Friday, October 29, 2010

Perth residential houses being discounted more heavily

Perth residential remains buyers' market
REIWA also says the large number of properties on the market was creating competition among sellers, who were dropping prices in many areas to secure a quicker sale. About 16,000 homes are on the market, the highest level since December 2008.

"The number of sellers prepared to drop their asking price has increased from 60 per cent to 67 per cent, with the average discount now being 6 per cent off the advertised price," REIWA says in its release.

The proportion of sellers discounting was higher in Perth's elite western suburbs, where 84 per cent of sellers were prepared to drop their prices.

"Remains"? Really? "Is becoming" or "increasingly is". It's as if the person who wrote the article title didn't read the article.

Wednesday, October 27, 2010

More Interconnectedness -- NZ Australia property fund being marketed in China

$1 billion NZ property fund attracts international interest

Du Val Group said it planned to raise about $1 billion in two funds focusing on real estate in Australia and New Zealand. Stories about its rise have been published by Bloomberg, the South China Morning Post and the Wall Street Journal.
Du Val said it was seeking investors in Asia after launching its $250 million Mid-Market Fund in early August.

China says will keep curbing property market

China announces it will keep curbing market
The pledge came after official data showed property prices in major Chinese cities rose 0.5 percent in September from the previous month, the first month-on-month increase since May.
Hedge funds began pulling money back out of China after it became clear an adjustment on the Renminbi was no longer imminent. Strange it chose September to rise. Maybe just inflation reflected in prices.

Majority wrongly believe HST applies to house sale

The real estate industry has been blaming HST for the slow down in transaction volume. Although this survey applies to Ontario only, Ontario and British Columbia implemented the tax change at the same time.

 Most Ontarians wrongly believe HST applies to home resales: Survey
A survey done by Ipsos Reid, commissioned by the Ontario Real Estate Association, shows 56 per cent of people in Ontario think the harmonized sales tax, implemented in July, applies to the cost of a resale home. . . . But the HST is only levied on the various transaction fees associated with the purchase of a home that has been previously occupied.
 The closing paragraph:
There have been signs of improvements in the Canadian housing market recently, with the Canadian Real Estate Association reporting sales gains in both September and August.
"Improvement" what does that mean? The author really should consider making "improvement" a reflection of affordability, or long-term price stability, otherwise he or she risks becoming another bubble cheerleader.

Tuesday, October 26, 2010

Hong Kong trapped in price spiral

These guys really ought to remember the last crash.

Hong Kong trapped in price spiral
Spiraling property prices have Hongkongers blaming Chinese speculators. They may be just looking at one side of the coin. Near zero US interest rates have inflated Hong Kong’s property market - and put the former British territory out of step with the rest of China. 

Home prices have almost doubled since the start of 2009. The surge is keeping increasing numbers of Hongkongers out of homeownership and has fueled government concerns that the property market may be overheating with a collapse to follow. 
(bolding mine)

MarketWatch asks if Vancouver has a housing bubble

Mostly a mood piece. Reporter asks self question, calls a few folks on the rolodex, submits to editor.

Does ultra-pricey Vancouver have a housing bubble?
Patti Croft, who recently retired as Chief Economist at RBC Global Asset Management,  recently wrote a column in the Toronto Globe and Mail stating that one of the key metrics she uses in determining whether there’s a housing bubble is affordability.  She cites the latest RBCHousing Affordability Measure showing that affordability has again “deteriorated” in the red-hot Vancouver market.
She says these data show that home ownership costs for an average two-storey home in Vancouver account for a whopping 83 percent of household income. No, that’s not a misprint.

Rule changes for foreign investment in Australia

Nice summary of recent streamlining of rules for foreigners buying real estate in Australia.

Foreign Investment in the Australian Real Estate Market
Developers are able to apply for approval to sell “new dwellings” to foreign persons. Previously developers could only obtain approval to sell 50 per cent of new dwellings “off the plan” to foreign persons. The 50 per cent threshold has been abolished providing that developers market the dwellings in Australia as well as overseas. This means there is no restriction on the percentage that can be sold to foreign persons. Furthermore, the definition of “new dwellings” has been widened to incorporated dwellings not sold by the developer but which may have been occupied for no more than 12 months. Pre-approvals may be given to a developer to sell to foreign persons, therefore relieving the foreign person from personally applying for approval.

Monday, October 25, 2010

Grand Strategy?

This article smacks a bit of paranoid conspiracy, insisting the power elite have a "plan" rather than what is more likely a high finance/bought politicians tragedy of the commons. He also hasn't noticed that most of this crash was exactly about markets' ineptitude at price discovery . . . but there was this blurb:

Trade of the Decade
7. The flood of global quantitative easing/liquidity/credit has flowed into risk-assets as zero-interest rate policies (ZIRP) have created a mad rush for yield.Rather than create new borrowing and spending in the real economy, as the Fed claims was the intention of its policies, the trillions of dollars, euros, yuan, etc. have flowed into emerging markets (many of which are up fantastic percentages in the past few years), commodities, corporate debt (which as surged to $7 trillion in the U.S.), Chinese real estate and developed-nation's equity markets.
This has created global bubbles in a variety of asset classes.
Why this isn't obvious to more analysts I don't know. 

China trying to avoid becoming Japan

Article is short on details, unfortunately.

China, Trying to Avoid Japan's Mistakes, Is Actually Following Same Path
Chinese officials face a major dilemma. The economy has been overheating and inflation is picking up. Real interest rates are far too low, by any standard. As a result, overinvestment in construction, manufacturing, and infrastructure are exacerbating massive overcapacity. Chinese officials understand that this accumulation of overcapacity is becoming a major threat.

Sunday, October 24, 2010

Noted solely for the convenience of pointing and laughing at later

Five Reasons Home Equity Growth is more likely than not local

Okay, leaving aside the awkward title . . . Come on, Buffalo? You're picking out Buffalo as some kind of bellwether of the current downturn? Strike one against demonstrating you have clue about your topic. Buffalo has been in rapid population decline since the 50s. Of course it has empty houses. That's what happens when 5,000 people a year move elsewhere, for 60 straight years.

But moving on.

1) Land Constraints. Sure, you have those, and that puts you in exactly the position of San Fran as long as the living remains desirable, as in: the earthquakes fail to materialize. But how many investment units are currently sitting empty? What's the overhang? Land constraints don't matter if you're already overbuilt and everyone tries to sell en masse to book their profit.

2) Large Infrastructure Projects. This one is on the money. But again, the construction cranes in the U.S. have moved onto massive federal spending projects on, guess what? . . . infrastructure. Clue in, please.

3) Job Growth. This can turn around in an instant. As soon as the bubble bursts. And again, nice un-cited dig at the U.S. for what reason, exactly?

4) Low Interest Rates "Mortgage rates are a bargain, period." Mortgage rates are ADJUSTABLE, period. "Some readers might remember when rates were 21 per cent." Yeah, and they can't go there again, why? Mortgage rates are the PROBLEM, period. 

5) Vancouver Canucks. Um WHAT?

Peter Simpson, The Minister for Property Propaganda President and CEO of the Greater Vancouver Home Builders' Association Goes on:
And while you are in smooch mode, plant a great big juicy one on our sound banking system -- including lenders, mortgage professionals and federal financial watchdogs -- whose responsible actions and reliable processes ensured that a U.S.-style mortgage and equity meltdown would not occur here.
So, explain why the Canadian banks have started commoditizing mortgages if they are so responsible? Why were they offering, however briefly, 100% financing?
 this region is still one of the best places on the planet. Americans must look northward with envy.
Ha ha ha. Yeah. With your obnoxious attitude, it's not envy you smell, that's the popcorn heating up so we can enjoy the show from down here.

Saturday, October 23, 2010

Clearance rates down year on year in Australia property auctions

Super Saturday Updated
Clearance rates:

Sydney October 2009: 70% 
October 2010 (so far): 62%
3rd weekend October 2010: 56%

Melbourne 3rd weekend October 2009: 82% 
3rd weekend October 2010: 66%

At the peak of the overseas buyer frenzy, Chinese citizens were estimated to have bought at least 80 per cent of all properties auctioned in some eastern suburbs of Melbourne.

"They're gone, as have other overseas buyers who can still buy off-the-plan homes, but they had been frightened off by the high Australian dollar," he said.

Friday, October 22, 2010

Random thought of the day

Why does everyone take on faith the economic numbers coming out of China?

Wednesday, October 20, 2010

World Markets as Intertwined as Financial Markets

This article is a bit schizophrenic.
World Markets as Intwined as Financial Markets
"Local housing markets are certainly very open to invasions of capital from abroad, and these can be disruptive," Goldberg said in an interview.
However, just as easily as it flows in, Goldberg noted that capital can flow out "as somebody finds the next hot place where you simply have to have a condo in the global marketplace."
Yeah, warns of the dangers, fine . . .
However, he argued that public officials need to be wary of situations where international flows of foreign capital overtake local demand and create "a market that is overly hot."
Warns of them again . . . we read it the first time, but okay . . .
In the case of Metro Vancouver, Goldberg said he sides with those who do not believe the city is in a bubble, and he is doubtful that the capital flowing into B.C. from investors, such as wealthy buyers from Mainland China, is cause for concern. 

"If it's at the high end of the market, where much of this foreign stuff is, I don't care," Goldberg said. "That's not a social issue."
Maybe Professor Goldberg needs to play a few rounds of Crack Shack or Mansion Everything is at the high end of the market in Vancouver. 

Where does the money to buy real estate in China come from?

The Grey Market in Real Estate
Many builders barely broke stride. They turned to underground banks that are part of China’s thriving gray market.

Real estate brokers say buyers here, too, often sidestep official bank loans, financing their home purchases from hidden sources of income, whether graft, undeclared bonuses from government jobs or money earned legally but not reported to tax authorities.
If you've reined in the legitimate paths to completing transactions and the prices still go up, you not only have a bubble, you have fraud.

China's Battle on Property Prices is Not Over
Chinese policy makers have shown increasing concern that a property bubble risks both destabilizing the economy and creating social tensions among urban Chinese priced out of the market.
Oh, that concern is going to seem so quaint in 12-18 months.

Tuesday, October 19, 2010

Vancouver prices up 8-10.2% on year but down 1.8-3.4% from last quarter

Detached Bungalows Average Price
Q3 2009 : 802,500
Q2 2010 : 905,000
Q3 2010 : 873,500
down 3.4% on the quarter

Standard Two-Story Average Price
Q3 2009 : 904,750
Q2 2010 : 995,250
Q3 2010 : 977,250
down 1.8% on the quarter

Canadian House Prices Record ‘Normal’ Year-Over-Year Growth According to Royal LePage House Price Survey
Interest rates continue to draw buyers in Vancouver where year-over-year prices increased between 8.0 and 10.2 per cent. Standard two-storey Vancouver homes rose to an average price of $977,250. 
. . . the third quarter was slightly stronger than anticipated, on new demand fuelled by improved affordability in many regions,”
Affordability, in a market of entirely variable rate loans, is a chimera. One that is going to bite you on the BEhind later.
“House price growth now sits just below the long term annual average of approximately five per cent, but once this is adjusted for inflation, which is very low and expected to continue to be that way for some time, appreciation is right on track.
And if you can hold growth at zero for a decade, you might land back at a reasonable income to price ratio.

Prices are down quarter to quarter. Beginning of the bubble bursting or a one time drop caused by tax uncertainty?

China's Ghost Town Cities

In China, a City but No Residents
Analysts estimate there could be as many as a dozen other Chinese cities just like Ordos, with sprawling ghost town annexes. In the southern city of Kunming, for example, a nearly 40-square-mile area called Chenggong has raised alarms because of similarly deserted roads, high-rises and government offices. And in Tianjin, in the northeast, the city spent lavishly on a huge district festooned with golf courses, hot springs and thousands of villas that are still empty five years after completion.

A heavy tax only on unoccupied properties to force speculators to find a renter that would help curb flipping and would force occupancy to rise in these ghost cities.

More generally, how does this all end? This is a much bigger bubble than, say, California. And it's in a market that, outside Hong Kong, doesn't know what a bubble and crash look like. How will the populace react?
Will China relax the one-child policy in an effort to reduce the housing overhang?
A centrally planned economy has unprecedented tools for attempting to deal with the aftermath, but given their limited success with controlling the ongoing build-up, it's going to be trial and error figuring out what works, in a very short time frame. The people's confidence better be running high.

Does forceable relocation still work when, increasingly, real money is involved?

After it finds itself the owner of all this, will the government simply give the apartments away in a lottery with a residency requirement?

Australia, Asia Pacific 2010 Q3 Resurgence in investment

Australia and wider Asia Pacific resurgence in property investment 2010 Q3
Cross border transaction volumes rose 23% quarter on quarter in Asia Pacific reaching US$5 billion in Q3, with Australia seeing close to a 110% year on year increase in cross border transaction volumes.
This reminds me of this article from yesterday Brazil boosting foreign inflow tax. Australia does not seem to have any interest in defending itself from foreign funds blowing this bubble up even larger.

Sunday, October 17, 2010

Other Housing Bubble Areas of the World

According to Global Property Guide's handy chart of inflation-adjusted price changes year over year, other places to watch for bubble action are:

Singapore at 35%
Hong Kong at 21%
Taiwan at 12%
Latvia at 9%
Israel at 9%
Finland at 9%

Global Property Guide has Australia at 15% (inflation adjusted) and Canada at 3% (nominal) in contrast to Greater Vancouver at 5.5% growth year over year according to the Greater Vancouver Real Estate Board September 2010 report.

2010 Fraudclosure Random Thought

The banks have the politicians to protect them from the people. But who will protect them from each other?

Saturday, October 16, 2010

China prices up .5% month on month 9% year on year

 China prices move back up

Merrill said Chinese officials were undoubtedly reacting to the data of rebounding house prices when they imposed tougher measures to curb prices in late September.

As part of those measures, Beijing lifted the size of down payments needed for first-home purchases in some major cities, excluded developers with idle land holdings from taking part in public land auctions, and unveiled tax exemptions for those companies who build public housing.
The first time homebuyer loophole could be easily exploited by buying clubs. The original curbs weren't going to work as designed for that reason alone. More importantly, every group running a buying scheme will suffer a financial collapse if they don't sell and buy the next property; they are on the treadmill. Given the downside of backing off, will any curbs actually work? Even a tax will seem cheaper than injecting personal cash to cover positions and getting out.

Sellers cashing out en masse in Perth

Prices down as property market floods
The number of properties on the market has steadily increased over the last year and has now reached 16,000 - the highest level since December 2008," he said.
Mr Bourke described "notable increases" in listings in certain areas with a 26 per cent rise in Melville, 21 per cent in Stirling East, 19 per cent in Swan and a 17 per cent jump in both north-east Wanneroo and in Bayswater-Bassendean.
Good sign, in a way, that sellers realize they have to discount fast and furious to bank the profit they have.

Perth is a unique case, so not sure how generalizable these numbers are, or whether it's the start of a broader trend. They are a large city sitting in total isolation. I doubt this will set off selling discounts elsewhere in Australia. Too easy for dwellers in Sydney/Melbourne/etc to say, it's different here from there. And that would be correct.

Wednesday, October 13, 2010

Crack Shack or Manshun? asks the question one way. I'm more interested in the other reading. How much of Vancouver's bubble is drug money and how much is the Chinese and how much is low interest rates? If the Chinese market crashes and they have to cash out will they just panic sell to the drug lords laundering money and everything will go on as before? For a while, at least?

Cascading Bubble Inputs, Australia

This is an older article from July, but it has a nice simple, illuminating chart.
Australian Economy Turbo-Boosted By Historic Surge In Export Prices
Compare this to the house price chart.

The deflection upward in Australian house prices is spot on 2001. Initially caused by this:
[This mortgage interest rate chart is from The Unconventional Economist]

Now, look back up at the first chart. Rising commodity prices did not cause the bubble, the trade boom kicked in around 2004. But it's prevented the bubble from bursting like it has in the U.S., Spain and Ireland. Waiting longer to prick a bubble does not generally make for a better outcome.

Survey Says: Australia House Price Growth of 1.5% Over Next 12 Months

This survey is being spun in every direction possible. But, it's just a sentiment survey.

Property Prices Set to Stagnate - Australia Survey

MARK COLVIN: A survey of the real estate agents, investors and developers that drive property prices has provided further evidence that Australian home prices are set to flatline.


MICHAEL JANDA: Australia's most watched monthly home value index has shown prices fell for three months in a row over winter.

And that news has now fed through to a gloomy outlook for property prices next year.

ALAN OSTER: There's been a significant revision down in expectations. So, at the beginning of the year everyone was very optimistic and now basically people are staying flat.

MICHAEL JANDA: That's Alan Oster; National Australia Bank's chief economist, talking about its latest quarterly survey of more than 500 real estate agents, investors and developers.

What is going to burst this bubble? Tighter lending won't do it if the Chinese are still pouring money into the country. Real estate prices are set at the margin. So between these two forces we might have equilibrium. Homeowners with equity aren't suddenly going to get desperate to sell en masse, especially if they think things will get rosy again later, and the ones that do will get snapped up at the going price. So, for now, stagnation is not a bad call.

Are there significant possible triggers besides China?

Monday, October 11, 2010

S&P Sees downside risk in China

S&P: China Major Cities' Home Prices May Fall 10% In 6-12 Months

Given the high-interest rate debt circle schemes being used to finance purchases, can it really only fall 10%? What, exactly, is there to arrest the fall? Once the rush to get out high starts, it isn't likely to cause a mere 10% blip in prices, especially when the buying clubs have to sell at any price to cover their interest. They won't be able to sell higher and cash out yet another mortgage. End of the gravy train.

Australia Commonwealth Bank Presentation, Slide Comments

Slides are copyright Commonwealth Bank. Reproduced here for commentary purposes.

Full Recourse to borrower? Four words for you: Blood from a stone.
Also, did you stress test the mortgage insurer too?
43% LVR, again, this number is based on bubble values. What's the LVR with 40% drop in prices? What % of mortgages go negative with 10%, 20%, drops in price? Hopefully this bank analyzes this stuff in house, even if they never show it to the public in a speech the NAR would have been pleased to give. The Fitch stress tests can't finish soon enough.

Chart on left. Forget the spike on the U.S. one for the moment, that is the bubble bursting. Right before that, leverage was holding steady at 40% for a surprising length of time, from 1994-95 or so. Below that is Australia. Sure, it's lower, but it's been increasing dramatically. It has in fact tripled since the 80s. That's not worrisome? That's not fundamental?

On the right we have, well of course households are "wealthy" their home values are inflated. That's the whole point. If every Australian sold out to the Chinese tomorrow and banked the earnings, then maybe that chart would mean something. Otherwise it's just paper wealth and it can vanish in an instant.

Saturday, October 9, 2010

Morgan Stanley Analyst Sees Bubble in Australia

Morgan Stanley Analyst Sees Bubble in Australia
Australian residential housing is very expensive on standard valuation measures.  House prices appear around 50% above fair value in terms of house prices to GDP per capita.  In terms of value of the housing stock relative to household disposable income, the housing stock appears around 35% above fair value (a trend line based on data until 2000).  With respect to house prices to gross rental yield, prices appear to be around 40% above fair value.  House prices started to move above fair value around 2000 on all three value metrics.
Why are house prices so expensive in Australia?  My view is that the single most-important reason is the increasing willingness and ability of households to increase leverage.  Several factors have come together.  First, Australia has not had a recession since the early 1990s.  There is now a generation of Australians who have never directly experienced broad-based job losses.  Second, financial deregulation loosened supply-side constraints on lenders.  Third, lower interest rates.  ... Now banks often provide discounts on the standard mortgage rate.  Consequently, the average effective rate paid was above the published standard mortgage rate until the late 1980s; now it is below. 
The key message is that real interest rates moved sharply lower from 2000.  The average since then has been the lowest since the early 1970s.  Go back to our earlier valuation measures and house prices also moved above fair value in the first half of the 1970s.  
I could excerpt the whole thing. Reading it is like finding an oasis in the desert.

What caused the bubble? oh, just the same thing that caused those in Spain, Ireland, the U.S. . . . Why this should be difficult for the bank heads in Australia to grasp, I don't know.

Gross Rent Yields is an important measure and an easy one for a house shopper to measure for themselves. Prices in the area you are buying for the type of house you are looking at should not exceed 15 times annual rent. If they do, slightly, you better love the house and expect to get back happiness in exchange for your money. If they exceed it significantly. You are better off renting than buying. Let someone else take the hit, there is no rule that says you have to. Investors form a floor on a falling market. Landlords, the smart ones planning for the long hold, will jump in when the price is right, but that's below 15x rent. When the market is 40% above that, you won't find anyone but suckers jumping in until the real investors show up. Look out below.

"Australia does not have a bubble brewing"

Australia does not have a bubble brewing in its domestic property market, in part because the pace of growth in house prices has been matched by the pace of gains in household incomes, a top central banker said on Friday. From the Economist (subscription required) via Reuters
The Economist itself has a great interactive chart addressing this exact issue. When you pull it up, you can adjust the right pop-up to Q2 2010, but it doesn't default to that. You can select price relative to income on the top pop-up, then again adjust the right hand year.

Snapshots are reproduced below, taken from the economist chart linked above.

Australia, China, Canada, United States prices against average income 2001-2009
As you can see the maroon line, China is in serious trouble. And Canada looks reasonable, interestingly enough. I'll have to come back to that later. Australia is running on a slight rise in price to income but this does not include any of the continued meteoric rise in prices into 2010 shown below with the U.S. housing bubble on there for comparison.

Australia house price index chart 1990 to 2010

Now, Battellino specified "household incomes" not "average (presumably individual) income". All right then. Australian Bureau of Statistics won't be releasing the 2009-2010 report on household income until a year from now. But we do have this:

(chart s2 on this summary report)

What do we see here? In 2005-2006 and increasingly in 2007-2008 the top quartile made disproportionate gains in income. That means the "average income" used in the top economist chart is increasingly being skewed upward and the median is going to be lower. That implies that a chart extending to 2010 against median household income have much more of a rise to it than the reassuring one shown above.

But it's not a bubble that started all the way back in 2001 where the affordability deficit was reflected in data way back in 2003. . . and would probably also show up if we have updated data for 2010 . . . You can trust a banker on that.

Thursday, October 7, 2010

Australia Holds Rates Steady

Everyone in Australia is celebrating the stay of execution on higher interest rates. Everything is going to be great again!

Aussie Construction will bounce back
Australian homeowners are now paying $446 more on home loans compared to a year ago, Mr. Airey said.

Oh dear, another country of entirely adjustable rate mortgages. I know, Americans are wimps, but we have easy total cost of ownership calculations. What can I say. I hear that ratcheting of the roller coaster as it tops the big hill . . .

Fitch is going to stress test the Aussie banks. I'll be on the lookout for the results of that.

Wednesday, October 6, 2010

China's Misread Property Bubble, Part 2

Misread is right. This same strange belief about bubble housing prices being supply side pops up again in this much better written article.

Angry Storm Over China's Housing Bubble
Dr. Liu, a research fellow at Peking University, believes that the speculative land purchase binge that peaked in 2009 was a result of the $600 billion stimulus money the central government pumped into the market at the end of 2008. The majority of the amount, experts say, has been invested in the real estate market by SOEs. 
The SOEs comprise the majority of the “land kings,” said a Guangzhou Daily report. Their spending has played an important part in driving up land and housing prices.

The stimulus money is your culprit. Speculators tapped into that money to buy 3-4 units each and by leaving them empty, they create a chronic shortage for the owner-occupier buyers, the angry ones mentioned in the article. Otherwise you are arguing that people wanted apartments, so SOEs built apartments, lots of them, boatloads of them, and somehow that influx of supply made the price go sky high. Seriously. Does that make any sense at all? 

Stated another way: Say that in a village of 10,000 people there is a minor wok shortage, say 1,000 people could really use a new wok. So an SOE comes in builds a wok factory, makes 5,000 woks and the market distortions of free land, cheap steel, and low financing, they sell them for bargain prices, 6 yuan each (about a $1). In a normal market, the 1000 people get a wok and 4,000 get an early replacement because they are so cheap, why not get one. But instead of this normal consumptive market, let's instead say that the villagers decide they are going to retire on the value of the woks they have hoarded in their attic. NOW we have the real estate market in China. Everyone spends every last penny they can beg and borrow to buy as many woks as they can, from anywhere they can. The 1000 poor wokless slobs are still wokless and some 1000 of the more money savvy villagers own 5 woks each, certain they are going to be rich rich rich, forever.

But everyone blames the high wok prices on the SOE and the state that gave them the land for the factory and the bank that loaned them the money at 0% interest, because that HAS to be the reason woks are unattainable for the ordinary villager.

China's Misread Property Bubble

Maybe I should have finished my first cup of coffee before reading this.

 China's misread property bubble

I found this informative mostly for the rhetorical style and as a peek into how the Chinese view themselves. I'll pick out this:

He explains that in the last 10 to 15 years of reforms, China has created immense wealth for its urban middle class. A very conservative estimate reckons that some 500 million Chinese collectively sit on at least 100 trillion yuan (US$15 trillion) of capital. (About 80%, or 500 million, of the roughly 600 million urban Chinese own their homes, constituting some 200 million family homes each worth at the very least 500,000 yuan
Dude, you can't count the real estate as wealth. It's just paper. The value is set by the margin. Not everyone could possible sell at the current price, there aren't enough buyers with that much money. Ergo, paper value.
These people are the foundation rock of social stability, the ones who have gained from the reforms, and now they have concrete capital to defend. The interests of those people must be defended and taken care of. A drop in the value of those assets benefits only a small minority of people who are looking for a flat to buy in the cities, but hurts the majority of the urban population concerned about their key financial asset and safety net. 
Yeah . . . and I wish I had a flying carpet so I could commute faster. Wouldn't a flying carpet be great? People made the same assumptions in the U.S., so I can't assume this is just intro to markets 101 missing here. There is some universal blind spot at work here. You need a buyer, with a completed transaction, to set the price. Those house-poor you so casually toss aside to live in an alleyway somewhere ARE your future price. In a healthy market, that is. That's the kind that lets owners have some predictability about their sale price. 27:1 price to income ratio, not a healthy market.
The rest of the population is also not completely deprived. Many are given lots of land in the countryside, where they have a house. The vast majority of the population thus has a stake in the overall stability of the country. Therefore, the goal of the state should be to protect those assets, which can also be monetized and given as collateral to banks or sold for other developments. 

Then forget a huge drop in real estate prices. They are more than assets to be traded in an inconstant market - they are guarantees of social stability. 
Bolding mine. This is all going to be so very interesting to watch. A massive controlled economy trying to keep a house of cards upright with the bottom row missing. I don't doubt they can do it for longer than everyone imagines.

The bulk of the article discusses market distortions caused by particular industries getting land and financing too cheap. Yeah, that would cause a market distortion, but where do we see the effects of this? If I'm building apartments and the land and money are free, my apartments would be cheapest. Walmartization, basically. But these cheap apartments, if they do exist, do so for only an eye blink. Like an Apple Store where no on limits the number of iPhones one can buy, someone will jump in, buy it cheap and resell it at the actual maximum price the market will bear. The distortions that really matter are elsewhere. Low mortgage rates, for example. Unrealistically low carrying costs. Unrealistic expectations. Irrational exuberance. Untraditional financing that turns everyone into a mini Bernie Madoff. Lack of diverse investment opportunities. Fraud. Those are your market distortions.

Tuesday, October 5, 2010

Korean Pension sinking $400 Million into China, Australia, Japanese Real Estate

Korean Pension to invest $400 million

SEOUL—South Korea's National Pension Service, the world's fifth-largest pension fund, will invest $400 million in the Asian and Australian real-estate markets in its latest move to boost its overseas exposure.
The official declined to elaborate on the types of properties the fund will invest in, apart from saying it will invest mainly in Australia, China and Japan.

I like the use of the word "exposure". Of course, as the article says, they are trying to diversify out of domestic bonds. Not a bad idea on the face of it. So much money out there with no place to go.

This will hold off the declines for a while, and spread the pain later.

Vancouver September Data are out

Vancouver Board Sept 2010

Mixed messages in this data. An increase in total listings 15401 vs. 12596 a year ago. This despite all new listings falling by a thousand from the same time last year. The Board's computed days on market dropped slightly, so these new listings haven't started gumming up the pipeline yet. Prices are up from a year ago for both detached and over all. $790,992 is the September index price for a detached house in the Greater Vancouver area, up 50k from a year ago.

Mirroring China last month? How much effect in there from frontloading of sales due to uncertainty about the harmonized tax?

Monday, October 4, 2010

Vancouver September Real Estate Numbers Should be Telling

While we are waiting on September's data, here is a nice summary about August.

Vancouver Property Prices Slow
While markets around the globe struggled, Vancouver prices hit their peak in April, when the REBGV's residential index hit a price of $593,419 for a house. International buyers helped fuel the surge, especially investors from mainland China. Since April the index price has slipped 2.8 percent, to $576,597, which is still 6.9 percent higher than August of 2009.
"The question I would ask is, in order to see this so-called 30 per cent price correction, what kind of shock is going to occur to induce that?"
You build the next condo and they don't come. That's all it takes.

I have a theory about Chinese real estate "investors" distorting the Vancouver market. It's understood that prior to Hong Kong returning to Chinese hands that Chinese buyers were driving the market leading up the the peak in 1994. (chart here) But what about now? How many of those empty condos downtown are held by Chinese investors? How many of them will have to firesale them when things in China mainland go sour?

China Property Prices rose 9.3% in August

Property prices in 70 major cities across China increased 9.3 percent in August, down 1% from July. This is was after a round of tightening by the central government that should have put the breaks on even more severely. 1% is noise. The new restrictions applied mostly on purchases of second and third homes. Higher downpayment requirements, for example. What does this indicate to me? It indicates that buying clubs are dominating the market. When you are running a buying club (where you keep passing around real estate to members, ratcheting up the price each time and getting the bank to fork over additional $ on a mortgage) you can't exactly stop. 

The lesson from California, Nevada, etc, is you can always find a rube to be your straw buyer, or your first time buyer in this case. If central policy that should put the brakes on legitimate sales did not put the brakes on the bulk of sales . . . then that implies the bulk of sales are not legitimate.

The Money Chart

House prices in UK US Australia NZ and Canada through June 2010

Scroll down for the chart "Residential House Price Indices" if it doesn't print below. This chart is from the site linked above.

Note some key features. The U.S. still has a few % to go to find a long term stable price. That flat section is various stimulus at the federal and state level (aka free cheese). NZ and UK are trying to create a "new normal" Canada is still on a tear and the only thing that makes them look reasonable is the insanity of the Australian market.

House prices, historically, increase only with inflation. Repeat: House prices, historically, increase only with inflation. The only exception to this is the discontinuity created by the move to two income households in the 70s and 80s. That effect is over now. Unless all of our kids move home and we start living in 4 income households. . .

How far can you extend the bubble

NDP Bill would ensure fairness for homebuyers

I especially like the Orwellian article title. Any means of dumping more money into an elevated market is good, right? Cash out your retirement to buy an overpriced illiquid asset. Come on, it's what all the cool kids are doing, no? The limit is already $50K per married couple, raised in 2009 from $40k. That was bad enough timing.

Steel demand to slow on China policy

Steel demand to slow on China

Why does this matter? Well, Australia's house of economic cards is built on selling everything they can mine to China. Their own bubble depends on that flow of raw materials continuing indefinitely.

Sunday, October 3, 2010

Housing Bubble Debate Boils Over article

'Disingenuous' figures

However, as Australia's largest home lender, the Commonwealth Bank has one of the biggest vested interests in house prices rising.  
Many analysts say that has led the bank to use misleading figures and comparisons.
If you go to page four of CBA's presentation and read the source information at the bottom of the graph and table, you would notice there is an additional source on the international comparison - Demographia.
However, if the Commonwealth Bank had also used Demographia's analysis of Australia's house price to income ratio, it would have come up with a figure closer to 9 rather than 5.6 or 4.3.
3.5 is a healthy ratio, although very desirous areas can sustain higher levels indefinitely (San Francisco, CA, for example). 9 is just crazy.

How do you know a banker is lying . . . ? :-D Yeah, you know the punchline.

Saturday, October 2, 2010

Adjustable Rate Quagmire

As an American who watched our domestic housing boom and bust with rapt attention, I nevertheless have a hard time wrapping my brain around the implications of every mortgage being adjustable rate, as in Canada. Sure, Canada has less of an issue with zero down mortgages. But a lot of the bust in the u.s. came from teaser rates coming home to roast on would-be homeowners. One of the most egregious problems during the boom was sleazy loan brokers sticking customers with disadvantageous mortgage terms when the customers well-qualified for better products.

Sure, Canada has low low interest rates, but that doesn't make it a great time to buy, unless you can lock that rate in and can calculate the total cost of ownership, for certain. For crying out loud, you have an entire country of buyers taking teaser rates that are going to burn them later, not just an unfortunate subset, like in the u.s. Yikes.

Friday, October 1, 2010

Beijing Investigating Apartment Vacancy Rate

Beijing to Start Investigating Apartment Vacancy Rate
In March, media reported that statistics from the State Electricity Company show electricity meters in more than 65 million houses are at zero. The reports were based on a survey that was conducted in 660 cities across the country.
Bursting bubbles always follow a familiar pattern. There is product overhang. Prices are sticky, even as sales plunge. If people are buying places to live in them, then at least one can assume that someone will want the place if the current owner plans to move. Stupidly stating the obvious here, I know. But once you have overhang, this is no longer assured. A healthy market is one composed of a majority of real buyers, not speculators trading empty units. The conditions for a painful undershoot sure are plentiful here.

Ponzi Shark Loans

So, if China real estate is affordable because people are reputed to pay cash for it . . . where does the money come from?

Ponzi "Shark Loans" Fuel China's Housing Bubble

Note the quote from Bill on the post above about repeatedly bailing out his mother in law. This Ponzi scheme is an old one, but up until now, the loan amounts were well within range of Western relatives making things right. Not so anymore. Bailing out a relative who got into hot water over $8k is a completely different ball game than $150k (the current price for an apartment in a major city in China).