Friday, December 19, 2008


Luigi Frascati, B.Econ

Thursday, December 18, 2008


A Crisis Of Competence

What public officials didn’t tell you about the recession – or refuse to admit.

One of the objectives of this blog, the Real Estate Chronicle, has been to share with readers throughout the time principles of economics and to lay the foundations for sound investment decisions. Although the focus of the Chronicle primarily reflects my chosen profession – real estate sales and investments – many of the economic principles enunciated herein are valid and applicable to other fields as well. In this respect and judging from the number of e-mails, comments and at times even criticism I have received over the years, I think I can affirm I have been successful at contributing my fair share to make people “know before they act”, at least those who have been steadily reading these electronic pages.

It is therefore with a great deal of apprehension that I now must bring forward to the attention of anyone willing to pay heed, the fact that it is becoming more and more evident we are living through a historical period of virulent incompetence in pretty much all levels of public administration, as well as among those who are at the helm of some of the largest and more powerful private and public enterprises. This is turning to be an epoch of errors of mastodontic proportions on the part of our government and business leaders, of wrong and at times unethical decisions and practices – whether made neglectfully or wilfully – and of self-serving application of economic and financial principles. All these, in turn, have caused and are causing a dramatic erosion of investors’ confidence, which is at the root of the present problems.

We all share some collective blame for allowing sub-prime lending practices to get out of hand, for continuing to consume far more than was responsible or reasonable, for not demanding that our elected officials ask tough questions and for embracing easy money. But I submit that we have done all this with the tacit consent of those in charge, who knew or ought to have known better, who had both a moral duty to warn the public about the consequences and a legal responsibility not to inflate expectations, who have elevated unsustainable consumption to the standing of moral value and preached that the more we spent the stronger our economies would become and, consequently, the better patriots we were. Politicians and business leaders alike encouraged the spending spree and absurd consumption on the rationale that “the merrier the people, the merrier the voters and the merrier the customers”. Likewise, the recovery plan involving massive spending they are now proposing, dubbed by some ‘The New Deal Redux’ , falls well short of its aimed objectives. It is at its best an economic exercise in futility, at its worst incompetence to the highest degree.

In the United States, the Federal Government has acted in a tradition of unwarranted market interference with "ad hoc" cash infusions which, far away from being well thought out, seem to have been drawn out of the hat. Take for instance the Bear Sterns merger with JP Morgan done with a helpline from Uncle Sam to the tune of USD 29 billion; or the AIG situation where the Feds have poured way over USD 100 billion. Then, of course, there is the ongoing Fannie Mae and Freddie Mac situation, which has led right into the core of the banking industry beginning with Bank of America, that walked into Merrill Lynch with the help of a USD 50 billion federal subsidy, the Well Fargo - Wachovia Bank USD 20 billion deal, the multi-billion dollar Washington Mutual rescue, all the way to Citigroup receiving a USD 306 billion bailout package. Not to mention the new 'rescue package' presently being worked out for the three automakers, which will be certainly followed through by the new Administration. All this has created and will continue to create the worst investment environment America has seen in recent years.

How many times does the Dow Jones need to be saved?

Banking analysts and public officials alike are quick to point out to the real estate bubble as the primary cause of all the economic turmoil. But in doing so, they conveniently omit the fact that they have been the very instigators of such bubble, by promoting and encouraging speculation in real estate, which ultimately caused prices to increase, thus producing more speculation and subsequent price increases until housing prices became so absurdly high that consumers either refused or could not afford to purchase, thus sending demand tumbling down. What’s more, officials of all political colors omit to point out that the present situation is a direct consequence of the biggest asset bubble in history: the stock market, the place where speculation is the norm. And that the economic decline began in the stock market well before it affected real estate. In fact, and contrary to what we all consistently hear, it is the stock market that has dragged down real estate and not the other way around.

A couple of years ago when both Alan Greenspan, the former Chairman of the Federal Reserve and David Dodge, the then Governor of the Bank of Canada were talking about "froth" in real estate, rather than putting pressure on lenders to tighten their credit standards, governments actually encouraged banks to lower the qualifications bar, on the political ground that ownership was a 'right' owed to and bestowed as upon each and every American, and as upon each and every Canadian. After all, so the rationale went, the higher the number of property owners the higher the number of property tax contributors. And banks, of course, merrily went along on the ground that the higher the number of mortgagees, the higher the interest income they received which, in turn, looked good in the balance sheets for when they traded their shares in the stock market. Not to mention the fact banks could go out and sell mortgages in packages to the highest bidder, thus furthering their profits even more. A course of action this first devised in Wall Street but more than happily followed by banks throughout Canada just as well.

I did raise the red flag several times in the past, to the extent that speculation was not synonym of investment. And in an article I authored, which is entitled “Speculation v. Investment” first appeared in this blog all the way back in December, 2005 when all outlooks were rosy and when nobody even remotely thought of economic slowdowns of any kind – much less of recessions – and which article nowadays can be found pretty much everywhere in the Internet, I did spell out that speculative ravages ultimately reveal themselves detrimental for the entire economy, especially when they involve large ticket items such as real capital assets. This is so, I stated, because the role of speculators in a free market economy is to absorb risk and add very little liquidity to the market place. Speculators, I contended, in fact reduce market liquidity by inflating prices which, particularly in the short run, reduce the pool of buyers thus hampering demand and reducing prices even further. Put differently, wealth dependence on speculation as opposed to production and investment, creates the illusion of prosperity.

In the last three months, it has finally become apparent that the economy has serious problems more than originally thought. Households both in the U.S. and now in Canada are indebted, the economy is stagnating, growth is forecasted in the red, and unemployment is edging up. Yet governments in North America, thanks in large part to the Obamania that is pervading the continent – if not the world - are proposing to spend with both hands in the months to come.

The truth - and this is what public officials from the right and especially those from the left won’t tell you - is simply that we are going to have to take it on the chin. There is no easy fix, no return to the days of plucking credit cards and of mortgages growing on trees, no Obamas out there to rectify the situation with the single stroke of a magic wand. Canada in particular is not “immune to the recession” like politicians and banking conglomerates here wanted people to believe, merely because we have all sorts of natural resources. If there are no buyers, we can ditch our resources. And buyers out there are dwindling. Here too people will lose their jobs, like it has already happened to countless individuals across the West. Obama cannot and will not help Canadians – the man has got his hands chockfull with Americans! Besides, I am not entirely convinced that the rooseveltian government spending propositions he is entertaining are the solution, nor am I convinced he’s got the money to carry them out.

Housing in Canada was and still is grotesquely overpriced, though prices are slumping. And albeit real estate is a localized business and varies from place to place, here in my hometown of Vancouver, British Columbia prices will continue to fall not “until June” like Premier Campbell wants you to believe (he’ll have to call elections within six months), but for the whole 2009 and maybe beyond. In time they will reach a level at which it will make sense for consumers to buy a home. These are painful and necessary realignments. However, when the market reaches equilibrium once again - and it will at some point in the future, given enough time to correct itself - then real estate will become once again the traditional, solid, no-frills investment the way it has been for decades before the onset of the new millennium.

When this happens, think twice before plunging your hard-earned money into the stock market once more. Given the choice between the purchase of a piece of paper representing the share into a far-away company over which there is no control, and the purchase of four walls and a ceiling that can be seen, touched and painted, be prudent and conservative and take the low-flying choice by going with real estate. Not to mention the fact that in times of financial straits real capital assets always hold at the very least a residual (land) value, as opposed to stocks that are not worth the paper they are written on.

I know, Donald Trump may not agree with all this, but then again I would not want to take at face value the expertise of someone who owes USD 390 million to Deutsche Bank by year's end - and who doesn't have it.

Luigi Frascati

Real Estate Chronicle


Sunday, December 07, 2008


Mr. Sore Loser

There are losers and there are sore losers.

The uncharacteristic turmoil of last week in the otherwise fairly tame Canadian political landscape gives us a taste of things to come. It was the Conservative government’s economic proposals of the week before that have provoked the full-scale rebellion of the opposition. Presenting the fiscal update in the tradition of a government that has valued cautious, prudent spending over grand bailouts, Finance Minister Jim Flaherty offered a relatively frugal stimulus package to boost the ailing Canadian economy, refusing thereby to follow the footprints of the American Congress and the Barack Obama Administration to come.

But the real spark that has incensed the Liberals – and most specifically their leader, Stephane Dion – was Mr. Flaherty’s announcement of cuts to a public fund for political parties. This cut was not entirely unforeseen following the Democratic Party’s own tally in the United States that Barack Obama’s election cost some USD 730 millions, and considering that in the wake of the general economic slowdown that has affected and is afflicting all Western governments to various degrees, the general idea is to reduce what is aptly termed "spending waste" – especially political spending waste.

Frugality, however, is not a term in Mr. Dion’s vocabulary if the end result affects his political agenda and own personal goals and ambition. The main reason for the anger of the liberal leader was the elimination of federal political subsidies, as this would have disproportionately worsened the financial situations of the opposition parties compared to the Conservatives; the Conservative Party received 37 percent of their funds from Crown funding in 2007, the NDP 57 percent, the Liberals 63 percent, the Green Party 65 percent and the Bloc Québécois 86 percent. Recent polling by Ipsos-Reid found that 61 percent of Canadians wants political subsidies eliminated.

Labeling the removal of public funding to parties as an “attack against democracy”, the opposition threatened to topple the weeks-old government: they would vote against the fiscal update, the defeat of which would be considered a vote of non-confidence in the newly formed Conservative minority government that would bring it down. And this notwithstanding the announcement by the Conservatives on November 29, 2008, that the plan to eliminate the political party direct subsidy would be dropped. And, of course, Stephane Dion would be appointed “interim”Prime Minister until the time he would resign as Liberal leader this coming May.

As it turns out, Governor General Michaelle Jean has agreed to “prorogue” the current session of Parliament until January 26, 2009 at the request of Prime Minister Stephen Harper. To “prorogue” parliament means to discontinue a session of parliament without dissolving it. Various prorogation scenarios were possible: one was a long-term prorogation, lasting up to a year, while another was a short prorogation period lasting a few weeks to a few months. Each would delay any parliamentary activity regarding bills, hence a motion of non-confidence could not be registered and the Conservative government would continue.

The economic implications of all this political drama are huge, especially as they relate to big ticket items such as real estate.

For one thing the very idea of national unity has been damaged, with Westerners who were never favorably disposed to the Liberals accusing them of trying to dislodge their Conservative government, and with Quebecers feeling that they have no business in governing Canada. And this does not reverberate well internationally at a time when large capitals are already looking upon North America as a dismal place to invest.

This theme was re-affirmed by Gordon Campbell himself, the liberal Premier of British Columbia, who has spoken out against the coalition stating that if their gamble fails, Canada's economic worries will become significantly worse as a result. And Campbell’s own worries in British Columbia would head south considerably, in light of the fact that the Premier will have to call the provincial elections within the first half of 2009 and seeing as to how the left-leaning New Democratic Party (NDP) is already leading the Liberals five points in provincial polls. An NDP win would be a disaster for real estate, recession or not.

And then an un-elected “coalition government” headed by Stephane Dion as interim Prime Minister would certainly be put under question by both Canadians and foreigners alike, considering Mr. Dion’s track record as leader of his own political party. Stephane Dion’s leadership quality have been already challenged and put to a test, having just led his own political party to one of the worst electoral defeats ever. And this too would not bode well with investors, especially foreign.

Besides, to see a Stephane Dion sitting in as an un-elected Prime Minister smacks too much of politics Venezuelan style. Anytime Canada’s political stability is diminished both domestically and abroad we all stand to lose in the international arena politically and ethically as a nation, as well as in the economic arena. Canada is too dependent upon its reputation as one of the best places on Earth to conduct business to afford ‘coup d’etat a la Dion’, and in light of this Mr. Dion has done a great disservice to the country.

Real estate specifically, as among other business, stands to suffer from the reverberations of all this political drama. The capital appreciation we all have enjoyed this past few years is the direct, proximate result of the international image of Canada as a politically stable society and a serious and resourceful economic partner. This in turn has attracted foreign investments and capital that have contributed to the unprecedented development of various sectors of the economy with real estate in the forefront.

We can hardly afford now to have politicians the likes of Mr. Dion satisfying their own political ego and ambitions by putting their own interest and personal agenda over and above the national interest.

Luigi Frascati

Real Estate Chronicle


Wednesday, December 03, 2008


And The Real Estate Board Says ...

A lesson in Marshallian economics.

The most recent bulletin released by the Real Estate Board of Greater Vancouver (REBGV) has stirred up a lot of apprehension in the Lower Mainland on the part of Sellers and Realtors alike. Sellers are clearly concerned by what they perceive as a drop in value of possibly their most treasured asset. Realtors, on the other hand, are fearful of the decline in sales with the corresponding decline in commission earnings. Following is the full, integral text of the REBGV Release, with highlighted in red the parts that seem to be causing a great deal of anxiety and widespread concern just about everywhere.


Slow home sales create window of opportunity

VANCOUVER, B.C. – December 2, 2008 – November reductions in home sales and prices have helped improve affordability in Greater Vancouver. However, November also saw a corresponding decrease in the number of new homes coming onto the market.

In its most recent statistics release, the Real Estate Board of Greater Vancouver (REBGV) reports that
residential property sales in Greater Vancouver declined 69.7 per cent in November 2008 to 874 from the 2,883 sales recorded in November 2007.

Residential benchmark prices, as calculated by the MLSLink Housing Price Index®, declined 12.8 per cent between May and November 2008, amounting to an 8.3 per cent year-to-date price reduction for detached, attached and apartment properties in Greater Vancouver between November 2007 and 2008. In May 2008, the overall residential benchmark price was $568,411, compared to $495,704 in November 2008.

“Times of turmoil, from which we always emerge, offer excellent opportunities to buy quality real estate,” says REBGV president, Dave Watt.“For those whose personal finances allow them to get involved, there are opportunities in today’s housing market that have not been seen in many years.

“The local real estate market is not immune to the current economic challenges globally; however, Canada’s disciplined lending structure has kept the mortgage landscape steady in these uncertain times.”

New listings for detached, attached and apartment properties declined 10.8 per cent to 3,012 in November 2008 compared to November 2007, when 3,377 new units were listed. Active listings in November declined 4.7 per cent to 18,348 from the 19,257 active listings in Greater Vancouver in October 2008.

Sales of detached properties in November 2008 declined 69.8 per cent to 322 from the 1,067 units sold during the same period in 2007. The benchmark price for detached properties declined 8.6 per cent from November 2007 to $666,525.
Since May 2008, the benchmark price for a detached property in Greater Vancouver has declined 13.6 per cent.

Sales of apartment properties declined 67.9 per cent last month to 410 compared to 1,276 sales in November 2007. The benchmark price of an apartment property declined 8.6 per cent from November 2007 to $342,315. Since May 2008, the benchmark price for an apartment property in Greater Vancouver has declined 12.2 per cent.

Attached property sales in November 2008 decreased 73.7 per cent to 142, compared with the 540 sales in November 2007. The benchmark price of an attached unit declined 6.4 per cent between November 2007 and 2008 to $426,287. Since May 2008, the benchmark price for an attached property in Greater Vancouver has declined 11 per cent.

In light of the foregoing figures, which are all but rosy, it would seem to be somewhat anachronistic for REBGV President Dave Watt to talk about "excellent opportunities to buy quality real estate", many of which opportunities have "not been seen in years". Afterall the bulletin speaks of a fall in residential sales to the tune of almost 70 percent for this past November compared to a year ago, as well as of a 13 percent decline of the benchmark price from May to November. And yet if there is one person who would wholeheartedly agree with what would appear to be at first glance Mr. Watt's somewhat optimistic stance, this person would be none other than Alfred Marshall, one of the founding fathers of modern-day Economics.

Prof. Marshall (1842 – 1924) was the first to attempt to explain price behavior within the context of the equilibrium between supply and demand in competitive markets. More specifically, as it relates to inefficient markets, the Marshallian Curve describes how prices vary as a result of a balance between product availability at each price (supply), and the desires of those with purchasing power at each price (demand). A market is defined as "inefficient" when prices of traded assets do not reflect all information about those assets. As such, prices are subject to variations depending upon information that is unknowable at the time the price is set - just like real estate.

Price elasticity of demand is measured as the percentage change in the level of demand that occurs in response to a percentage change in price. In general, a fall in the price of a good is expected to increase demand for that good. More specifically, price elasticity is said to be high when a small increase in price causes demand to fall substantially. An increase in price arises also in the situation wherein the general value of the commodities in an instant segment market falls. Thus, entering a market at a price level that is not in line with market value for similar goods causes demand for that particular good to drop, if its price level is even only slightly higher than the general market value. Lesser demand, of course, causes a fall in price for that particular good which, in turn, has the proximate effect of increasing demand, all of which, therefore substantiates Dave Watt's statement as it relates to the opportunities available in the present market.

Alfred Marshall, during his tenure at the University of Bristol in England, opined furthermore on the concept that consumers attempt to equate prices to their marginal utility, defined as the measure of happiness or satisfaction gained by consuming goods and services or, in the case of real estate, capital assets. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain consumer behavior in terms of rational attempts to alter prices. Hence, as the pool of buyers dwindles, sellers must apply leverage on the perceived value of the interest in land they are offering , that is alter their utility so as to motivate buyers to purchase. Which, in turn, helps to consolidate the market. And this, of course, explains how real estate, among other markets, always rebounds from times of turmoil, as Dave Watt announces.

Thank you for the lesson in Capitalism, Mr. Watt.

Luigi Frascati

Real Estate Chronicle


Sunday, November 30, 2008


The Paradox Of Plenty

If we all managed economic wealth responsibly we would never, ever have to go through periods of recessions in North America.

There has never been the shadow of a doubt in my mind that if one of those little green aliens flying UFO’s way up there in the sky were to add all the brainpower our North-American societies are so very plentiful of, he or she would definitely think twice before considering Homo Sapiens an undeveloped, undereducated, undercivilized, underachieving and overall somewhat primitive creature. If this little alien were to take into account all the intelligence that our Presidents, Prime Ministers, Congressmen, Members of Parliament, Senators, Chairmen of the Boards of a plethora of Corporations large and small, luminaries of all sorts and walks of life and indeed each and everyone of us put in behind the economic and business decision-making processes we make on a daily basis, he or she would crank up the engine of the UFO (possibly fuelled not by oil or other fossil derivative) and shoot away in the Universe all the way back to Alpha Centauri or wherever he or she came from in the first place.

But then, if in fact in this great continent of ours we are all so smart and capable at figuring out the overall economic picture, why is it that every so often we have to go through periods of economic downturns? For one thing, monetary policies reflect valuations of what we have in terms of economic resources and how we use them and, to a certain extent, they are also a reflection of who we are. They are Capitalism way of dealing with national wealth in an all-encompassing fashion, which in turn determines our economic stability or instability for years to come.

Take for instance the situation wherein windfalls flow in from exports fuelled by excessively low interest rates, which ultimately push up the value of currencies and in turn decimate other areas of the economy, most notably manufacturing. Overall growth suffers as the “easy money” resource sector crowds out more productive sectors, thereby tending to bring in economic stagnation and, in the limit, de-industrialization. Or, more perniciously, the other situation wherein wealth is increasingly bestowed rather than earned, as it has been the case in recent times with speculative trends in both the Stock Market and in Real Estate, where winners came to dominate losers, at least in financial terms or, by way of another example, with excessive access to credit on the part of consumers that has resulted in the spread of debt, as opposed to distribution of wealth, to endemic proportions.

In fact, it can be safely stated that lack of an even distribution of wealth through sectors of society is a main underlying cause of recessions. When resources are harnessed in such a manner so as not to promote general economic vigour, this is the time when economic expansion sooner or later will come to a halt. What economists define as the “polarization of wealth” may come in different forms, but it is more typically present when governments’ ability or otherwise willingness to resist short term grab–and-run tendencies and temptations is impaired. This particular economic concept, it must be noted, is a far cry from the parallel but dissimilar political doctrine of “redistribution of wealth” first enunciated by Karl Marx and Friederich Engels in their Communist Manifesto of 1848, and most recently and so successfully re-enunciated by President-elect Obama during the 2008 electoral campaign, hopefully with a different nuance. With the difference consisting mainly in the fact that the economic concept of polarization of wealth lacks the reference to struggles between the ruling class (capitalist bourgeoisie) that owns the means of production and the working class (proletariat) that labours for a wage, which is present in the political doctrine. In fact, in capitalist economic theory capital and wages complement and are intertwined with each others.

Wealth dependence on speculation, as opposed to production and investment, creates the illusion of prosperity which is, in ultimate analysis, destabilizing for the economy. Speculators, more often than not, reduce liquidity by inflating prices. This has the deleterious effect of reducing the pool of buyers, thus hampering demand and reducing prices even further. By comparison, instead, investors buy and hold capital assets, which are not consumed instantaneously but rather are to be used at a later date. Thus, for example, the purchase of a house to be used as one’s primary domicile and place of residence is an investment and much more beneficial for the economy than, say, the purchase of a second or third house with the intent of flipping it or otherwise re-selling it for a hefty profit in the short term.

Capitalism, of course, does not condemn making a profit – and neither do I. But it is the speculative excesses that we have witnessed in both the stock markets and real estate these past few years that have altered and skewed the relation between personal income and capital appreciation in favour of a few to the detriment of the many, particularly when fuelled by easy access to credit. And all this has resulted ultimately in a gross mismanagement of national wealth for which we now have to pay the cost.

Greed, like just about everything else, has a price.

Luigi Frascati

Real Estate Chronicle


Monday, November 24, 2008


The Great Canadian Recession

And, if indeed it does happen, how it will affect you.

November 24, 2008 may have been a glorious day in the stock markets following the rescue of Citigroup Inc. with the U.S. Government purchase of $20 billion in preferred shares and the announcement of its subsequent back up to $306 billion worth of the giant bank's assets, in return for a further $7 billion stake. But the financial news coming from our home front, British Columbia and Canada, are far less encouraging.

For one thing early in the morning Prime Minister Harper stated that Canada could soon be in a recession later this year (not much time left) or early in 2009, adding that "Indeed, the economic growth is just about zero, perhaps a little bit less". The Prime Minister, who was attending the Asia-Pacific Economic Cooperation summit in Lima, Peru, attributed Canada's present woes to the deteriorating economic conditions in the western world and "especially in the United States".

This was followed by the announcement that the Royal Bank Of Canada (RBC) will likely be forced to take a CAD1.6-billion hit as market losses mount and loans start to go sour. The largest bank in the country cited "extreme volatility in the American financial markets" as executives said they would write down CAD1-billion in investments and set aside CAD620-million to cover credit losses.

Then La Presse Canadienne reported that the "Prairies see biggest-ever consumer confidence decline in November". In a very concise statement, La Presse declared that "Resource-rich Western Canada, once thought to be the most recession-proof component of the national economy, is beginning to experience the same economic malaise that has gripped the rest of the country". La Presse Canadienne quoted a survey published by the Conference Board Of Canada wherein consumer confidence in the Prairies has dropped 7.4 percentage points between October and November - the region's biggest decline on record. The Conference Board attributes the drop to energy exports to the United States, which will see "an expected 12 percent decline in 2009".

And, finally, there was Colin Hansen, Finance Minister of British Columbia who in a terse bulletin announced that the Province "will lose more than $3 billion in revenues over the next three years because of the cascading effects of the American financial crisis", adding that the CAD 1.77 budget surplus this year will have to be scaled down to 'only' CAD950-million.

Heck, it sure seems that Canadians like Americans only when they are rich! So much for all those who thought that Canada was somehow 'immune' to the crisis affecting pretty much the rest of the world.

Canadians, just like their American counterparts, are unaccustomed to recessions, particularly when they involve shopping less. During the past quarter-century Canada has suffered only two official downturns, in 1990-91 and 2001. Both were short and shallow. What's more, in 2001 consumer spending barely skipped a beat; a decade earlier it fell, but only briefly. Since then, the Canadian wallet has not snapped shut. But all this may be about to change.

Evidence is mounting that the economy has slipped into recession - and this time consumer weakness is to the fore. For instance, the Real Estate Board of Greater Vancouver reports that "Residential property sales in Greater Vancouver declined 55 percent in October 2008 to 1,364 from the 3,028 sales recorded in October 2007" and that prices are down 8.8 percent since May, 2008, or about 17 percent annualized (if you wondered why I have taken up writing again in this blog, this is it). Likewise, the British Columbia Real Estate Association estimates a conspicuous drop in the number of licensed realtors in the Province in 2009 (I will stay on).

The once doughty Canadian consumer is being pummeled mainly by two things: the perceived forthcoming housing bust and a weakening labor market, especially in the East where unemployment has been steadily rising as the private sector has lost jobs for four months straight. And seeing that consumer spending accounts for 70 percent of demand, that hurts, especially when coupled with the near collapse of the once mighty construction industry.

There are two big questions about this downturn, both for Canada and the world: how long and how deep? On the second count, there is room for guarded optimism: although American recessions have usually sent the world economy into a funk, this time around the slowdown need not be so severe, especially for the emerging world. The economic test instead may come from the length of this downturn: an America that stays sluggish for several years could cause all sorts of problems.

Contrary to the popular and widespread belief that the origin of this crisis is due to housing and the real estate bubble, the present situation is a direct consequence of the biggest asset bubble in history: the stock market. Financial markets have already suffered arguably their biggest shock in eighty years, dragging down even real estate. There is a reason as to why Congress is poised to throw billions and billions of dollars at financial institutions of all sorts and at the Big Three, all important players in the Dow Jones, and not at the real estate and construction industries. In fact, the Dow began its decline a full three years before real estate, a modern day 'Fall Of The Gods'.

A prolonged sluggish America will be a problem hard to tackle for President-elect Obama. With the budget deficit rising, big domestic reforms such as expanding health-care coverage will become more difficult. And with a fragile economy, the Democrats may have to rethink their plan to roll back George Bush's tax cuts, while the momentum to re-regulate the financial markets and punish the oil industry, credit-card firms or indeed any other malefactors of great wealth will grow.

So where will all this leave you, the British Columbia consumer? Let me appeal to that old and somewhat clichéd saying:"Cash is king". It is a saying not without some wisdom. For when a recession strikes then asset prices fall - shares, real estate, just about everything you can buy - and the person with cash in hand can take advantage. So if you are pondering how to invest your millions, perhaps the best option right now is simply to open a deposit account with a triple A-rated bank.

Luigi Frascati

Real Estate Chronicle


Monday, May 05, 2008


What Type Of Homebuyer Are You?

Know thyself and you'll know what kind of home to buy.

Granted, in real estate sales we do everything for a buck. If you don't believe me, ask your friendly neighbourhood Realtor (but ask him politely). So, in the spirit that uniquely characterizes the lives of charming professionals such as myself, the real estate community routinely goes back in time throughout the annals of the history of mankind in an effort to discover new elements of the human psyche, which can help achieve exactly this goal: doing everything for a buck.

This time around someone (the competition, but I am not going to reveal who since I do not particularly care to be sued for libel) has dug up the word of none other than Heraclitus of Ephesus, who said: "Know Thyself". Not only did he say that, he also carved it into stone literally by having it inscribed in the forecourt of the Temple of Apollo at Delphi.

Heraclitus was a pre-Socratic Ionian philosopher, a native of Ephesus on the coast of Asia Minor. An ancient Greek, in other words (ladies, never trust a Greek). The reasoning behind his famous quote is the philosophical Law Of Identity, an axiom of Logic, which states that an object is the same as itself. Which then, as it applies to human beings, means that humans tend to project in what they do and in what they choose a reflection of their own inner self. A concept this, which was later on taken up and amplified by stoicists in the Roman Empire and particularly by Emperor Marcus Aurelius.

Marcus Aurelius in fact applied the principle of 'Know Thyself' thoroughly to the various people the Romans had conquered and subjugated throughout the centuries, and when it came to the Germanic Tribes across the Rhine and the Danube he quickly reached the conclusion that those folks did not know themselves at all. So much so, in fact, that he decided to exterminate them entirely (ladies, never trust an Italian).

Now, according to the competition who has conducted this intensive immersion into the depths of civilization, the step between these events that took place in the regions across the Alps and the psychology of the modern homebuyer is clearly very short, at least by cosmological standards anyway - just a handful of centuries.

Following the principle of 'Know Thyself', home seekers can be divided into four types, according to the study in question. Knowing what type you are will enable you to identify and then attract like-minded buyers and increase the resale value of your home when deciding where to sink your home renovation dollars (hopefully, you will not come across a buyer with the mindset of Marcus Aurelius).

The study divides homebuyers into the following four categories (albeit I might add I would have chosen different headings, somehow):

Social Animals

Social animals value spending time with neighbours and going for a walk around the block greeting everybody. They enjoy having a park or community centre nearby, they like to entertain friends, hanging around the kitchen with the family, enjoying the deck or backyard and walking the dog. While the feel of the neighbourhood is a big selling point for these "people's people", renovations that might warm their hearts would be a comfortable new deck, a spacious and homey kitchen, large fireplace, attractive backyard fencing and front curb appeal.

The Epicureans

Above all sun and food traditionalists, they value bright and sunny homes with lots of open spaces, fancy kitchens and gardens, including vegetable gardens, and formal dining and living rooms. Essentially they respond to the materialistic and esthetical aspects of life and want these values reflected in their homes. Renovations that would appeal to this bunch are gourmet elements in the kitchen, a fresh, bright paint job, thoughtful landscaping, opening up rooms by removing partition walls and formal elements such as high quality flooring and crown mouldings.

Pleasure Seekers

For them the experiences in life make it worth living. As such, they are somewhat oblivious to interior decorating and fancy faucets. But show them items such as a hot tub, pool, Jacuzzi, a home theatre room with surround sound system, recreation room complete with entertainment centre, wet bar and pool table, or a backyard deck with built-in barbecue and they will be ready to let the good times roll.


Villagers are willing to sacrifice space and even comfort in order to be able to live close to the conveniences they care about. Having groceries stores, restaurants and shops within walking distance or a short car ride away makes life exciting for these urbanites and uses their time in the most efficient manner. Home details that will catch their eyes are an ingenious and efficient use of space, professionally organized closets, open and bright floor plans and high quality materials that improve the looks of otherwise cramped quarters.

So now we know it. This study and particularly its conclusions certainly elevate all of us – shall we say – above the crowd. The sky's the limit. See you all in the stratosphere.

Luigi Frascati

Real Estate Chronicle


Wednesday, April 23, 2008


The Curse Of The Crude

In 2006 the world's oil rigs pumped out crude at a rate of nearly 85.5 million bbl. a day. They haven't come close since, even as prices have risen to USD 115 per barrel and are forecasted to reach USD 150 per barrel twelve months from today (source: ). All of which raises a question of potentially epochal significance: is it all downhill from here?

It's not as if nobody predicted this. Survivalists, despisers of capitalism, a few billionaire investors and a lot of respectable geologists have long cited the middle to the end of this decade as the likely turning point. Governments and the oil industry have typically dismissed such talk as premature. There have been temporary drops in oil production before, after all. In most official scenarios, production will soon rise again, peaking at more than 110 million bbl. a day around 2030.

But the official scenario doesn't seem to hold water - oil if you prefer - anymore. Even taking the 2030 deadline as true, the implication is that the optimists think we have less than three decades to go. But the fact of the matter is that the word from producers is getting gloomier by the day, to the point that many of them openly agree that oil production will never top 100 million bbl per day. The International Energy Agency warns that new capacity additions will not keep up with declines at current oil fields and the projected increase in demand, forecasted at 1.5 percent more in 2008 or 1.3 million barrels a day.

This isn't quite the same as saying that oil production has peaked and is about to start declining sharply. The big issues are not so much geological as political, technical, financial and even human-resource related. All these factors delay the arrival of oil on the market, meaning that production would not so much peak as plateau. But with demand rising sharply, especially from China and India, even a plateau could be precarious.

The world is not running out of oil. There are massive reserves available in the Alberta tar sands, Colorado shale, Venezuelan heavy oil and other unconventional deposits. The problem is that most of this oil is difficult and expensive to extract and even harder to refine, and is not likely to account for a significant share of global production anytime soon.

Almost everybody agrees that the pumping of conventionally sourced oil outside OPEC has peaked already or will peak soon, a reality that even discoveries like the recent 8 billion-bbl. find off the coast of Brazil cannot alter, because production from so many existing fields is declining.

The big question mark is OPEC, which represents the oil powers of the Middle East and a few other big exporters, and which currently accounts for 41 percent of world oil production. Every optimistic scenario assumes that this share will rise dramatically in the coming years. And of course the implication of this is that if things turn out well, North America and Europe will become substantially even more dependent on middle-eastern oil.

Then there is the gloomy view, postulating that Saudi Arabia - OPEC's top producer - cannot pump much more oil than it does now. In fact, in recent times Saudi out put has dropped from 9.6 million bbl. per day to 8.6 million, despite rising prices.

So far the answer from OPEC leaders has been that high prices are the fault of speculators and the falling dollar, not low production. They cite stats after stats showing that there is more than enough oil for sale right now. The price pressure, they point out, is coming from financial participants in futures markets. All this may be true, but the reality of things, however, is that if OPEC members are not able to boost production in the coming years, it will be impossible to keep blaming the traders as prices rise.

Voices are loud out there that cheap oil is the essential fuel of modern capitalism, which will founder without it. On the other hand, a more hopeful take is that innovation is the essential fuel of capitalism, so that high oil prices will drive rapid advances in conservation and alternative energy. Either way, the beginning of the end of the oil era may be upon us well ahead of schedule.

Luigi Frascati

Real Estate Chronicle


Saturday, November 03, 2007


Use, Location And Market Timing

Adding value to a real estate asset.

At minimum, a Realtor always must ensure that the Client has an understanding of whatever interest he/she wants in a real estate asset and the character that particular interest might include in the wide range of real estate asset types. Real estate transactions range from simple purchases of single-family dwellings to more elaborate types of transactions, such as leasing of office, retail or warehousing space to acquisition of real estate assets in liquidation.

The value any talented real estate agent can add goes well beyond the standard of care Clients are entitled to expect, which is the knowledge or competency element of such transactions. Real "value add" derives from the structural elements that flow from experience and counselling. A good agent does not simply warn a client on what he cannot do; the key is how to deal with problems and still fulfill the Client's objectives. Take negotiating an offer, for instance: only rarely are problems insurmountable, especially in a world like real estate where flexibility almost always provides more than one approach.

A good beginning in a Realtor-Client relationship, once the issue of agency has been defined and explained, is always to ask questions and listen to the answers carefully. All experienced Realtors realize that Clients may not frame a deal in particular terms, may not reveal immediately – whether unwillingly or otherwise – exactly what is that they are looking for, may not even know, in fact, what is that they want. Therefore sorting out the various elements such as prices, rent, type of real property asset, selling, leasing, financing and many similar details may not be provided in any particular sequence, or at all. Many good agents are quite talented at the "extraction" of information early on in a clear and useful manner.

One major determination is the purpose of the Client's representation. For instance, it is very different to act on behalf of a corporation seeking to lease space in an office building as compared to a developer with a vision for building value, and how to realize it in a fairly short time horizon. But no matter what, the three old elements of value in real estate – use, location and market timing – apply to almost every transaction.

To appreciate the importance of these three elements one must first realize that real estate is the single most fundamental asset of value worldwide, and it has always been. Land and its potential uses as a resource – for agriculture, grazing, actual occupancy, access to minerals for extraction, access to water, transportation and so forth – has been fought over since Biblical times.

The real value tied up in land is inherent to its use, location and market timing, not merely its existence.

Economics is very concerned with real immovable property and rules like the one regarding its valuation and disposition, and obligations accrueing to its owners. In economic terms, real property consists of some natural capital (land per se) and infrastructural capital (buildings and improvements). Land use and land management practices have a major impact on natural resources including water, soil, nutrients, plants and animals. Land use information can be used to develop solutions for natural resource management issues such as salinity and water quality. For instance, water bodies in a region that has been deforested or having erosion will have different water quality than those in areas that are forested.

According to a report by FAO, land degradation has been exacerbated where there has been an absence of any land use planning, or of its orderly execution, or the existence of financial or legal incentives that have led to the wrong land use decisions, or one-sided central planning leading to over-utilization of the land resources - for instance for immediate production at all costs. As a consequence the result has often been misery for large segments of the local population and destruction of valuable ecosystems.

Such narrow approaches should be replaced by a technique for the planning and management of land resources that is integrated and holistic and where land users are central. This will ensure the long-term quality of the land for human use, the prevention or resolution of social conflicts related to land use, and the conservation of ecosystems of high biodiversity value.

Luigi Frascati

Real Estate Chronicle


Friday, October 19, 2007


The Triumph Of Unreason

Examining why you are not always rational when purchasing real estate

Neoclassical Economics is built on the assumption that humans are rational beings who have a clear idea of their best interests and, moreover, strive to extract maximum benefit -or "utility" as economists are fond of saying – from any situation. Seeing from this viewpoint, price helps people decide which combination of work, spending and saving suits them best. In real estate, however, things are not quite this simple.

Theory of price asserts that the market price reflects interaction between two opposing considerations. On the one side are demand considerations, while on the other side there are supply considerations. In real estate, however, there is another factor – value - which is frequently confused with price, because market value is calculated as the quantity of some good multiplied by its nominal price. Clearly this should not be so, in that value represents by definition how much a product or service is worth to someone relative to other things. But then, of course, the worth of something is in function of consumer's perception. Thus the old saying that real estate is only a matter of emotion.

Neoclassical Economics assumes that the process of decision-making is rational in that, as mentioned at the beginning of this article, humans are viewed as rational beings intent at maximizing utility. But this too is only partly true when it comes to real estate. And there is now growing evidence that decision-making draws heavily on emotion, even when reason is clearly involved. In other words, scientific evidence is being presented that humans are not only irrational in real estate – they are irrational, period. This is the triumpf of unreason.

The role of emotions in making decisions makes perfect sense. It is wired in our brain, as our ancestors had to weigh frequently the pros and cons of, say, obtaining food, whom to mate with and confronting or fleeing threats. The neural mechanism evolved in such a manner so as to maximize utility at minimum cost of energy. Since emotions is the mechanism by and through which animals are prodded towards such maximization, evolutionary and economic theory predicts the same application in humans. But the question today is: does this mechanism work when we have to respond to the stimuli of urban modenity?

It appears that it does not.

Researchers have discovered that different parts of the brain are involved at different stages in the decision-making process. The "nucleus accumbens" for instance, the collection of neurons within the forebrain, is the most active part and its level of activity correlates with the desirability of a certain product. It processes rewarding stimuli such as food, recreational drugs and monetary gains, as well as the anticipation of those rewards.

Price, however, increases activity in different parts of the brain. Excessively high prices increase activity in the "insular cortex", a region of the brain linked with expectations of pain, monetary loss and the viewing of upsetting pictures. This is also the part of the brain that lights up when consumers decide not to purchase an item. Price information activates also the "prefrontal cortex", that is the anterior part of the frontal lobes. This region is involved in rational calculations as well as in the balancing of the expected and actual outcomes of monetary decisions. Particularly, the reaction of the prefrontal cortex seem to correlate with both desirabilty of a product and its price, rather than to price alone. This evokes in turn a higher sense of a good bargain, and it precedes the decision to buy.

All the foregoing seems to contraddict orthodox economic theory. Rather than weighing the present good against future alternatives, people seem to balance the immediate pleasure of the prospective possession of a product vis-à-vis the immediate pain of paying for it. Which makes perfect sense in a cash purchase, as the future utility of what is being given up is embedded in the price that is being paid for it. But when it comes to real estate, where payments are practically always deferred by way of mortgaging, the balance between the pros and cons of purchasing appears to be modulated in favor of the pros. This is so because of the abstract nature of mortgage deferred payments.

Research continues, of course, and nothing is definitive as of yet. But if in fact it turns out to be proven that buying on mortgages, just like buying on credit, eases the pain of purchasing, then real estate purchase financing will have to join the list of things such as fatty and sugary foods that subvert human instincts in ways that seem pleasurable in the present tense, but which in fact can have a long and malign aftertaste.

Luigi Frascati

Real Estate Chronicle


Wednesday, August 01, 2007


Financial Insecurity And The Rise Of Real Estate

The effects of the recent real capital appreciation on income.

There is a segment of analysts, in Real Estate Economics, that worries about consumers financial insecurity. More specifically they contend that the average middle class has seen few effective gains from the recent boom in real estate, since as profits have soared inequality has widened. Because of this, the standards of living of most people are more precarious than they used to be, because incomes have become more volatile. They argue that the defining economic shift of recent times has been the increasing instability facing households in North America. While income inequality – the gap between the highest and lowest earners – has risen sharply due in large part to the appreciation of real capital assets, income fluctuations have increased even more dramatically.

Examining stack after stack of economic data, they conclude that the average North-American household has a 17 percent chance of seeing its real and effective income drop by more than half from one year to the next, and that the painful consequence of this all is to be seen in the higher personal bankruptcy rates as well as in the rising number of home foreclosures. In sum, they conclude that income volatility is undesirable and excessive.

Rising income instability, however, is not necessarily a bad thing. A dynamic, mobile society is one in which people's income varies a lot. Milton Friedman pointed out that living standards should be affected only by permanent changes in their income, as short-term fluctuations are smoothed out by borrowing and saving. The fact that real capital assets have appreciated so dramatically and that, in turn, household saving rates have plunged does not necessarily suggest that consumers are now terrified by the spectre of more variable incomes. In fact, the opposite is more likely to be true. The increased sophistication of credit markets and, particularly, the ability to extract equity from housing has made temporary income instability easier to cope with.

There is little doubt that household incomes are more variable than they were a generation ago, but this argument is nuanced. It is not clear, for example, that rising bankruptcy rates have much to do with income instability. In fact, economic mainstream theory suggests that most people's consumption varies as permanent income changes, but barely responds to temporary shocks. Only poor people, who are less able to borrow, are affected by temporary changes in income.

In this respect, therefore, the recent appreciation of real estate works as a safety net for most consumers as against specifically what some analysts seem to be worrying so much about – financial insecurity.

Luigi Frascati

Real Estate Chronicle


Saturday, July 28, 2007


The Most Expensive Homes In The World

Wedding anniversary is coming up and you don't know how to surprise the wife? Want to indulge yourself but don't know how? Looking for a change in your daily routine but do not know what to do? Not to worry. Here are a few solutions personally hand-picked by a 21-year real estate veteran (… that would be me …).

If a lifestyle change is in your cards, there is nothing better to kick it off than by purchasing a new home. But just like everything else, it has to be done with style and inspiration. And nothing beats buying an opulent residence, capable of making your in-laws green with envy and, above all, darn expensive.

There is just such a place, a 103-room mansion spreading out over 58 acres of gardens and woodlands called Updown Court located in Windlesham, Surrey, England.

Now, this is quite a home for the extrovert purchaser who is into sports and doesn't mind to carry a little extra mortgage. This particular property offers several ballrooms, an indoor squash court, a two-lane bowling alley and a poolroom just as well. If the wife likes gardening, she will find her pleasures in the 11-acre landscaped and manicured garden, and chatting with fine neighbours the likes of the Duchess of York, Elton John, and, at nearby Windsor Castle, the Queen of England has never been easier.

To impress your friends, the entrance hall features a sweeping dual staircase modeled after one in the late fashion designer Gianni Versace's Miami home. Behind the staircase, a great hall supported by marble columns looks onto an ornamental pond, which holds a fountain that, at the flick of a switch, sprays water 200 feet in the air.

Marble abounds. Five acres of more than 30 different types of imported stone line the floors, driveway, and expansive terraces. One indoor swimming pool is styled as a Roman bath, while another is set off by a two-story stone mosaic depicting a snow-capped Mount Fuji (that would be in Japan …).

This 50,000 square foot house may be just what you need to escape your daily routine, with its heated marble driveway, 24-carat gold leafing on the mosaic floor of the study, a helipad for your flying trips to the store, the 50-seat indoor movie theather and the underground garage that has enough room to harbor eight limousines. Guests can be lodged in anyone of the 23 bedrooms but really – and in my professional view this is perhaps the most important bonus – the cost of upkeeping is a modest USD 2 million per year.

Conveniently priced at USD 138 million (that's right, million with a "m" as in Mary), this is no doubt Luigi's hand-picked bargain of the year. And the added plus is that it can be paid for also in Sterlings – now, who could ask for anything more. Just the perfect place to drop your darn Yankee accent … yeah.

If, on the other hand, you do not wish to leave North America and like horses, may I suggest the Hala Ranch to your otherwise inquisitive attention.

The Hala Ranch – as one can intuitively deduct from the name – is the property of Prince Bandar bin Sultan bin Abdul Aziz Al Saud (but make an offer and you can call him Al). The Prince, who used to be the Saudi ambassador to the United States, is selling as he has taken up the position of National Security Counselor back in Saudi Arabia. This 56,000 square feet home is just what you need if you are looking for a little country décor, peace and tranquility. The estate has its own wastewater treatment plant thus allowing you to save on sewer charges, and a mechanical shop with its own gasoline pumps and carwash. Cross-country ski trails are maintained throughout the property. The centerpiece lodge of the estate is larger than the White House, so if Hillary wins you are going to make her green with envy too. It is built in a rustic style, with massive timber beams and stone columns, and contains 15 bedrooms, all with patios, and 16 bathrooms, just in case one gets all clogged up.

Conservatively priced at USD 134 million, this is an opportunity one can hardly afford to pass. Trust me on this one, or my name is not Luigi …

Have you ever considered relocating to Turkey? I'm asking because, as you know, although still in Asia (Asia Minor, to be exact) Turkey is poised to become Europe in the not too distant future. The perfect Europe, one might add – without the Europeans …
But really, if you wish to cultivate your talent for archaeology and ancient history there is nothing better than this 30,000 square foot residence overlooking the Bosphorus in Istanbul, Turkey, (Europe). Sited on three-quarters of an acre, the Waterfront Estate offers opulent living with its 64 rooms, which feature large windows looking to the water. You can even fish from your bedroom. This mansion boasts not only gilded mouldings and crystal chandeliers, but it even has a rare quay that is nearly 200-feet long (as I said, you can fish from the bedroom). If you need a boat, the Turks can rent you one for about 1 Euro an hour.

Presently offered for sale for USD 100 million, there is a little room for negotiations here. Sorry, only American Dollars accepted by way of cash, Visa or Mastercard or, of course, debit card.

How about a pied-a-terre in none other than New York City for your week-end leisurely trips? Or for your next New Years Eve in the Big Apple, close to Time Square? Think about it, you wouldn't have to watch it on CNN anymore. If this is the case, may I recommend The Pierre Penthouse, a chateau in the sky that occupies the top three floors of one of the poshest hotels in New York City, right abutting Central Park. Guess the price, just guess it – USD 70 million!

Now, this is what I call cheap, cheap, cheap! The original 3,500-square foot ballroom boasts a 23-foot high ceiling, and on each of the two west-facing corners, soaring French doors open up onto terraces offering breathtaking views of Central Park and beyond. The master bedroom suite has two additional corner terraces so that, all in all, the balconies and windows have 360 degree views of Manhattan, Central Park, the East River and the Hudson River. And, with an annual maintenance fee of USD 464,600 which includes the services of a uniformed housekeeper and houseman (yes, I know, I didn't believe it myself), this is a true deal in the making. Hurry, it won't last.

Luigi Frascati

Real Estate Chronicle


Tuesday, July 24, 2007


Real Estate And The Degree Of Happiness

Real Estate can make us rich. Don't ask it to make us happy as well.


Having practically doubled in value during the past six years and going, real estate is over half way towards notching up its best decade ever. Market capitalism, the engine that moves real estate, seems to be doing its job well. But is it? Once upon a time that job was generally agreed to be to make people better off. Nowadays, this is not so clear. A number of real estate consumers backed, somehow, by an increasing number of analysts think that real estate ought to be doing something else: making people happy.

The view that real estate should be about more than just money has been widely held in Europe for decades. And now the idea of "wellness" behind real capital assets has sprouted in North America too, catering especially to the prosperous baby-boomers. Much of this draws on the upstart science of happiness, which mixes psychology with economics. Its adherents cite copious survey data, which typically shows some unsurprising results: the rich report being happier than the poor. However, a paradox emerges that requires an explanation: affluent countries, taken as a whole, have not gotten much happier as real estate has appreciated and as people have grown richer.

The science of happiness offers two explanations for the paradox. Capitalism, it notes, is adept at turning luxuries into necessities, thus bringing to the masses what the elites have always enjoyed. But the flip side is that people come to take for granted things they once coveted from afar. Homes they never thought they could possess become essentials they cannot do without. In a way, consumers are stuck on a treadmill: as they achieve a higher standard of living, they become inured to its pleasures.

Add to all this the fact that many of the things people most prize – such as an exclusive home address – are luxuries by necessity. An exclusive mansion, for instance, ceases to be so if it is provided to everyone. These "positional goods", as they are called (a reference to the hierarchical 'position' within society), are in fixed supply: you can enjoy them only if others do not. The amount of money and effort required to grab them depends on how much your rivals are putting in.

All this somehow casts a doubt on the long-held dogmas of Economics. The science of Economics, especially as it applies to Capitalism, assumes that people know their own interests and are best left to mind their own business. How much they work and what they buy is their own affair. But the new science of happiness is much less willing to defer to people's choices. In 1930 John Maynard Keynes imagined that richer societies would become more leisured, where people would have more time to enjoy the finer things in life. Yet most people still work hard to afford things they think will make them happy. They also aspire to a higher place in society and purchase status goods such as expensive homes, and in so doing they work even harder and have less leisurely time at their disposal.

On the other hand, if economic growth through consumerism does not make people happy, stagnation will hardly do the trick. Ossified societies guard positional goods even more jealously. A flourishing economy creates opportunity, which in turn spurs happiness to a certain degree. It is hard to say that most people were unhappy during the heydays of the real estate boom.

To find the real estate market or, for that matter, the entire capitalistic system at fault because they do not deliver joy as well as growth is to place too heavy a burden on them. For many to do well is not enough: they want to do better than their peers, and this competition sets anxiety very deep.

Real estate can make people well off and the consequence of it is that one can choose to be as unhappy as he wishes. To ask anymore of it would be asking too much.

Luigi Frascati

Real Estate Chronicle


Thursday, July 12, 2007


Russian Roulette

The oil policy of Vladimir Vladimirovich Putin, President of the Russian Federation.

"The world is leaving one epoch, the 'Cold War,' and entering a new one. We have buried the Cold War at the bottom of the Mediterranean Sea" [Mikhail Sergeyevich Gorbachev, Malta, December 1989].

Who stands to gain the most from the destabilization of oil prices?

Ten years ago Russia was in a state of disarray reminiscent of the Seventeenth Century. Putin's predecessor, Boris Yeltsin, had secured re-election in 1996 only by turning the privatization of the Russian energy sector into a sleazy scam, trading oil and gas fields for campaign contributions. Meanwhile, ordinary Russians had to endure rampant inflation and unemployment. As former Soviet republics and Warsaw Pact allies queued up to join NATO, the superpower seemed really to have become – as the Cold War joke had it – Upper Volta with missiles.

Then, at the end of 1999 Vladimir Putin took over, and since then he has ruthlessly reasserted the Kremlin's control over the energy sector – in fact over the entire country. When it comes to energy, Putin's Russia seems prone to loutish behaviour, despite constant claims that Russia is a reliable partner. Russian officials have made no secret of wanting to keep big oil projects in the family, and thus have pushed out of the country pretty much all major oil players, from Royal Dutch Shell to Mitsubishi. And the Kremlin has often intimidated neighbours with threats to cut off their oil or gas supplies. Last winter, for example, Russia appeared to blackmail the Ukraine's new pro-western government by cutting off the country's gas amid a dispute over prices. Early this year, when Lithuania had the temerity to sell an oil refinery to a Polish firm instead of a Russian one, the pipeline that supplies the refinery with Russian oil suddenly succumbed to a mysterious technical fault.

Through these bullying methods Russia's economy has bounced back, with growth averaging almost 7 percent and inflation coming down into single digits, and has enabled the country to once again re-establish its former political clout throughout the world. So much so, in fact, that at the recent international conference on Security Policy in Munich the Russian President declared that a "unipolar world", meaning a world dominated by the United States, would "plunge into an abyss of permanent conflicts".

Maybe so, but what would happen to a world dominated by Putin's Russian Federation?

His Russia is an energy empire, sitting on more than a quarter of the world's proven reserves of natural gas, 17 percent of its coal and 7 percent of its oil. America, for geographical and political reasons is not one of Russia's main customers, but three-fifths of Europe's natural-gas imports and one-fifth of its oil come from Russia. Energy is a weapon with which Vladimir Putin seems to be intent at restoring the lost greatness of the Soviet Empire. No longer needs Russia to go beg the West for money cap in hand, as it did in Boris Yeltsin's days. Now it can stand tall once more, not the least among the neighbouring former Soviet countries that many in Moscow have never reconciled themselves to losing.

Mr. Putin's use of energy as a weapon is only one instance of a newly-found Russian assertiveness that nowadays seems to border on gangsterism, as clearly pointed out by the assassination of former Russian Agent Alexander Litvinenko in London in December, 2006. Polonium has its merits.

Russia's geopolitical power has become a function of its energy exports. As history teaches us, the energy crisis of the 1970's helped the Soviet economy very much even has it hurt the West, by bathing the ailing Soviet system in petrodollars. But as oil prices slid below an average price of USD 20 per bbl. from 1986 through 1996, Russian power and prestige slid too. It is no coincidence that the price of oil touched USD 11 per bbl. in Yeltsin's miserable last year.

As the renaissance of Russia is now well under way, one can't avoid wondering the political implications of today's very expensive oil, for which we all pay out of our own pockets. Quite simply Russia is, after all, the only major power that has an interest in high oil prices, both economic and political. Which then conversely means that Russia is the only major power with no interest whatsoever in the stability of the Middle East. And it shows.

Russia poses America's biggest problem when it comes to stopping Iran from acquiring nuclear weapons capability. Russia is the one supplying Iran with more than 3000 centrifuges for the enrichment of uranium. Russia is fomenting anti-Americanism throughout the region as well as sowing the seeds of discord among Arabs. Russia's condemnation of President Ahmadinejad's repeated calls for Israel to be wiped off the map was lukewarm, at best. Russia is building the Iranian nuclear reactor at Busher, and the Russians have recently been awarded the contract to build an additional six such plants.

So, would this be the world with the Russian Federation at the helm? A world where destabilization of the Middle East would guarantee high energy prices on which Russian power has come to depend?

Some things never seem to change.

Luigi Frascati

Real Estate Chronicle


Friday, June 22, 2007


Real Estate And Personal Wealth

How the appreciation of real capital assets has redistributed household wealth.

Much of Adam Smith's classic treatise on "The Wealth Of Nations" is not really about wealth at all, but about income. The two concepts are different: income is the flow of money a nation or household receives in a given lapse of time, say a year. Wealth, conversely, is the stock of capital assets the nation or household have accumulated over their lifetime, minus debts. The difference matters, but how much is hard to say.

On the one hand the distribution of income has been debated over and over but, on the other hand, the distribution of wealth has been largely ignored. This is so because whereas it is relatively simple to measure global income inequality, to measure wealth is an entirely different story. This is all the more true in this time and age, when the richest 10 percent of adults in the world own 85 percent of global household wealth, while the bottom half collectively owns barely 1 percent.

Even more strikingly, with the appreciation of real property assets particularly in Western nations, the average person in the top 10 percent of wealthy adults owns nearly 3,000 times the wealth of the average person in the bottom 10 percent.

In everyday conversation the term ‘wealth’ often signifies little more than ‘money income’. But the economic interpretation of wealth is much broader and encompasses the value of all household resources, both human and non-human, including the ownership of real capital. Although real capital is only one part of all personal resources, it is widely believed to have a disproportionate impact on household well-being and economic success, and more broadly on economic development and growth.

The World Institute For Development Economics Research (WIDER) in Helsinki has now attempted to measure personal wealth, which includes real estate, financial assets, consumer durables and even livestock. Specifically, estimates of wealth levels are based on household balance sheets and wealth survey data, which are available for 38 countries. These include many of the rich OECD countries, that is those nations members of the Organization For Economic Cooperation And Development, as well as the three most populous developing countries, China, India and Indonesia; so the data cover 56 percent of the world’s population and 80 percent of all household wealth.

The researchers at WIDER found that wealth levels vary widely across nations. Among the richest countries, mean wealth measured in US Dollars was $144,000 per person in the USA and $181,000 in Japan. Lower down among countries with wealth data are India, with per capita assets of $1,100, and Indonesia with $1,400 per capita. Even within the group of high-income OECD nations the range includes $37,000 for New Zealand, $50,000 for Denmark and $127,000 for the UK.

The regional pattern of asset holdings shows wealth to be heavily concentrated in North America, Europe, and high-income Asia-Pacific countries which together account for almost 90 percent of all global wealth. Although North America has only 6 percent of the world adult population, it accounts for 34 percent of household assets. Europe and high-income Asia-Pacific countries also own disproportionate amounts of wealth. In contrast, the overall share of wealth owned by people in Africa, China, India, Russia and other lower income countries in Asia is considerably less than their population share, sometimes by a factor of more than ten.

So, how wealthy are you compared to the rest of the world?

If you have more than $2,161 in net worth, defined as the overall value of your capital and financial assets minus debts, you belong to the wealthier half of the human race. If you are lucky enough to own more than $515,000, you belong to the top 1 percent of wealthy mankind, although this is hardly an exclusive club, since it contains 37 million adults just like yourself.

The top ranks are dominated by the Japanese, Americans and Europeans, in that order. China occupies the middle ground. Throughout the globe, wealth is shared much less equitably than income: more than one-half of it is held by just 2 percent of the world's adults. The distribution is equivalent to a world of ten people, in which one had $1,000 and the other nine had $1.00 each.

Furthermore, there are some appalling results as well. Many people in poor countries have next to nothing, but quite a lot of people in affluent countries have even less than that, since their liabilities exceed their assets (negative net worth). Take Sweden, for example: the bottom half of all Swedes have a collective net worth of less than zero. And this is a characteristic of pretty much all Nordic countries, due in large part to their social welfare set-up. Sweden, for example, has a wealth per head of $39,000 – less than South Korea.

Someone ought to tell the Swedes that ownership pays.

Luigi Frascati

Real Estate Chronicle


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