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Real Estate Market Seems to be Back in Rude Health

Kitty Miv, Editor
13 June, 2013

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

It's not fair, is it, at least not judged from the perspective of say a jobless Greek or Italian home owner, that the United States real estate market seems to be back in rude health less than five years after mortgage-linked CDOs nearly brought the global house of financial cards crashing to the ground. Yet the picture in the US looks more positive than it has done than at any time in the last five or six years: metropolitan area median home prices continued to rise in the first quarter of 2013, with the national gain showing the best year-over-year performance in over seven years, according to the latest quarterly report by the National Association of Realtors. The median existing single-family home price rose in 133 out of 150 metropolitan statistical areas (MSAs) based on closings in the first quarter of 2013 compared with first quarter last year, while 17 areas had price declines. At the end of the first quarter there were 1.93 million existing homes available for sale, which is 16.8 percent below the close of the first quarter of 2012, when 2.32 million homes were on the market. In the fourth quarter of 2012 the median price rose 10.0 percent from a year earlier. In March 2013, the Bank of America revised upwards its house price forecast for 2013 from 4.7 percent growth to 8 percent growth. At around the same time, JP Morgan doubled its prediction for house price growth to 7 percent, and it anticipates 14 percent growth by the end of 2015. It remains to be seen though whether reality meets the banks' expectations. The only thing that might dent the animal spirits that are propelling the market upwards would be if the mortgage interest deduction was to be removed; but according to a new study from the Urban-Brookings Tax Policy Center, there is no chance at all of that happening.

Now I'm going to surprise you, saying something good about bête noire Algirdas Šemeta, European Commissioner for Taxation, Customs, Anti-Fraud, Audit and Statistics, who has often figured negatively in this column. Well, he has slapped down a Belgian MEP who wanted him to investigate Gibraltar's e-gaming industry, which has been one of the Rock's success stories as it struggles to scrape a living under the lowering glare of "neigbour" Spain, which has trouble accepting the conclusions of the Treaty of Utrecht, which allocated Gibraltar to England "in perpetuity" a mere 300 years ago this year. I wonder if the Gibraltarians will be celebrating? At home, and very quietly, if they have any sense. Anyway, it's good news about the gaming, and let's hope that Šemeta is equally resistant to equivalent siren calls regarding Malta's even more successful gaming regime from the growing number of EU Member States, including the UK, Greece, Spain itself and many others, which are operating illiberal and almost certainly illegal e-gaming regimes under the selectively sensitive noses of the Commission and the European Court of Justice. All countries have got their peculiarities, and they should be allowed to benefit from them: the Dutch have got their water (tulips), the Greeks have got their islands (tourism), the Danish have got their grass (butter) and Malta, which like Gibraltar is mostly made of rock, has got its wits.

Speaking of Mr Šemeta, he hasn't had a good week on the dossier which must be keeping him awake at night, which is needless to say the Financial Transactions Tax. He began the week with a ritual denial that the tax was to be scaled back – well he would, wouldn't he – and then took a series of body blows from opponents of the tax, beginning with another attack from the UK when George Osborne (bonus point for him) wrote scathingly to Guido Ravoet, Chief Executive of the European Banking Federation (EBF), calling the tax "poorly designed, badly-timed, and, we believe, unlawfully extraterritorial." Then, from an unexpected quarter, came another blow when Gérard Mestrallet, the president of financial markets organization Paris Europlace, told French Finance Minister Pierre Moscovici about his concerns about the future of the Paris financial center, and stressed his opposition to the tax. Mestrallet warned of the "devastating risks" of the European Commission’s plans for an EU FTT, saying that, in its current form, the proposal would have "systemic effects," not only on all financial activities in Europe, with the risk of a relocation of activities outside of Europe, to the benefit of international competitors, but also on corporate financing, including the financing of small- and medium-sized companies and intermediate-sized companies.

Beginning the negative section of the column under the heading of "silly" we have the Philippines indulging in a piece of top-down bureaucratic craziness which will be as ineffective as it is irksome. There is a – widely ignored – system of "official receipts" (ORs) which have to be issued in respect of every transaction worth more than – wait for it – sixty US cents – yes, you can believe your eyes – and needless to say there is a thriving black market in ORs, many of which date back to the 1970s, since it is the ORs, and only the ORs, which entitle you to an income tax deduction. I think I've got it right. Anyway, they should simply scrap the whole lunatic system and allow normal commercial practices to take over instead, as is the case almost everywhere else in the world, instead of which, yes, they are scrapping the system, but only to reinvent it with a whole new batch of replacement ORs. The only people who benefit from the existing system are the golden boys who have official permits to print ORs: while in say France or Russia it's the notaries whose palaces line the streets of the capital, in the Philippines it must be these printer guys and gals who have the palaces. If you could get to the truth, you'd probably find that the biggest of them is married to a sister of someone high up in the tax department. There has to be an explanation!

"Starring Algirdas Šemeta," we should put on the marquee for today's column, because here he comes again with second prize for nuttiness after the Philippines, in a renewed bid to recapture EUR10bn of annual taxes "lost" through tobacco smuggling. There's so much to talk about here it's like a bowl of especially delectable honey cakes, but before starting I will just note that the EU has a special interest in excise taxes and VAT, since it gets a lot of its "own funding" from them. Let's begin with "lost" taxes. Finance Ministers and tax officials are very fond of talking about them: EUR10bn here, USD34bn there (try searching congressional records for Bermuda or the Cayman Islands), GBP5bn there (stamp duty on contracts for differences). But the money isn't "lost" – it was never there in the first place. The reason you can't collect it, dear Finance Minister, is because people don't like being robbed, and if you put your hand too deep into their pockets they will just sew them up. Smuggling is of course one of the best ways of sewing up your pockets, and cigarettes are so highly taxed (up to 95 percent of the purchase price) that they are a particularly tempting target. Just as far more people smoke than you would ever guess from the disinformation put about by do-gooding pressure groups, so also far more people smuggle than Finance Ministers want to accept. I have a UK acquaintance who orders her cigarettes over the Internet from a foreign sales outlet; they are actually manufactured in Birmingham (England) or somewhere like that, and make a 28,000 mile round-trip before being delivered back to the UK at less than one third of the regular UK price. Don't ask me how it is that the Customs don't intercept the shipments, which are made through the regular mail, but it's a fact that so far there have been no losses to official theft! I don't smoke myself, but on regular trips to Russia I used to bring back my allowance of Marlboro Lights for smoker friends: USD100 of profit ("loss," that is) each time; that was in the 1990s, by now it would be more than twice as much but I don't go to Russia any more.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 56th) two or three countries are given encomiums and two or three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is on + 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Gibraltar after 300 years

United Kingdom flogging a dead horse

United States onward and upward

And Kitty's Execrations:

European Union puff, puff

The Philippines gone bonkers




Tags: Euro

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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