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.“
