shut down of the physical floor, but speculation has been running about this.

CME’s announcement comes after several companies advised employees to work from home in an effort to prevent contagion from the virus.

This would make CME the first major U.S. exchange to close a trading floor due to concerns over the coronavirus. The New York Stock Exchange is taking precautionary measures as well, working to separate traders and other employees, according to a Reuters report citing an internal memo.

UK Spends Big In Budget About Face

The budget released overnight reads more like a Labor than Conservative strategy, with big spending on infrastructure – including in the UK’s north, as well as a significant spend on combating the virus.

Rishi Sunak delivered his first budget with both the tactical and strategic in mind. He focused first on the public health challenges of coronavirus but went on to “levelling up” across the country.

His virus emergency package totaled £30bn, included welfare and business support, sick-pay changes and local assistance. This includes £7bn for businesses and families and £5bn for the NHS. Statutory sick pay will be available to individuals self-isolating and self-employed or gig workers will be able to access support from Government more easily. The requirement to physically attend a job centre will be removed – everything can be done on the phone and online.

The chancellor announced £1bn of lending via a government-backed loan scheme, with government backing 80% of losses on bank lending and £2bn of sick-pay rebates for up to 2m small businesses with fewer than 250 employees.

He will also abolish business rates altogether for this year for retailers, in a tax cut worth more than £1bn. Any company eligible for small business rates relief will be allowed a £3,000 cash grant – a £2bn injection for 700,000 small businesses.

Beyond the virus, Sunak said the government is tripling its investment in transport and infrastructure spending to the highest levels since 1955. The government will provide additional funding worth £640m for Scotland, £360m for Wales and £210m for Northern Ireland.

The government will spend £27bn on more than 4,000 miles of roads. £5bn of funding will be invested in gigabit-capable broadband. An additional £1.5bn will be made available for further education funding.

Sunak said almost £1.1bn of allocations from the housing infrastructure fund will be made to build almost 70,000 homes in high-demand areas.

The chancellor announced a Grenfell building safety fund worth £1bn. The funds will help to remove cladding from tall residential buildings.

He said almost £650m of funding will be made available to help rough sleepers into accommodation.

Sunak said the government will increase NHS funding by £6bn during this parliament. Reiterating campaign pledges, he said the package will help to hire 50,000 nurses and build 40 hospitals. The chancellor announced the NHS surcharge for people from overseas will increase to £624.

As a result, the chancellor forecasted growth before the coronavirus hit of 1.1% in 2020, then 1.8%, 1.5%, then 1.3% and 1.4% in the following years. Already lower than expected in earlier forecasts. So growth has been downgraded BEFORE the virus impact.

UK Government borrowing as a percentage of GDP will be 2.1% this year then will rise to 2.4% in 2020-2021, 2.8% in 2021-22, then falls to 2.5%, 2.4% and 2.2% in the following years. Debt as a share of GDP is forecast to fall from 79.5% this year to 75.2% in 2024-25. UK Austerity is over.

UK Cuts The Cash Rate And Releases Liquidity Buffers

Overnight the Bank of England cuts the UK cash rate by 0.5% to 0.25%, cut the banks’ liquidity buffer to zero, and announced extra funding for banks to lend to businesses, all in response to the virus. The Prudential Regulation Authority (PRA) said that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions.  

The Bank is coordinating its actions with those of HM Treasury in order to ensure that initiatives are complementary and that they will, collectively, have maximum impact. The Bank continues to co-ordinate closely with international counterparts. We will discuss the budget spend, also announced today in a separate post.

The bank said that although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses.  This economic shock will affect both demand and supply in the economy.

At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%.  The MPC voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.  

When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.

The TFSME will:

  • help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;
  • provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
  • incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption; and
  • provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.

To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.  The rate had been 1% and had been due to reach 2% by December 2020.

The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.

Although the disruption arising from Covid-19 could be sharp and large, it should be temporary. Such economic disruption should have less of an impact on the core banking system than recent stress tests run by the Bank have shown the system can withstand.  Those stress tests demonstrated that banks would be able to continue to lend to businesses and households even while absorbing the effects of substantial, prolonged economic downturns in both the UK and the global economies, as well as falls in asset prices much larger than experienced in recent weeks.

Given the resilience of the core banking system, businesses and households should be able to rely on banks to meet their need for credit to bridge through a period of economic disruption.

The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019. Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption.

The FPC and the Prudential Regulation Committee (PRC) will monitor closely the response of banks to these measures as well as the credit conditions faced by UK businesses and households more generally.

The release of the countercyclical capital buffer reinforces the expectations of the FPC and the PRC that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock.  In addition, the Prudential Regulation Authority (PRA) has today set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions.  

Major UK banks are well able to withstand severe market disruption. They hold £1 trillion of high-quality liquid assets, enabling them to meet their maturing obligations for many months.

In response to the material fall in government bond yields in recent weeks, the PRC invites requests from insurance companies to use the flexibility in Solvency II regulations to recalculate the transitional measures that smooth the impact of market movements.  This will support market functioning.

The Bank of England has operations in place to make loans to banks in all major currencies on a weekly basis. Banks have pre-positioned collateral with the Bank of England enabling them to borrow around £300 billion through these facilities.

The actions announced today by the three policy committees of the Bank of England comprise a comprehensive and timely package to allow UK businesses and households to bridge a temporarily difficult period and thereby to mitigate any longer-lasting effects of Covid-19 on jobs, growth and the UK economy.

Fed Ups The Repo Ante

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the repurchase agreement (repo) operational schedule for the upcoming period.

Beginning Thursday, March 12, 2020 and continuing through Monday, April 13, 2020, the Desk will offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.  In addition, the Desk will also offer three one-month term repo operations, with the first operation occurring on Thursday, March 12, 2020.  The amount offered for each of these three operations will be at least $50 billion.

Consistent with the FOMC directive to the Desk, these operations are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation.  They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus.  The Desk will continue to adjust repo operations as needed to foster efficient and effective policy implementation consistent with the FOMC directive.

Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page.

We are headed to $800 billion extra liquidity, which clearly is more than a temporary problem in the banking system. John Adams and I discussed this in a recent post.