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German Property Quiet Boom Attractive To Investors
News Posted On: 04 July 2013 Germany’s status as a safe haven for investors is well documented. But the forces that have generated a housing boom in the Eurozone’s most prosperous economy go beyond interest from investors anxious to squirrel their money away safely. The boom in German property has come as a result of low unemployment, rising construction rates and robust growth in rents, according to UK-based Knight Knox international. Germany was recently voted Europe’s most attractive property market, in a survey held by property consultants CBRE. The result was backed up by statistics indicating that every sector of the German property market is flourishing. The rental sector alone is worth over £890 billion in a country where homeownership is low, at around 53%. German rental rates have grown by 15% over the last five years, while apartment prices have risen by 23% in the same period, according to BulweinGesa, Germany’s leading property indices. But the growth of the German housing market is underpinned, not by foreign investment or speculation, but by genuine economic growth. Germany’s unemployment rate is near to its 2012 record low, representing the deepest cut in the jobless rate since reunification. The 2.943m Germans out of work make up 6.8% of the population, as against unemployment of 7.8% in the UK. There’s more though: part of the German employment boom is in the construction industry, where residential construction rates grew by 2.5% in the third quarter of 2012. Rather than a speculator-led bubble, though, the German property market is participating in a nationwide economic upswing. And that’s being recognised by investors. Germany drew in over a fifth of the overall investment in Europe last year and international investors carried out 40% of 2012’s transaction volume. Investment in German real estate totalled €6.7bn in the first quarter of 2013, a 21% year-on-year increase, according to Savills. Berlin, once a stoutly industrial city and then the home of the Wall separating the two Germanies, is now the home of a rocketing population – up by over 100,000 since 2007 – and increasing rents, which have risen by a third in the same period. Apartment prices have seen a 41% increase, according to online broker Immobilienen Scout. Mitte, a city centre district of Berlin, has been a vital part of the city’s property boom, with apartment prices now nudging £6,700/m2 in the district. Comparable properties in Charlouttenburg-Wilmersdorf run to £4,700/m2, though the two districts are close; German property is governed by German perceptions of desirable neighbourhoods. Germany’s boom has seen prices rise so sharply in Berlin that both Germans and foreigners have begun to look further afield. The German provincial cities are increasingly sites of investment as well as purchase for habitation, showing much lower prices but comparable rental demand. And the German economy, still Europe’s healthiest and the Eurozone’s pricipal creditor, underpins this strong housing growth, indicating bright days ahead for investors in German property. Les Calvert – overseas property reporter Continue reading
What Would A Quick Transition To ETS Really Mean?
July 4, 2013 – 12:05AM Matthew Wright and Trevor Jack Read more: http://www.theage.co…l#ixzz2Y06Kt4Wm The newly minted Rudd government may bring forward the date at which the Gillard carbon tax converts to an emissions trading scheme (ETS), currently legislated for July 1, 2015. What would an earlier transition to an ETS, linked to the European system, mean for the community, business and global warming? An early transition may be impractical or at least fraught with difficulties (ref Greg Combet). If an ETS was linked to the European scheme and the price there remained low (around $6 a tonne), income from issuing ETS permits would be substantially lower than budgeted for the carbon tax ($24.15 a tonne in financial year 2014 and rising). This budget shortfall could be averted by applying a floor price – in which case the resulting ETS would just be the current carbon tax but with window dressing, a different name and substantial logistical and bureaucratic technical difficulties. Although technically different, an ETS and carbon tax have similar objectives. An ETS sets a limit on pollution (supply constraint) and allows the market to determine the price. A carbon tax sets a price for polluting and allows the market to determine demand (which equals supply). If the defining factors of each system are set consistently, each will result in the same price and demand (i.e. volume of pollution). But the factors need to be set in advance of the period in which they are effective. Accordingly, these factors are based on projections. The problems with the European ETS, principally a price that is too low to have any meaningful effect, arose mainly because the key factor (the volume of permits) was based on a projection that didn’t allow for the GFC. This is not a criticism – not many people saw the GFC coming. But it explains why the scheme is so ineffective and the price so low. An argument for transitioning to the ETS earlier than currently legislated is that it would be cheaper. True, in the short term, given that the carbon tax would be around $25 and the ETS cost would be about quarter of this. But this is cheaper in the same sense that buying a five-litre can of fuel is cheaper than buying a 20-litre can. Each is a can of fuel. But the useful content is different by a factor of four. Similarly, a $25 carbon price buys much more real abatement than $6. And the policy objective is surely real carbon abatement and not just “anything so that we can be perceived to be doing something”? Changing to an ETS and linking with Europe would be similar to retaining the carbon tax but reducing it to $6 a tonne – but a lot easier. But what is the effect of a carbon tax at $6 a tonne? On consumers? A lower carbon tax might flow through to lower prices for electricity and goods heavily dependent on electricity for production. But this assumes that generators would pass on resultant cost reductions. Is this likely? Government control/monitoring is likely to be necessary to ensure such behaviour – as it was to ensure price increases were not excessive when the tax was introduced. Assuming the compensation package – including lower personal taxes, based on a higher carbon price – is not changed, the net result would be lower prices. It is likely that such changes in prices would be imperceptibly small. And such lower prices would be offset by the cost of higher taxes/lower services necessary to make up for the forgone tax revenue. (TANSTAAFL – There Ain’t No Such Thing As A Free Lunch.) The effect on businesses not liable for the carbon tax? Essentially similar to consumers – generally imperceptibly lower input prices but with the possibility of higher taxes to make up for forgone government revenue. On businesses liable for the carbon tax? Lower costs, much of which might flow through to higher profits. The effect on global warming? Carbon pricing can affect short-term production decisions and thereby change short-term CO2 production. A lower carbon price should increase, by a small margin, CO2 emissions. But the main imperative for any carbon abatement policy, is to affect long-term investment decisions and transform the community and economy to a cleaner future. For example, any serious response to global warming must result in no new fossil-fuelled power stations. Decisions on investments with 30-year-plus lifetimes are based on all the future circumstances, including explicit carbon costs. If investors perceive the Australian government taking a token approach to global warming and expect this to continue well into the future, they should factor lower future carbon prices into their decision making – i.e. more coal-fired power stations rather than better/smarter grids, energy conservation measures, renewable power. On the other hand, if investors perceive that the government and community generally want action, they will expect carbon pricing to rise steeply over time. Thus, investors would invest in renewable alternatives, rather than fossil fuels. Combined with the Coalition’s policies, which provide no incentive for economy-wide transformation, the effect on global warming of the government implementing a lower carbon price is likely to be further delay in de-carbonising the Australian and global economies. On political standing? With appropriate spin, (possible) lower costs to consumers, higher profits to generators, and omission of the need to fund the revenue shortfall, there may be short-term political gain, relative to the “ban the carbon tax” alternative, in switching to a lower carbon price. But the government’s credibility in terms of having a serious long-term strategy to address global warming would become similar to that of the opposition – essentially non-existent. If the political need is to be seen to be doing something, then an ETS, with a floor around $25, might dissociate Rudd’s “new policy” from Gillard’s so-called dishonestly introduced carbon tax yet maintain the price at a level at which it is plausible, that investors would believe the government to be serious and thereby consider cleaner rather than more carbon-intensive investments. Matthew Wright is the executive director of climate and energy think-tank Zero Emissions. Trevor Jack is an actuary with JAC Actuarial Consulting. Read more: http://www.theage.co…l#ixzz2Y06GVUtC Continue reading
"US Housing Market Recovery Still In Early Stages"
Prof. Stephen Oliner, a former senior official at the US Federal Reserve, tells “Globes” about the latest trends in US real estate. 1 July 13 17:43, Gil Shlomo “A fire sale” of US bonds, such as the funds of large universities are carrying out, is liable to cause bond prices to crash and send long-term interest rates soaring. A new crisis in the recovering housing market is then only a matter of time. Mortgage interest rates in the US have been creeping upwards in recent weeks, although the interest rate on 30-year fixed-rate mortgages is still just 3.91%. The concern is that a jump in the interest rate on long-term loans, such as mortgages, will deliver a serious blow to the fragile US economic recovery. Prof. Stephen D. Oliner, who held a series of senior positions in the US Federal Reserve over 30 years, is an expert on the subject. “Globes”: US home prices are still rising, almost 11% in the 12 months through March. On what basis is the market recovering? Oliner: “Prices began to rise, especially in areas which were severely affected by the bursting of the bubble, such as California. But the recovery is still in the early stages, and comes after a very sharp drop in market activity as a result of the 2008 crisis. In fact, new construction has not yet returned to a normal level, or even close to it.” There are claims that the recovery is driven by investors, rather than by the general public. “Investors are now taking a larger share of the housing market, far beyond the normal proportion. They are buying cheaply, renovating, renting, and expect to sell at a higher price later. In my opinion, this is a helpful development, because we have a shortage of rental properties, and this offers a solution for people who cannot really buy a home now in their current financial situation.” Land lottery Oliner’s name appears in the bibliography of a Bank of Israel research report published two weeks ago, in which there appears, for the first time, an index of the change in residential land prices. Surprisingly, the US does not yet have such an official national index of changes in land prices, even though the value of land was $17 trillion in 2006. “This is a noteworthy lack, which is why I would like to see the index I developed with my former colleagues at the Fed made accessible to the public. To the best of my knowledge, the Fed is seriously considering publishing the index on its website regularly.” Oliner’s last position at the Fed was senior adviser at the Division of Research and Statistics. He and his colleagues examined 180,000 land deals, which were defined as the sale of an empty lot or a lot with buildings slated for demolition, in 23 areas in the US in 1995-2009. If you thought that home prices in the US were volatile, you haven’t seen the graph of land prices, which rose fairly modestly in 1995-2002, but then jumped by an average of 135% in 2006, and by even more in East Coast cities. The bursting of bubble in that year sent prices down by more than 50% by mid-2011. The home prices index includes the price of land and the cost of construction. The fact that land prices rose and fell much faster than home prices (according to the Case-Shiller Index) in the current business cycle indicates that land prices are more volatile. Oliner attributes this to “supply rigidities”. “When demand for homes or commercial real estate grows, the supply of zoned land does not increase at the same rate as the number of workers or the amount of building materials. As a result, land prices tend to rise much more than the prices of other new construction inputs.” Should zoned land be a rationed product that drives up the price? “That’s a tough question. I think that regulatory review is required when land is rezoned. In the US, the changes mostly include the release of farmland at city margins for residences and commerce. This is a sensitive issue because the value of farmland is derived from its use to produce food, as well as for protecting open spaces. Uncontrolled changes are liable to result in urban sprawl, and we’ve seen ever-worsening traffic problems in constantly growing cities. “On the other hand, landowners want to protect property values, so they aren’t interested in increasing the supply, even if there is a social advantage. There are places where the land shortage is clearly dictated by the interests of landowners and homeowners. But there is no need to go to the opposite extremes and not examine land rezoning at all.” It is odd to talk about land shortages in the US. “The issue is not a shortage of land, but of deciding the best use for it. Opinion in the US about the direction of development is changing. There is a switch to the redevelopment of urban centers, partly because baby boomers whose children have grown are not interested in continuing to live in a big house in the suburbs. In addition, for municipalities, population density reduces necessary investment in highways and railways. It also creates a vibrant urban environment, which is something that we in the US are beginning to appreciate. In this sense, we are now catching up with the rest of the world.” Oliner currently serves as a resident scholar at the American Enterprise Institute. He advises lenders and borrowers to take into account the huge volatility in land prices when using land as collateral and on setting financing rates. In addition, in areas where land value is a large part of a home’s price, he emphasizes that loans should be granted especially conservatively. “The Fed is definitely worried about the day a reduction in quantitative easing is announced, even if is a drop in purchases to $60 billion a month from the current $85 billion,” says Oliner. “This will be a serious challenge, because the market has a tendency to over-react to any major change by the Fed. The market will conclude, mistakenly, in my opinion that a halt in purchases also means a halt in expansionist policy in general, including interest rate policy, more quickly than the Fed believes.” Oliner visited Israel to attend the 2013 American Real Estate and Urban Economics Association International Conference held on June 23-26 at the Hebrew University in Jerusalem. He participated in a panel on monetary policy after the global crisis together with governors and several officials of central banks from around the world. Negligible US interest rate until 2015 “The central bank really tries to manage market expectations, but it is not easy to communicate with the public, especially when working on two monetary fronts. Ending expansionist policy in the coming years will be a pothole-filled road,” says Oliner. The second front that Oliner talks about is the US interest rate, which most members of the Board of Governors of the Federal Reserve System believe will remain near zero until 2015. “The Fed has set thresholds, the crossing of which will set off a debate on raising the interest rate. An unemployment rate of 6.5% is one of them. The second, in general, is that inflation should remain under control. Since the unemployment rate is currently 7.5%, we are far from the unemployment threshold, and therefore from an interest rate hike,” he says. “It should be remembered that these thresholds are relevant only for interest rate decisions, and not for bond purchases, for which no quantitative threshold has been set,” says Oliner. “The Fed will begin to reduce its purchases at the same time as a sustainable improvement in the labor market. We’re not there yet, but if there will be several good monthly job figures later on, I see this happening in the fall, possibly in September.” “I believe that the purchases will stop altogether in the first half of 2014 and that the interest rate will remain negligible into 2015.” Published by Globes [online], Israel business news – www.globes-online.com – on July 1, 2013 Continue reading
