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Housing Ministry surpasses real estate developers in sales of new cities

The Ministry of Housing, through the New Urban Communities Authority (NUCA), has achieved significant sales in the cities of New Mansoura and New Alamein, in contrast to the expectations of real estate developers regarding the deceleration in sales of the real estate market during the current year.

The ministry announced in early March that 536 distinguished housing units were electronically booked in New Alamein in just 26 minutes. This is a great indicator of the popularity of the ministry of housing, which is almost the sole developer in the New Alamein city.

The substantial sales are not merely for the New Alamein city, but the ministry has also achieved sales which exceeded EGP 1.5bn in the Zahya project in New Mansoura in just three days, contrary to what was expected by City Edge Developments, the marketer and the project manager on behalf of the NUCA.

Additionally, in late February, Amr El-Kady, the CEO of City Edge Developments, elaborated that the company has achieved EGP 8.5bn in sales of New Alamein by the end of 2018, and has achieved EGP 500m in sales in the city in the first two months of the current year.

Moreover, the company achieved EGP 1.5bn in sales in New Mansoura in 2018, and EGP 600m in the first two months of 2019, according to El-Kady.

Some developers believe that this represents a significant competition for them, and not in favour of developers, but rather in favour of the ministry, which may affect their sales in the coming period.

Chief Projects Officer at Capital Group Properties, Amgad Hassanein, said that the government’s offers of luxury or distinguished housing projects are not its role, but rather the role of private sector companies.

Hassanein added that the continuation of the state in offering luxury housing may lead to problems in the real estate market, which may lead to the reluctance of some companies to exist in some areas where the ministry strongly competes.

For his part, Alaa Fekri, chairperson of Beta Egypt for Urban Development, said that this competition is unbalanced, especially after increasing the implementation cost by about 80%, in addition, developers incur the payment of the value of land purchased from the state.

Fekri explained that the companies’ advertising expenses are rather extensive and therefore companies are working under financial pressure, and at the same time are required to pay the instalments of the land’s value, so it is strongly seeking to accelerate marketing rates.

He elaborated that real estate companies currently face major challenges because they are competing for the same housing category, as well as facing intense competition from the ministry of housing.

Meanwhile, Ayman Sami, the JLL country head-Egypt, believes that the state had to first start by entering these new markets such as New Mansoura and New Alamein in order to reassure investors wishing to operate in these new cities–expecting that there will be a great presence by developers in those cities in the coming period.

Furthermore, Waleed Abbas, the assistant housing minister of the NUCA, said that there is no competition between the state and developers in new cities, especially New Alamein and New Mansoura, proving that the NUCA has offered four plots of land to investors in these two cities in November.

Abbas denied that the state is the only investor or the winning competitor in those cities.

He explained that competition exists if the ministry is offering the same features in projects provided by the investors, noting that develops must distinguish their products in order to be more attractive to the client than what the ministry offers.

He also pointed out that the ministry’s prices are not competitive but are rather market prices as the ministry calculated the cost and profit margins much like developers, in the case of units offering in any of the new urban communities.

Source: Dailynewsegypt

Building Collapse: Sanwo-Olu Promises Urban Renewal For Lagos

Babajide Sanwo-Olu, governor- elect of Lagos state has vowed to implement urban renewal programmes that would put a stop to collapse of buildings in the state.

While admitting that urban renewal policy has always posed a challenge for successive governments in the state, Sanwo-Olu said he would approach the programme with human face, by earning the trust of the people, rather than clamping down on their properties.

He gave the indication on Monday, after paying a courtesy visit to President Muhammadu Buhari at the State House, Abuja, in company of his deputy-elect, Dr. Femi Hamzat.

While reacting to the recent school building which collapsed in Lagos Island, the governor- elect acknowledged that many of the buildings in the state were now obsolete, especially as most of them were constructed when the state was a colony under the British government.

He hinted that his first approach to tackling the problem would be to do proper enumeration of the building in the state, while entering into agreement with the property owners.

His words, “The recent building collapse is an unfortunate incident, even when I was serving in government, I used to be the Vice – Chairman on issues that had to do with building collapse.

It was about ten years ago, which is what led to us to creating an agency called Lagos State Building Control Agency (LASBCA), it was meant to begin to identify structures well ahead before issues like this begin to happen.

“But it’s an unfortunate thing, extremely very unfortunate and it also means that we expect it would happen again. So imagine the current government had started very quickly the integrity testing of the properties in the state.

You know Lagos is a part of the old colony of Lagos, so you will expect to see houses that are over a century old and in those numbers, we need to be sincere to ourselves and we need to be real.

“Lagos truly really needs regeneration, especially Lagos Island and that was part of the things we promised on the campaign train. So, it’s to have a conversation right round all these with families and we’ll see the kind of redevelopment that is important as it’s built on in a lot of other big cities like Lagos.

“The issue of urban renewal has been a big challenge to Lagos, over the years, it’s been a challenge to successive governments. We are bringing things that will be different from what others have done that will make Lagos what it’s supposed to be.

“It’s really not that it’s been a challenge, but because we have not been able to see it through to the end. When you want to take people’s properties and you want to regenerate, they must first see a sincerity of purpose – what are the additional plans that you have for them? Before you could regenerate, there must be a stop gap – in the next two to three years what are the plans you have for them? And you need to do what we call proper enumeration.

“Once you can enumerate properly and determine who are the original owners? And you sit and have an agreement, then the regeneration will start. You can do it in two ways: It could be in form of which when you come back, you have part of it; or you turn it into equity. So it depends on whatever model you are working round to ensure that it works”. Sanwo-Olu narrated.

Source: Innocent Oweh

German Home Buyers Look East to Dresden, Leipzig and Beyond

DRESDEN, Germany — After an evening drink at the old-fashioned wine garden overlooking the Elbe River in Dresden last summer, Stefan and Katharina Kluge decided to hop a nearby construction fence and check out a 19th-century building being converted into luxury condos.

Once inside the gutted old walls, they sat down, drank another glass of wine and stared out at the water.

“That’s the moment we fell in love with the place,” Mr. Kluge said. “That’s when we decided to buy.”

When their 1,270-square-foot, four-bedroom condo is finished this summer, the Kluge family will do what many East Germans are doing today — return to their roots.

Having earned enough money elsewhere, they are settling in to raise their children where they grew up. And they are not the only ones drawn to a part of the country that has been underpopulated for decades.

Housing prices in Germany have been on the rise for years, powered by a strong economy, low interest rates and a growing desire for homeownership. The highest prices are in western Germany, in cities like Hamburg and Munich. But these days, cities in the former East Germany like Dresden and Leipzig — which have gone through complete transformations since the country reunited nearly three decades ago — are attracting buyers, too, and prices there are soaring.

Across Germany, a standard condo, defined in Germany as a 2-bedroom, 861-square-foot apartment, has risen in price nearly 65 percent since the beginning of the decade, almost entirely driven by price increases in cities, according to IVD, a real estate association that keeps track of property prices. (Nationwide top-of-the-line single-family houses with roughly 1,600 square feet have gone up 44 percent in the same span).

Compared with prices in Munich — the country’s most expensive city — Dresden’s standard condos still cost a little over a third as much, but things are changing quickly: From 2017 to 2018, the year the Kluges bought their new apartment, the value of an apartment in the city has risen 46 percent, on average.

In the 1990s, East Germany emptied out. In the decade after reunification, the area that made up eastern Germany, including East Berlin, lost close to a million inhabitants, almost all of whom went west.

The migration was so extensive that many small villages were dotted with abandoned houses and empty apartment buildings, and local officials set about knocking them down, rather than living with the blight. In 2004, roughly 60,000 apartments — one quarter of all apartments in the city — stood empty in Leipzig, according to one study.

Since then, much has changed. Cities like Dresden and Leipzig have things to attract both wayward natives, like the Kluges, and outsiders looking for nice places to live: excellent infrastructure, meticulously refurbished downtowns, shorter commutes, a less hurried pace — in short, a better quality of life.

Dresden, which grew from its lowest point of 484,646 inhabitants in 1998 to 566,484 now, attracts residents with its historic downtown, cultural scene and the Technical University of Dresden, one of the best universities in the country. At first, the city had a shortage of living space. But thousands of new units have been created, a mixture of new apartments and refurbished old ones.

Most of the foreigners who invest in Dresden buy property in the area around the Frauenkirche, a painstakingly restored Protestant church with the largest stone dome north of the Alps, according to Henry Brömme-Herrmann, a native who has been dealing in real estate for more than a decade.

“Dresden’s growth is sound,” he said. “But you do have to know where to invest.”

In much of the city, a standard two-bedroom apartment sells for slightly more than $200 a square foot, making Dresden the most expensive market in the east, apart from Berlin, where a comparable apartment would cost closer to $250 a square foot. But luxury apartments in some parts of Dresden, can exceed $600 a square foot.

Stefan Kluge grew up in Leipzig; Katharina, in Dresden. After completing their degrees in Leipzig, where they met, she moved to Myrtle Beach, S.C., to intern in an animal emergency hospital and Mr. Kluge focused on making films. In 2007, they moved to Switzerland, where Ms. Kluge earned her doctorate and where their two children were born. The family then moved to St. George, Grenada, where Ms. Kluge works as a veterinary professor and Mr. Kluge as a data scientist while they live on a 35-foot sailboat, which Mr. Kluge plans to sail across the Atlantic when they move.

They want to return because their children are at the perfect age to transfer from Grenadian to German schools.

“What I love about the East — especially Dresden — that it is still a little wild,” said Mr. Kluge, in a telephone interview. “You meet many people who live a different kind of life.”

Just 70 miles west is Dresden’s fiercest rival, Leipzig. Its real estate market is even hotter — for the first time since reunification.

After the fall of the Berlin Wall, Leipzig faced more obstacles than Dresden. The city was considered more utilitarian, and though there was more than enough living space, much of it was not up to modern standards.

When Leipzig was at its lowest in 1998, it counted 437,101 residents.

Not only are universities and colleges attracting researchers and faculties, but Porsche and BMW have opened huge factories on the outskirts. Both Amazon and DHL have overnight hubs in Leipzig.

According to a study by the city, more than three quarters of the people in Leipzig are satisfied with their quality of life — a rating many cities in other parts of the country could only dream of.

Last year, after growing by nearly 6,000 people, Leipzig counted almost 596,000 inhabitants.

“I remember this city when everything was gray. The houses were gray, the streets gray, there seemed to be a layer of soot on everything,” said Andreas Köngeter, a West German who has lived in Leipzig and been active in the real estate market since 1991.

The change, he says, came in 2003, when Leipzig won the domestic bid for the 2012 Olympic Games, which the city would ultimately lose to London. Although the campaign was unsuccessful, the media attention reintroduced the city to German audiences.

Before World War II, Leipzig was one of the most important trading cities in Germany and on track to becoming a city of one million, said Matthias Hasberg, the city’s spokesman.

“It’s why the streets are so wide, and it’s why the train station is so big,” he said.

The British Academy of Urbanism awarded Leipzig the European City of the Year award for 2018, bolstering its reputation as the new pearl of the country’s east.

Although the average price for a middle-of-the line apartment is closer to $150 a square foot, many are betting on a strong upward trend.

A carefully refurbished 1,520-square-foot, five-room apartment in a house built in 1909 in Connewitz, a left-leaning neighborhood with a history of squatters occupying houses, may fetch over $500,000, a sum that would have been unthinkable just five years ago. The unit is not the only one for sale on the block. Dozens of new condos across the street reflect the changing neighborhood.

But because of the often eclectic mix of beautiful prewar buildings (Leipzig has several examples of Bauhaus), more functional German Democratic Republic blocks and newly built post-reunification buildings, neighborhoods mostly stay mixed. Large-scale gentrification, which occurred in the Prenzlauer Berg district in what was East Berlin, is still a ways off.

Mr. Köngeter says that the boom is best documented by the cost of empty lots — the result of bombs during the war, or Communist-era houses in such poor repair that they had to be torn down after reunification. For a while, such lots had virtually no value. But recently, they have been sold for millions to investors planning to build condominiums. According to market research provided by IVD, the price for such lots has gone up 212 percent in the last five years.

“Many who say Berlin is just too expensive now come to us,” Mr. Köngeter said.

Markkleeberg and other villages south of Leipzig are also getting attention. The towns were at the edge of some of the largest open-pit coal mines in the region. When the destruction of the landscape stopped with the fall of East Germany, those living closest to the pits had won the lottery: After billions of euros of cleanup, the pits were converted into large lakes, and the lakefront land became some of the most expensive real estate in the region.

Private real estate in East Germany didn’t exist as such before 1990. Property was state-owned and virtually everyone rented or received housing from their employer.

A problem for young families who were raised in eastern Germany, is that their parents can’t help them with down payment or financing, the way many do in the west, Mr. Kluge said in a telephone conversation, because their parents were never able to buy property or otherwise amass wealth.

So the couple had to finance the nearly $700,000 price themselves.

Although their unit is not yet finished, the family has spent a lot of time thinking about how to style their apartment, how to make best use of the light and of the two windows facing the Elbe, where Mr. Kluge hopes to be able to sail a dinghy. (He plans to keep his big sailboat on the Baltic Sea, roughly four and a half hours by road from Leipzig.)

“In all the places we’ve lived we realize, what really counts is not so much the house itself, but where it is,” Mr. Kluge said.

Source: Nytimes

Affordable Housing Segment: These two regions are topping the chart – What homebuyers, real estate investors should know

The National Capital Region (NCR) and the Mumbai Metropolitan Regions (MMR) lead the affordable housing segment in terms of launches and sales across seven cities in the country, a CII-Anarock report said on Sunday. NCR and MMR account for 55 per cent share of total six lakh affordable housing units launched across the top seven cities in the country and NCR saw the maximum supply, said the report.

Of the total 3.98 lakh units sold in the price category of under Rs 40 lakh, NCR and MMR contributed 57 per cent of the total sales. The other cities where the survey was conducted were Bengaluru, Chennai, Hyderabad, Kolkata and Pune.Commenting on the report, Anuj Puri, Chairman, Anarock Property Consultants said: “The anticipated 8-10 per cent annual growth of this segment is luring investors.”

“Data further suggests that out of the total 15.3 lakh units launched across the top 7 cities between 2014 to 2018, affordable housing contributed about 6 lakh units – 39 per cent of the overall supply,” he said. Homes have already been sanctioned under the Pradhan Mantri Awas Yojana (PMAY), but the pace of development needs to pick up, said the report.

According to the survey, some of the key deterrents for speedier affordable housing development are scarcity of land, illegal settlements and slums and limited private sector participation despite several fiscal and statutory benefits to attract private players.

Source: Zeebiz

Cosgrove boosts housing market with Abuja estate project

Poised to expand the frontier of real estate and bridge the housing gap, Cosgrove Investment Limited has begun Cosgrove’s Smart Estate Wuye in the Federal Capital Territory, Abuja.

The exclusive ‘future-ready’ gated estate offers a mix of three to five bedroom flats, terraces and fully-detached buildings, each providing a perfect balance of safety, accessibility, privacy and functionality.

According to the developers, the estate represents a future driven by innovation and offers ground-breaking solutions that would change the course of industries, communities and societies.

Located at the Wuye, a phase II development plan of Abuja city, close to Wuse and Utako districts, the firm said, the estate is making a new statement through a product or service, as the world expects something innovative and unprecedented.

According to the Chairman of Cosgrove, Mr. Umar Hadeija, the premiere project in Wuye, Abuja and most recently Katampe, Abuja site, “ is evident that Cosgrove is developing estates that tell the world the future is here indeed.”

He said: “From the time, construction on the project began in April 2018, it was clear that Cosgrove had been able to move at such a fast pace without sacrificing their goal of building world-class smart bespoke homes for their clients.

“ All these are possible because Cosgrove pays close attention to the details of the planning, design, and finishing of each building”, he added.

Hadeija also stressed that at the heart of every Cosgrove project is a commitment to use only world-class infrastructure required for home automation and smart living. That’s why all their projects are ‘future ready’and meets global standards of smart homes.

He noted that the impact of Cosgrove’s vision to change the way people live and at the same time bring long-term returns is already being felt by their investors who are seeing a minimum of a 40 per cent return on their investment.

Speaking on the project, trainer for Bosch power tools and accessories, Mr. Dieter Schulze, said Cosgrove pays close attention to the details of the planning, design, and finishing of each building.

Schulze was among the team from Bosch Power Tools and Accessories in Germany, who visited the Cosgrove’s Wuye, Abuja site, to assess the quality of work on the estate with 150 housing units of various types.

The team expressed delight with the quality of the construction and resources that went into each building on the site.

Source: Bertram Nwannekanma

Estate agents call for Real Estate Investment Trusts review

The Association of Estate Agents of Nigeria (AEAN) has called for a review of the Real Estate Investment Trusts (REITs) laws to allow direct investment of pension fund in real estate development.

Mr. Adeolu Ogunbanjo, AEAN Chairman, made the call in an interview with the News Agency of Nigeria (NAN) in Lagos on Friday.

According to him, REITs laws and the National Pension Commission (PenCom) guidelines prohibit pension funds from being directly invested into real estate.

He said that REITs regulations directed that pension funds could only be invested in mortgage-backed securities.

Ogunbanjo said contributions to PenCom under the national contributory pension fund had accumulated to more thn N6.3 trillion.

“These are idle funds that can be unleashed into the real estate sector to stimulate business activities and create room for people to invest in the sector.

“The fund is enough to grow the building construction industry and the economy as a whole if properly harnessed and managed,’’ he said.

Source: DailyTrust

CHINA HOME SALES SLOW, BUT REAL ESTATE INVESTMENT REBOUNDS IN 2019

Growth in sales of real estate in China fell to 2.8 percent during January and February 2019 compared to the same period a year ago, with the value of new property sales during the two months totalling RMB 1.28 billion, according to data released on Thursday by the National Bureau of Statistics.

The slowdown in the value of real estate being sold was a drop of 9.4 percentage points from the 12.2 percent annual growth pace recorded in December 2018, and may help to explain recent government moves to open up China’s monetary taps while local authorities begin to loosen sales policies and allow cheaper mortgages.

The change in government direction seems to already be understood by developers, who increased the amount invested in the real estate sector by 11.6 percent in January and February compared to the first two months of last year — the biggest surge in commitments to the sector in five years.

Sales Growth Slides

The NBS’ latest data indicated that, in addition to the declining growth in the value of homes sold, property sales by floor area fell 3.6 percent year-on-year in the first two months of 2019, declining to 1.41 million square metres. That slide in the amount of space transacted came after the volume of square metres sold had grown by 0.9 percent in December.

China real estate sales

China’s real estate sales growth by value (in blue) slowed by 9.4 ppt in Jan-Feb. Source: NBS

The volume numbers included a dip of 3.2 percent in the residential sector, excluding subsidised housing, while sales of office and retail properties declined 15.7 percent and 13.6 percent by volume respectively.

Overall sales of real estate during the period reached RMB 1.28 trillion, with residential sales posting 4.5 percent growth, office sales dropping by 6.2 percent and retail property sales falling by 9.4 percent, according to the government statistics.

Local Governments Loosen Policies

The slowing sales of homes, and the dependency of Chinese local governments on land sales for the majority of their revenues, appears to already have led to changes in how real estate rules are implemented in many cities.

“Local authorities, feeling that price growth has now come under control and wanting to encourage transaction volumes in support of local market and cash-strapped developers, are selectively loosening some of the more stringent restrictions while banks are starting to reduce the cost of financing in selective cities,” analysts from property consultancy Savills said in a research note issued in response to the latest government real estate statistics.

Some southern cities, such as Guangzhou, along with Heze in Shandong province, have been loosening curbs on the property market since late last year amid slowing sales and bearish sentiment.

Despite the changes happening at the local level, China’s Minister of Housing and Urban Rural Development, Wang Menghui, vowed this week to avoid a “big rise and big fall” in property prices.

Investment Surge Follows Liquidity Boost

The slowdown in China’s real estate sector, which is responsible for 20 percent or more of the country’s economy according analyst estimates, may have already been recognised by top decision-makers who have pumped liquidity into markets this year.

China property investment

New property investment jumped by the biggest margin since 2014. Source: NBS

The NBS data showed that property investment in China rose 11.6 percent in the first two months of the year, compared to the same period a year earlier, up from the 9.5 percent growth reported for the 2018 full year.

Total investment in the sector reached RMB 1.21 trillion during January and February, after China’s central bank lowered the reserve ratio requirements at the nation’s banks by an average of 100 basis points during the first week of January.

That RRR cut, the fifth such reduction in the amount of cash that banks must hold in reserve in a one-year period, had the effect of freeing up around RMB 779 billion for new lending.

In the nation’s subsequent real estate investment surge, commitments to the the residential sector accounted for 72.1 percent of the total and represented an 18 percent increase in investment compared to the same period the previous year. The trend marked the strongest growth for the January-February period since 2014, when it rose 19.3 percent, according to Reuters.

The NBS said that robust investment in the property sector was due to steady housing prices and an increase in new construction starts.

Source: JAN KOT

Rent controls won’t solve London’s shortage of affordable housing stock

The topic of introducing rent controls in London crops up time and time again in our industry. But it’s been hitting the headlines again lately, as Sadiq Khan has pledged to cap rent in the capital as part of his 2020 re-election campaign.

The Mayor hasn’t explained precisely what he means by rent control yet. There are two main forms he could opt for: introduce rent stabilization to prevent sudden rent increases, or impose a blanket rent cap that limits how much a landlord can charge overall.

Various forms of rent controls already exist in many cities around the world. Berlin, Munich and Dusseldorf have all banned rent increases in property potshots, while roughly one million homes in New York have their rent stabilized to prevent sudden spikes. Oregon is also poised to be the first state in the USA to impose statewide rent controls.

In fact, if Khan is successful in his bid it wouldn’t be the first time that rent controls have been imposed in the United Kingdom.

A shortage of housing during WWI saw the introduction of rent controls in the UK and subsequent legislation retained rent controls in some form or the other until deregulation under Thatcher.

More recently, Scotland and Northern Ireland have been using their devolved powers to introduce rent caps in some areas and types of tenancies.

Making life more affordable for Generation Rent

London’s private rented sector has been growing rapidly in recent years and now accounts for 30% of all London households. Some predict that by 2030 that number will climb to 40%.

But rent prices have also risen far quicker than wages and for the typical Londoner the majority of their income goes on rent.

In the areas of East London we work in, we’ve seen the average 2-bed skyrocket to over £1700 a month in rent. To buy a 2-bed will also easily set you back around £500,000 – with the deposit amounting to the cost of a whole property elsewhere in the UK.

The likelihood is that many Londoners – especially the young and lower income earners – will rent for way into their 40s and beyond. This is a totally new phenomenon, so it makes sense to adapt and to take steps to protect tenants’ rights.

Ideally, some form of rent control would make London more affordable for those who live and work in the city and give tenants greater security.

But will it actually work in practice?

The cultural component of housing in the UK and London

If rent controls already work in other cities and countries they could work in London too, right?

Unfortunately, it’s more nuanced than that. Drawing simple parallels between countries ignores the fundamental and historical differences between national property markets.

Take Berlin, for example. Arguably, rent control works quite well in Berlin. However, that’s largely down to one key cultural difference: Germans don’t rent in order to buy down the line, they choose to rent as a way of life. As a result, Germany’s home ownership rates are among the lowest in the developed world.

This in turn means that the property market is far more stable than in the UK, where home-ownership is considered a long-term goal for many.

It also means that tenants make up a large proportion of the electorate and so there’s a greater level of pressure on the government to impose strong tenancy protection laws throughout the whole housing system. For instance, it’s common to find fixed tenancies for five or 10 years in Germany.

So applying rent caps in London won’t be enough to solve the city’s housing issues. If the Mayor wants the Berlin-model, rent controls would need to be rolled out alongside improved tenant rights across the board.

Existing and would-be landlords will be put off the sector

The National Landlord Association has been understandably critical of the Mayor’s proposals. It points out that capping how much landlords are able to let their properties for will reduce rental yields and potentially drive many ‘good’ landlords out of the sector.

We’ve seen this play out for our landlords over the last two decades. In the early to mid-2000s, a third of our sales in East London were for buy-to-let properties; now that number sits closer to 10%. Back then, landlords could expect a rental yield of 10%, whereas now they can expect 3-4% on average.

The impact of rent control is basic supply-and-demand economics.

As investing in buy-to-let becomes less lucrative, more and more landlords will leave the private rented sector and move their money into other income-generating projects, like stocks and shares. With fewer landlords in the sector, the supply of rented properties will dwindle.

Middle income earners who are currently renting may well be able to leave the private rented sector too, since more rental properties flood the housing market and drive prices down. But even so, the demand for private rental properties will still outstrip supply.

What’s more, with social housing in short supply, the risk of homelessness among low income earners may rise. This means that the very government intervention intended to give greater housing security might have the exact opposite effect.

Lack of affordable housing stock

The crux of the housing issue in London is not that there’s a lack of stock – there are a million properties being advertised on Right move right now. The issue is that there is a shortage of affordable housing stock.

Artificially suppressing rents in the private rented sector won’t fix the root of the problem – it may even exacerbate it.

London needs more investment in affordable social housing, alongside stronger protection for tenants in the private rented sector and incentives to keep ‘good’ landlords in business.

Regardless of any individual’s political leanings, as an industry we’d love to see a housing policy work in the long term for the many, not the few.

The Mayor of London’s well-intended proposals, however, may have far-reaching and unintended consequences.

The Debt Shift Theory Of The Global Financial Crisis And The Great Real Estate Bubble

Bank lending is a key to economic growth but what happens to the economy when there’s a shift in the kind of loans that banks make and a shift in debt?

When banks de-emphasize lending to companies that produce new goods and services, what happens to labor productivity and wage growth? When banks become more interested in lending so people can buy stuff that already exists, like real estate and stocks, what happens?

Since the 1990s, the majority of bank credit in advanced economies has gone into buying real estate and financial assets, like stocks, instead of going to businesses that create new goods and services (non-financial services, that is). That’s according to a recent working paper, “Credit where it’s due: A historical, theoretical and empirical review of credit guidance policies in the 20th century,” by Dirk Bezemer (University of Groningen, Netherlands), Josh Ryan-Collins (UCL Institute for Innovation and Public Purpose), Frank van Lerven (New Economics Foundation) and Lu Zhang (Utrecht University, Netherlands).

“Banking systems in industrialised economies have shifted away from their textbook role of providing working capital and investment funds to businesses. They have primarily lent against pre-existing assets, in particular domestic real estate assets.”

Looking at 1973 to 2005, the researchers found that financial sector deregulation in advanced economies is significantly associated with a lower share of bank loans going to finance the production of goods and services (non-financial services).

Globally, debt shifted toward financing the purchase of pre-existing assets like real estate and stocks, and away from financing businesses that produce goods and services.

Credit flowing into goods and service businesses typically leads to investments that lead to increased productivity and wage growth. Credit flowing into real estate and financial assets typically does not lead to increased productivity in the real economy to the same degree.

The shift toward relatively less credit going toward productive businesses helps explain slower wage growth and increased income inequality. The shift toward relatively more loans going toward pre-existing real estate and financial assets helps explain their booms and busts, the depth of the Great Recession and the increase in income inequality.

In the 1980s and 1990s, governments deregulated their banks and reduced their “credit guidance policies” that steered credit toward certain industries and uses.

The authors of the paper believe it was this change since the 1980s in how credit is allocated — a change made worse by financial innovation like derivatives and the globalization of finance — that was at the root of the 2008 Great Financial Crisis.

Backstory

From the end of World War II until the 1980s, it was very common for central banks and treasury departments to, 1) have credit guidance policies which steered where private sector loans went, and, 2) have government economic development banks that explicitly lent government money to targeted industries and uses.

Government policies typically encouraged loans to export industries, farming and manufacturing while discouraging loans to import industries, service, housing and personal consumption. Rebuilding after the war, the countries wanted to increase production first in order to increase consumption later.

The governments felt monetary policies like interest rates were too blunt an instrument to promote economic development. They wanted to steer loans toward certain productive industries. Monetary policy couldn’t do that. Credit policy could.

Credit guidance policies from central banks and state-owned development banks worked particularly well in Asia. They were a big part the economic miracles in post-war Japan, Korea and Taiwan and more recently in China but their effectiveness outside East Asia was limited.

This seems incredibly high but the paper refers to a study that found that, “Globally, by the 1970s governments owned 50% of the assets of the largest banks in industrial countries and 70% of the assets of the largest banks in developing countries.”

That began to change in the 1980s.

Distortion of Credit Allocation

In the 1980s, the story on central bank credit guidance and state development banks shifted from good to bad. At the same time, the top priority of central banks had shifted from promoting economic growth to controlling inflation.

The consensus among economists started to change. Credit guidance policies began to be seen as distorting the efficient allocation of credit because loans were going to less profitable industries. Some industries were getting cheap credit, while other, more profitable industries, weren’t getting the productive investments they needed. It was thought a deregulated banking sector would allocate the money more efficiently and lead to faster economic growth.

The paper barely mentions it but by the 1980s, incompetence and corruption had often become a problem. Credit guidance often guided loans toward political allies. Instead of reforming the bureaucracies, the consensus was to remove the policies.

The United States was one of the first countries to start to reduce it’s credit guidance policies.

The U.S. government was hugely involved in private sector credit in the 1980s. The policy paper refers to a study that found between 1980 and 1990 in the U.S., “a third of all net credit issued to non-federal sectors was either directly provided, subsidized or guaranteed by federal credit programmes.”

A “Washington Consensus” formed in the 1980s as the U.S., IMF and World Bank all agreed to that central banks and treasuries should de-emphasize policies that directed credit to particular types of businesses. Financial industry deregulation became a strong global trend

What Happened Next?

So what happened as banks were deregulated around the world? Did lending become more efficient as credit guidance was reduced.

A main thesis of the paper is that the 1980s and 1990s financial deregulation gave banks more freedom to determine where to lend money and they chose to lend a lot more money to people to buy things that already existed, like houses, but only a little bit more money to businesses to invest in making things or providing services.

The thesis of the working paper is that when given a choice lenders often prefer to make mortgage loans because of the collateral. The interest rate is certainly lower on mortgages than on business loans but with mortgages, lenders get great collateral, the house itself. Overall, mortgages are much quicker, easier and safer for lenders to make than business loans.

They also make the argument that when lenders decide, for whatever reason, to lend more money to buy houses, house prices will increase because houses have such inelastic supply.

The idea here is that when house prices increase, foreclosures decrease. Let me expand on that.

If house prices have increased and you lose your job and can’t pay the mortgage, you’re a lot more likely to be able to just sell the house and make money instead of getting foreclosed on.

When one huge lender, or enough small lenders, want to make more mortgage loans and to do that they all lower their lending standards a tad bit at the same time, it increases the amount of money chasing houses so house prices increase (inelastic supply) and the number of loans that go bad will be lower than previously expected, at least for those buyers who bought before the house prices increased.

Given the lower than expected percentage of defaults, the lenders lower their lending standards another notch and the cycle repeats itself until, eventually, years later, house prices stop increasing and defaults “unexpectedly” increase.

I’d say, the lenders may have convinced themselves they were making mortgage loans but mostly they were speculating on house prices rising.

The result of this feedback loop is much higher levels of household debt which, in the long-run, can lower household spending on the goods and services that are being produced today and that are creating jobs today. That in turn, lowers wage growth.

Globally, debt shifted from investments in producing future goods and services toward investments in buying things that were already produced.

The debt shift increased income inequality two different ways. First, lower relative investment in businesses that produce goods and services helps explain the wage stagnation. Second, the higher relative investment in existing assets raised asset prices which benefited those who owned more assets, higher income households.

For Example, Stock Buybacks

Finally, I think the current controversy over corporate stock buybacks is a perfect example of how the Debt Shift Theory works. Until 1982, it was illegal for U.S. companies to buy back their own stock. This restriction could be considered to be a credit guidance policy.

Today, without that credit guidance policy, many companies are borrowing money at historically low interest rates, not to invest in capital equipment and increased productivity, but to buy back their own stock.

It’s far easier to increase the price of your company’s stock by borrowing money to simply buy some of your company’s own stock than it is to go through all the time and work needed to borrow money and invest it in increasing your company’s productivity.

The stock price may increase in either case but the national economy grows in one scenario but not the other.

Other Possible Debt Shift Explanations

The paper certainly does not say that the de-emphasis on credit guidance from central banks was the only reason for the debt shift. Here are a couple of reasons that come to my mind.

Effect of Partial Deregulation. Despite the financial deregulation of the 1980s and 1990s, the U.S. government, for example, continued to have large credit programs (subsidies, guarantees or direct programs) particularly for house purchases and agriculture. Keeping the credit guidance policies for housing while deregulating other parts of finance could have been a big factor in steering money toward real estate lending.

Falling Interest Rates. From the 1980’s into the 2010s, falling interest rates likely also played a role. I would have expected that lower interest rates would spur all investment equally but it may be that lower rates naturally favor some investments, like real estate and financial asset investments, over others, like riskier but more productive investments.

Nevertheless, the experience of Japan suggests credit guidance from central banks is the most important factor. Richard Werner’s book, “Princes of the Yen” details how after decades of economic miracles, a massive real estate bubble appeared in Japan in the 1980s right after Japan changed it credit guidance policy called, “window guidance,” to encourage more lending, including encouraging more lending to real estate.

Summary

The Debt Shift Theory isn’t about a shift in who made the loans or who received the loans but about a shift in what loans were used for.

The Debt Shift Theory says the removal of central bank credit guidance policies in the 1980s and 1990s led to a large shift in lending toward pre-existing assets which lead to a large shift in debt toward real estate and financial asset purchases. The shift in debt had impacts on real estate and financial asset prices, price instability, expenditures on goods and services, labor productivity, wage growth, income inequality and was the root cause of the Great Financial Crisis.

Source: Forbes

How a Cooperative Approach to Property Management can Build Collective Power

Nestled among single-family homes in a quiet Berkeley, California neighborhood sits a boarded-up apartment building whose owner hopes to use it to fight displacement, empower African-American community members, and upend traditional rental housing models.

McGee Avenue Baptist Church, which owns the property, joined with the Bay Area Community Land Trust to develop the apartments using an ownership structure built around the idea of keeping the property affordable for the long term and using a management model that puts tenants in charge.

The need for alternative approaches is dire. Soaring housing costs and intensifying gentrification have led to massive displacement of historic San Francisco Bay Area communities.

African Americans used to make up almost 20 percent of the Berkeley population, but their numbers have declined by 37% since 2000, a 2017 report from the Berkeley Mayor’s office found.

Three trends have contributed to the rapid increase in housing costs in the area: the Berkeley campus of the University of California steadily increasing its student body, the Silicon Valley economic boom, and the unprecedented amounts of speculative capital pouring into the San Francisco Bay Area from global real estate investment companies.

This has pushed housing prices and ownership opportunities farther and farther out of reach for many of the area’s African American families, even those that have been native to the area for decades.

To help address this crisis, the Bay Area Community Land Trust partnered with the 100-year-old McGee Street church, which runs one of the most robust local food programs for the homeless, on a program they called “Empowerment through Cooperative Management.”

The program goes beyond housing to generating leadership, sustainable self-management, and resilience in the face of limited resources, thanks to the cooperative approach.

The program’s first project is to rehabilitate the apartment building next door to the church and convert it into housing for undeserved and historic Bay Area communities of low and moderate income with three aims:

  1. to provide cooperative housing opportunities to communities under threat of displacement
  2. to empower African-American communities through a cooperative management model
  3. to create permanently affordable housing in perpetuity by using the community land trust model to remove land from the speculative market.

Understanding alternative ownership and management models

The Community Land Trust (CLT) is an established and successful model for the creation of democratically governed permanently affordable housing, and most urgently in the face of the crisis, a tool to prevent the displacement of historic communities.

The Bay Area trust, like many of the more than 250 such trusts across the United States, uses cooperative ownership and management in conjunction with the CLT model.

In this approach, the trust owns the land and the co-op collectively owns the buildings, with individuals owning shares, as in a Limited Equity Housing Cooperative. Ownership of a share offers greater security than being a renter:

It gives the resident the right to enjoy the use of the property and, most importantly, not be displaced by a landlord taking advantage of rapidly rising rents.

In exchange for this security, the resident cannot transfer the unit at market rate, and without the permission of the cooperative (usually approval of its board).

The Bay Area trust and McGee church are using community land trusts and co-ops as an anti-displacement tool (similar to San Francisco’s Small Sites program that helps preserve buildings with fewer than 25 units, and laws like the Tenant Opportunity to Purchase Act that offer residents the first chance to buy their buildings before they’re put on the market).

This approach focuses on making housing affordable not only for initial residents, but also for future ones by decommodifying housing and taking it off of the speculative market so that it can be permanently affordable.

Historically, affordable housing has had a stigma as “welfare,” which often disempowers its recipients. The Bay Area trust’s program is aimed at removing this stigma and creating a greater sense of dignity and empowerment through self-organization and the security offered by ownership

. Just like the first CLT, New Communities Inc(1969), which made land permanently affordable for African-American farmers and their families, land trusts can serve once again to put collective power back in the hands of African-American communities.

Source: Resilience.org

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