Political Risk

July 10th, 2011 by De Onion

Well, it’s nice to see some liberalisation of immigration and housing, but these issues highlight what a political risk Bermuda has become.

The problem here is that to repeal the policies is too little too late – the problem is that these policies became law in the first place. Changes to both immigration and housing rules bought with them massive unintended consequences that have seriously hurt Bermuda and Bermudians– from the term-limit induced economic meltdown that began at the same time as the global recession to the blatant discrimination against Bermudians married to expatriates while foreign developers were given carte blanche to get into residential real estate.

This quote really sums it up:

Leroy Douglas, president of the Real Estate Division of the Bermuda Chamber of Commerce said: “I hoped that Government would be more receptive to some of our input. I’m delighted to see this coming to fruition.” He added: “In the past, rules and regulations were put into practice and we were given no opportunity to have a say. This is a start.”

At the core – the PLP politicians did not bother to understand the impact of the rules before they were put in place, and when warned about the likely consequences by experts they were ignored. The inability to listen to expertise is a real cultural problem in the party and is one of the major elements of their unfitness to govern. Thankfully some new ministers are finally getting the message.

Slow motion trainwreck.

October 8th, 2009 by De Onion

Looks like the Gazette is picking up on what some of us have been predicting… in 2007 I was bullish on the construction industry because I thought that increases in employment would continue and demand for housing would rise to a corresponding degree. The combination of term limits, tighter financing, and global recession has taken us toward the scenario that became more clear in mid 2008.

Overbuilding of commercial buildings is the culprit this time.

In July 2008 I wrote:

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.

Denis over at 21square.com has also written about this.

Odds of a large hotel project are very low, although there may be a lot of cleanup work done at Morgan’s Point I think we can be sure that the ultimate beneficiaries will be the usual Friends and Family Plan members. At the same time, the overspending by government during the boom times and deficit spending to fund current expenditure has left the government unable to prudently pursue large capital projects now in a time of cheaper construction.

The Bull Case.

August 8th, 2008 by De Onion

After my recent posts of relative skepticism about the Bermuda real estate market I think it’s worth outlining the bull case for Bermuda real estate. It can be located right here: Royal Gazette Employment Classifieds.

As long as the government continues to allow population growth then Bermuda’s economy will continue to grow largely independent of the rest of the world, and despite poor government (really terrible government could still cause a local recession/depression). However this population growth fuels the decline in standards of living as more of us are packed into condos/human filing cabinets, and spend more of our lives sitting in traffic. This population growth also shields government from responsibility and side effects of having a government producing large numbers of (mostly black, mostly male) people who are only employed because we are building as fast as we can to provide housing for the growing population, so as long as the government continues to keep the demand side for housing growing by allowing net immigration, and as long as they continue to artificially constrain the supply side through incompetent management of urban planning and building control, then we should see prices remain firm.

Of course, we are building a social house of cards by leaving the lower income Bermudians chronically under-housed, and by keeping prices and rents high are transferring wealth from the young and poor to older (mostly white) home owners.

Anyone who claims the PLP is the party of “social justice” is clueless.

Of Bears and Bankers…

July 15th, 2008 by De Onion

Disclaimer: The following is speculative. I have no non-public information on current banking conditions whatsoever and am very likely wrong, or at least I hope the worst does not come true.

The Royal Gazette picked up a real estate story… just in time for me to finish another – somewhat speculative piece about real estate markets of the future.

The value of a bond is dependent on the amount of the regular interest (coupon) payments and the prevailing interest rates. When interest rates rise the interest payment amount of a bond stay the same, but it’s possible to get new bonds that make a higher interest payment, so the value of the old bond falls.

So for real estate: if interest rates rise, the amount that can be borrowed falls for any given payment amount.

The more that debt is used as a tool to buy property, the more that property will behave like a bond, rising as interest rates fall and falling as they rise. With increasing use of 100% financing and other “innovative” financing methods this part of what happened in the United States. Incidentally, this is why we should be very wary of any government initiative that simply serves to increase the amount of debt that consumers are able to take on to buy a property, such as giving away down payments. They tend to raise house prices in the short run, but if house prices fall and someone has borrowed all the money to buy it then the lender has immediately lost money. If the lender is the government then it’s the taxpayer who is in trouble – which in the USA is exactly what will happen as the US government is ultimately backing much of the mortgage industry.

What I missed is that the lender’s use of Mark to market accounting adds another dimension to the dynamic. And was the driver of the first waves of the credit crisis. Banks are highly leveraged – they often have leverage of on the order of 15:1, which is to say they have large amounts of assets and debt that are based on a fairly small amount of equity. When the value of their assets falls they then have to reduce their lending or raise capital to return their leverage (which they call “reserve ratio”) to more normal levels. As the credit crisis continues it is now appearing quite likely that some major financial players will (or already have) reached the point where their liabilities (debts) exceed the values of their assets, making them effectively insolvent. The US Federal government is then going to start to take these risks onto its balance sheet – as has begun with Fannie Mae and Freddie Mac, both of which would otherwise be sliding into bankruptcy, and if the Fed is not able to stem the decline in confidence those two will in all likelihood be joined by a variety of other financial institutions.

Bloomberg link.

U.S. banks can lend $12 for every dollar raised through the securities, so $100 million of the preferred shares may become as much as $1.2 billion in credit, based on Basel I banking rules.

When prices fall, the bank’s risk of loss in a foreclosure increases. Under the old paradigm with a 20% down payment on a house, it’s rare for banks to take a bath and the bankers are far less sensitive to downturns in the real estate market. This has previously been especially true, where large down payments and substantial discounts on valuing rental income have kept Bermuda banks safe from market declines. However, with first time buyers in Bermuda now being offered the ability to borrow more than 100% provided they live in a property for period, the banks have essentially made an economic loss the instant they write these mortgages (they have origination expenses). Accounting rules determine if banks need to show a loss on their income statement/balance sheets, and so the dynamic in Bermuda may be different if the banks don’t need to start taking huge write downs when prices do start do decline.

The problem is that the sale price of real estate is dependent on the bank’s ability to lend.

*cue ominous music*

Once a bank starts to lose money as house prices decline and credit starts to be constrained then they can’t lend as much so house prices decline and credit becomes more constrained so the banks can’t lend as much so house prices decline… and so on. A vicious cycle. The newest and most greatest loan/value ratio mortgages lose money first – and as prices decline successively older vintage mortgage holders find themselves underwater.

That’s essentially what has been happening in the USA. As house prices have declined mortgage rates have gone up, reflecting the unavailability of credit, which has effectively increased the cost of ownership.

In the US (and to a vastly lesser degree in Bermuda) bankers have decided to abandon risk controls because they have been in an almost generation long bull market for real estate that began with the taming of inflation in the early 1980s and which last had a major shakeup almost 20 years ago. The world has changed and there’s a very real risk that the USA will face massive financial stress as layers of debt unravel, what began with sub-prime mortgages issued by 22 year old Las Vegas mortgage officers has now spread because the growth of the US economy has for most of the past 6-8 years been dependent upon debt creation. The crisis has the potential to be truly crippling for America as the US Federal Government is in terrible financial shape after years of neo-Keynsian policy under Regan and Bush II and may be unable to produce a policy response to restore confidence, which in a worst case scenario will result in a truly spectacular recession and possibly a depression.

In theory, we in Bermuda should have been taking note and creating a sovereign wealth fund during the boom times instead of abandoning financial control in the government and spending hundreds of millions of dollars on farcical projects, and we DEFINITELY should not be spending like drunken sailors now.

Some time ago Bank of Bermuda head Phil Butterfield remarked in his sweeping style that “We have never lost money on Bermuda mortgages.” Sorry Phil, you have lost money on mortgages before and you’re about to again. However, the margins are so large on Bermuda mortgages that we probably don’t have to fear the kind of financial mass destruction that is happening in the United States (all bets are off for Bermuda banking if some major insurers go bankrupt, the government starts talking about exchange control, and a hotel or two closes at the same time).

Price indexing…

July 5th, 2008 by De 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 that because 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 for 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.

Bermuda bears…

July 2nd, 2008 by De Onion

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.

Urban planning on a geological time scale… in a lifetime.

May 6th, 2008 by De Onion

In the spirit of Dennis’ post here’s a nifty link on hypermiling.

And here’s a question: What are the problems we’re going to have 20-30 years from now?
– Rising sea levels?
– Coastal erosion?
– Coral bleaching?
– Changing ocean currents?
– Expensive air travel?

I’ve already suggested a transition to New Urban living principles and Human Architecture, both of which are by nature far more sustainable than current urban patterns that are relying more and more on cars (as it becomes more dangerous to use other forms of transport)… and for me personally, unlike the politicians who are looking as far as a few years ahead, I am looking a lifetime ahead. As with US housing, Bermuda is suffering from an incentive mismatch, I wrote about the consequences a while ago.

Real Estate Developments in disguise.

April 21st, 2008 by De Onion

We need to take note that many of the hotel developments include a large portion of fractional units.

So here’s the question – if we need to discriminate against Bermudians married to non-Bermudians and Bermudians who own properties in the international purchasers end of the market in order to preserve Bermuda for Bermudians then why is it perfectly acceptable to sell Bermuda to foreigners as fractional units?

On housing wealth…

April 15th, 2008 by De Onion

One thing we need to make sure we remember is that much of Bermuda’s wealth growth has been from real estate. Which is little more than a wealth transfer from one generation (mine) to another (my parents’).

This article does a reasonably good job of summarizing.

The money that people are said to have “made” on their properties – this wasn’t free cash that fell off the money tree; it was earned by first-time buyers, or at least, they pledged it in promissory notes, debts, to earn over the course of a lifetime. Britain is going to be living with the consequences of these debts for decades yet to come. This is very far from free money.

Bermuda is a little bit different since we get a lot of our foreign exchange revenue from expat’s rental payments on their housing (this is why allowing fractional ownership and building high-rise filing cabinets owned by foreign companies is a hair-brained idea (unless you can sell at stupidly low yields and then reinvest elsewhere, but that’s a technicality)).

Scandal list draft

December 12th, 2007 by De Onion

Recently there have been a number of people in letters to the editor and on blogs saying that the current government can “run on their record”… their web page of their accomplishments is here.

I asked the posters on the Bermudasucks.com forum (yes, I deeply dislike the name and always will) for some help in creating a government scandal list for the past few years… Here’s what they came up with:

BHC – The big kahuna.
Premier sues the media to keep them quiet.
Limo Importation – Law changed to allow government insider to start a Limo business.
Hummer H3 commercial vehicle
Cedarbrige Mould
Education Statistics
Firing of Hotel Chef
Work Permit of Curtis Mcleod (construction boss v. George Scott)
Southlands Tunnel
Southlands planning approval
Hospital location
Discrimination against non-Bermudian spouses
Equality act
Col. Burch “House ****” comment
Long-line fishing
Berkley over-budget
“we had to deceive you”
Robert Jensen
RC’s profane e-mail
Mount Saint Monica (dump fire)
Calling squatters “criminals”
Faith Based Tourism
Tracking Chips for Vehicles
Emission Testing.. Buildings
Emission Testing… Contract
“settlement” with Pro-Active Construction
Club Med 1
Club Med 2
Club Med 3
Rebecca Middleton handling
Indigent Clinic and firing of Doctor for writing a letter to the press.
Kurron
Stem Cell Clinic
Cedar Beams
SDO’s
Removal of Stuart Hayward and Bermuda’s #1 Eco Farmer from the round table.
Voting from the bathroom (applies to both parties’ MPs). (Gay Rights Issue)
Independence (most notably the BIC report)
After closing the Clinic, the Brown one, signed up as an “approved Dr” then refused to take any patients.
Forcing GPS upon the taxis
Brown’s Relationship with Tina Poitevien , Mark Lay and MDL Investments.
Free Bus & Ferry Transportation (that never was!)
The $11 million spent on cricket
The amount spent on football
The police contracts never being settled
No cruise ships for Hamilton
Building a pier over an historic wreck
The “deal” they cut with the US government re the cost of cleaning up the Baselands [$11 mill towards the bridge when the estimated cleanup costs were $65 mill]
The apparent about face re moving the Southlands project to Morgans Point (and the bill that will stick the taxpayer with)
Pay to Pray
Pay to Play
US Passport
$ 1 million per month spent on PLP travel junkets abroad.
$25,000 to $30,000 to fly entertainers to Bermuda on a private jet for Brown’s love fest
$1 million to set up Govt TV channel
Abdallah Ahad
Racist dog attack on Gibbons
non-Charity (THE)
Alex Scott’s email to Tony Brannon
$82,000 spent on security for Brown’s private residence.
$1,500,000+ for renovations at Clifton, and then overcharging for rent so it remains unoccupied.
“Political eunuch”
China tourist office
Plantation questions
Refusing to answer cost questions
Donation to a US congressman even though EB shouldn’t be an American anymore.
Gay cruise saga
Reducing funding for the Salvation Army.
Firing developers who were ready to go on Club Med.
Health Minister’s notes on need to obfuscate “embarrassing” report.
Bermuda Cement
BHC 2.0

Readers – please help me remove the inaccurate ones and add any others – I have done some of this on my own.

If I had more time I’d like to go through and add up the cost of these various mistakes to the taxpayer – it would probably run into the thousands of dollars per person in Bermuda.