2008 Real Estate Capital Markets Industry Outlook


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One reason markets worry about debt is that there's not as much cash around to cover it. The cash-to-debt ratio for corporate borrowers fell to 12 percent in , the lowest ever. The tax breaks also appear to be helping. Companies saw their nominal tax rates reduced from 35 percent to 21 percent and apparently are using a large chunk of the windfall to knock off some debt. One measure of how willingly the market is snapping up bonds, particularly those lower in quality, is through covenant quality, or the amount of protections being demanded in case of default.

Moody's reports that its Covenant Quality Indicator has held at its lowest level of classification for 18 straight months and is just off the record set in August We could see triple-B credits, some of them, move from investment grade to high yield. That slide from low investment grade to junk is one of things that scares markets.

General Electric is the highest-profile case to have that potential, though company officials insist they are doing everything they can to make sure that doesn't happen. Should a company that big slide, it would reshape the high-yield market. Investors would be counted on to snap up those bonds, but could demand even higher yields to do so. You get an underappreciated risk that becomes a catalyst," Rusnak said.

Well Fargo itself is retreating from the space, with a neutral position on investment grade corporates and an unfavorable outlook on high yield. You could argue they took what the market gave them, to take on the leverage at lower interest rates," Rusnak said. In a lot of cases they will, but there will be some bubbling up of challenges. Elizabeth Warren spoke publicly about the threat in a recent public hearing, with the Massachusetts Democrat warning Randal Quarles, the Federal Reserve's vice chair of supervision for the banking industry, that leveraged loans pose an economic threat on scale with subprime loans from a decade ago.

Simon Macadam, global economist at Capital Economics, also said leveraged loans, which generally are issued to lower-quality borrowers that already have a substantial debt load on their balance sheets, pose a danger. However, Macadam said that "for the time being" there are "at least three sources of comfort" for why the danger won't become systemic: "manageable" corporate debt loads, stronger bank capital, and an expected tempering of interest rate rises.

Capital has an out-of-consensus forecast that the Fed will begin reducing rates into as the economy weakens. Currently, the Fed is expected to approve a rate hike in December and has forecast three more in Indeed, fixed income strategists who spoke to CNBC were almost unanimous in their belief that problems with corporate debt will be far more company-specific than systemic.

Tax reforms are beneficial. Looking into next year, overall debt servicing should be very stable and not problematic. We see a lot of opportunities in the market. The current climate is likely more conducive to active management, or selecting individual issues, rather than following broad indexes, Klevan said. The current climate shows "how important it is to do your homework," she added. Lazard has found value in "green bonds," which focus on companies that invest in environmentally sustainable ways.

That's not to say there isn't danger out there, but Klevan does not see it in a macro sense for the U. So that's going to have a big impact in the medium term on a lot of countries. Sign up for free newsletters and get more CNBC delivered to your inbox. Notes : Each banking crisis episode is identified by country and the beginning year of the crisis. Only major systemic banking crises episodes are included, subject to data limitations. The historical average reported does not include ongoing crises episodes. Consumer indices are used to deflate nominal house prises.

The credit crunch: impacts on the housing market and policy responses in the Netherlands

Source : Reinhart and Rogoff Some of the countries in Fig. Ongoing crises are in dark shading and past crises are in light shading. The historical average coloured black in the diagram does not include the ongoing crises. Reinhart and Rogoff found that the cumulative decline in real housing prices from peak to trough averages The most severe real housing price declines were experienced by Finland, the Philippines, Colombia and Hong Kong. Reinhart and Rogoff observe that falls in the stock market are sharper and shorter-lived than falls in the house prices.

Reinhart and Rogoff describe the mounting national debt as a defining characteristic of the aftermath of banking crises.

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They conclude that, so far, the current crisis in the US has followed the pattern of history. Apparently, it still has a long way to go. Highly synchronized recessions per cent of countries in recession; shaded areas denote US recession. The analysis by Reinhart and Rogoff a , b , and the study of IMF a , b can serve as a template for interpreting the impact of the banking crisis on the Dutch housing market.

Volatility in the exchange rate US dollar: euro, January —10 March Source : CPB : The credit crunch started in mid with major problems on the US mortgage market, particularly the subprime market Di Martino and Duca ; Shiller Borrowers who use subprime lending have to pay interest rates which are basis points higher than rates in the prime market Pennington-Cross : The Federal Administration wanted to promote home-ownership among low-income households who could not meet the criteria of mortgage giants Fannie Mae and Freddie Mac.

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The mortgage norms in America are lower than in the Netherlands. It is, for example, easier to get a loan in America, and interim re-mortgaging is available if the interest payments start to bite. Rises in the value of dwellings are often anticipated. In order to temporarily ease the burden, the interest is usually set for short periods Buckley et al.

Lower entry rates are offset later by an extra supplement. Interest-only mortgages with variable interest rates are very popular. Two-part mortgages are even available in which the first part meets the requirements of the federal mortgage guarantee, while the second takes the form of a subordinated loan to finance the rest. Many Americans with a low credit rating have taken on a high mortgage in recent years. The Clinton Administration relaxed the mortgage conditions for low-income households and inadvertently increased the popularity of Alt-A and subprime mortgages with a relatively high, variable interest rate and high risks for low-income households.

The share of subprime mortgages in all mortgage loans rose from one tenth to one quarter. The growth of subprime mortgages was a key trigger in the sudden demand for homes in less popular urban neighbourhoods Wyly et al. The outlook seemed good as long as house prices were on the increase, as long as the general economy was booming, and as long as jobs were relatively easy to find.

But when the economy fell into stagnation and house prices began to fall in , the problems came thick and fast. More and more households ran into payment difficulties and there was a sharp rise in the number of foreclosures Sanders By , no fewer than three million compulsory sales were taking place on an annual basis.

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Recent American research Immergluck ; Schwartz suggests that this segment of the market is rife with fraud. Often, these rapid increases begin in real estate that comes onto the market because owners are unable to keep up the mortgage payments and because the value of the property on a stable market is not immediately clear. There are many dishonest valuators in the US market, who value property on the basis of sale-and-profit strategies and more or less ignore the actual market value.

They sell overvalued homes to banks and thus force them into accepting a sizeable capital loss. These problems were exacerbated by the growing popularity of securitisation: the practice of bundling mortgages and trading them on the secondary mortgage market Aalbers So, they were automatically regarded as sound and reliable, but eventually even the experts were unable to properly assess the risks.

The banks and insurance corporations faced serious problems after it transpired that the banks had acquired many bundled mortgages that had been traded on the secondary mortgage market and which had an underlying value that was far lower than the book value van Hoek Eight days later Lehmann Brothers collapsed.


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Soon afterwards, the US administration and national governments in Europe intervened to bail out the banking system. Pennington-Cross observes that subprime and FHA market shares are higher in cities with higher economic risk profiles. In contrast, prime lenders concentrate their origination activities in markets with lower economic risks.

Recent developments in residential mortgage securitisation in the USA are discussed in greater detail by Haffner Though a small country, the Netherlands, relatively speaking, has strong international ties. Because of its international connections the Netherlands is exposed to the fallout from the economic trials and tribulations of other countries.

As in China, the Dutch economy in was particularly hard hit by the steep fall in exports. Unfortunately, this variable does not enter into the analysis of Reinhart and Rogoff a , b , In Europe the United Kingdom, in particular, fell foul of the toxic loans that were part and parcel of mortgage securitisation. Meantime the credit crunch was taking a heavy toll on the Dutch insurance sector: The government had to step into rescue Fortis and Aegon. Banks no longer had the resources to grant mortgages or other long-term loans.

The Dutch government intervened across the board by partially nationalising the banks and accepting some of the risks.

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When the banks had sufficiently recovered to lend money again, they tightened the conditions. In the past, it was not uncommon for banks to grant mortgages that amounted to six times the annual income; now they rarely grant mortgages that amount to more than four-and-a-half times the annual income.


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Banks are also demanding more personal capital and more repayments of the principal. Now this share is decreasing quickly. More and more banks do not like offering mortgages without repayments and without personal capital. Wellink placed explicit emphasis on the anticipated rise in unemployment Giebels In August , the CPB adapted these forecasts and predicted a reduction in the output of 4. This new forecast provides the basis for the National Budget for On 23 December the following crisis calendar appeared in De Volkskrant newspaper:.

The value is later fixed at billion dollars. The Prime-Minister of Iceland warns that his country is facing bankruptcy. The banking problems in the Netherlands had a snowball effect on the economic sectors that relied heavily on investment goods, durable consumer goods and exports. After some delay, the international haulage industry, the port of Rotterdam, the airport of Schiphol, the steel industry, the car industry and, last but certainly not least, the construction industry and the real-estate market were hit by wave after wave of bankruptcies and job losses.

Source : Douwes and Van Keken a. On 25 March the coalition partners reached agreement on the emergency measures. The Cabinet was already stimulating the economy to a considerable degree via in-built stabilisers that work more or less automatically. It reserved an extra 3 billion euros to boost the economy in This money was earmarked for the labour market, energy saving, building projects and infrastructure. Another 3 billion euros would become available in According to de Kam a , the incentives for the economy paled into insignificance alongside the future cuts in public spending.

Step by step the Dutch Cabinet decided to come to the aid of the economy by adopting stimulatory measures. Meantime, tax revenue was dwindling, inevitably resulting in a growing deficit in the government account book. The national debt is now growing at the rate of 65 million euros a day.

That works out at 24 billion euros a year. The Minister of Finance has to borrow this money. In the budget deficit will rise to about 35 billion euros. In another 22 billion euros will be added. If the fundamental budget deficit fails to decline substantially every year, it will reach 92 billion euros by On August 11, the Bureau for Economic Policy Analysis adapted its forecasts on the budget deficit in from 4.

De Kam b nevertheless foresees a bloodbath when the political parties ask the Bureau for Economic Policy Analysis in to do the sums for their election programmes. The Netherlands is clearly following the model of Reinhart and Rogoff as far as the budget deficit is concerned. A total of 84, households used the NMG in 63, to purchase a home and 20, to finance home improvements de Groot Seventy per cent of new-builds costing less than , euros the limit at that time was backed by a National Mortgage Guarantee.

In the number of compulsory sales with residual debt fell to compared with in The expectation for the number of foreclosures in is about 3, now. Confidence in the housing market took a nose-dive at the end of The owner-occupier market caved in, especially at the higher end. The serious drop in commissions for architects, developers, construction firms and estate agents would lead to greater unemployment and more bankruptcies.

The volume on the house-building market fell dramatically because many owner-occupier projects were withdrawn. The exploitation of land showed financial losses, so the construction of more affordable owner-occupier and rental homes often ground to a halt as well. At present consumer spending power is still intact, but consumer confidence struck a low point in the spring of The decline in output in the construction sector and the relatively low interest rates are aggravating the housing shortage and therefore making for only a very modest fall in property prices.

In August the average fall in the price of homes was 5. Though the housing associations are also being hit by the credit crunch, they are being asked on all sides to continue with rental dwelling projects and to take over projects from commercial developers and realise them, usually in the form of temporary or permanent rental housing. Nevertheless, also housing associations have been severely hurt by the credit crunch and by current policies of the national government. The rigid rent policy, the introduction of a corporation tax for all housing associations, and the lower number of housing units sold by housing associations have together considerably reduced the capacity of housing associations to invest in new construction.

There are fewer divorces and fewer new households being formed: the dilution of the family is undergoing a temporary interruption and the demand for housing is growing at a slower rate than before;. Banks and mortgage providers have adopted more cautious lending policies, which have been partly responsible for the steep decline in projects by private developers and construction firms.

People who want to take out a mortgage are experiencing more constraints and barriers than before;. Hans Hoogervorst, Chairman of the Netherlands Authority for the Financial Markets AFM , has stated that in one out of every four cases, the mortgage advice given in the Netherlands is inadequate. He has also expressed concern about overcrediting on the housing market: unlimited deductibility of mortgage interest has led to too many top mortgages.

These markets have similar features to bull markets , although a buoyant market may not necessarily last as long. After the market crash , for example, the equity market became buoyant and hit an all-time high just seven years later. A buoyant market is one that displays prices that gradually trend upward over time. A market that displays buoyancy or becomes buoyant normally occurs as a result of optimism regarding the economy, which generates positive economic activity. It becomes a self-fulfilling prophecy of sorts, in which people begin to regain confidence after a down market and increase investment, consumption and savings, driving the prices of commodities and equities higher.

People view this as a positive sign and begin to generate more economic activity, further increasing prices. Buoyant markets usually display characteristics of high corporate profits , low cost of capital and a high return on capital. An investor who enters the market at the beginning of a buoyant period is set to profit, while an investor who takes a long position at the end of a buoyant market may realize losses.

If a buoyant market is one with increasing prices, it makes sense that a market that displays buoyancy will have higher corporate profits, and therefore, higher profit margins. This makes it look like the average margins in the market are increasing.


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2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook
2008 Real Estate Capital   Markets Industry Outlook 2008 Real Estate Capital Markets Industry Outlook

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