Peter Pays Paul

I returned Saturday from a trip to Central Asia. The trip was not work related, but I wouldn’t call it a vacation either. It was very pleasureful and rewarding, but it involved a lot of effort.

One of the interesting notes that I came back with is that the country I visited experienced a real estate bubble and liquidity crisis along with the U.S. market.

Real Estate Bubble

According to my contact in country, this is the story. Banks in the West and the U.S. would lend money to banks in the East. In turn these Eastern Banks would lend to the locals to purchase real estate, start a business, or buy a car.

As the cost of money (interest) grew less expensive, more individuals and companies were able to receive loans from Eastern Banks. As the number of qualified buyers grew so did real estate prices. They dramatically increased, almost doubling in a few years.

When the Western Banks suffered a liquidity crisis, the faucet was turned off for the Eastern Banks. The supply of money was gone. Fewer buyers could afford to purchase real estate causing the rising values to fall.

Speculation is not isolated to the United States. Prices have fallen in the past year. My contact in country told me that his organization had benefited from the sale of one asset during the peak of the market. After the bubble burst, they were able to buy a more affordable piece of property and begin the construction of a new facility to meet their needs.

The Cost of Money

Another new friend worked for one of the Eastern Banks. She was in charge of arranging loans from Western Banks to her Eastern Bank. The last transaction she arranged was $500 Million.

If you think interest rates are bad here, be glad you do not live there.

My friend told me that her Eastern Bank borrowed money in the 8-10% range from Western Banks. I assumed that the bank’s margin would be 1-3% to Eastern Borrowers. Her answer was “No, more like 6% to 9%. That is not including the fees. They have fees for everything.”

On the low end the Eastern Banks were going to charge 14% and up to almost 20% before fees. All this in a country where the per capita GDP is about $11,000.

Oh, so many things to be thankful for.