New Onion

Developing a price index for Bermuda real estate is far more difficult than in the United States because every home is a custom home. In the USA you will have quite literally identical houses being built all over the country so they’re really a commodity and easy to index. A Vexed says:

The article claims that the average cost of a single family home is now just under a million. Meanwhile a January 2007 article from the same agency put the price at 1.325 million. That implies the average sales price of Bermuda real estate has dropped by more than 25% in one year.

Before we get hysterical, we need to remember thatbecause properties in Bermuda are all different, the median transaction price is not necessarily the same as the price change any given property from year to year. We can infer changes in the market’s demands, but because houses are not commodities, a decrease in year over year median price does not imply a falling market, and could instead reflect a smaller number of high-end transactions, or a larger number of low-end transactions.

A more careful and subjective analysis of comparative properties is needed to arrive at the actual year over year decline in what a property sold for last year compared to what it would sell today. I believe that at present we can have some faith in the agency’s estimate of a flat market with longer time on market, from which we can infer that if time on market does not stabilise or fall then prices will decline and may have already, sales price data lags as properties that come on the market today will not sell for months.

Next up… lending.

Here’s a neat interactive side by side comparison of healthcare systems internationally. Just something I stumbled across.

As I’ve said before - the only conclusion that an honest economist can make about healthcare is that one that is for fully private and for-profit is the worst possible solution and Japan, which from an economic perspective is one of the best healthcare providers is also the worst for the doctors. This is not a coincidence, and it looks remarkably like the Bermudian system.

It’s late, I’m tired, but two things happened today.

1. A realtor said that now is the time to buy (Bermuda Sun)
2. An analyst exposed that a bank faces writedowns from credit losses (Royal Gazette)

Oh. No.

I thought that the American “experts” suggesting a buying opportunity a year ago were dead wrong. While the focus of her words are on the residential owner-occupier who faces different constraints (a very long time horizon, the opportunity cost of renting vs. owning) The question is still: Is Bermuda headed the same place as the United States, Spain, the UK, and a number of other countries?

In the Bermuda Sun:

Market conditions for home buyers are the best they’ve been for 15 years, Bermuda’s largest realtor said this week.

The days of properties getting snapped up as soon as they come on the market are over - nowadays houses and condos may have to sit for months before a buyer comes along.

I disagree, and suspect that the piper is just showing up. Because of the use of financial leverage, real estate prices are downward sticky and so we see time on the market rise before price declines begin.

Here’s an article from February 6, 2007 - A few months before US real estate prices began to fall dramatically.

As markets have “normalized” around the country properties are staying on the market longer before selling. In many areas a perfectly good listing may take sixty to ninety days to sell, sometimes longer. This raises considerations that are new to many agents, and that haven’t been at issue for some time.

The author had no clue what was about to hit the US real estate industry. I remember walking into a KB Homes showroom in April 2007 when I was on holiday in the USA and the salesman was convinced that the market had already turned around… when in fact the pain was just about to begin.

Personally I have become more bearish on Bermuda than I was back in September as credit writedowns have spread beyond just sub-prime housing, and more bearish in general than I was in July 2007.

If this article about Bank of Butterfield in today’s business section is true then Bermuda will just be entering the process of feeling the sustained effects from massive credit losses occurring elsewhere.

Butterfield Bank is expected to make significant markdowns in its “held to maturity” portfolio by the end of this year due to a widening in credit spreads and the further deterioration of the US housing market, according to a new equity research report released by LOM.

If the Bank faces losses then turn this will impair the bank’s balance sheet. In turn this affects their ability of the banks to lend. And in turn they will either need to raise capital, raise mortgage rates, and curtail lending. I must disclaimer that I have no knowledge whatsoever of Bank of Butterfield’s operations and have not even done the due diligence of looking at their annual report and financial statements.

Foreign global banks have generally been able to raise capital from sovereign wealth funds and other sources, but since then have faced further losses and will this time around be unable to raise additional capital as investors become wary of throwing good money after bad. Combine with oil price increases and the stage is set for a multiple year period of pain in global finance, the effects of which could easily be felt in each and every one of our pockets (note, all bets are off if oil suddenly falls to $40 per barrel, but bet on a depression if Bush tries to invade Iran to send oil to $250).

Although local banks end up being more sensible than some of their American counterparts because they hold loans on their own books, Bank of Bermuda (HSBC) have bought into Bermuda American style financial innovation which has allowed for higher leverage and exposed the Bank’s balance sheets to much higher risk of loss. This is fine during rising markets, but comes back to bite them during a bear market. For example, by offering what is in effect an option on Bermuda real estate with their No money down, interest only mortgages. You pay the difference between the interest and rental payment and if at the end of the three years the house is worth more then you sell it at a profit. If not then you mail the Bank the keys. All you risk are your credit ratings (no, it’s not actually that simple, but close enough).

It’s worth noting that the intrinsic value of Bermuda real estate is driven substantially by the effects of immigration and local wages, which thus far have also suffered as the same credit crunch affecting banks has also affected insurance companies and will probably affect bonuses and pay in those companies as well.

The next casualty if real estate goes will be the construction boom. Prices of construction have already risen substantially in dollar terms If the public’s ability to buy falls then builders will not be able to sell quickly, returns to speculative builders will fall, and some may lose money and those most dependent on leverage will fail while most slow down the pace of building. Then the workers building them may then be unemployed - the failure of education and lure of the drug industry have sent a large number of young Bermudians into the combination of drug dealing and construction work. They are going to be pissed off and the effects on Bermuda will be quite painful.

As Alan Card said “He was underwater and he had his arms wrapped round the fish and the fish was pushing him under… (and) I knew there was no good going to come out of it.“

I think the most recent posts on the political parties web sites says a lot about the state of Bermuda’s two main parties.

The closest thing the UBP has to a blog has an opinion piece by Opposition Leader Kim Swan where he expresses the following:

Today, our state of mind is anything but tranquil. Tensions are running high. More and more I see people frustrated, people irritated, people confused. More than a few are getting angry.
As a politician, it is incumbent on me to try to understand why things are happening, to connect the dots and draw conclusions that might help our society work better.

As I see things today, the tensions are growing out of a variety of developments that can be traced to one common source – PLP Government policies and actions.

Let’s look at a list of incidents, decisions and events over the past few months to see if this observation makes sense:

He takes a while to get into the meat - which loses most people because let’s face it, it’s boring. But by the middle he has moved to a wholly factual and specific list of items which I suspect will get a nod from most of us as they focus on the real quality of life issues that are facing our island and our government. Then he closes with:

Each of the items I’ve listed above emanate from the decisions and actions of Government ministers under the direction of the Premier.

People more and more are seeing this government as out of touch and arrogant, and not really interested in their views. That labour unions are feeling the brunt of this callous style of government speaks volumes about the leadership of the Progressive Labour Party Government today.

It is time this government learned how to work with people. It is time this government started treating people with more respect. It is time the government started governing for the people.

…meanwhile over at the PLP Blog there is a post by Premier Dr. Ewart Brown about medical tourism. If you look at the line in italics, you’ll note that he has either written the article on medical tourism or plagiarized from it.

So, you see, I am a busy guy – with a lot of interests in a lot of areas. Today, I want to focus on two of my converged interests – medicine and tourism. I want to spend a few minutes talking about this fairly new term - Medical Tourism.

What is Medical Tourism? It is simply a term initially coined by travel agencies and the mass media to describe the rapidly growing practice of traveling across international borders to obtain health care. So, while it is a new term, it is an old art. All of the pilgrimages we have heard about from biblical times when people traveled hundreds of miles for the lame to be made to walk and the blind to be made to see are grounded on the same premise – people will travel to be healed. Wouldn’t we all?

What strikes me is - who benefits from Dr. Brown’s vision? Not most Bermudians. My life is no better if we become a medical tourism destination, and neither is yours. We don’t have lots of doctors and nurses living in poverty. In fact, to support medical tourism we’ll have to import lots of doctors because we don’t have enough, which squeezes the rest of us out of our limited space. The one person who benefits from medical tourism in Bermuda is Dr. Brown with his clinic. How typical.

I get the impression that people are starting to wake up that they thought they were getting fillet mignon when they voted PLP but are waking up to table scraps.

I don’t agree 100% with all the details, but nonetheless I wish I could write this well.

Link to a comment on the Catch a Fire blog.

The UBP need to grow a pair, take the PLP to task, overcome the big lie that they have allowed the PLP to tell about them for the past few years, and show that they have cleaned house, and are a viable alternative. “Winning the election on the doorstep.” and ignoring race have pretty much failed.

Just so we’re clear. If you’re a hedge fund manager and you lie to people about the prospects of your funds then you get prosecuted. Link

Cioffi, 52, and Tannin, 46, were charged by federal prosecutors with misleading investors about two hedge funds whose collapse last year helped ignite the subprime-mortgage crisis. A companion Securities and Exchange Commission civil suit accuses Cioffi of redeeming $2 million from the funds while Tannin mocked as “silly” at least one investor who wanted to get out.

“No one should be surprised that people on Wall Street talk out of both sides of their mouths,” Peter Henning, a former U.S. Justice Department prosecutor who teaches at Wayne State University Law School in Detroit, said in an interview. “Wall Street is in sales, and no one trusts everything a salesman says.”

In the Bear Stearns case, federal prosecutors allege that Tannin, in an April 2007 e-mail to Cioffi, wrote that the “subprime market looks pretty damn ugly” and could be “toast.” The SEC said they gave monthly reports that “consistently understated” the funds’ exposure to subprime mortgages.

If the accusations are true, “it shows a callousness toward their own investors,” said Theodore Sonde, a former SEC enforcement attorney now at Patton Boggs LLP in Washington. “You have an obligation to be honest with your investors about what’s going on.”

That’s accountability.

“It is true — the Union has taken a 20 percent stake of Island Cement,” said Mr. Piper. “And that (Island Cement formally submitting a proposal to Government to lease and operate the Dockyard Cement Facility) is true as well.”

Looks to me like the BIU is being bought and paid for under Dr. Brown’s “Friends and Family” program. Funny to see the Union - which judging by the usurious interest rates (article in the RG the other day, which I can’t find) appears to have abdicated any responsibility for the quality of life of its membership - becoming an avowed crony capitalist.

Say it ain’t so.

From The online Royal Gazette.

“We talked about Bermuda. He was interested in how we were doing in tourism and understood our rationale for rebuilding tourism and not having a one-legged economy.

Essentially shows one thing: The Premier, the President, or both do not understand international business.

As I have said before, we do not have a one-pillar economy, not even close. We have insurance/reinsurance, investment management, trusts & fiduciary services, and a number of others. Each of them is a completely different industry and each of them is highly efficient at bringing in revenue from overseas into Bermuda and depositing it into our economy in the form of salaries, rental payments, services, taxes, tourists, etc.

Each of these international industries can offer Bermudians completely hilariously high salaries in comparison to competing jurisdictions and other industries. If we do things right then these salaries funnel through to the service sectors and keep our blue collar workforce enjoying a good standard of living and unlimited opportunity for their children. Why? Because Bermuda has a sustainable competitive advantage of being a historically stable, well-run country with a legislative framework far more nimble than large countries (although a number of countries are gunning to take us down).

All of our pillars are suffering from the bad behaviour of Dr. Ewart Brown and his cronies and the utter mismanagement and corruption that is their standard operating procedure.

Unknown to most voters, and despite the politician’s best efforts to derail international business, in the background the machinery of the Bermuda regulatory system continues to do an acceptable job of keeping legislation up to date without the clown show of some of our competing jurisdictions.

So it looks like the government is going to start making good on some hastily thought out election promises. I have a sneaking suspicion that we, the Bermudian taxpayers, are about to find out that no matter how poorly managed, any project can be completed if given an unlimited budget. Again.

Not that we’ll be able to tell exactly what they’re spending our money on thanks to the 36 page embarrassment of a government budget… when the budget is shorter than the Auditor General’s Report we have a problem.

The rumours flying around now range from the mildly comical to terrifying. I can only imagine the riots if we come to find out that… you know… Beyonce Knowles is pregnant and due in October. If it’s true then a “splinter” is going to be the least of Dr. Brown’s worries..

Generally we should take rumours with a dash of salt… although they have a nasty habit of being based on truth here on the island.