Michael Khazin: Real estate could collapse in the price of 5 times

29.09.2010 09:01
Michael Khazin: Real estate could collapse in the price of 5 times Topic of high house prices periodically, and was constantly on all resources, with at least some relevance to the economy. And I think that is worth discussing this topic.

True, not in terms of a specific price for a specific property, but in terms of reasons for high growth and, consequently, the situation when these causes cease to operate.

We begin with 1981, when it became implement policies, was subsequently called "Reaganomics." The essence of this policy was in constant increase household demand by pumping money by lending. But incomes were falling all the time (although not as fast as in 80-ies), and household incomes have grown only by the fact that more women started working. However, they have grown slightly, and in recent years generally have to fall again, but is not the case, and that at this point the general concept of economic growth came into conflict with the position of individual banks.

The fact that the very model of loan incentive assumed (explicitly or implicitly) that consumers will gradually move from the return of loans from its own revenues exclusively to their service. Which means that the actual return may be exercised only at the expense of lending - that is, by taking new loans, of which must be carried out and return the old ones. Since the main purpose of this policy was to increase demand, then each additional credit should not be just more than the previous, but more than the previous and the interest thereon. And for that, when the cost of services has not grown too much, the Federal Reserve is constantly lowers the cost of credit.

But here, for each specific bank situation was quite complicated. The bank can not afford to give credit to the borrower who can not explain how he will return the loan. Count on the fact that some other bank will lend, from which will be returned to the previous - naively, in practice, no one ever does. How could then operate the system of "Reaganomics," taking into account the fact that household income is at least as rapidly growing, and often fell down?

Partly situation massaged statistics. It was after the beginning of "Reaganomics" started active manipulation of statistics, particularly on inflation, thereby creating an illusion of growth in incomes, wages have grown since the denomination, and the real purchasing power has been hidden under-inflation. In other words, the banks made a profit in the increasingly weakening dollar. However, since the loans still are not in purchasing power, and at face value, then again, part of a negative effect on the impossibility of repayment of loans covered by this. But only part.

Hence, a fundamental task in the process of implementing a policy of "Reaganomics" was the creation of a system providing "guarantees" repayment of loans, as households and businesses (mostly small and medium, large are other tools). And the most natural option was the creation of all potential borrowers of adequate security, bond, for which ideally performed real estate. Accordingly, the program loan incentive households received a serious bias towards the mortgage on the property began to swell serious "bubble". And the more it swelled, the better it was to take a new mortgage secured by the rising cost of real estate, the greater was the amount of the mortgage, the more bloated real estate bubble. And today, the majority of household debt in the U.S. - this is mortgage debt.

We will not describe in detail the bubble, it is not the subject of this text, but note that this situation could have become not only the result of meaningful programs, but also emerge quite spontaneously, so if the idea of constant growth of lending to households has become dominant, and the risks it has become fashionable ignored. But the result is that we have today can accurately predict the situation.

Not only in the U.S., but around the world share of financial assets relative to real a lot higher than they were 30 years ago. And if you look closely at the chain of security for loans, they are all directly or reduced to collateral assets (most of which - the real estate) or to provide commercial and consumer demand, and the first to go through the chain of sales still comes down to the second, a significant portion which is the origin of the credit, again, secured by real estate. In other words, much of the modern economy, especially its financial part, there is only so long as there is a property with a high price.

It is for this reason that the banks at any cost try to keep the high cost of real estate. Records in personal bankruptcies and defaults on mortgages in the U.S. does not give rise to market a large number of low-cost housing: the banks that have excess liquidity, just buy it from each other at high prices. Yes, of course, keep it on the balance of expensive - but the loss of her impairment would be an order of magnitude stronger.

Of course, as the crisis will be reduced and the scale of the financial sector and real estate prices. According to our estimates, the fall of the U.S. GDP will be up to the crisis, approximately 55-60%, but the real sector during this fall by 35-40 per cent of the total, but financial - in 3-5 times. Thus, the proportion of the latter in overall corporate profits will fall from the current more than 50% to, at most, 20%, at least - will return to normal values of the first half of the twentieth century, that is 10%.

This is the scale of the fall in average house prices: from 2.5 to 5 times. Of course, each particular object, this estimate does not apply, but the effect on the whole is almost inevitable. Of course, the state by varying taxes, this scale may decline somewhat to adjust in one direction or another, but can not fundamentally change. However, note once more, this decline will inevitably be accompanied by the destruction of the existing financial system.
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