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IMF Warns Of Significant Downside In Home Prices Worldwide

 …The International Monetary Fund (IMF) warned this week in its regular Financial Stability Report that global home prices are now stretched. Stimulus policies backstopped the market, creating moral hazards. Buyers now have a “can’t lose” feeling,…

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 …The International Monetary Fund (IMF) warned this week in its regular Financial Stability Report that global home prices are now stretched. Stimulus policies backstopped the market, creating moral hazards. Buyers now have a “can’t lose” feeling, pushing them to pay risky premiums for property. As a result, the agency now sees a significant downside in a worst-case scenario. Their model shows the worst-case scenario has double the downside compared to pre-pandemic.

Home Prices Have Been Soaring Across The World

Home prices across the globe have been rising during the recession, which is odd, to say the least. They found soaring home prices and record sales in advanced and emerging economies. The agency attributes this to supply asymmetries, low rates, and rising disposable income. These factors have combined to drive demand (and prices!) much higher.

Typically housing correction risks are due to loose lending, and a recessionary shock. They say this isn’t the case this time. Banks are in a much better position than they were during the Global Financial Crisis in 2008. Forbearance policies have also pushed delinquencies lower, skewing price growth to the upside. This gave homeowners a significant equity windfall, sometimes exceeding their household income.

Rapidly Rising Home Prices Across The Globe IS The Risk

Rapidly rising home prices and lofty gains are the risks. A boost to home equity gives some people a cushion to weather a storm, but also a euphoric high. Lenders eliminating the risk of default and high price growth created moral hazards. The thinking has shifted to, “if they can backstop prices now, they’ll always do it!”

The IMF warns this moral hazard is creating a risk of people believing any price is justified. “Sustained periods of rapid growth in house prices can create the expectation that such prices will continue to rise in the future, potentially leading to excessive risk-taking and rising vulnerabilities in housing markets,” wrote the agency. 

People now think the risk of paying more later will always be greater than the risk of losing. This can lead to paying premiums that don’t make sense in practical terms. This can get out of hand pretty fast.

Global Home Prices Have “Significant” Downside Risk Now

Just how bad is the downside risk? “Significant,” said the agency when discussing its worst-case scenarios. In the latest report, the IMF said advanced economies can see a 14% drop in prices on average (rolling back 17% of gains). This is up from the 6% drop in the worst-case scenario pre-pandemic. The timeline for the bottom would be three years after the peak.

Downside Risks For Home Prices In Advanced Economies Rises

The current probability density of home price movements in advanced economies, compared to pre-pandemic risk.

Source: The IMF.  

The IMF elaborated, the downside risk is relative to the country’s fundamental misalignment. Countries with a low disconnect from fundamentals would see smaller declines, if any. Those with large disconnects would be overrepresented, and see greater drops. One also assumes the effectiveness of policy support plays a role. An inefficient market can only be extended so long before it spills over into other issues.

Market Inefficiencies May Begin To Spill Over And Undermine The Recovery

Speaking of market inefficiencies, why can’t they just prop up prices to infinity? Well, another risk stated in the IMF report is the impact on inflation. If high home prices trickle into rents, this drives inflation higher. Shelter costs are the largest component of the inflation basket. Everyone needs shelter, including all of the producers and service people. As their costs rise, so do the input costs of goods and services.

The higher cost of living, especially inflation not captured by CPI, becomes a big drag. As the cost of living rises, more capital is diverted from spending into essentials. Since one person’s spending is another person’s income, it can undermine recovery. A slower recovery (or double-dip recession) would end up impacting home prices anyway.

Remember, global home prices are rising, but not to the same extent everywhere. Canada and Germany’s home prices made much sharper gains than other G7 countries…

Editor’s Note:  The original post by Stephen Punwasi has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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Highlights of My Weekly Reading and Viewing

Timothy Taylor, “Some Economics of Pharmacy Benefit Managers,” The Conversable Economist, September 28, 2023. This is the nicest treatment of the facts…

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October 1, 2023

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Timothy Taylor, “Some Economics of Pharmacy Benefit Managers,” The Conversable Economist, September 28, 2023. This is the nicest treatment of the facts that I’ve seen. I confess that I’ve seen PBMs as something of a black box rather than doing the standard middleman treatment that Tim does.

Tim highlights the work of Matthew Fiedler, Loren Adler, and Richard G. Frank in “A Brief Look at Key Debates About Pharmacy Benefit Manufacturers,” Brookings Institution, September 7, 2023.

Ending paragraph:

As in most economic discussions about the role of middlemen, it’s important to remember that they (usually) don’t just sit around with their hands out, collecting money. Some entity needs to negotiate on behalf of health insurance companies with drug manufacturers and pharmacies. Some entity needs to process insurance claims for drug prices. I do not mean to defend the relatively high drug prices paid by American consumers compared to international markets, nor to defend the costs and requirements for developing new drugs, nor to defend some of the mechanisms used by drug companies to keep prices high. But while it might be possible to squeeze some money out of PBMs for slightly lower drug prices, and it’s certainly possible to mess up PBMs in a way that leads to higher drug prices, it doesn’t seem plausible that reform of PBMs is going to be a powerful lever for reducing drug prices.

Thomas W. Hazlett, “Maybe Google Is Popular Because It’s Good,” Reason, September 27, 2023. I think Hazlett is the best writer in economics. This piece is a good sample.

An excerpt:

The innovation was simple in design, complex in execution, and radical in result. The business achieved a rare triple play: First, a robust new web crawler devised a superior method for finding and tagging the world’s digital content, deploying cheap PCs linked in formations to achieve momentous computing power (Brin’s genius). Second, this more prolific database of global digital content was better cataloged. A clever “Page Rank” score evaluated keyword matches, countering the influence of scammers by scrutinizing the quality of their web page links (Page’s inspiration). Third, “intention-based advertising” displayed commercial messages to searchers self-identified as ready to buy. For instance, the internet user wondering about “coho salmon, Ketchikan, kids” gave Hank’s Family Fishing B&B in Alaska a digital target for its 10 percent off coupon, while signaling to Olay not to bother advertising its skin care products. This solved the famous marketing dilemma: “I know I’m wasting half my ad budget, I just don’t know which half.” Businesses loved these tiny slices of digital real estate, and Google mined gold.

Fiona Harrigan, “America’s Immigrant Brain Drain,” Reason, October 2023.

Excerpt:

In June, The Hechinger Report outlined how foreign governments are welcoming U.S.-trained international students. The United Kingdom offers a “high potential individual” visa, which authorizes a two-year stay and is available to “new graduates of 40 universities….21 of them in the United States.” Recruiters from Australia are “attending job fairs and visiting university campuses” in the United States. From 2017 to 2021, according to the Niskanen Center, a Washington-based think tank, Canada managed to attract almost 40,000 foreign-born graduates of American universities.

Most international students want to stay in the U.S. after graduating, but very few are able to do so. The U.S. does not have a dedicated postgraduate work visa. Canada and Australia, meanwhile, have streamlined the steps from graduation to employment to permanent residency. Graduates in the U.S. can complete Optional Practical Training, but it does not lead to permanent residency and lasts a maximum of three years.

Personal note: Actually the maximum of 3 years for Practical Training sounds good. When I took advantage of the F-1 Practical Training visa to be on the faculty of the University of Rochester, the max was only 18 months.

David Friedman, “Consequences of Climate Change,” September 24, 2023. David does his typical calm, clear, masterful job of laying out the facts. He takes the IPCC reports as given and then follows the implications, uncovering a lot of misleading claims in the process. While David takes as given that the earth will heat about another degree centigrade by about the end of the century, he lays out why we can’t be sure that the net effects are negative or positive. Watch about the first 35 minutes of his speech, before he gets to Q&A. I would point out highlights but there is zinger after zinger. And he references his blog and his substack where you can get details.

The pic above is of David Friedman giving his talk.

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Russia’s Military Budget Set To Rise By 70%

Russia’s Military Budget Set To Rise By 70%

Via Remix News,

Russian military spending is set to rise by almost 70 percent — to €106…

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Russia's Military Budget Set To Rise By 70%

Via Remix News,

Russian military spending is set to rise by almost 70 percent — to €106 billion — by 2024, according to a Russian Finance Ministry document published Thursday, an increase that illustrates Moscow’s determination to continue its military intervention in Ukraine despite the human and economic costs.

According to the document, Russian defense spending will increase by 68 percent in 2024 compared to this year and will reach 10.8 trillion rubles (€106 billion).

As a result, the amount allocated to defense will represent about 30 percent of total federal spending in 2024 and 6 percent of GDP — a first in Russia’s modern history.

The budget for internal security is set to rise to 3.4 trillion rubles (€33 billion), almost 10 percent of annual federal spending.

The priorities for this budget are outlined as “strengthening the country’s defense capacity” and “integrating the new regions” of Ukraine whose annexation Moscow has demanded, as well as “social aid for the most vulnerable citizens,” just months ahead of the Russian presidential elections in spring 2024.

Conversely, total spending on education, healthcare and environmental protection accounts for barely a third of the defense budget, according to ministry figures. Overall, federal spending will total 36.7 trillion rubles (€359 billion), a dramatic 20 percent increase over 2023.

The government, however, has explained little about how it will finance this large increase, as Russian Prime Minister Mikhail Musustin said last Friday that revenues from the sale of hydrocarbons will be down sharply and will account for “a third of next year’s budget” in 2024, whereas before the invasion of Ukraine, they accounted for half the budget.

The sector used to drive Russia’s growth, hydrocarbon sales are declining due to international sanctions and the European Union’s determination to move away from energy dependence on Moscow.

One indication that the government expects a delicate month ahead for the Russian economy is that it has announced that it has based its budget forecast on the assumption of a dollar worth around 90 rubles, thus betting on a weakening of the national currency in the medium term. The draft budget law for 2024-2026 is due to be sent to the State Duma, Russia’s lower house of parliament, on Friday.

Tyler Durden Sun, 10/01/2023 - 08:10

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Atlantic Overfishing: Europe’s Worst Offenders

Atlantic Overfishing: Europe’s Worst Offenders

Each year, agriculture and fisheries ministers decide on total allowable catches (TACs) for…

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Atlantic Overfishing: Europe's Worst Offenders

Each year, agriculture and fisheries ministers decide on total allowable catches (TACs) for commercial fishing.

Scientific bodies, such as the International Council for the Exploration of the Sea (ICES), provide information on the state of fish stocks around the world and recommend maximum catch levels per zone to ensure sustainable fishing.

However, this scientific advice is all too often ignored by the authorities, jeopardizing the sustainability of marine resources.

Statista's Martin Armstrong shows in the following infographic, based on the latest report from the New Economics Foundation, these European countries are the worst offenders for this, having on numerous occasions set their fishing quotas in the North-East Atlantic in excess of the sustainability recommendations in recent years.

You will find more infographics at Statista

Sweden exceeded its recommended TAC by almost 33 percent in 2020 (the latest year available), equivalent to 12,000 tonnes of fish, followed by Denmark (6 percent, 20,000 tonnes) and France (6 percent, 17,000 tonnes).

Ireland, Belgium, Spain and the UK all exceeded their targets by between 2 and 4 percent.

The year before, in 2019, the overshoot of the sustainable fishing threshold in the zone was even more pronounced: 7 percent of the recommended TAC for Spain, 9 percent for France, 10 percent for Belgium, 18 percent for Germany, 20 percent or more for Denmark, the United Kingdom and Ireland, and 52% for Sweden.

Tyler Durden Sun, 10/01/2023 - 07:35

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