Published at Sunday, February 17th, 2019 - 05:19:57 AM. House. By Diki Assidiqi.
The Macro-Dynamics of the US and the Canadian Housing Markets: An Analytical Comparison Introduction: This article examines three key fundamental questions: (1)-Would the US housing market face any reversal given what is happening in the US and global economy? (2)-As predicted by some pundits, would the Canadian economy undergo any serious correction? (3)-What are the key macroeconomic factors which impact the Canadian and the US housing markets? And using this framework what predictions can we make both for short and long term trends of real estate markets? The US Housing Market: Its Evolution from Crisis (2007-2008) to Present: The US housing bubble was created by Steroids Banking using Securitization process and taking advantage of low interest rates and massive inflow of investment money from abroad. The housing prices in most regions almost doubled 2001 to 2006; and subprime lending escalated astronomically. The private Mortgage banks were applying their creativity and greed in designing highly risky esoteric mortgage products using the Securitization process. What is Securitization? Put simply this is packaging of mortgages (including subprime) into structured products (Mortgage backed securities, Collateralized debt obligations). The manufacturing mortgage bank then removes these esoteric products from its balance sheets to minimize any risks and sells these products to institutional investors using SIV (Structured investment vehicles). The buyers of these products erroneously assumed that the underlying mortgages of these securities were safe collateral given upward trending housing market. However, when subprime mortgages defaulted and housing market began to sink, these structured products built around defaulting mortgages fell sharply in value, thereby freezing the entire global credit system. Added to this turmoil was dilution of commercial paper because of potential default of big lending institutions. The global financial system was under siege. Ironically, the Credit default swaps, which mean to insure against default of these mortgages collapsed under their own weight, thereby reinforcing the Credit crisis. The US Treasury and the Fed intervened and injected trillions of dollars to save the collapsing US Housing and Banking system. This crisis is a classic example of Moral Hazard issue. Who was responsible for over-leveraging the system beyond its buoyancy point? Technically the Mortgage banks had packaged the mortgages and passed on the risks to the institutional investors. The institutional investors made the wrong assumption that the US housing market will move North forever. The Fed and other institutions did not have a proper regulatory-monitoring structure as envisioned in the BASEL guidelines to avert such over-leveraging. Nobody knew who will be responsible if the edifice collapses. Worst of all, the institutional investors assumed wrongly that the Credit default swaps (CDS) instruments would work miracles; and bail out defaulting mortgages. This is known as Moral hazard problem. Ultimately everybody was looking forward to the Fed and the Treasury to bail out the global financial system from reaching the doomsday. The US Housing Market in the aftermath of Crisis: The Mortgage Delinquency Rate (MDR) is a key metric that speaks of the real fallout of the US housing crisis (2007-2008). It measures the percentage change in delinquency of residential loans. In June 2007, the MDR was 2.17% and reached its highest level in March 2011 at 11.36%. It recovered back to 2008 levels at 10.4% recently. MDR is a key lagging indicator that reflects economic difficulties. Another key metric reflecting the state of housing health in the US is the S&P/Case Shiller Home Price Index. This is an index reflecting change in housing prices of 20 (and 10) key US metropolitan areas. The home prices in April 2012 for 20-city composite have reached the level existing in the start of 2003. In April 2012, the home prices have declined about 34-35% from its peak level in 2006. The main reason for a stagnant US housing market as evidenced from the MDR data is a fragile labor market. Slow job growth rate is due to weak consumer spending, which is the 70% component of real GDP and key driver of job creation in the US. Consumer spending is directly related to job growth rate, the saving rate and the consumer confidence. In an uncertain environment, spending falls and both the US dollar and saving rate increases. Although savings are recycled by the intermediaries as investments for businesses, this does not necessarily translate onto investment spending and GDP growth. Companies in a high risk environment aim to trim their balance sheets by paying off their debts, a process called as deleveraging. They do not want to burden their balance sheets by borrowing from banks. This deleveraging process slows down the level of investment in the economy thereby indirectly moderating the job growth rate. Deleveraging also runs counterproductive to low interest rates and impedes growth in jobs and therefore fast recovery of real estate prices. Why the Canadian housing market is not poised for a serious correction? The Canadian Mortgage system is more robust and conservative than the one prevailing in the US. First of all, the Canadian subprime market is only 5% of total outstanding mortgages whereas during its peak years 2004-2006, the US subprime market captured 25% of total outstanding US mortgages. The Canadian mortgage system executes better risk management tools including limited exposure to securitization and tight lending practices backed by insurance mortgage. The recent changes in the Mortgage lending have further tightened the belts to avoid any risks to healthy housing in Canada. The supply and demand conditions in Canada are monitored by all players actively. There is a great degree of transparency and authenticity in the housing data and practices. Supply dovetails both current and future demand leaving little room for creation of bubbles. Remember bubbles happen when there is a huge undiscovered lag between supply and demand. For example, there is an anticipated constraint of commercial real estate supply in the wake of surging demand both in Toronto area and Western Canada. A large number of Canadians are currently disillusioned by lower and volatile investment returns in the core financial assets, stocks and bonds. The ongoing volatility in the Capital markets is expected to last in the next few years, given some long lasting problems like risks of Sovereign debt crisis in Europe & the US. This situation has mobilized a great number of people to invest in real estate as most viable alternative investment in the wake of record low interest rates. This process might continue for some years as the core financial assets (stocks, bonds and mutual funds) may not pick up momentum soon. The concept of a bubble is not quite relevant in the context of the Canadian housing market. This is explained in terms of a typical sales cycle witnessed in Toronto and other places in Canada. The sales cycle woven around tighter demand-supply conditions mitigates the probability of bubbles. For example, in Toronto, condos are sold or flipped by investors, who generally do not live in those condos. When interest rates would inch up in future, these investors will find it difficult to keep highly expensive condos. They will sell these condos putting downward pressure on prices of the condominium market. Intuitively, the falling prices will give opportunity to new immigrants and other investors to purchase condos, as they could not previously afford it. This process is further strengthened by different ethnic groups who support their new immigrant friends and families toward the purchase of their first homes in Canada. Overall these processes would push prices upwards again. To conclude, given these tight supply-demand conditions, the chances of any serious correction are quite minimal in Toronto. What are the Macroeconomic factors which impact the prices of Real Estate? Interest Rates and Inflation: Interest rate is the price of money. It is determined by supply and demand of loanable funds. However the countrys Central bank can greatly influence the rate by tightening credit conditions or making those relaxed by pumping money into the system. This is typically done through Monetary Policy and open Market operations. Lower rates make it cheaper for potential buyers to borrow money and make purchases. It also helps current homeowners to refinance their homes and save money. All this will lead to stronger demand for mortgages and housing. Increasing rates will have the opposite effect and dampen the level of sales activity in the Mortgage market. Carry forward trades, borrowing at lower rates in one region and investing it in other, also indirectly impact real estate. For example, foreign institutional investors can borrow money overseas at cheaper rates and invest in Canadian real estate market. More important, real interest rates equal nominal rates minus inflation. Rising level of inflation will lower the real interest rates and declining levels will inflate real rates. Inflation typically feeds into asset prices including real estate. Tightening of money supply is done to control inflation, and this process leads to rising interest rates. Easing of money supply is done to trigger growth and this is accompanied with declining interest rates. However greater supply of money and rising oil prices (supply side) feed into inflation and ultimately inflates asset prices. Economic Growth, Consumer spending and Employment level: Economic growth is measured by growth in the real GDP. Slowdown in economic growth-both global and regional-raises fears of deflation or declining prices, which does not bode well with overall economic affluence. Deflation can be compared to freezing of an economy. Japan experienced sustained recession due to deflation for a long period. Fear of deflation due to declining growth can have negative impact on the real estate market. Labor Market dynamics and in particular the level of unemployment has a critical relationship to the health of the housing sector. Rising unemployment during recession is often accompanied with low housing demand and mortgage delinquencies. For example, when Enron crisis erupted, there was general softening in the regional housing market. Another example is the current state of the US housing market. Economists say that the slow pace of housing recovery is attributed to a stagnant US labor market, which is stuck up at over 8% of unemployment rate. Consumer spending plays a key role in the US while the export sector plays an important role in China. As well in Canada, consumer spending has correlation to the GDP growth. In case of the US, Consumer spending constitutes 70% of GDP and is therefore most important driver of GDP growth rate. Higher consumption level, driven by consumer confidence levels, leads to greater economic (job creation) activity and ultimately translates into greater demand for housing. Surging consumer debt, as it is happening in Canada, is also not healthy for a sustainable consumption and GDP growth. Over-leveraged consumers do not have the capacity to absorb shocks like layoffs or increase in interest rates & inflation. Institutional Capacity of Economy to absorb External shocks: The housing crisis of 2007-2008 contaminated the global financial system. The Fed and G-7 countries had to undertake unprecedented bail out measures to save the global financial system from getting derailed. Fortunately, the Canadian housing market was resilient enough to absorb the shocks and did not sink. This happened because of a relatively conservative mortgage system prevailing in Canada. Regulatory measures also impact the resilience of the housing market. For example, tax credits in the US had triggered growth of the housing sector in the aftermath of crisis. Canada has applied its regulations to keep the housing sector strong and healthy. Demographics and Migration: These play an important role in shaping the long term prospects of the real estate market. In Canada and the US, the aging population of baby boomers will create more demand for residential and vacation homes in the next decade. International migration to Canada is also an important determinant of housing market in Canada. Technology, Oil-Commodities boom and Exports: The Canadian economic and housing activity is also impacted by three external forces: Chinese Investors, Oil-commodities prices and economic activity in the US. The Western Canada is impacted by the level of Chinese and foreign investments, mainly in the Mining and Oil sector. The Eastern region, mainly Ontario and Quebec, is impacted by the level of exports to the US and therefore indirectly on the state of the US economy. Stronger Canadian dollar does not augur well for exporters. Overall, the Canadian economy and dollar are strengthened by rising demand for Oil and commodities. National Level of debt: In the US, the national level of debt is reaching about $14 trillion and will continue to grow in the years to come. National debt piles up due to persistent fiscal deficits in the economy. In the US, there is a challenge of twin deficits-both fiscal deficit and external imbalances. The twin deficits not only lead to faster growth of national debt but trigger anticipation of higher interest rates and inflation. This happens through the following mechanism: Higher debt in the US is monetized by either selling bonds to China (or other surplus countries) or by printing money from thin air. In either case it leads to greater risks and consequently higher interest rates, fast depreciating currencies and therefore more inflation. Some economists say that if debt is not contained by the US policy-makers, we may enter an era of hyperinflation where all asset prices (including real estate) will become very costly. Applying Macroeconomic Framework to analyze current & future trends: (I)-Current Global Economic Outlook: The global economic growth is expected to moderate in 2012 (and perhaps 2013). Concomitantly, the global real estate market is cooling down a bit. The moderation in growth is spread unequally across different geographical regions. In the US, which been the central point of housing crisis, there is some improvement in key housing indicators. Given sustained low rates, minimal probability of deflation (freezing of economy) and complete preparations by European Central Bank to cope with Eurozone debt crisis-there is less likelihood of any major reversal to the US economic fundamentals and therefore the housing market. The key emerging Global housing trends are captured in the following summary: (A)-The battered US housing market is relatively stable, with less increase in foreclosures and mortgage delinquencies. The US market is currently an ideal buyers market. However, there will be a substantial lag time before we can witness a complete turnaround in the US housing market. (B)-The vibrant Canadian housing market is generally perceived to be ready for some correction in 2012 and 2013. Chart V shows key housing trends in Canada. (C)-The European housing market is (and will in future) undergoing a degree of correction. This stems from recent fiscal crisis in Europe as well as fragility of the German economy exposed recently. The housing market in the emerging global economies is also cooling down a bit. (II)-Some Predictions using the Macroeconomic Framework: The short term perspective of the Canadian housing market might witness come corrections in 2012 and 2013, but as argued in this paper this will be minimal. Also, as argued further, the commercial real estate market will stay steady and strong in 2012 and 2013 in Canada. Given the complex interplay of global economic forces and what is happening in the Eurozone and the US in terms of debt crisis, it is rather difficult to make any certain long term predictions. However, growing complexity warrants a more holistic inter-market analysis to predict about the real estate trends. The seven key global economic trends of the next decade can help us understand the future real estate prospects as well. These seven trends are as follows: (1)-The bubble of Sovereign debt crisis in the US and Europe will last for sometimes, at least next decade. Governments in this part of the world are running unsustainable massive debts, which will ultimately put an upward pressure on inflation and interest rates. (2)-The clear outcome of (1) above will be depreciating value of currencies. (3)-Another consequence of (1) above will be fragile and volatile bonds and stock markets. (4)-Commodities, gold and some alternative investments will become attractive as they will be perceived to store real value. Currencies, stocks and bonds will depreciate fast. (5)-Inflation will be triggered by massive monetization of debt (printing currency from thin air). This situation may be exacerbated if China pulls out trillion of dollars of US bond purchases it made in the last decade; and if oil prices continue to move north. (6)-Demographic trends entail growth of baby boomers in North America and Europe leading to migration to North America. (7)-The US dollar will not evaporate because of spectacular performance of the US companies and technological advancement in North America. Given these seven key economic trends of the next decade, the housing market will stay vibrant and steady in Canada and the US. Baby boomers, foreign investors and immigrants will continue to play a critical role in strengthening the housing demand in North America. Hyperinflation, as worst case scenario, might pull down demand of assets because it would stoke prices of those assets including real estate. At this stage, however, it cannot be predicted whether the European and the US governments will take concrete measures to contain their debts and put in place sustainable debt management policies. Future events will unravel the political commitment of these governments. At this stage, one thing is certain: the current debt monetization policy of these governments is not sustainable in the long run.
Writing Haunted House Stories - Building Atmosphere Through Setting : Atmosphere strikes your character with unease. Consider the houses that might be in your neighborhood. You know the one: Its the house that pedestrians cross the street to avoid. Its the house that high school students dare to spend a night, beyond the creaking doors to warily explore the strange whimpers within its indefinable shadows. Even though nothing tangible has actually occurred, your characters are afraid. This fear comes from the atmosphere: The setting that surrounds your house and your characters. Atmosphere is the mood, and that mood should haunt your readers long after the story is over. So where do you begin? Creating a haunted house story is a frightening and daunting task. To make things easier on yourself, establish the date and time from the beginning of your story. If you write a prologue, begin the story with your date and time or, at the very least, give hints to the decade. Perhaps your character is listening to Disco Inferno just before a psychopath sets the house on fire. Perhaps your character is trembling in the shadows, her bonnet is drenched with perspiration and shes praying for her lantern to stay lit long enough to be rescued. This not only establishes your setting, but also gives you a chance to add a bit of dimension and foreshadowing to your story. Haunt Your Readers Using the Correct Word Using the right word can also establish the setting in your haunted house story. Consider this sentence: Beverly Harris walked into the house. Not very creative at all. Theres barely a setting and the action is not very descriptive at all. Lets try another set of words: Beverly, overwhelmed with incipient danger, crept through the doorway. Better. Crept is a stronger description than the word walked. This is an acceptable description that readers would more likely enjoy. But couldnt we write this sentence in fewer and more ominous words? I think we can: The house consumed her. Ominous, descriptive and simple. This causes the reader to feel discomforted; therefore, empathetic which should be your goal as a writer. To make your readers feel what your characters are feeling. Location, Location, Location Your haunted house is a character just like the rest of your cast. It should have a personality. It should draw your characters into it, much like a protagonist is hunting for a villain. It should have a personality and a history. Your protagonist wants something and your house wants something too. So what kind of personality does your house have? Consider the location. It could be a bayou mansion decorated in a French-Creole, or maybe its a simple two-story cabin in Washington State like in Stephen Kings Alan Wake. Perhaps its even more classical such as a fortified castle located on top of a sheer cliff above a sleepy village. Each of these houses should reflect its geographical location, and its personality should be revealed through the protagonists perspective. If your house could speak, would it have an accent? How would you show that? The décor? The architecture? The location of your haunted house defines its personality. Let it speak. Let it lure your protagonist back into its swampy tendrils. Other ways to give your house a personality through the setting is by re-establishing the environment according to how people speak in their geographical region. People in the Deep South speak differently to each other in Miami and people in Miami speak differently than people in Montana. People gossip about each other and every person has a different perspective on life. Apply that to your haunted house. No matter the geographical location, your house has a back-story and people will gossip about it. What they say and how they say it can reveal more of your houses personality. Each time your character hears a story, his or her perspective will change. For example, The Infinite written by Douglas Clegg, some of the characters that stay in the Nightmare House see it as just an ordinary house at first. Once they begin to hear the strange stories, the paranoia begins to take over and pretty soon the house takes on a more sinister appearance. No, it doesnt physically change. What changes is the characters perception of the house. Your house is another character that deserves to be gossiped about. Everyone has secrets; your haunted house does too. Originality is Vital There are already a number of haunted house movies and books that take place in all kinds of environments all over the world. There are literally hundreds if not thousands that take place in a haunted cabin in the middle of the woods. In order for your horror story to survive the cutthroat competition, it must be unique. It must bring something new to a concept that has been done over and over again. Being unique is vital for your story to survive. Creative writers must be flexible. Instead of a haunted cabin in the woodsy Canadian mountains, perhaps your story is about a haunted floating home in the Puget Sound. Or maybe consider moving your cliché southern plantation to the sunny beachfront tropics of Africa surrounded with palm trees, monkeys and deadly spiders as big as a coconut. Originality doesnt have to be that extreme either. Perhaps your setting is in the Colonial American suburbs of Massachusetts but the architecture is ultra-modern. One last thing to consider when choosing an original setting for your haunted house story is the lighting and ambience. Remember that the farther your house is to the equator, the more drastic your hours of day and night become. A haunted house located in lowest parts of South America, for example, will spend at least a full month in total darkness in the winter and a full month of total daylight in the summer. Enter If You Dare H.P. Lovecraft was a master at building atmosphere through setting. He used the description of the landscapes and neighborhoods to give the reader an ominous feeling long before his character even approaches the house. Take this example from The Picture in the House: ... They climb to the moonlit towers of ruined Rhine castles and falter down black-cobwebbed steps beneath the scattered stones of forgotten cities... The haunted wood and the desolate mountains [are] shrines, and they linger around the sinister monoliths of uninhabited islands... But the true epicure in the terrible and unutterable ghastliness is the chief end and justification of existence, esteems most of all the ancient, lonely farmhouses of backwoods New England... Their strength, solitude, grotesqueness and ignorance combine to form the perfect portion of the hideous. This paints a very sophisticated picture using carefully chosen adjectives and a forward approach. Although H.P. Lovecraft has surpassed the expectation of horror in its finest excellence, award winning author Joe Schreiber writes a more literal description of the Round House in one of his most bone-chilling haunted house stories: No Doors, No Windows: ... It was sparse and plain and narrow, with a curved concrete floor and smooth, almost circular black walls that didnt look as though theyd been painted black but were somehow sculpted out of naturally black material-some substance that literally absorbed light. There were no doors and no windows. Although the passageway appeared to be straight, there was definitely some bend to it, some winding quality just outside the lighters glow. Both of these excellent examples describe the haunted house using atmosphere and setting in different ways. They work well because of the strong word choice and vivid, unnatural descriptions that go beyond the details of how someone would usually describe a house. Joe Schreiber didnt just blatantly say: The room was round. Instead, he painted a picture so vivid that the reader simply got a sense that this room was unnatural and no sane person would enter it -especially if he only possessed a lighter. When is a haunted house not a haunted house? A haunted house isnt always necessarily a house. It can be an apartment or a condo on the beach. Sometimes its a cemetery where spirits of the dead live, work and haunt like in Neil Gaimans novel, The Graveyard Book. Haunted factories, sanitariums, junkyards, prisons, schools, caves and even sewers could all potentially be haunted house stories. All the same rules apply.
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