Garth Lays Out What Happens Next in Canada

This man sounds optimistic.

Careful

I said recently (for a variety of reasons) the average house price could decline 15%, then enter a long comatose period. That seemed to disappoint some and enrage others, who believe real estate must (and therefore will) decline until they can afford it. So they pile on and forecast a 30-50% rout, taking a SFH in 416 to $450,000 and in Van to half a million. The justification (other than their own finances) is Phoenix or Vegas or Miami.

Well, ain’t gonna happen. Nor should you wish it. A halving of housing prices would drop our GDP by 5%. That compares with the sharp 2.6% contraction in the US economy in 2009 – enough to throw 14 million people out of work and gut the government. So imagine the consequences of a slowdown twice as severe in a country with one-tenth the population, and a commodity-dependent currency, run by people who want to buy more fighter jets and prisons.

In fact, it seems many of our delusional visitors have no idea what 15% means. First, this average number would translate into a 0% change in, say, La Broquerie or Chicoutimi (or Fredericton and Thunder Bay), but something closer to 20% in Brampton and 30% in Surrey. Given local conditions, there’d even be individual neighbourhoods exceeding that.

Whacked

This might seem, like, weird. But there’s a reason stuff costs money. Some things should be earned. Our debt today, and the housing reversal it’s about to cause, is the direct result of unbridled consumptive lust, usually by those virgins. Home ownership without equity is called renting, but without the freedom or mobility tenants enjoy. Those who will suffer the most from the coming correction – whether it’s 5% or 30% – will be the ones who couldn’t wait to buy, and traded their hormones for indenture.

Yes, but this is always true. That's why financial policy should take it into consideration. And if it doesn't take it into consideration it should be automatically assumed to be a policy to suck the middle class dry to the monetary benefit of the people who move assets around inside computers. And the real estate agents and developers. A handful of lucky sons of will fund their retirements, but that will be an accident of the setup.

The system is designed to do what it is is doing right now . . . indenturing the young and impoverishing the middle class.

Stats from China's Crash

22 months unsold inventory in Beijing
21 months unsold inventory in Shanghai
Chinese steel production down 15% since June
100 local governments had land auctions fail last month
The average wage earner would have to work 36 years to buy an average home in Beijing
18 years in Singapore
12 years in New York
5 years in Frankfurt
Transaction volumes down 50% percent year on year in Shenzhen
57% in Tianjin
79% in Changsha


Foreign Affairs: China’s Real Estate Crash

Because the industry kept on building [believing like previous cooling measures that the government would have to back off them], there has been no negative impact on GDP. Real estate investment has continued growing at nearly 30 percent annually. But inflation began to rise from 1.5 percent in January 2010 to a peak of 6.5 percent in July 2011, and authorities began to sweat. They broadened their cooling efforts. The central bank tightened credit expansion, and China’s economy began to slow. As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts.

Ironically, as Chinese investors start pulling their money out of property, many are putting it into bank- and trust-sponsored “private wealth management” vehicles that promise high fixed rates of return but channel the proceeds into investments — like real estate developers and local government bonds — whose returns are themselves predicated on ever rising property prices. Many fear this repackaging of real estate risk is laying the foundation for a follow-on crisis that some are labeling the Chinese equivalent of Wall Street’s collateralized-debt-obligation mess.

Interesting follow-on prediction. There are no safe landing places for the money, not even Yuan, which will decline as China has to realize the bad loans on the banks' books.

The China Burst is Here

China's epic hangover begins

China's $3.2 trillion foreign reserves have been falling for three months despite the trade surplus. Hot money is flowing out of the country. "One-way capital inflow or one-way bets on a yuan rise have become history. Our foreign reserves are basically falling every day," said Li Yang, a former central bank rate-setter.

The reserve loss acts as a form of monetary tightening, exactly the opposite of the effect during the boom. The reserves cannot be tapped to prop up China's internal banking system. To do so would mean repatriating the money – now in US Treasuries and European bonds – pushing up the yuan at the worst moment.

The economy is badly out of kilter. Consumption has fallen from 48pc to 36pc of GDP since the late 1990s. Investment has risen to 50pc of GDP. This is off the charts, even by the standards of Japan, Korea or Tawian during their catch-up spurts. Nothing like it has been seen before in modern times.

Those Mortgage Downpayments in China, They Be Borrowed

Sorry to continue to harp on this; it's a pet peeve of mine.

Nod of Approval for Black Lending

Niu Wei, marketing director for a start-up company, used a private lending firm to pay the down payment for her third apartment in Beijing. She had to make a down payment of 400,000 yuan ($61,538) in 30 days but only had 300,000 yuan ($46,153) on hand, including the money borrowed.

"I had already asked all my friends and family members, but still lacked 100,000 yuan ($15,380). Then a friend of mine recommended Creditease," Niu said. Niu provided her personal ID, monthly salary certificate and the property ownership certificates. Within a week, she got what she wanted at an interest rate of 1.42 percent per month, 18 percent a year.

The article also has a little overview of private lending:
Small credit companies charging 2.5-3% per month (backed by a mortgage)
Small credit companies charging 6.8-10% per month (no mortgage)
Peers and business partners 6-12% per month
Illegal banks, loan sharks, money launderers 70% per year (although that's not worse than the other at the extreme ends)

Like this article, there's been a lot of talk about the government banks turning their back on SMEs lately. Based on my reading, I think this is a bit of mythologizing. Banks report default rates to SMEs of 30-40%, so clearly they made some. These numbers always seem to raise up whenever orders come from the central government to make more loans, as a kind of shield, I presume. I suspect what has changed more is the interest rates on private lending have risen, making the gap between the official bank rate and the underground rate more painful. As borrowers have jumped from one lender to another, to cover the last loan's principal *and* interest, the risk premium has increased, and now all loans are unsustainable. I think this theory has some support in the risk premium in the interest rate list above, in the jump between 2.75% average to 8.5% average with and without collateral.

Some "historical" (2003, SO long ago...)
At the Mercy Of Loan Sharks

Although he had plenty of collateral in the form of sales contracts, machinery and inventory, lenders wouldn't grant him even a small line of credit. So potential customers, he fears, have gone to state-owned companies with better access to capital. "The government sees state enterprises as its sons, so it helps them," Mao says. "Someone else will drink up my market."

Ha, look at this kernel of inconvenient fact. I have not seen this so bluntly stated in the press this year unless someone is quoting Chanos:

China's four biggest banks are technically insolvent because they are owed an estimated $500 billion in nonperforming state-enterprise loans, but 70% of their new loans still go to state companies.

The article mentions pawn shops lending at up to 5.7% per month (with collateral like industrial machinery or a luxury car) That was the only interest rate number I could find in 5 pages of google articles.

This is how shadow banking runs its course. The lenders think intimidation substitutes for wise lending and there is always another loan shark to lend again, to cover that loan and unpaid interest. Until there isn't.

You had me at "Copy of Manhattan"

China Debts Dwarf Official Data With Too-Big-To-Complete Alarms

A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout.

Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.

There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 billion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.

OR, there is a lot more debt out there, unaccounted for. I think "Unaccounted For" is going to be the phrase of China 2012.

And with these loans essentially secured by future land sales, falling prices are the start of a self-feeding downward spiral.

The financing companies accounted for almost half of the 10.7 trillion yuan in all local government debt tallied by the official audit.

Go big, or go home. And debt from reviewed issuers rose 10% year on year. It does not appear to be slowing down, despite central government warnings to the contrary.

Furthermore, the data doesn't add up, implying that totals are most likely higher than disclosed.

Yao Wei, an economist at Societe Generale SA in Hong Kong, says another 7 trillion yuan of debt will be needed to finish projects in the government’s five-year plan through 2015.

“It’s very likely that senior government leaders have no way of knowing which numbers provide the best picture of the evolving lending binge China’s banks seem to be on,” said Carl Walter . . .

The number of loans going bad will rise because of the borrowers’ poor cash flow, according to a November report from London-based HSBC Plc. Around 68 percent of 184 local financing companies that have sold bonds analyzed by HSBC had a return on capital lower than 5 percent, the benchmark lending rate last year, compared with 37 percent for all 499 corporate issuers it studied, the report said.

For example: Gansu Provincial Highway Aviation Tourism Investment Group Co. did not have sufficient cash flow to cover even interest this year, fortunately they will just take out another loan to cover the interest and they will keep doing this until 2019 at which time they will owe 130billion yuan.

Gansu Highway’s situation encapsulates the problem of local government borrowers, which often have minimal or no plans to repay debt aside from borrowing more money, says Fitch’s Chu.

Noting Australian Bubble Denialists

Just noting some predictions.

Houses to fall 10% next year? Tell him he's dreaming

Australian Property Monitors' property market outlook, senior economist Andrew Wilson tipped 3 to 5 per cent growth in median house prices nationally and for Sydney
...
Brisbane, the worst performer this year with prices down almost 7 per cent mainly due to the devastating January floods, would bounce back between 5 and 10 per cent off the back of the resources boom. Likewise, Perth and Darwin. But Melbourne, due to big price rises in 2009 and 2010 and an apartment oversupply, could expect growth of between 0 and 3 per cent.

Monique Sasson Wakelin, managing director of Wakelin Property Advisory, said the two recent interest rate cuts would be the catalyst for growth and agreed with the APM forecast for Sydney and Melbourne. . . . ''I can't see a national drop of 10 per cent, there hasn't even been that this year,'' she said.

Another property expert, Mark Armstrong of the auction tipping competition Property Tycoon, was also optimistic about next year. . . . ''I think it will grow by 5 to 10 per cent

Shane Oliver, the head of investment strategy and chief economist at AMP Capital Investors . . . expecting a weak start to 2012 because of economic uncertainty. Over the year, he says prices could drop 1 or 2 per cent nationally but he is more optimistic about Sydney. ''I'm expecting modest gains over the year of maybe 1 or 2 per cent for Sydney,'' he said.

Gambling Rates High Among Foreign Students in Australia

Problem gambling among foreign students is 6.7% in contrast to 1% for the general population.

Vice of the dice: learning the hard way
(boy, the Aussie journalists sure like their puns)

Australia offers international students opportunities as well as temptations. While low-level social gambling is accepted in parts of Asia, legal gambling opportunities are restricted in the countries where most of our international students are from: China, India, Korea, Indonesia and Malaysia.
Gambling Research Australia estimates that between 17 and 45 per cent of previously non-gambling international students gamble once they arrive on our shores.

The Gambling Research Australia report identifies Chinese and other Asian international students as being particularly vulnerable to gambling addiction. While Asian students are by no means alone in having gambling problems, the report's authors say Chinese and other Asian students, and particularly males, have many risk factors that predispose them to addiction. These include inexperience, isolation and disconnection from family and friends. Close to 50 per cent of the international students in Australia are aged between 20 and 24 and most are under 30. This makes them particularly vulnerable to risky practices such as gambling. Add to these Australia's liberal gambling culture (bursting with casinos, pokies, horses and dogs) and tens of thousands of inexperienced, unsupervised young people with ready access to large amounts of cash (usually provided by their parents for living and tuition expenses) and you have a combustible mix.

Isn't It Subprime to Need a Loan for a Downpayment?

Housing industry shy on new rules

The government did move about three years ago to require Canadians to have a 5% down payment, increasing from zero. However, most of the major banks allow for a cash back option. Mr. Clark’s own bank will give you 5% of your mortgage principal up front if you lock in a mortgage for five years or longer.

“A really damaging move would be significantly increasing the amount of cash a young family would have to have to qualify for a mortgage. It would take a lot of transactions out of the marketplace,” said Mr. Soper.

According to the article, the RE industry is more open to returning amortizations to 25 years than they are on tightening rules about downpayments. I guess that follows. 0% down at 30 years is leverage at 186:1 (total mortgage over first payment) and 0% down at 25 years is 170:1. Whereas strict downpayments at 5% is 20:1 leverage. It's the leverage the industry (which lives and dies on churn) can't bear to have touched.

Nevertheless the government has targeted condominiums during this housing boom. It now forces investors to have 20% down to qualify for mortgage default insurance, up from the 5% it requires for owner-occupied buyers.

Still there remains some scuttlebutt the government will tweak the condo rules again with one suggestion being that 100% of condominium fees count towards debt obligations when considering how large of a mortgage a consumer can get.

Wow, they are actually doing something to tame speculation.

Gregory Klump, chief economist of CREA, said the figure is misleading if you look at the number of unoccupied condos as an absolute number. But if you normalize it as percentage of unabsorbed inventory, it’s not historically high.

I have no idea what that means. Anyone?

Hong Kong, 4% Fall July to October, Transactions Down 64%

The Shine Is Off Asian Properties

Hong Kong, which has seen home prices surge almost 75% since the beginning of 2009, recorded its first fall in property prices in three years in July. From July to October, prices fell 4%. In November, the number of residential property transactions in Hong Kong fell 64% from a year earlier, according to Land Registry data.

"The drops in home prices in China and Hong Kong are moderate partly because there are simply not that many transactions. Property owners are holding onto their properties and refusing to sell them cheap in bad times," said Nicole Wong, regional head of property research at brokerage firm CLSA.

Hong Kong Chief Executive Donald Tsang said Friday that the government's measures to curb speculative activity, including an additional tax on buyers who sell within two years of purchase, will remain in place.

I'll just wait it out. Prices will rise again. How long did it take for the bubble to reform from 1997? 14 years then. Well, I'm sure all of these owners can comfortably wait that long.

Only 191 Vancouver Properties Valued Below $500k

Living in Vancouver comes at a price

An architectural firm that recently mapped virtually all properties in Vancouver could find just 191 valued at less than $500,000. About 40 per cent were worth more than $1-million. The benchmark price for a home on the city’s west side is now more than $2-million. On the east, it’s $863,183, according to the Real Estate Board of Greater Vancouver.

In Canada, the issue is particularly acute in markets such as Toronto and Vancouver, where real-estate prices long ago made home ownership a dream for everyone except the wealthy.

This is a misleading assertion. Affordability has eroded substantially in just the last decade. In Toronto, house prices have doubled since 1999 while in the same time incomes have increased 45%.

Checking in with South Africa

On the Economist Clicks and Mortar chart snapshot below, you can easily see South Africa. It's that high flying line that dwarfs even Spain for non-linear growth.

House prices - In the doldrums
Still overvalued

Auction Alliance estimates that up to 50000 repossessed and foreclosed homes could hit auction floors and the sheriff’s office over the next year. That’s in addition to the 10000 or so distressed properties currently for sale.

With so many more cash-strapped homeowners expected to dump properties they can no longer afford on the market, prices will no doubt come under pressure. Estate agents say average house prices are already down by an average 15%-20% from pre-2008 highs.

SA is estimated to be overvalued [by The Economist] by an equally hefty 17%.

Very similar tone to Australian analysts. It's different here. It will soft land.

Rode expects house price growth of no more than 2%/annum for at least the next five years. That implies a cumulative real price fall of 15%, assuming an average inflation rate of 5%/annum over the next five years.

The luxury end of the market is meanwhile setting records, a trend that pans out across a range of capitals, including London. Big money is still getting parked from abroad without regard to the broader real estate trends.

Nice Overview Article on the Unfolding Banking Crisis in China

China: Banking crisis looms from Chinaworker.info

The last period has seen a phenomenal expansion of the shadow banking system, in which many state-owned companies and local governments are active players. Part of the shadow banking system is comprised of private ‘underground’ banks and trusts that charge usurious rates of interest mainly from privately owned small and medium enterprises (SMEs).

These illegal financial institutions have grown rapidly, exploiting the government squeeze on the state banks. According to the central bank, underground banks hold around 2.6 trillion yuan (US$410bn) in loans, but this is likely an underestimate. They attract investments from other capitalists and from wealthy government officials (who also provide protection), drawn by the high returns from interest rates of up to 100 percent. Xinhua quoted the owner of an 800-million yuan illegal bank, who said that 80 percent of her depositors were local government officials.

Chart showing China GDP per person and Components of Government Debt as a % of GDP

It's long and broad and I recommend reading it all if you are new to the issue of China's financial situation.

The broken image for the chart of Chinese M2 versus U.S. M2 can be seen here

Land Confiscation Leads to Protests

In China, local governments arrange unrestricted financing through selling land to developers. Insider deals and fraud are rife in a system lacking transparency. Compensation to existing landholders is reputed to be insufficient, at best. Inflation, the end result of national monetary policy, has left many households struggling to buy food let alone anything else. Eventually it boils over. Mass incidents are at 180,000 per year.

Inside Wukan: the Chinese village that fought back

For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.

“Almost all of our land has been taken away from us since the 1990s but we were relaxed about it before because we made our money from fishing,” said Yang Semao, one of the village elders. “Now, with inflation rising, we realise we should grow more food and that the land has a high value.”
Thousands of villagers stormed the local government offices, chasing out the party secretary who had governed Wukan for three decades. In response, riot police flooded the village, beating men, women and children indiscriminately, according to the villagers.

“I have just been to see my 25-year-old son,” Shen Shaorong, the mother of Zhang Jianding, one of the four, said as she cried on her knees. “He has been beaten to a pulp and his clothes were ripped. Please tell the government in Beijing to help us before they kill us all,”

Her son was one of the 13 representatives the government agreed to negotiate with.

Australian Real Estate Investor Borrowing Falling Faster than Owner-Occupier

Investor borrowing fell 5.5% between October and September while owner-occupied fell 1.2%.

30% of all mortgages are on investor properties.

1.2 million out of 1.7 million investors fail to cover costs with rents.

Property Dreams Strain Australian Market

Compared with live-in homeowners, landlords are more likely to put properties up for sale when things go wrong—a surge in properties for sale could cause disarray in the broader market.

Abandoned Large Projects in China

Abandoned large projects stretch back farther than the GFC.

Abandoned Fake Disneyland near Great Wall

Although, I'm still partial to Thames Town Maybe because it's finished but empty. Any place can be unfinished and empty.


Hat tip: Mish

Li's Parents Were Savers, They Saved Their Whole Lives

And their son lost it all in less than a month buying an overpriced apartment.

China's housing bubble is losing air

The swift turnaround has stunned buyers such as Shanghai resident Mark Li, who thought prices had nowhere to go but up. The software engineer closed on a $250,000, three-bedroom apartment in August, only to watch weeks later as the developer slashed prices 25% on identical units to attract buyers in a slowing market.

Outraged, Li and hundreds of others who paid full price trashed the sales office, scuffled with employees and protested for three days before police broke up the demonstration. Walking away now would mean losing the $75,000 down payment that he borrowed from his working-class parents.

"I still haven't told them," Li, 29, said of his home's plummeting value. "It will just make them worry, and it's already too late."

And Chinese aren't nearly as leveraged as Americans. First-time buyers are required by law to come up with down payments equal to 30% of a home's purchase price; many put down more.

Wait, wait, the buyer just 9 paragraphs up in the same article is rather leveraged. You just described him. Did you forget him already?

Li plans on marrying his girlfriend this time next year, when the apartment is scheduled to be finished. He'll have to devote half of his $1,500 monthly salary to pay the mortgage.

?? We're missing some debt or downpayment here. $750 a month at 7% interest only gets you a 75k mortgage. Either he plans to put down more than the article stated, or they've got his salary wrong. Presumably he hasn't needed to come up with the rest of the money yet, since he hasn't taken delivery on the apartment and won't until next year. At which time he has to come up with 100k to get his mortgage to be a mere half of his salary. If he can come up with a 100k in a year, why is he pawning off the parents?

Either way, buyers putting 30% down since 2009 when prices have fallen 40% means they are already are 13% underwater. What about after the next round of price cuts?

Debt-strapped home buyers have been dubbed fang nu, or house slaves.

But the Western analysts and press insist they aren't over-leveraged. Who to believe?

The Inequalities that Result from Government Policy to Inflate House Prices

A little cry in the wilderness here.

Why falling house prices aren’t the calamity the media would have you believe

By contrast, those households living in rental accommodation are subsidised by $3.2 billion. For individual homeowners this subsidy amounts to around $8,000 per year, investors are subsidised by $4,000 while concessions to private renters amount to just $1300 per household and public housing tenants $1000 per year.

Recent analysis published by the Australian Bureau of Statistics estimates that the median net wealth of households who rent in 2009 was just $55,265 whilst householders who own their home but are paying off a mortgage had a median net wealth of $487,183. Those homeowners who own their property outright had a median net wealth of $737,394 – 13 times greater than the median wealth of those who rent.

It is an uncomfortable truth that government policies have been instrumental in maintaining housing inequality. The current taxation arrangements serve the interests of homeowners and rental investors, and politicians are reluctant to advocate reforms that might damage their electoral prospects.

ABS: Total Value of Dwelling Commitments down 2.5%

Loans slim down as buyers shun debt

But, in a ray of positive news for the other property market, the number of new home loans offered to owner-occupiers climbed, 0.7 per cent to 51,981 on a seasonally-adjusted basis.

The ABS said the total value of all housing finance offered to homebuyers fell 2.5 per cent from September to October, to $20.46 billion.

The headline isn't supported by the data. Houses cost less. Total value of home loans is down. That, by the way, sounds like a good thing. Unless you are a journalist, I guess.

Also, your "ray of positive" isn't one either, necessarily. According to the ABS report it includes refinancing. All we know is at best people have gotten a better deal on their mortgages, or at worst, took equity out of their homes. They might have bought more homes, but we don't know that. (I assume that's what got the writers all excited.) We don't know what they did. We only know more mortgages were written.

Loan Shark or Borrowing Walrus?

I think this comparison to a loan shark is being broadly misunderstood. Yoram Bauman, the standup economist, summarizes the situation here:
Is America a Loan Shark or a Borrowing Walrus?

For a longer answer, note that the U.S. runs a trade deficit with China: we buy more from them than they buy from us, so Chinese companies end up with about $25 billion a month in U.S. dollars that they "don't want". The Chinese government weighs in by effectively buying these U.S. dollars, i.e., it gives these companies Chinese yuan in exchange for their U.S. dollars. And then the Chinese government turns around and uses all those dollars to buy U.S. treasury bonds, currently over a trillion dollars' worth.

It all sounds a bit odd, almost as if the Chinese are loaning us money so that we can buy stuff from them. And there are definitely tensions on both sides. Many people I talk to here in China -- regular folks like taxi drivers and restaurant managers -- know all about the U.S. Treasury bonds that China owns, and they're not happy about it. One man told me that the U.S. was a "loan shark" (at least that's how my dictionary translated "gao li dai"), when in fact the U.S. is more like a borrowing walrus, floating in an ocean of our debt.

First thing one needs to understand is people in China give money TO loan sharks. Between 50% and 90% of households (Wenzhou is the 90%) loan money out to others in various setups, from loan circles to lending through a loan shark. They even take mortgages out on their properties to generate more cash to loan to loan sharks, with the expectation that they will be paid back their principal plus a gain in great excess of the prevailing bank savings rate. Now, the comment from the taxi driver is cast into a different light.

To wit: The U.S. took China's money and gave them treasuries and now isn't going to pay as much back (due to devaluation of the dollar). Voila, the U.S. is acting like a loan shark who not only refuses to pay any gains to the funder, but doesn't even return all of the principal.

Another thing that's been irking me, the notion that Chinese mortgages are safe from a price crash because they put 30% down. What this ignores is that the 30% is also borrowed, just not borrowed from the bank. Or, from that bank, anyway.

Shanghaied Home Buyers Turn Protesters as Shattered Dreams Vex Government

Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago. Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.
. . .
For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.

Quick calculation has him making about 19k and the wife just under that at 18k (in $). Just the mortgage is 4.6x total household salaries. The house itself is 6.6x household income, and his total debt service, including mom and dad and the boss is 6.3x, most of it at nearly 8% interest.

And yet, the Chinese are touted as savers. Yes, they are, but where are they saving? They aren't keeping their money in guaranteed bank accounts, they are keeping it with the kids trying to get into a grossly overvalued real estate market on the verge of collapse, or worse yet with the equivalent of Bernie Madoff in the form of a loan shark, who may or may not have loaned the money to a run-away shoe factory boss.

The banks this year have suffered an exodus of tens of billions in deposits that went directly into the shadow banking system, to the loan sharks. TO the loan sharks. This "savings rate" and the "large deposits" on real estate mortgages are considered the reason that the property bubble bursting will "be contained" and not impact ordinary Chinese. Believe it?

The lack of understanding of why the U.S. looks to a Chinese taxi cab driver like a loan shark really demonstrates why the general media doesn't seem to grasp what is going on.

Canadian Banks Heavily Involved in Re-Hypothecation

Re-hypothecation (where client collateral is used again to obtain funds for a financial firms own trades) and churn (where the counterparty RE-uses the collateral to obtain more funding, and so on) is the West's least known shadow banking system. The unlimited re-hypothecation of funds mostly through the UK (which has no limits) and a bit through the US (which has relaxed their limits since the late nineties and into the 2000s (funny, just the same time they were relaxing every other limit on shady financial activity)) results in a money multiplier effect backed by, on average, 25% capital.

Canadian banks appear to be deeply involved in dipping into their client's assets to obtain funding for themselves, a la MF Global. Note, once your bank or brokerage has sent your assets to the UK and a firm there has then re-hypothecized them, you will not see them again if your financial firm's bets go bad. The regulation is so poor it is up to the individual investor to arrange limits on their financial firm's actions regarding their own assets.

MF Global and the great Wall St re-hypothecation scandal

firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

Prices down 60% in Kangbashi, Near Ordos

Satellite Pictures Of The Empty Chinese Cities Where Home Prices Are Crashing
If demand is zero, the bottom price should be something closer to zero, unless someone can invent some other economic use for these places. Long term warehousing?

The bigger issue, however, will be if declines reach the major cities. "The degree of price declines you are seeing in Kangbashi give a preview of what you will see in major cities. I would expect price declines of 20% nationwide over the next 1-2 years," Tulloch said.
Tulloch points to plunging transaction volume as evidence of a property slowdown. His firm expects a hard landing, with China slowing to zero GDP growth for several quarters.

Anything below 9% is disaster for China. 0% would be devastating.

Germany Props Up Their Banks' Reserves

Germany Set to Offer Banks Help on Reserves

Germany plans to revive the government fund it used in 2008 to rescue banks, in order to help some German institutions increase their reserves, the Finance Ministry in Berlin said Wednesday.

It's 2008 all over again. Why? Because after the U.S. bailed out AIG and AIG bailed out the European banks structural change didn't happen. Well, it happened, a little, with change to take effect far in the future. It's almost like they hoped with continued high leverage the banks might roll the dice and gamble themselves out of the corner they were in.

Last month Commerzbank said it would sell assets and temporarily stop issuing new credit through its troubled EuroHypo unit to meet tougher capital reserve requirements. The bank, which reported a loss of 687 million euros, or $920 million, in the third quarter, said at the time it would also look at other options to increase its reserves.

All these German Hypos going under. And remember, Germany had no housing bubble. They didn't even have a housing blip. This is all high leverage killing them on bets outside their borders.

The German newspaper Handelsblatt reported that the revived fund would be able to issue up to 400 billion euros in guarantees and 70 billion euros in credit to banks. According to a proposed law to be considered by Chancellor Angela Merkel’s cabinet next week, banks could be forced to accept the money to expand their reserves.

Oh, and that old game. Pretend they all need a bailout to hide the worst offenders. (Although in the U.S. it turns out (we just found out in the last months) all the big banks needed the bailout, public statements to the contrary notwithstanding.)

Vancouver House Prices Continue Slow Slip

June 2011 continues to be the peak month for detached prices. And this month the overall price slipped more than detached, which did slightly better than holding firm.

The odd vacillating pattern continues. It's strange enough, I wonder if it's not some manifestation of the HPI calculation.

Vancouver House Price Chart, Detached and All 2010, 2011

On the price change chart, you can see that the overall prices are pulling down harder this month, as the year on year for detached increased.

Year on year change in house prices, Vancouver, Detached and All

We are running right on the five year average for inventory and sales.

House for Sale Inventory Vancouver over 5 years

House Sales Detached Vancouver over 5 years

One Million Dollar Price Cut

The season to be jolly
It says the price has been slashed by $1 million, but all I can think is: Is that a house with glass walls on the bedroom?

There is a metaphor here, somewhere.

And the rest of the article can be summarized with: feel free to bargain, especially at the high end which is down 15-20% year on year.

Be careful out there.

Royal Bank of Canada and Bank of Nova Scotia Most Exposed to Consumer Debt

Safe as Canadian banks, eh?

Concern over Canadian bank exposure to overleveraged consumers

According to David Beattie, Moody’s analyst and author of the report, the Royal Bank of Canada is the most susceptible with 24% of its total managed assets made up of uninsured loans. Next is Bank of Nova Scotia at 21%, CIBC at 20%, Toronto-Dominion Bank and National Bank of Canada both at 18%, with Bank of Montreal the most protected at 14%.

“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Mr. Beattie. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”

Canadian Bank exposure from the Financial Post article

Canadian Personal Debt overlaid with U.S. Personal debt (orange line).

Financial Post chart has been overlaid with the U.S. chart from here. Both are charted as a percent of disposable income, although the U.S. is Gross and the Canadian one is marked Personal (which isn't clear if that's post or pre personal tax) so use the chart only as a trend. The blue field in the background chart is U.S. consumer debt relative to GDP.

As you can see the Canadian consumer has continued to rack up additional debt while south of their border, the U.S. consumer has been trying to repair their personal balance sheet.

Hat tip: Kevin commenting at Greaterfool.ca

"That's why we have to depend so much on the Chinese."

Comments during a luncheon by property developer Harry Triguboff.
Crisis will force Greeks back: Triguboff

He said that most of his customers were from China because the costs imposed by authorities and interest rates ''made it very difficult for Australians to buy''.

''That's why we have to depend so much on the Chinese.''

Chinese House Prices Down a Third Month in a Row

China Home Prices Drop for Third Month in November Amid Curbs, SouFun Says

Home prices dropped 0.28 percent last month from October, when they retreated 0.23 percent, according to SouFun, the nation’s biggest real estate website owner. Prices slid in 57 of 100 cities tracked by the company, including in all 10 of the country’s biggest cities such as Shanghai and Beijing, it said in an e-mailed statement.

Markets are very excited about the Reserve Ratio requirement cut of 50 basis points (.5%) except that's a cut from 21.5% which was a record high ratio. I believe it is the signal it sends, rather than any delusion that at 21% reserve ratio could be said to encourage growth, that the markets are reacting to. This is expected to add 350 billion yuan ($55 billion) to the economy.

This is in contrast to the move in August to require banks (as part of a phased in policy that doesn't come to full fruition until February) to hold reserves against margin deposits (letters of credit) which was expected to remove 800-900 billion yuan out of the system over the course of the implementation. That contraction of credit is still ongoing. Of course the amount the banks need to hold against those deposits just went down. (old marketwatch article on this)

Generation Squeezed in BC

Housing, child care stings 'Generation Squeezed'

With a combined income of $92,000, he and his wife could qualify for a $500,000 mortgage. But Atkinson said the minimum $25,000 down payment is too rich for him and his young family.

Banks are approving at a 5.16x multiplier of salary in a country where there is no such thing as a 30 year fixed mortgage? And people claim there is no subprime.

"We'd have to save up for at least five, six years just to get a decent down payment…and that's really frustrating," he said.

I have bad news for you. If you can't save up for a down payment, then you certainly can't save up for the emergency fund you need to keep a house operating. Houses can ding you for 25k with no warning. If you aren't that liquid, you need the security of the kind of predictable monthly expenditure that one can only get through renting.

A recent study from the UBC Early Learning Partnership found that young families are bringing in roughly the same income as those before them did nearly 30 years ago, even though most families are now duel-income.

Kershaw said while household incomes have flat lined, housing prices have not -- rising 76 per cent in the same period since the 1970s.

THIS is the real issue for this generation. Relative to their parents, where does all the wealth this couple generates working end up? Is it going into more expensive advanced health care? Is it going into supporting the now larger generation before? Is it being distributed upward to a greater degree? Or, most likely, a mix of all of the above?

The wealth shifted away from the pocketbooks of the middle class, but for some crazy reason, house prices continued to mount. That is the essence of the problem. Debt has been substituted for wages and excessive credit issuance is reflected clearly in the rise in price of the most widely leveraged asset: the family home.

"Squeezed" doesn't quite cover it.

Canadian House Price Index Shows Stall

Housepriceindex.ca has published the September data.

The only remaining city still truly defying gravity is Winnipeg. Ottawa and Quebec City are showing peaks.

In other, possibly related news, the major central banks of the world are again mistaking a solvency crisis for a liquidity crisis, and the markets are ecstatic about this.

Vancouver Realtor: 90% of High-End Buyers are Foreign

Another data point in the foreign influence debate.
Should there be restrictions on ownership of real estate in Metro Vancouver?

Moore says almost 90 per cent of higher-end house buyers are foreign.

“They seem to find Vancouver and the Lower Mainland to be a safe place to live, in terms of worldwide, and they do like our weather, and it doesn’t seem to be slowing down since they began looking for homes in the ’80s,” says Moore. Condominiums are a different story, though, where he estimates it to be more of a 50-50 mix, although he admits 26 of the 28 units he sold at a new complex on Royal Oak recently went to those of Asian descent.

There's the rub with an informal survey. Asian descent doesn't tell you anything about foreign money.

Although much of New West is high on a slope, it hasn’t seen the same pressure from foreign buyers.

. . .

However, Goodwin has noticed many of the South Asian builders that buy land in Burnaby to construct big homes and sell them, are now targeting New Westminster’s West End for its big view lots.
Pilothouse Marketing’s Craig Anderson has been project manager for three recent new developments that went on sale in the city—Brickstone Walk, 8 West and 258, and he estimates 35 per cent of the buyers for the last two were mainland Chinese.

The Real Estate Board of Greater Vancouver doesn’t track specifically where foreign buyers are purchasing homes. However, president Rosario Setticasi says a regular informal poll of up to 400 realtors reveals only about 10 to 12 per cent of home purchases are by foreign buyers.

10-12 percent is enough to boost a market. It's certainly enough to utterly juice a few select submarkets.

Vancouver is a Balanced Market

Have to note this for the future. Brian Morton. We'll check back in on him later.

“The threat of a bubble has largely dissipated,” senior economist Robin Wiebe said of Metro Vancouver. “But, really, there never was one.

“When prices rise, new supply is attracted to the market. And that's what's happened.”

Actually, when the supply increases during a speculative frenzy, you just get more objects to trade with in a speculative frenzy. The laws of supply and demand left the building exactly when the increase in price triggered an increase in demand.

According to the index, the average price in Metro Vancouver was $774,000 in October, two per cent more than September and 15.3 per cent more than October 2010.

A gain in excess of inflation is not balanced.

The Fraser Valley was in a balanced market, with prices up 9.6 per cent year-over-year to $494,000, but Victoria was considered a buyers' market, with prices down 7.1 per cent year-over-year to $490,000.

Why is falling prices a buyers' market exactly? Sounds like a perfect wait for a better bargain market.

No mention of how much additional credit needs to be issued to sustain these gains "with sales of the expensive homes having moved through the system." (read: foreign $) and where that credit is going to come from to even match the recent gains ongoing. If the shift in buyers is real (they admit it is) where is that money going to come from?

Hat Tip: Smokin' Jayne commenting at VREAA

Jim Chanos on His Trip to Australia and Hong Kong

Video at the link below.
Chanos Says China Bank System `Extremely Fragile'

Our concerns about what we saw in Australia: an economy clearly tied to China, has hitched its wagon to the tail of the tiger.

The banking system in China is extremely fragile. . . . In fact because of what happened in the last two crisis in 99 and 04 when non-performing loans went crazy in China, without even a recession, the Chinese banking system was not recapitalized like ours was, it was papered over. So going into this credit expansion Chinese banks are sitting on lots of bonds from these so called asset management companies from 99 and 04 and they are keeping them on their books at par, at full value. In the case of Agricultural Bank of China, which we are short, those restructuring receivables are equal to over 100% of their book.

And when they talk about those foreign reserves of 3 trillion dollars, what everyone forgets is there is liabilities against that. And everyone seems to think it is just a free and clear open checkbook. It's not.

There is a growing sense that the Chinese government will ease. What we point out is their credit this year is going to grow between 30 and 40% of Chinese GDP. If that's tight, I'd hate to see . . . [Betty: what loose would look like.]

OECD Notices China Has a Problem

And they don't mince words.

Real-Estate Risks Overshadow China’s Economic Prospects, OECD Report Shows

“While the exit of small developers would not pose a problem, the failure of large promoters could put some bank lending at risk, perhaps triggering negative chain reactions,” the Paris-based OECD said in a report today. “A key risk is an overly quick liquidation of unsold property.”

And there is a lot of unsold property, not including up to 64 million empty apartments.

China’s economy, the world’s second biggest, will expand 8.5 percent next year even as export growth is pulled down by weak demand and a decline in the nation’s competitiveness, the report said.

Elsewhere in Asia Pacific, Australia has scope to cut interest rates should Europe’s sovereign-debt crisis stall global growth, the OECD said, a scenario investors already are betting on.
If downside risks to the international economy materialize, “monetary policy should be eased significantly to sustain demand in the context of moderating inflation,” the OECD said. Australia’s government could also boost spending, it said, though that would delay a pledged return to a budget surplus in 2012-13.

So, imagine this. Australia cuts rates, but that only applies to the domestically funded 2/3 of a mortgage. International appetite for Australian mortgage debt will not necessarily increase proportionally to track the same rates. In terms of funding mortgages, Australia's central bank is not in full control.

Affordability Index for Vancouver at 90.6%

Real estate becoming more affordable: RBC
Everywhere except the large metropolitan areas, that is.

For example, an affordability reading of 50% means that home-ownership costs, including mortgage payments, utilities and property taxes, take up 50% of a typical household's monthly pre-tax income.

The index in Vancouver stands at 90.6%, Toronto 52.1% and Montreal 40.9%.

This Sure Doesn't Sound Like a Place with a Housing Shortage

Empty Richmond houses attract metal thieves

Thieves are breaking into abandoned Richmond residences to steal valuable metals such as copper and aluminum, RCMP said on Tuesday.

It's so common it's called urban mining.

The thieves break into empty homes and take copper pipe and wiring, radiators, appliances and aluminum-framed doors and windows for the metal to sell to scrapyards.

Housing Starts in China, Including Affordable Housing at 2.2% year-on-year

Also, the manufacturing sector is expected to have fallen into contraction. And since exports are up nearly 16%, this points to a pull back in domestic demand, the only thing that can rescue the economy.

China May Find It Hard to Break Fall

Wang Tao, China economist at UBS, estimates that new housing starts fell to 2.2% year-on-year in October. More alarming, that number includes government investment in affordable housing that was meant to ride to the rescue as private investment slowed.

This certainly implies that the big central government push for affordable apartments has failed.

Can China Rescue Its Economy?

Most worrisome, it appears that the factory sector is shrinking due to weakness in domestic, as opposed to export, orders.

Unfortunately for Beijing, its technocrats have already expanded their money supply to stratospheric levels. China’s M2 was 34% larger than America’s at the end of last month, even though its economy was less than half the size of ours. China’s money supply increased rapidly in the last three years, creating today’s high rates of inflation. Inflation, which came down rapidly last month according to the Bureau of National Statistics, is still uncomfortably high, perhaps more than twice the official figure.

In view of this, Beijing’s only real option is to buy GDP growth by direct spending, what some call “tidal wave investing.” The center can spend, but China has already built its “ghost cities” and other unviable projects, from one end of the country to another. A signal from Beijing that it was spending again would definitely buoy sentiment, yet technocrats no longer run a command economy and have limited means of forcing investors into projects that look unprofitable.

Ordos Has Fallen from up to 13,000CNY/sqm to Average of 3,000CNY/sqm

So says the HK Standard.
Stay cautious as bubbles burst amid tighter money

Real estate prices in Ordos are said to have dropped sharply to an average 3,000 yuan per sq m. So not only is de-leveraging occurring in Europe and the United States, it is in China too to a certain extent.

Don't underestimate the effect on Hong Kong, where the stock market plunge has caused investors to lose huge amounts in the past few months.

Meanwhile, property developers have started selling flats below secondary market prices.

Melbourne Auction Clearance Rates Worst in 7 Years

The article says sellers were spooked into pulling houses off the market. That's a bit confusing. Do they want to sell them, or not? This is the part of the market where the real estate agents' rhetoric comes back to bite them.

Only half of all houses up for auction in the past month drew purchases

Just half the properties going under the hammer have sold in the past four weekends - the worst run of auction results in seven years.

About 1000 homes will still go for auction today and tomorrow, the most in a weekend since early this year.

This weekend is the biggest for auctions since February 27, when 994 properties went under the hammer.

"The clearance rate that weekend was 64 per cent," Mr Larocca said.

30% of Australian House Funding Comes from Overseas

Why? Why do Australians borrow money from abroad to buy overpriced houses from each other?

House prices at risk from Europe crisis

The implications of another meltdown in credit markets are dire. Roughly a third of the funding for Australian mortgages comes from overseas bond markets. Were a third of the big banks' sources of capital to suddenly dry up so would credit for housing markets here. Ergo, price drops.

Ontario Wharf Condos Going Under the Hammer

Going once, going twice ... Muskoka Wharf suites to be auctioned off

Full ownership condo-hotel suites previous asking up to $375,000 going for reserve of $85,000
Conventional condos previous asking up to $650,000 going for reserve of $155,000
Commercial space previous asking up to $507,900 going for reserve of $120,000

80% of Construction Companies in China Say Builders Behind on Payments

And 27% of builders said developers want to slow construction.

Most Chinese Builders Face Payment Delays, Credit Suisse Says

“We have put a full stop on land purchases,” Vice President Alex Liu said yesterday in an interview in the southern Chinese city of Guangzhou, which neighbors Zhongshan, where Agile is based. “We’ll stop for at least the next three months and probably assess the situation again after Chinese New Year.” The Lunar New Year runs Jan. 23-25.

Land purchases by Chinese developers plunged 42 percent in the first 10 months this year, according to China Securities Journal, citing data from B.A. & 515J Group. Residential land spending dropped to 65.7 billion yuan ($10.3 billion) at top 10 developers by sales, the newspaper said. The property companies, which include China Vanke Co. and Poly Real Estate Group Co., spent more on residential sites in the less affluent tier-two or tier-three cities than in the metropolitan areas for the first time, the newspaper said today.

Economist Warns More Housing Markets Have Turned

UPDATE: Original Economist Blog Post is here

Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble.

Warning of plunge in house prices

''The latest global house price indicators are now falling in eight of the 16 countries surveyed by the magazine, compared with five countries in late 2010,'' the magazine said.
Using price-to-income ratios - a gauge of affordability - and price-to-rent ratios, The Economist said home prices were overvalued by 25 per cent or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden.

Charts below are from here
Ireland and the U.S. are approaching a normal market (where affordability is at long-term historic norms), so they are included as a metric. Britain and Spain are still adjusting. Australia, despite the year and a half of decline, is still second only to Hong Kong (and South Africa, which is not shown) in being over priced.

Looking at prices relative to rent, which adjusts for pure demand for shelter, the chart shifts around. France pulls into the lead for most overpriced, and New Zealand, Canada join Hong Kong.

That could be exacerbated by a looming credit crunch, the magazine said.

But the analysis did not account for local supply and demand factors, the Real Estate Institute of Victoria said.

REIV is delusional. Those buyers aren't paying with local cash. A global credit crunch does not have to abide underlying demand. Buyer will can't be expressed as high prices if the creditors pull back.

Dot Com Chinese Style

China Real Estate posts 3Q loss as market cools

The Chinese real estate information and consulting company posted a loss of $413 million, or $2.94 per share, down from earnings of $6.6 million, or 4 cents per share, in the same period a year earlier.

Revenue grew 47 percent to $69.2 million from $47.2 million.

Mortgage Your Future, Please.

Anything, ANYTHING to keep the sagging bubble inflated and the commission checks rolling in. Mortgage everyone's future. Sacrifice every last dime of credit. The bubble must continue.

Real estate lobby group pushes for Canadian-style first home buyers scheme

The Real Estate Institute of Australia is urging the government to adopt a successful Canadian scheme that allows first-home buyers to tap into their superannuation to assist with making their first purchase.
The Canadian Home Buyer's Plan has been in operation since 1992 and allows first-home buyers to withdraw up to $25,000 from their retirement savings plan to purchase or build a home.
The scheme has proven popular, with nearly 1.4 million Canadians withdrawing money from their retirement savings to participate in the plan between 1992 and 2004.

"The Canadian Home Buyer's Plan is the perfect example of this proposal in action and REIA would like to see it implemented in Australia as a solution to overcome the problems faced by first-home buyers."

Newsflash. They aren't participating because prices are too high. If there are no longer enough buyers at elevated prices, then prices will come down until those buyers can enter the market, entirely with traditional financing. Encouraging them to borrow from themselves serves only those with an interest in propping up the market; it does not serve the buyer. The repayment requirement to the retirement plan will still be part of the household's ongoing debt load.

Shift in Structure of Developer Financing to Bubble Model Leaves Hole When Banks Get Conservative

This is rather interesting. Without a bubble to drive presales, developers are dead in the water. This structure accelerates the cycles by cutting off new development until there is enough shortage to drive credit excesses and start the cycle again.

$1 billion in distressed property on the market

I've heard one agent claim that there aren't developers in the old sense of the word anymore, just facilitators between banks and buyers.

Developers don't build a project and sell it - projects can only be financed to be built if they are pre-sold. And you can't pre-sell a project for site you want to buy from a receiver.

The banks' wariness of lending to developers while still recording writedowns in the sector is leaving those parts of the economy dependent on construction weak, with the Gold Coast the clearest example.

The Reserve Bank's latest statement on monetary policy not surprisingly reported credit remains tight for developers. Except for those fortunate enough to be cashed up, developers can't borrow and therefore they can't buy, leaving the banks to hold written-down property portfolios that aren't producing income.

RBC Predicts Canadian House Price Rise in 2012 Except for BC

Canada’s housing market forecast update
British Columbia
2011 forecast average: $603,300; 2012 forecast average: $593,200
2011 forecast gain: 8.9%; 2012 forecast gain: -1.7%

Ontario
2011 forecast average: $357,100; 2012 forecast average: $358,900
2011 forecast gain: 4.9%; 2012 forecast gain: 0.5%

In terms of prices, the gains expected this year now generally appear to be a little stronger than previously projected (5.3% overall in Canada versus 4.9% previously) but are still unlikely to move very much next year (now projected to rise 0.5% overall versus 0.1% previously)

They underestimated 2011 gains and tweaked up the forecast for 2012. The report is good news for those in favor of a massive wealth transfer between generations. Young and want to set up house without renting? Jump on the massive debt bandwagon with the proceeds going to the generation before you.

1 in 5 Vancouver Homes and 1 in 20 Toronto Homes Sold for over $1 Million

Canada House Prices: 1 In 5 Vancouver Homes Now Sell For More Than $1 Million

CREA's data shows the percentage of homes sold above the million-dollar mark has doubles since 2009. The same is true for Toronto, where more than 5 per cent of homes sold this year went for more than $1 million. That's double the percentage in 2009.

This doesn't mean that 1/5 of the homes in Vancouver are worth a million. Houses that are being used speculatively are brought back to market faster than the norm.

Digging Deep for the Last Wave of Buyers in Vancouver

‘Mingles’ moving housing markets
Single women are the latest target demographic for the real estate ponzi scheme. Fun times. Can't afford it alone (meaning a $500k apartment. APARTMENT.), you and a friend can go into massive debt together.

Much of the desire for homeownership is driven by fear of being priced out of the market. The Real Estate Board of Greater Vancouver says the benchmark price for a detached home in Vancouver is $884,778, but even a condominium apartment has a price tag of $402,702.

Buy now or be priced out forever! Where have we heard that before? Oh yeah, here.

“They look at rental rates in an era of low vacancy and they figure they can put their money to work for them,” Mr. Simpson says. “They want to jump on the equity train right away and build equity.”

These numbers only work in a rising market, meaning one tracking significantly ahead of inflation. Otherwise, not so much.

She is part of a trend that adds an extra stage to the housing market.

Ha, they actually admit it in the article. An extra stage before . . . what? Didn't seem to finish the thought here.

“I would say a lot of my friends are doing this,” says Ms. Yan. “People are getting married later in life, too. Weddings are so expensive. I figured I would invest in an asset for now. I know it’s not my final home.”

Fortunately, there is always the option of elopement.

“They’re not getting married, so they should get on with their financial lives,” he says. “They have cash flow increasing and they can afford it, plus financially it makes tremendous sense.”

It makes tremendous financial sense to go illiquid at the point in your life with the most uncertainty about where you will land long term. Maybe that's part of what is going on here, that uncertainty is stressful and to solve it these kids take years of savings and leverage it into a deed, therefore removing the stressful uncertainty. You WILL be in that apartment paying that mortgage. I guess this is one way of keeping those young'uns in Vancouver, bury them deep in a debt trap.

Real Estate Funds Attracting Investors in Chinese property -- well, not exactly

Real estate funds rush to enter China

The Hong Kong-based CITIC Capital Holdings Limited announced this week that the CITIC Capital China Retail Properties Investment Fund completed its first phase of funding earlier this month, closing at $225 million.
The fund, which attracted institutional investors from the United States, Europe and Asia, aims to raise a total capital commitment of $600 million and is focused on retail property and mixed-use development with a substantial retail portion in China's second- and third-tier cities, according to the company's statement.

Soros' fund is also rumored to be planning adding Chinese real estate to its portfolio.

The kicker is this:

"From the beginning of 2012, there should be good investment opportunities," he said.
He expects the market correction to last one and a half years. But "if the market correction takes longer, say three years, we'll focus on China's second- and third-tier cities in the first one and a half years and then center on first-tier cities in the second one and a half," he said.

They are getting in a position to vulch.

Dim Sum Bonds Surging

Up six-fold since last year. Some big names issuing yuan debt.

China Wary of Choking on Dollar Driving Hong Kong Dim Sum Bonds

Reflecting a trend, McDonald's Corp. issued 200 million yuan of debt in August 2010, marking the first Dim Sum deal by an overseas nonfinancial company.

Bond sales by Caterpillar Inc., Volkswagen AG and Tesco Plc, leading a charge of over 80 issuers, could bring total sales to 230 billion yuan ($36 billion) this year, a sixfold jump from last year, according to HSBC. The lender forecasts Dim Sum bond sales could total as much as 310 billion yuan in 2012.

Dim Sum bonds are a way for China to hedge its dollar bets. The world's second-largest economy is promoting the use of yuan in global trade and finance because the weakness of the U.S. dollar may hurt its record $3.2 trillion in foreign-exchange reserves.

Australians Becoming Reluctant About Buying Houses

Percent of people intending to buy a house in the next 12 months:
January 2011: 21.6%
May 2011: 19.1%
September 2011: 16.9%

I don't know historically what percent act on their intent every year, nor do the older surveys include this data point, but that's some serious churn even it if it's half. If transaction costs are 10% of $450,000 (the median this year) and half of those 22% with intent actually bought, that would be $4500, averaged across all households, being thrown away on real estate transaction costs. About what is spent on clothing/footwear and health care combined.

Property buying losing appeal even as prices retreat

The survey said buyer reluctance was reflected in price expectations, with 46.4 per cent of respondents predicting lower house prices next quarter, more than double (20.9 per cent) the figure nine months ago.

Takes a while for change to sink in with people.

The Province Asks if It's Time to Curb Foreign Real Estate Purchases

Is it time to curb foreign real-estate buying in Vancouver?

Not only does this speculative buying seem to be driving housing prices into the stratosphere - Re/Max recently reported the sale of Vancouver homes worth more than $2 million rose by 118 per cent in the first four months of this year - it's starting to have a corrosive effect on the economy as young people start to leave the city in search of affordability, she said.

"This erosion is really undercutting our future sustainability and other strengths," she said. "We are losing a generation of young people."

Basically, this is a perennial blog topic gone mainstream. And the comments on the article show it. A lot of vicious language in there and foregone conclusions.

Underpinning the article is the steadfast belief that Canada welcomes all comers and that belief restricts how this topic is approached, in contrast to a blog, anyway. They gave examples showing the broad range of uncertainty about how much market influence was in play. They quoted good old Cam Good, who is always got his mug plastered on articles of this sort. He whines a bit about whiners, funny enough. But the article fails to address the most interesting question regarding this topic, which is, what is the economic background of this wave of immigrants? I'd love to see a survey on this, but I know that's a dream.

The Chinese system doesn't operate the way the Canadian (or U.S. one does). It rewards people for different things. This wave represents the most successful players out of that system. How many of these sometime immigrants are from the private sector. How many were bureaucrats? How many from state-owned enterprises? Money is influence, even though the numbers aren't huge (11k 12k a year?), their influence is presumably in excess of the numbers, so I find it surprising that their origins are so opaque. Canada just sort of happens by accident like that, and apparently likes being that way so no one collects any data (or publishes what they do have).

On the upside, having this wave sink their cash into overpriced real estate guarantees they will lose half of it while funding a few retirements, so there is that.

Everyone in China Has Their Finger in Real Estate

The Henan Soong Ching Ling Foundation with assets of $476 million is being investigated for its real estate dealings. It spent $140 million on charitable activities last year. It failed to explain the source of the funding for a $63 million dollar, 24 meter stone statue of the founder. (Click the link below for a picture.)

Probe into charity's real estate spending

A report by Xinhua News Agency revealed the foundation raised a great deal of money selling health insurance in the vast rural areas of Central China's Henan province, some of which was then lent to property developer.

The agent, who has run the business since 2007, added that the project named "charitable health insurance" was run in such a way that it would appeal to villagers. He explained that most farmers chose to buy the insurance as they were promised they would receive an annual 400 yuan in interest once they paid 10,000 yuan in premiums.

The Anatomy of Blame in a Real Estate Collapse - Ireland

Irish Real Estate Tycoon Declares Bankruptcy in Belfast

Sean Quinn, an Irish property mogul who parlayed a gravel pit into a sprawling business empire, on Friday declared bankruptcy in a Belfast court, unable to pay the €2.8 billion he owed to a troubled lender that Ireland nationalized in 2009.

The state-backed bad bank is seeking repayment.

“I am certainly not without blame,” he said Friday. “I am not in the business of pointing fingers or making excuses.”

“However,” he added, “recent history has shown that I, like thousands of others in Ireland, incorrectly relied upon the persons who guided Anglo and who wrongfully sought to portray a blue-chip Irish banking stock.”

Quinn points out that their lending him exorbitant amounts of money was in their own interest. (A pattern that repeats itself across the pond, I might note.) During a bubble banks take an ever increasing short view. Of course those big bonuses (no matter how cooked the books) probably has something to do with that. Something no one is addressing, which means we'll get to repeat this nonsense all over again.

His fall came after he secretly invested in derivatives based on shares in Anglo Irish Bank, a strategy that went sour in 2008. These “contracts for difference,” or C.F.D.’s, enabled Mr. Quinn to bet on the bank’s shares without buying them outright, meaning he could win huge tax-free profits or take enormous losses.

Since then, Mr. Quinn and his family have taken legal action to contest the validity of his bank debts, arguing that the €2.8 billion, or $3.9 billion, was lent for the “illegal purpose” of propping up Anglo’s own share price.

I have no sympathy for Mr. Quinn, but I appreciate that he's big enough to get a voice in showing how the rot within the executive suites at these banks was a significant driver of widespread financial fraud.

477 Real Estate Firms in Beijing Close Down

477 real estate firms to lose qualifications

These real estate enterprises did not apply for extensions after their qualifications expired or have canceled their business licenses, said the statement.
The list contains some subordinate real estate enterprises of some famous companies, as well as some unknown enterprises.

Auto Sales Falling in 3 out of 4 BRIC Countries

Down 1.1% in China (month on month? Driven by an 18% decline in minivan sales, aka cargo moving vehicles)
Down 1.1% in India (year on year. Passenger vehicle sales down 24%)
Down 8.8% in Brazil (year on year for cars and light commercial, down 5.5% if averaged against business days)
Up 27% in Russia (year on year, car sales only)

China Auto Sales Fall, Cars Plunge in India as Loan Costs Rise
"In India, passenger-vehicle sales tumbled 24 percent to 138,521, the biggest drop since December 2000, according to the Society of Indian Automobile Manufacturers."
"Deliveries of passenger and commercial vehicles in the [China] fell 1.1 percent to 1.52 million in October . . . the China Association of Automobile Manufacturers said yesterday."

UPDATE: Brazil Auto Sales Slow, Still On Target For Year -Anfavea
"October sales including trucks and buses totaled 280,567, the lowest sales figure for the month since 2008."

Car sales drive Russian imports up
"Over the last 10 months approximately 2 million new cars have been sold in Russia."

Chinese Land Sales Faltering, will Pinch Local Governments

Local governments (with the exception of two experimental property taxes in Chongqing and Shanghai) rely on land sales to fund, well, pretty much all fixed asset investment. They are restricted from borrowing money, but have done so anyway, using special financing vehicles, Enron style. Now they must make payments on those vehicles as well as generate enough income to continue. And their main source of revenue is fading fast. Aside from accelerating an expected property tax rollout slated for 2012/13, things are going to get ugly, both for critical local government spending and also the banks that backed their earlier creative financing.

FEATURE - Chinese cities fret as land sales fall

"The land market is cooling down so quickly -- it's as if all the property developers vanished overnight," said an official at the department that handles government land sales for Changsha, a central Chinese city of 7 million.

On Tuesday, two days after Beijing pledged to "unswervingly" maintain property curbs, a major auction for 12 plots in the southern city of Guangzhou was abruptly cancelled, without explanation, just three hours before opening.

China Debt Reckoning coming in January

China's cradle of entrepreneurs braces for debt reckoning

That test will take place in January, when companies and individuals have to settle their bills ahead of the Lunar New Year.

Still, many people in Wenzhou are awaiting with dread the most tense time for businesses even in very good years -- debt collection time.

"Chinese like to settle their debts between January 1st and the start of the Lunar New Year," said Hu Zhenhua, a professor of economics at Wenzhou University. The first day of Lunar New Year celebrations is January 23.

More important is that many businesses have themselves started relending money or borrowing for speculative purposes -- a practice that paid off handsomely in good times but is now exposing many to big losses.

"I just wish that my clients, if they have cash, wouldn't invest in things like stocks, gold, and property. If it's not properly managed, it will be dangerous for our industry," said Chen.

Cut off My Finger Instead

When loan sharks cornered Zhong Maojin and wanted to take over one of his pharmacies in lieu of payment, he offered them a more traditional payment. “If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them.

Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He’d borrowed 30 million yuan ($4.7 million) at interest rates as high as 7 percent a month to expand the business. Many of the lenders were elderly neighbors who’d mortgaged their homes.

This this this. There has been a lot of press about the loan sharks, but less so about the 50% of households with their life savings tied up in this Chinese Madoff style Ponzi scheme. There is no reserve requirement in the shadow banking system and the total debts undoubtedly far exceed the total original capital. Like Lehman Brothers collapse, managing the great unwind in an orderly fashion will be difficult, to say the least. This article cites an estimate of 8% of total lending (4 trillion yuan or 630 billion $) is shadow banking.

A previous credit squeeze in Wenzhou 25 years ago affected 200,000 lenders, resulting in 523 kidnappings and more than 30 deaths, according to a local government website.

Many of Zhong's informal lenders mortgaged their houses to lend to him.

The collateralization of homes means Zhong’s problems may stretch back to the banks. One-third to a half of money used for private lending originally comes from banks, said Lu Ting, an economist with Bank of America Corp.’s brokerage unit.

22 Months of Inventory in Beijing

Home price-cuts get steeper, more extensive in China

In September and October, only 10,743 homes were sold in Beijing, down 46 percent from a year ago. New home sales in the first ten months totaled 69,079 units, down 17.8 percent year-on-year, while second-hand home sales dropped 35.8 percent to 101,188 units, according to bjfdc.gov.cn.

According to the Centaline Property Agency, a supply of 9,152 new homes in October has added Beijing's total house supply to 118,000 units, a new high since June 2009.

It would take 22 months to consume the inventory even if there were no new supply, said the agency.

Australian House Price Index from ABS for September Quarter 2011

The acceleration in the declines has disappeared with the exception of Brisbane. The charts change shape from release to release, even for older quarters, due to revisions. Things look less precipitous than previously. But a 3-5% loss on top of inflation at 3.5% starts to add up to an slow-leak investment.

Sydney certainly appears to believe in a soft landing, but we only have two quarters of 0% growth from them so far. Sustaining it will be difficult, and not because property won't continue to be dear in Sydney, it will be because of access to credit.

Australian Change in Houe Prices September 2011

Vancouver October 2011 House Prices

The biggest news this month is that the peak price in Vancouver continues to be June 2011. The Real Estate Board of Greater Vancouver's HPI house price index for both overall and detached has continued to meander below the June 2011 price. Detached has fallen 1.78% or $16902 (yeah, my stats teacher from college would cringe at that kind of precision being reported, but he's not here.) The overall price has declined 1.26% or $7966.

Given the global economic climate and an ongoing vacuuming up of spare credit in China it is hard to imagine the trends will reverse, but Vancouver likes to surprise.

Vancouver House Price Change Chart Oct 2011

Vancouver House Prices Graph 2010 and 2011 compared

As to sales, 2011 continues to be dead on the five year average.

Vancouver Housing Sales Detached over Five Years

As to inventory, 2011 is running 2nd or 3rd for highest inventory. You can see in 2008 how the inventory shot to the moon as financing fell apart. Yeah, the value of a house isn't inherent, it's based on how deep in debt the buyer is allowed to get. Inventory shot up so fast, REBGV stopped reporting it in their press releases. The numbers charted below are computed based on 2009's numbers and the reported percent change from the previous year.

Vancouver MLS Inventory chart over five years