Friday, October 06, 2006

Housing Slump in the U.S. versus UK, Australia and New Zealand / roubini

die frage die hier vom superbären roubini beantwortet wird ist in der tat das hauptargument der analysten die ein soft landing für die us wirtschaft erwarten. obwohl icvh glaube das schon jetzt ein hard landing in uk usw auszuschließen ein wenig verfrüht ist. klat wird hier jedoch das die usa am schlimmsten getroffen werden.

after all i find it premature to judge that uk etc won´t have a hard landing. but this great piece from roubini makes it very clear that either way you look at the facts the us will be hit the hardest and can´t avoid a hard landing.

von nouriel roubini

Housing Slump in the U.S. versus UK, Australia and New Zealand: Four Differences or Why No Soft Landing for the U.S. Economy…


One of the strongest argument of those who believe that a housing hard landing will lead to a soft landing of the economy is to point to the experience of the U.K., Australia and New Zealand, three countries where - allegedly – the housing sector bubble burst and the housing market had a sharp slump but where the economy avoided a hard landing; indeed, in these three economy the growth rate slowed down for a while but there was not recession or deep hard landing. So, the argument goes: since UK, Australia and New Zealand avoided a hard landing, so will the U.S. This argument has some superficial appeal but it hides substancial differences

Let me elaborate on these important differences

First, the approach of monetary policy makers to asset bubbles is radically different in the U.S. relative to UK, Australia and New Zealand.

When a bubble is growing – say Greenspan and Bernanke – you do nothing about because a) you are not sure there is a bubble; b) trying to prick a bubble is like “performing brain surgery with a sledgehammer” i.e. you risk to kill the patient - i.e. the economy – as you try to prick a bubble (woked very well during the bubble......../hat ja während de bubbles hervorragend geklappt...)

The attitude – both formal and practical - of the central banks of the UK, Australia and New Zealand have been very different. Their effective view has been one of a more symmetric response to bubbles, both on the way up and down

three central banks aggressively increased interest rates – well above what would have been warranted by a standard Taylor rule centered on growth and inflation – to keep in check or prick the housing bubble (my believe is that this attempt failed also/mission trotzdem nicht erfüllt)

So, UK, Australia and New Zealand avoided a hard landing because they pricked the housing bubble early on; the US risks to have a hard landing – like it did in the aftermath of the bust of the tech bubble in 2000-2001 – because it has taken a totally different approach to asset bubbles ( i think that this judgement is al little premature/verfrühte feststellung)

Second, US Australia and New Zealand have experienced positive terms of trade shocks while the US has experienced negative terms of trade shocks

What prevented a hard landing of the economy in the UK, Australia and New Zealand has been – among other factors – the fact that all three countries have experienced sharp positive terms of trade shocks that have boosted overall GDP at the time when the housing market was going into a sharp slump following the bursting of their housing bubbles. Instead the US has been buffeted by negative terms of trade shocks. Both Australia and New Zealand have benefited in the last few years from the sharp rise in commodity prices: being important commodity exporters this large positive terms of trade shock has stimulated growth at the time when the housing sector was going into a sharp slump

Similarly, the UK has also benefited of positive terms of trade shocks: while oil is not now anymore a major export of this economy, the significant inflows of private foreign capital – mostly recycled petrodollars from Mid-East to London – both its financial system and its housing market – has been the equivalent of a positive terms of trade shock for the UK economy (this argumet is not convincing me,finde ich als argument nicht nachhaltig überzeugend)

In the United States instead the rise in oil prices, energy prices and commodity prices that have occurred in the last three years has represented a significant worsening of terms of trade

Thus, positive terms of trade shocks buffeted the UK, Australia and New Zealand at the time when their housing markets were going into a slump while in the US the terms of trade shocks – apart from the recent fall in oil prices from a temporary upward spike – have been sharply negative at the exact time when the housing market has been going into a bust.

Third, US household’s savings are now negative while they have been positive in the UK and New Zealand. Also, overall national savings rates are lower in the US

Countries experiencing housing bubbles tend to experience reductions in the private savings as the wealth effect of housing leads to an increase in private consumption. This reduction in private savings has occurred in all four countries but it has been more extreme in the case of the US where the household savings rate has been negative since 2005. In the other three countries – with the partial exception of Australia where household savings became moderately negative since 2003 – the households’ savings rate has not become negative.

Also, the US has – unlike the other three countries – very large negative public savings – i.e. large budget deficits – and thus the overall savings rate is negative

Why having negative households’ savings matter for the probability of a hard landing? The reason is clear: if your household savings rate is negative the only way you can consume more than your income is to use your home as your ATM machine, i.e. borrow against your home equity (here we are assuming not much liquid assets as most of the wealth in the US is in illiquid housing or tax-preferred savings accounts; i.e. the option of running down asset as opposed to increasing debt is limited). Instead, if your savings rate is positive, you can run down your savings without extra borrowing.

And since home equity withdrawal (HEW) in the US has been much larger – as a share of income – than in the other three countries (peaking at about $800 billion annualized rate, or 7% of households’ income, in late 2005) the implications of the sharp reduction in HEW that is currently undergoing in the US will be sharper than those in the other three countries. Indeed the IMF had argued that HEW has not been a major driver of consumption in a country such as Australia.

Fourth, the conventional wisdom about housing finance in the US - that the US has mostly fixed-rate mortgages while the other three countries have mostly floating rate mortgages - is actually incorrect.

now at least a third of all US mortgages – about three trillion out of nine trillion dollars - are ARM and other non-fixed rate instruments. Thus, these mortgages are quite sensitive to refinancing and interest rate risk. Worse, most of these floating rate mortgages were of an ARM sort where a low rate was fixed for a number of years and being repriced at much higher interest rates when the ARM comes to maturity. Much worse, more exotic ARM became the norm: interest rate only mortgage, option ARMs where the introductory interest rate was even lower than the set ARM rate, negative amortization mortgages

These exotic and monster mortgages are much more prevalent in the US than in the UK, Australia and New Zealand and the debt servicing effects of their repricing more severe. On top of it, the growth of the sub-prime lending markets – with extremely loose credit standards and mortgage sizes too large relative to the income of the borrowers – has been much more intense in the US than in the other three economies. And indeed the sub-prime lending market is already under significant stress in the US. (but at least uk is moving closer to the us lending standarts,aber uk holt auf)

In conclusion, there are significant and structural differences between the housing bubbles in the US and those in the UK, Australia and New Zealand:
1) monetary policy responded early on to the housing bubble in UK, Australia and New Zealand and did not allow it to fester for too long and thus achieved an economic soft landing; while in the US the Fed let the bubble to grow without bounds, thus guaranteeing a harder landing;
2) UK, Australia and New Zealand experienced positive terms of trade shocks while the US experienced sharp negative terms of trade shocks;
3) US households’ savings are negative while they were mostly positive in the other three countries; thus negative wealth effects from housing and binding borrowing constraints will have a larger impact in the US than in the other three countries;
4) exotic and monster mortgages and very lax lending standards were more prevalent in the US than in the other three countries; and thus the recent and coming repricing of these mortgage (about $2 trillion between 2006 and 2007) will have significant debt servicing implications.



Post a Comment

Links to this post:

Create a Link

<< Home