MARKET MOVER - BNP PARIBAS - Investment Services India

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owner-occupied housing units, renter-occupied housing units have been on a sharp, upward trend, adding about 1mn per year over the past two years (Chart 1). Rental yields, calculated as annual rent divided by home prices, have now reached their highest levels as far back as we have data, even as yields on other assets have been declining steadily (see Chart 5). As investors seek returns, housing looks increasingly attractive. A lot of increased activity has come from cash buyers; the National Association of Realtors reports that the share of existing single-family home sales purchased by cash buyers has risen to just below 30% from 20% a few years ago. Private equity investors have also been reportedly buying blocks of homes for rental conversion, although comprehensive data on this source of demand is unavailable. If prices remain stable, banks could become more willing to lend to potential landlords. Indeed, The Wall Street Journal reported this week that ratings agencies are exploring rating securities backed by home rental contracts. A market for securitized rental contracts could significantly increase the investor demand base. Broadening the investor/rental market is no simple task. Some regions have higher rental yields than others, and each state has its own legal framework for rental contracts and protections for renter occupants. Regions that experienced more of a housing boom and bust, like the South and West, currently offer the highest rental yields. Despite the complexities involved, rental yields are increasingly compelling on the back of negative real yields on safe assets, and we would expect this market to continue to grow. A new channel for monetary policy The Fed has tried valiantly to stimulate housing with its unconventional policies. It has acquired a net USD 844bn in mortgage securities and roughly USD 1ttrn in Treasuries since the crisis began. Mortgage rates have dropped to record lows. Yet, demand for homeownership remains dismal by historical standards. It is tempting to conclude that the Fed’s new efforts will have little-to-no impact on this critical sector (Chart2). However, the portfolio balance channel appears to finally be reaching the housing market. QE has been quite successful driving down yields on safe assets and forcing investors into riskier assets, such as corporate bonds and equities. It appears that housing is increasingly becoming an important beneficiary as investors are driven toward the now relatively much more attractive investment of rental housing. This is good news from a macroeconomic standpoint, as well, since increased rental supply will help meet our expectation of continued growth in rental demand. Greater investor activity should lead to further stability Chart 3: Homeownership Is Plunging Source: Reuters EcoWin Pro Chart 4: Mortgage Deleveraging Continues Source: Reuters EcoWin Pro Chart 5: Housing Is a Great <strong>Investment</strong> Source: Reuters EcoWin Pro or modest gains in home prices, and temper the recent rise in rents, thereby, relieving upward pressure on core inflation. The rise in housing investors will not boost all segments of the housing market; higher-end suburban markets are not good candidates for investors seeking a liquid rental market. However, many middle- and lower-end neighbourhoods and urban areas should continue to see improved demand dynamics on the back of the Fed’s aggressive new policy stance and may even lead to an increased marginal impact from their interventions. Julia Coronado and Yelena Shulyatyeva 20 September 2012 Market Mover 14 www.GlobalMarkets.bnpparibas.com
Japan: The Eastern Fiscal Cliff • Due to its inability to enact deficit-financing legislation, the government has decided to suspend for three months the disbursal of roughly JPY 5trn in expenditure. While this should have little economic impact, failure to enact this legislation by December could trigger more drastic spending cuts of roughly JPY 7trn (almost 5.7% of GDP) in December. • To avoid such a disastrous development, debtfinancing legislation needs to be enacted as soon as possible, something that will require some kind of deal with the opposition LDP. And here, there are two main possibilities. • The straightforward deal would be to agree to dissolve the lower house in exchange for opposition support for the legislation. This would mean a snap election by year end (or slightly thereafter, if Prime Minister Yoshihiko Noda insists on passing a supplementary budget). • The other option would be for the LDP to make its cooperation contingent on an agreement to forswear using such legislation as a political trump card, something that would benefit the LDP should it return to power (as seems likely). This would leave the dissolution of the lower house at Prime Minister Noda’s discretion, essentially pushing the general election back to next summer. Budgetary disbursement delayed for first time in postwar era Non-essential budgetary spending has been postponed for the first time in the post-war era. The government has moved to conserve cash, because the Diet session was drawing to a close (on 8 September) without action being taken on legislation authorising the issue of deficit-financing bonds. As almost half of the spending in the general account budget is covered by deficit-financing bonds, it will be impossible to implement the budget as planned without this key legislation. With the fate of the debtfinancing bill still uncertain owing to the political stalemate in the divided Diet, there is a risk that the government could run out of cash by late October. Consequently, in an effort to tide things over at least through November, the government on 7 September decided to conserve cash by suspending for three months the disbursal of roughly JPY 5trn in spending. These funds had been destined for (1) administrative expenses (telephone and photocopying charges, etc.), (2) subsidies to independent organisations, such as national universities, (3) tax-revenue grants to local governments, and (4) transfers to the special accounts (including the public pension-fund special account). To limit the impact on people’s lives and the economy, all essential spending (social welfare, defence, reconstruction, etc.) will not be affected. That said, if the debt-financing legislation remains in limbo, drastic spending cuts will become inevitable, resulting in a partial shutdown of government. And this would have serious ramifications for the economy and daily life. US faced government shutdown risk last summer While one might shudder at the idea of a government shutdown, it is worth remembering that the US faced a similar risk last July because of the debt-ceiling crisis. As in Japan, the US federal budget and the amount the government can borrow to service the budget deficits (debt ceiling) are agreed separately. Congressional authorisation is required whenever the debt ceiling is raised. In the US, where control of Congress can often be divided between government and opposition, negotiations on raising the debt ceiling ran into difficulty when Democrat and Republican views on fiscal affairs collided. And for a while, there was a growing risk that an agreement might not be reached, which could have resulted not only in the delayed disbursement of social security benefits and other payments, but also sovereign default. While an accord was reached at the eleventh hour, financial markets were destabilised for a while. Little economic impact from delaying JPY 5trn Getting back to Japan, the recent decision to save roughly JPY 5trn basically involves the delayed disbursal of funds, though there also is the possibility that some of this spending might be eliminated altogether. The targeted administrative expenses and subsidies to independent organisations could be axed. Together, this could save the government roughly JPY 600bn, a fairly insignificant amount in macro terms (ultimately, we suspect little spending will actually be cut). The lion’s share of the spending delays come from transfers to the special accounts (JPY 2.3trn) and tax-revenue grants to local government (JPY 2.1trn), which cannot be cut. Accordingly, as these disbursements will only be delayed for three months and duly paid out from December, the economic impact, when averaged out over the full period, should be pretty neutral. Ryutaro Kono/ Makoto Watanabe 20 September 2012 Market Mover 15 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: Spain set to present its new budget
Page 5 and 6: The methodology All of the above in
Page 7 and 8: Ireland: What to Expect When You Ar
Page 9 and 10: Spain: Inching Closer to a Request
Page 11 and 12: UK Inflation: No Pressure • UK in
Page 13: US Housing: New Channels for Policy
Page 17 and 18: an agreement that all budget-relate
Page 19 and 20: This section is classified as non-o
Page 33 and 34: Table 1: BNP Paribas' Inflation For
Page 35 and 36: Table 3: BNP Paribas' Inflation For
Page 43 and 44: Economic Calendar: 21 - 28 Sep (con
Page 45 and 46: Key Data Preview Chart 1: UK Cumula
Page 47 and 48: Key Data Preview Chart 5: German He
Page 49 and 50: Key Data Preview Chart 9: German ES
Page 51 and 52: Key Data Preview Chart 13: Japanese
Page 53 and 54: Key Data Preview 7000 6500 6000 550
Page 55 and 56: Treasury and SAS Issuance Calendar
Page 57 and 58: Central Bank Watch Interest Rate EU
Page 61: For Production and Distribution, pl

MARKET MOVER - BNP PARIBAS - Investment Services India

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