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How an advertising minnow outgrew the big beasts

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The striking rise of The Trade Desk in the fast-moving world of digital advertising is something of a puzzle.

An “adtech” business that sells itself as a neutral platform for managing digital campaigns, it now has a market value that towers over Publicis, Omnicom and WPP, the old advertising empires that it principally serves, on revenues that are a tiny fraction of what the big names earn.

All this in an industry where tech groups such as Google and Facebook have been hoovering up marketing budgets for years and spending has slumped further since the pandemic.

But even through advertising’s year of woe, shares in the California-based company have more than doubled in value since January, giving it a $28.6bn market capitalisation that is bigger than Omnicom and WPP, the world’s biggest advertising holding groups, combined.

The stunning rise of The Trade Desk_UPDATED

Investors such as BlackRock and Baillie Gifford backed the company in a bet on the future of digital advertising. So far it has paid off handsomely. But it remains a leap of faith.

The Trade Desk’s revenues were about $680m in the year to June 2020, little more than 2 per cent of what Omnicom and WPP generated during the same period. “Something has to give!” said one frustrated industry executive.

Rather than a shortlived star of tech speculation, Jeff Green, The Trade Desk’s founder and chief executive, claimed his company is built “to last a 100 years”.

His aim is to provide an efficient way for clients to access and plan ad campaigns in the “open internet”, a fragmented market outside the gated realms of Google, Facebook and Amazon. PwC estimates this market is worth as much as $100bn, covering advertising on websites, mobile phones, podcasts and connected televisions that is bought using automated systems.

“Sometimes in an industry, you create a rough draft, and throw it away, create a rough draft, and throw it away. And that is what advertising has been doing with digital until now,” Mr Green told the Financial Times. “At some point you create a business that is going to last a very long time. And that is what we believe we have done.”

Even after years of trying, he admitted it is still hard to explain the business model to people unfamiliar with the industry. “My mother still has no idea what I do,” he said.

He likens the first company he created, AdECN, which was sold to Microsoft in 2007, to a financial exchange but offering real-time bidding on advertising space, a business that is dominated by Google’s AdX.

Jeff Green, chief executive of The Trade Desk, said he is ‘more confident than ever’ that the platform can win market share in China. ‘We may be the only company who has successful partnerships with Apple, Amazon, Facebook, Google, Baidu, Alibaba and Tencent, all at the same time,’ he said © REUTERS

The Trade Desk, by contrast, acts as a broker for its 800 buyside clients, co-ordinating data and access to advertising space. In total, through fees tied to spending volumes and data services, the company took about 21 per cent of the $3.1bn of gross expenditure on its platform in 2019.

“Investors have decided that The Trade Desk can grow into its valuation,” said Brian Wieser, head of business intelligence at GroupM, a media buying agency. “And one of the bets is that the take-rate can hold up. Going from 20 per cent of $3bn billings to the same take on $30bn is a serious stretch.”

The biggest groups performing a similar function are the in-house operations of Google, Facebook and Amazon. But because The Trade Desk does not have advertising space of its own to sell, Mr Green argued it is free from conflicts of interest where “you are trying to rip off . . . customers as much as possible without them firing you”.

“What we are trying to do is string together a healthy ecosystem in the open internet, so that all the disparate pieces . . . can compete with [the big tech groups].”

PwC estimates the ‘open market’ is worth as much as $100bn, covering advertising on websites, mobile phones, podcasts and connected TVs that is bought using automated systems © Tolga Akmen

The Trade Desk has won praise for its easy-to-use product and customer service, the bedrock of a business that has been in the black for five years, making a pre-tax profit of $116m in 2019. Mr Green’s 10.7 per cent stake is worth about $2.9bn.

But Ratko Vidakovic, founder of consultancy AdProfs, said that despite the obvious strengths of the company “people in the industry remain baffled by the valuation”.

The adtech groups that were meant to revolutionise the industry with automated, real-time and highly targeted ad buying have mostly come and gone, chewed up by a fast-changing sector and ferocious competition from Silicon Valley.

Even those that have survived — such as AT&T’s Xandr and Criteo — have been affected by tougher privacy rules and new restrictions on the data flows that are the sector’s lifeblood.

Mr Vidakovic said at first it is hard to see The Trade Desk’s competitive advantage. “They have no unique inventory, no unique data, none of the ingredients you would expect a successful ad platform to have.”

Digital continues to disrupt traditional advertising

What differentiates the business, he said, is its relationships with agencies within advertising holding groups.

“The Trade Desk is a true platform in that it enables the agencies to build their businesses on top of it, not just technologically but financially,” he said. Some holding groups have looked at ways to reduce reliance, but have in the past struggled to develop in-house tech capability.

Laura Martin, an analyst at Needham, said The Trade Desk has “re-intermediated” the agencies as middlemen by offering them volume discounts. Brands have a reason to buy advertising through agencies because it is cheaper, while agencies “do not feel threatened” by The Trade Desk because it is protecting their place in the supply chain.

Mr Green sees two main sources of growth for the company. The first is China. He is “more confident than ever” that The Trade Desk can win market share, even though it is just the kind of US-listed, data-rich tech business that seems likely to rouse that country’s protectionist instincts.


$116m


The Trade Desk’s pre-tax profit for 2019

“We may be the only company who has successful partnerships with Apple, Amazon, Facebook, Google, Baidu, Alibaba and Tencent, all at the same time,” he said.

But even more important is internet-connected television, a market that is expected to boom as consumers cut cable and move to ad-funded streaming services, which can use customer data to serve highly targeted ads.

The prize is a potential slice of a global television ad market worth $132bn, according to GroupM. The Trade Desk expects 80 per cent growth in internet TV ad spending on its platform in the third quarter.

While few doubt the market’s potential, some think The Trade Desk might be muscled out by big operators.

“For now The Trade Desk can still buy inventory on Amazon Prime TV, Roku and Hulu,” said Rocco Strauss, an analyst at Arete Research. “But they all have their own demand-side platforms. Amazon will say: come and use my platform and you can layer on all the Amazon targeting data. It is a strong proposition that The Trade Desk can’t match.”

Traditional ad agency sales dwarf The Trade Desk

Internet cookies are another challenge. These data files that track people’s website visits have been banned on browsers such as Apple’s Safari and are being phased out by Google on Chrome, posing a fundamental challenge to the adtech industry.

Connected television services are unaffected because they do not use cookies, but it does make it harder for The Trade Desk to access good ad targeting data to sell to clients.

Mr Green is convinced the connected market is too fragmented to be attractive to big players such as Amazon and Google. “You can set the rules when you’re big, but no one in television has that sort of market share,” he said.

As the adtech sector consolidates in a difficult market, Mr Green also said he is “looking at more deals than we have historically” and plays down the prospect of The Trade Desk being sold to a bigger rival.

“If it were to ever join forces with somebody else, they would have to share that value, that this is a play to keep the open internet competitive,” he said. “I said to our first large investor: this is the first thing I’ve ever created that was not built to sell.”



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Analysis

BoE sees tight labour market as trigger for higher rates

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UK interest rates updates

The Bank of England was not expecting to change its coronavirus monetary policy guidance so soon.

For the past year it has said it would not even consider tightening monetary policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.

With inflation having already burst through this target, reaching 2.5 per cent in June and the BoE now thinking it will rise to 4 per cent later this year, and signs of labour shortages across the economy, the committee decided to drop that guidance.

None of the Monetary Policy Committee was ready to raise interest rates yet from the historic low of 0.1 per cent, but the committee agreed new guidance that said if economic data followed its latest forecasts, “some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”.

The change and the new guidance raised lots of legitimate questions on what the MPC meant in practice, but Andrew Bailey, BoE governor, was not in a mood to be transparent when discussing the committee’s new stance at a press conference on Thursday.

He declined to answer simple questions about the balance of opinion on the committee and the definition of “modest”, but he was a little more forthcoming in his press conference on what the trigger would be for higher interest rates.

Line chart of CPI inflation (annual % change). Actual and BoE forecasts showing The BoE now expects UK inflation to reach four per cent this year

The first two “key judgments” that the MPC would consider before changing policy were its view that much of the coming rise in inflation would reverse automatically next year and that there would be a continued recovery as the pandemic waned. On these Bailey was confident the committee’s view was right. It was a third judgment, on the labour market, that he stressed was most likely to prove the trigger for higher interest rates earlier than expected in the months to come.

The outlook for employment has already changed much faster than expected, with many employers now struggling to hire even though both unemployment and inactivity remain well above pre-pandemic levels.

“The challenge of avoiding a steep rise in unemployment has been replaced by that of ensuring a flow of labour into jobs,” Bailey told the news conference, adding that the committee would closely monitor labour market developments, particularly on unemployment, wider measures of slack in the economy, and underlying wage pressures.

The BoE now thinks that unemployment, which was 4.8 per cent at the end of May, has peaked, and will fall steadily to 4.4 per cent in a year’s time and 4.2 per cent from 2023.

Underlying wage growth has already returned to near pre-pandemic levels, the bank estimates. This is much stronger than expected given the large number of workers still standing on the sidelines: there are 250,000 more unemployed than pre-pandemic, 750,000 more counted as inactive, and 2m still at least partly furloughed in late June.

But what is worse from an inflation perspective is that the BoE has found evidence of “frictions” in the labour market, especially the difficulties employers are reporting in recruitment.

For now, the MPC is taking the view that these problems are temporary and are “likely to dissipate” with the hiring crunch owing in large part to the speed at which entire sectors reopened. Another factor behind the shortages — existing employees’ apparent reluctance to look for a new job — would in any case be more likely to depress wage growth than to fuel it.

Companies report recruitment difficulties

But the MPC warned that if labour shortages proved bigger and more persistent than expected — if workers were in the wrong place, or had the wrong skills, for the jobs available, or if young people who had left the labour market to study stayed in education for some years — that was likely to make wages rise, inflation more persistent and the BoE raise interest rates.

When it does become time to tighten monetary policy, the BoE also changed its guidance on Thursday on how it will make borrowing more expensive for households, businesses and government.

Until Thursday, the BoE’s declared policy had been that it would not change the level of money created and assets purchased under its quantitative easing scheme until interest rates had reached 1.5 per cent.

In future, it said that once interest rates reached 0.5 per cent, it would no longer reinvest the proceeds of government bonds that reached maturity and were redeemed.

Bailey said this new policy of quantitative tightening was not supposed to supplant higher interest rates, but would provide a “predicable and gradual” path for reversing quantitative easing. Some £70bn of the BoE’s £875bn gilt holding are due to mature across 2022 and 2023, with another £130bn across 2023 and 2024, he added.

Once interest rates rose to 1 per cent, the MPC said it would consider active sales of the assets it owned, but only if that was warranted by economic conditions and sales “would not disrupt the functioning of financial markets”.

In both areas of policy, the BoE was adamant it was making no promises and would change policy only when that was needed to keep inflation under control. This meant the wait-and-see strategy that has been its watchword since the early days of the coronavirus crisis would continue.

But as Ruth Gregory, senior UK economist at Capital Economics, said: “Talking about the mechanics of tightening policy, that is another signal that tightening is drawing nearer”.



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Lars Windhorst tries to plot future beyond H2O crisis

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As the world retreated into lockdown, German financier Lars Windhorst criss-crossed the globe in a private jet on a mission to raise billions.

The 44-year-old needs to make good on a promise to buy back more than €1bn of bonds from H2O Asset Management, a once-feted European fund manager whose backing helped Windhorst assemble an eclectic collection of businesses that includes Italian lingerie maker La Perla and German football club Hertha Berlin.

After the extraordinary scale of H2O’s bets on the financier threatened to capsize the asset manager in 2019, Windhorst last year vowed to buy back the illiquid debt at the heart of a crisis which has drawn regulatory scrutiny. But more than 12 months later, H2O’s clients, whose money is tied up in the troublesome securities, are still waiting.

The challenge is one of the toughest yet for Windhorst. Hailed as a precocious entrepreneur by then-German chancellor Helmut Kohl when he burst on to the business world in the mid-nineties, his chequered career has included personal bankruptcy.

An initial plan to use an investment vehicle called Evergreen to buy back half the bonds last year and the rest by this June fell apart. Then last August French regulators ordered H2O to suspend several funds because of uncertainties over the valuation of the bonds.

The London-based asset manager has significantly written down the value of the securities, which in some cases Windhorst has agreed to buy back several years ahead of their maturity, and shifted them into so-called side pockets that are closed to investor redemptions.

A criminal investigation launched by the Berlin prosecutor’s office into Windhorst is a further complication. Authorities are probing whether Evergreen violated German law by allegedly engaging in banking activities without the necessary licences. Windhorst denies any wrongdoing and said he has offered his assistance to authorities.

Chart showing the scale of H2O’s Windhorst exposure at fund suspension

Armed with infectious optimism, an insatiable thirst for dealmaking and an uncanny ability to escape from near ruinous predicaments, Windhorst insists that a large chunk of the debt will be bought back this year.

“Tennor [Windhorst’s main investment company] expects to pay down a major part of the H2O debt before the end of the year,” Windhorst told the Financial Times.

Following the collapse of the Evergreen plan, Windhorst bought himself some breathing space until early next year when Tennor in May announced a restructuring of its debts with “major creditors”, the biggest of which is H2O.

Under the agreement, Tennor Group’s debt will be consolidated into a new €1.45bn bond, carrying a 4.5 per cent interest rate, which is due to be repaid in early 2022. H2O said that the agreement provided a “more stable platform” to liquidate the securities in the funds’ side pockets.

Bet on Hertha Berlin

Windhorst, who operates from a swanky office in London’s Mayfair and a new base in the pricey “Palme” office building in Zurich once occupied by Russian oligarch Viktor Vekselberg, says he tires of the scrutiny that his relationship with H2O has generated.

“It’s normal in business that things are difficult. It’s not a problem for me, I deal with it,” said Windhorst. “I get beaten up for this and we need to move on here and make money and do business.”

Obtaining a clear view of Tennor’s finances is difficult. La Perla, one of its highest-profile investments, posted a €136m loss last year. However, several subsidiaries’ accounts have not been signed off, with filings citing delays in finalising Tennor’s own audited accounts that were due to be filed by the end of March.

According to a 2019 provisional balance sheet filing, the latest that is publicly available, Tennor Holdings had €2.6bn in liabilities at the end of that year.

Windhorst has long lent on debt and short-term funding deals, including repurchase agreements, to finance his businesses. It is a pattern he says he wants to break.

The shadow cast by H2O has done little to dull Windhorst’s ambitions, however. The financier is on track to complete his €374m investment in Hertha Berlin, a German football club with a long history but largely empty trophy cabinet. The agreement to acquire a majority stake was announced just a week after the H2O scandal erupted in 2019.

In June, he took to Twitter to scotch rumours he had fallen behind on payments to the club. “Hello to all doubters who don’t believe this is my account,” Windhorst declared. “Everything is on schedule,” Björn Bäring, Hertha Berlin’s head of finance, told the FT. A final €30m instalment is due this month.

La Perla
With H20’s backing, Windhorst was able to acquire the Italian lingerie maker La Perla © Alamy

Since Windhorst took control, Hertha Berlin broke its transfer record for a player but lost a manager, the legendary German striker Jürgen Klinsmann, after just 10 weeks in February 2020.

Earlier this year a creditor obtained a judgment in a Dutch court to auction off the investment vehicle Windhorst used to buy his Hertha Berlin stake. The suit, which relates to a short-term loan, is “generally settled”, according to a lawyer for the creditor.

The investment in Hertha Berlin is one of several demands on Windhorst even as the H2O bill remains outstanding.

Shortly before H2O described the financier’s efforts in August 2020 to buy back the bonds under the Evergreen plan as “very partial”, Tennor committed €100m to medical robotics start-up AvateraMedical.

It also announced a major stake in a joint venture with New York-based luxury condo developer Extell to build what is intended to become the tallest Manhattan skyscraper. Despite sluggish progress following planning objections, Windhorst is confident that the project will be “perfectly timed” for an eventual recovery in Manhattan’s luxury residential market.

Windhorst has also expanded his shipping business. Tennor first acquired ailing shipbuilder Flensburger Schiffbau-Gesellschaft in 2019 from Norwegian businessman Kristian Siem. FSG late last year laid the keel on the first ship since it relaunched its operations after insolvency proceedings. The customer: a company owned by Windhorst.

Then last month, FSG snapped up luxury yacht shipyard Nobiskrug in Germany for an undisclosed price. Previously owned by French billionaire Iskander Safa’s Privinvest, Nobiskrug was placed into insolvency in April.

“Both shipyards combined have secured orders in excess of €1bn”, said Windhorst.

If a reliance on debt has been a feature of his business career, so have legal battles.

Earlier this year Siem filed suits at London’s High Court. Meanwhile, in June a judge in Amsterdam ordered Windhorst to “disclose his assets and to provide security” in relation to a long-running dispute over his acquisition of a 50 per cent stake worth €169m in international show jumping event Global Champions Tour from US billionaire Frank McCourt.

Windhorst is adamant that the public filings paint a misleading picture. All the suits bar one filed by entities linked to former Tennor advisory board member Manfredi Lefebvre d’Ovidio, which have made claims worth more than €120m, have been amicably settled, he says. Representatives for Siem, Lefebvre d’Ovidio and McCourt declined to comment.

Paying off

There are signs that the businessman’s frantic flight schedule is beginning to pay off. Windhorst in May sold Berlin-based ad-tech company Fyber, which he owned 90 per cent of, to Nasdaq-listed Digital Turbine at a $600m valuation. The transaction was settled for $150m in cash plus shares in Digital Turbine.

Meanwhile, Windhorst says Tennor has agreed to sell a minority stake in Avatera for €600m. A start-up in the fast-growing field of medical robotics, Avatera has long been considered a potential crown in Tennor’s investment portfolio.

H2O disclosed in a corporate filing that it was unable to dispose of a 12.5 per cent Avatera stake held by one its funds in an “orderly fashion” earlier this year, with a spokesperson saying the asset manager’s priority was to sell at the best price.

Although Avatera is likely to require considerable investments to realise its potential, Windhorst remains bullish. “Avatera has the potential to be a €10bn to €20bn business,” he said.

If that proves the case, it would mark a remarkable turnround for the financier. But four years since H2O stepped in as Windhorst’s saviour, backing his empire as he fought off aggressive creditors, including a Belize-based company linked to a former Russian energy minister, it is the asset manager’s clients who remain in need of rescuing.

Gerard Maurin, an investor, who is spearheading efforts by some to claim damages from H2O, says that communication from the asset manager on the repayment schedule has been vague.

“It motivates us even more to continue our action,” he said. “It’s not normal to have to wait [to redeem your investment].”

 



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Analysis

‘It has never been like this’: US house price spiral worries policymakers

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House prices are rising in many major economies. This FT series explores whether these increases are sustainable.

A decade ago, the average house in Ohio’s leafy state capital Columbus would sit on the market for almost 100 days before being sold. Today, a similar property sells in just 10 days.

“It has never been like this,” said Michael Jones, a real estate agent at Coldwell Banker Realty with more than 20 years’ experience in central Ohio. “It’s unprecedented.”

US policymakers are becoming increasingly concerned about the rising price of housing for both homeowners and renters, as the broadest global house price boom for at least two decades drives up living costs.

“Today, it is harder to find an affordable home in America than at any point since the 2008 financial crisis,” Marcia Fudge, US housing and urban development secretary, said at a recent congressional hearing.

Nationally, house prices in May were 16.6 per cent higher than the year before, according to the latest S&P CoreLogic Case-Shiller index update — the biggest jump in more than 30 years of data and up from 14.8 per cent in April.

“A month ago, I described April’s performance as ‘truly extraordinary’, and [now] I find myself running out of superlatives,” said Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices.

The pace of price growth and sales has been particularly fast in smaller cities, suburban enclaves and towns.

Columbus’s housing market has exploded since the start of the pandemic, as historically low interest rates, remote working, increased demand for larger homes and a relatively limited supply of houses for sale sparked a feeding frenzy among prospective homebuyers and a windfall for sellers.

Line chart of S&P CoreLogic Case-Shiller national home price index (year-on-year % change) showing US housing market booms again

Homes in Columbus sold more quickly than in any other large metropolitan US area, according to Zillow, the property website. Almost three-quarters of Columbus properties were under contract in less than a week in April. Other fast-moving areas included Denver, Colorado, and Salt Lake City, Utah.

The fierce competition means many properties are selling at a significant premium to their listing price, favouring those on higher incomes or younger first-time buyers whose parents are willing to stump up the cash required to win a bidding war.

FT Series: Global house prices — raising the roof

House prices are rising in many major economies — but is it sustainable?

Part 1: How the pandemic has triggered the broadest global house price boom in more than two decades

Part 2: Buyers flock to smaller US cities, renewing policymakers’ concerns about affordability and risk

COMING SOON:

Part 3: Netherlands grapples with the social consequences of rapidly rising house prices

Part 4: Why Berlin’s renters want to expropriate their homes from Germany’s publicly listed landlords

Part 5: Should house prices count in inflation data, and what can central banks do about the economic effects?

Columbus’s average sale price has jumped 15.8 per cent in the past year, according to Columbus Realtors, the local industry body of which Jones is president.

“People say to me, ‘Don’t you love this market?’” he said at a recent open house for an almost 6,000 square foot family home with a listing price of just under $1m in a residential neighbourhood east of downtown Columbus.

“I say, ‘Not especially, because I represent buyers and sellers alike’,” he added. “Somebody is a loser here.”

Other places have experienced even more frenetic sales. Median home prices in Austin, Texas, have risen 40 per cent year on year, according to online real estate brokerage Redfin. Buyers have also flocked to Phoenix, Arizona, where prices are almost 30 per cent higher in the same period. In Detroit, Michigan, they have risen 56 per cent.

Suburban enclaves and smaller towns have also benefited. Redfin reported last month that median home prices in “car-dependent” US areas had surged at twice the pace of those in “transit-accessible” cities since the start of the pandemic — with the former gaining 33 per cent while the latter increased 16 per cent.

Across the 30 largest metropolitan areas in the US, Columbus, along with St Louis, Missouri, and Tampa, Florida, logged some of the biggest net increases in people arriving in the area, according to an analysis of US Postal Service records of mailing address changes by commercial real estate and investment firm CBRE.

Most moves came from the “surrounding area”, defined as a few hours’ drive from the householder’s previous address, the analysis suggested.

The house price spiral is feeding into the rental market too. According to Apartment List, a listings website, national median rent has risen 11.4 per cent so far this year, more than three times the average increase in the same period in the previous three years.

“The high cost of housing keeps millions of families up every night,” Fudge warned. “They wonder if they can afford to keep a roof over their head — and still manage to keep their lights on, to pay for their prescriptions, to put food on their tables.”

Remote working boom fuels demand for suburban and rural areas

Industry experts say the pace of price growth is set to slow as supply begins to catch up with demand.

The number of existing-home sales rose 1.4 per cent month on month in June, according to the National Association of Realtors. Lawrence Yun, chief economist at the industry body, said supply had “modestly improved in recent months due to more housing starts and existing homeowners listing their homes, all of which has resulted in an uptick in sales”.

Real estate experts and economists surveyed by Zillow expect price growth to peak this year and then ebb.

“At a broad level, home prices are in no danger of a decline due to tight inventory conditions, but I do expect prices to appreciate at a slower pace by the end of the year,” Yun said.

Daryl Fairweather, chief economist at Redfin, said “homes that would have gotten 20 offers are now getting only two or three”.

But she added that while “we are already seeing demand start to stagnate”, prices were not coming down significantly — suggesting that policymakers’ concerns about affordability are likely to persist.

Federal Reserve chair Jay Powell recently said that today’s trend looked distinctly different to the one a decade ago that pre-empted what was at the time the worst recession since the Great Depression — but he called the problem of housing affordability “a big one”.

“Housing prices are moving up across the country at a high rate,” he told a congressional committee last month.

Although he acknowledged that it was “not being driven by the kind of reckless, irresponsible lending that led to the housing bubble that led to the last financial crisis”, he warned that it “makes it more difficult for entry-level buyers to get into the housing market, so that is a concern”.



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