Canadian Banks Cutting Profit in Competition for Mortgage Customers

A shrinking market is making the banks hungry. But financing at cost now, means they are either going to become charities, or they have to play bait and switch with the carrying costs to the consumer. Or they are in a grow or die phase and as soon as "grow" ends . . .

In a slowing market, banks fight over mortgages

“There’s a lot of signs of mortgage competition out there,” said Darko Mihilic, an analyst at Cormark Securities. Not only are lenders incenting brokers and agents, they’re also “adjusting” some of their conventional mortgage products to make them more appealing to home buyers, for instance by extending the amortization period to as much as 40 years when the buyer can make a significant down payment.

Meanwhile, most of the big banks have announced a round of mortgage rate cuts over the past few days.

Such tactics seem to be paying off and some lenders are growing faster than others — TD grew its mortgage business by 8% in the most recent quarter, for example — than the overall market as they grab business from competitors

Hat Tip: Dan T at Greaterfool

Added: This parallels Australia as noted a week ago:
Cheap Loans as Bank War Hots Up (sic? ;-)

Pawn Shops, Loan Sharks, Source of Small Business Loans in China

Shunned by banks, small China firms hit pawn shops

The ongoing credit curbs actually made banks even more reluctant to lend to SMEs, whose deposits are smaller than large companies, the official China Securities Journal said.

Without the freedom to charge higher interest on riskier loans, China's banking sector, dominated by the "Big Four" state banks, mainly lend to other large state-controlled enterprises and shun small- and medium-sized enterprises (SMEs).

Wang got an order in February and needed 500,000 yuan ($77,000) in working capital to buy materials. He waited in vain for two weeks for a reply to his bank loan application. Time was running out.
"Then a friend told me about pawn shops. It turned out to be cost-efficient. It would have been a pity had I lost the order," said Wang, who quickly repaid the two-month loan, using an apartment as collateral.
. . .
Despite higher fees and interest than what banks charge, sources of private financing such as pawn shop loans, inter-business lending and loan sharks are often more accessible, realistic solutions for small business owners.

Credit crunch, high prices hit SMEs

This factory once was used by "Sooq", a famous electric cable company in China.

But rapidly evaporating capital and more than 120 million yuan in debt has pushed the company into bankruptcy.

Unlike Sooq, many factories in the city are seemingly operating as usual. But as a matter of fact, they are scrambling with shrinking profit margin and capital shortages.

A shortage of capital has brought opportunities for some businesses, though: in particular, the private banking sector. Industry insiders say more than a third of the capital in Wenzhou are invested in the financial investment sector. But experts say a resurgence of the loan sharks, who charge exorbitantly high interest rates, is bad news for local businesses.

Goldman Sachs and Hank Greenberg Can't Fend for Themselves Where China Is Concerned

The Audacity of Chinese Frauds

Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason — Deloitte did not say why —the auditor went back to Longtop’s banks last week to again seek confirmation of cash balances.

It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop’s cash really was on deposit. And that set off panic at the software firm.

Goldman Sachs was not the underwriter of ShengdaTech, a Chinese chemical company traded on Nasdaq, but its investment arm, Goldman Sachs Investment Management, had accumulated a 7.6 percent stake in the company before its auditor, KPMG, refused to sign off on the company’s 2010 annual report and then resigned in late April. KPMG cited “serious discrepancies” regarding bank balances and “discrepancies between KPMG’s direct calls to customers and confirmations returned by mail.” Just as at Longtop, it appeared that auditors had been given false confirmation letters.

What part of this whole thing ISN'T a fraud?

Welcome to real capitalism, haters of regulation. Someone took your money? So sorry.

Landcor Study of Luxury Buyers in Vancouver

The study has some flaws, it will tend to overcount, but even if their estimates are double reality, it's still a market driving percent of the buying population. Every sale sets the comps for a whole lot of houses.
Chinese buyers snap up most of ritziest homes

Landcor looked at transactions and flagged buyers with pure Chinese names who have spellings typical in the People's Republic of China, filtering out those with Westernized first names as well as non-Chinese names.

They found 74 per cent or 122 out of the 164 homes sold in 2010 above the "luxury" threshold ($3 million for houses on Vancouver's west side and $2 million for condos in Richmond) were bought by buyers who fit the mainland China profile.

That was a jump from 2009, when 68 per cent of luxury homes (49 out of 72) in the two areas were matched to likely Chinese buyers.

In 2008, 46 per cent or 32 out of 69 sales fit the profile.

Of the sales that were not directly to foreign buyers, some percent were purchased at elevated prices solely on the belief that a foreign buyer would be there later, that losses are impossible.

The virulent pushback against just the theory of foreign buyers has been interesting in itself. It speaks to enormous mistrust of the real estate industry by a subset of the population. (We know it's a subset, because otherwise as monopoly gatekeepers, their presence (like the used car salesmen in a loud 70s sport coat) would be holding prices back, and clearly that's not happening.) It speaks to a need for someone to blame, but not a minority acting in what appears to be their own self interest, but the system itself. This is a good place for the blame, the system itself is broken. Although, not in the ways most people think.

All bubbles need a story, true or half-true, or utterly false, the narrative about why things are different today than the day before is critical to get buyers to act when this much risk is involved. The paired narratives of: "you can jump on this free money bandwagon from the East, oh and by the way, if you don't, you'll never ever own a house here, so you better really enjoy that illegal basement flat you are lurking in" are a well matched carrot and stick.

But this is all temporary. These buyers certainly look like the last ones in, the herd mentality outsiders, the bagholders.

"The PRC is heavily investing in Metro Vancouver for homes (and) outer B.C. for steady resource pools, but for how long?" it asks. "Bubbles can certainly burst and the economic shrapnel could be painful."

Oh, and there is a whiff of that other myth, that this is some kind of Chinese State Project. If things play out on the wild side, this will be roundly debunked if the Chinese state starts chasing down this exported cash (although it remains to be seen if Canada would even help with that). I really don't think this scenario is a complete stretch. Those trillions of reserves sitting in China are needed to sterilize the exchange rate. The Chinese are going to need to recapitalize the banking system, and the losses this time will be at (or very near) Western levels, unlike previous rounds. A cash crunch back in PRC will challenge every assumption.

Renovation Figures in Canada Point to Bubble

Reno figures point to bubble
Video interview on BNN interview with
David Madani
Capital Economics

Looking at the composition of residential investment. . . a substantial run-up in renovation investment . . .

Renovation was 2.8% of GDP down to 2.7% This is a long way above where we were, which was at 1.5% of GDP. We see this as a symptom of a larger bubble in Canada.

. . .

Q: would you consider what you are describing as a temporary lull . . .?

A: for a number of years the canadian housing market will be in a persistent slump.

Canadian Banks' Exposure to Uninsured Loans Going Into Distress

Very rough calculation to follow.

Let's assume a worst case 33% drop in prices. Based on the CAAMP survey, roughly 20% of all mortgages have between 20% and 40% equity. (20% is of course the bottom end as anything less is required to be insured and I'm using 40% as the top end to account for transaction costs, which the bank must assume to foreclose and offload the house.) Assuming valuations are flat across equity that's $200 billion in mortgages. I expect that's a little low, given that recent purchases are more expensive and are more likely to have less equity and as well due to HELOCs some houses with less than 20% equity are uninsured too, but let's use that number for now. Roughly half of all mortgages are insured. That leaves us with $100 billion in uninsured mortgages in this borderline equity range.

Let's assume a horrific worst case of 40% of these uninsured mortgages going bust. The banks would face about a 14% loss on average for a total loss of $5.7 billion. That's about 3 quarters worth of profit for the big banks combined. Assuming their profits hold steady, that is.

Jim Chanos on Bloomberg

Waste and corruption and fraud, oh my. Lions and tigers and bears. Especially bears.

Chanos says he may not be bearish enough

The Bloomberg Chinese Reverse Mergers Index has plunged 41 percent since Nov. 8 amid speculation financial statements from companies such as China MediaExpress Holdings Inc. (CCME) can’t be trusted. The concern intensified this week after Longtop Financial Technologies Ltd. (LFT), whose initial public offering was underwritten by Goldman Sachs Group Inc. and Deutsche Bank AG, said its auditor quit because of false records.

Be sure to watch the video linked in the left column. Chanos could do a 5 hour interview and I would watch the whole thing. It's the glasses, I think.

Teranet for March 2011 is up

Teranet House Price Index

No surprises here. Calgary continued its slow slide, everyone else is still partying. April is expected to show another increase for the bubbly areas of Vancouver, Ottawa, Toronto and Montreal. If there is any surprise on there it is how hot Montreal's market has gotten. Up 1.17% month on month and 7.54% year on year. The world of potential hurt grows ever larger in a place that really can't weather it.

NAB In the Middle of a U.S. Property Bubble

In agricultural land, that is. Prime wheat land in Australia goes from $1000-$2000 an acre. Similar land in the wheat belt of the U.S. is trading for $10,000 an acre.

Way out west, another bubble is forming

But regulators there are warning that a new real estate bubble may be forming across the US grain belt - and National Australia Bank is right in the middle.
A little over three years ago, NAB made a triumphant return to the US market, paying about $900 million for Great Western Bank, a tiny South Dakota lender.

At the same time, loans now stand at $US5.3 billion ($A4.98 billion) from $US2.6 billion when NAB took over. Profit from the bank has also been on the up. This year it is expected to top $US90 million from $US35 million when NAB moved in.
Lending to farmers and related businesses has increased to just over 17 per cent of Great Western's book, from a little over 10 per cent. Today, Great Western is the seventh-biggest agribusiness lender in the US.

That's quite an aggressive bank you've got there.

A reminder that Moody's cut NAB's rating (along with the 3 other major Australia lenders).
Moody's Cuts Ratings of Top Four Australian Banks
This really only put Moody's in line with the other rating's agency, so the timing is probably incidental.

he downgrade to Aa2 from their previous rating of Aa1—one notch below Moody's top rating—comes as ratings firms world-wide step up reviews of the global banking system following the 2008 subprime-mortgage crisis and a subsequent backlash against the ratings industry.

. . . Earlier this year, Moody's said its review would focus on the Australian industry's dependence on the global wholesale lending market, in which big banks lend to each other. That market can tighten during times of uncertainty, such as during heightened worries about finances of European Union nations.

Added:NAB does seem to be in an aggressive growth phase.
Cheap loans as bank war hots up
(I was tempted to put [sic] on that title for the North American readers, but it's not Friday. I'll behave.)

NAB's UBank arm will offer standard variable-rate mortgages until the end of next month at 6.59 per cent, although the discounted rate is available only on mortgages sold online. The rate is more than one full percentage point below the current standard variable rate of most banks.
. . .
NAB's strategy over the past 18 months of discounting mortgages has been starting to pay off. It is notching up sales at more than three times the rate of growth of the broader mortgage market. Much of this growth is coming from Commonwealth and Westpac.

Expanding your loan book at a smaller margin into the teeth of higher risk is what kind of strategy, exactly?

NAB fired the first shot in February, when it offered to pay the $700 mortgage exit fee of CBA and Westpac customers. This was followed by the ''break-up'' advertising campaign against the other big banks.
CBA quickly hit back by offering up to $1200 in cash to NAB customers looking to switch loans. At the same time CBA also targeted NAB business banking customers, while Westpac offered a range of discounts across new mortgages.

I love a good race to the bottom.

Lack of Affordability Noticed by Canadian Press

I'll just pluck one of many articles out at random.

HOMEOWNERSHIP SLIPPING OUT OF REACH: RBC
First off 70% of Canadian households already own a house. That's going to be painfully clear very soon.

“Quebec started the year with a hit to affordability, showing deterioration that ranked second only to British Columbia for certain housing types,” said Hogue. “The province’s housing market has seen consistent price increases over the past year, which has raised the bar for homebuyers in the province.

A little reminder that housing is local. Houses in Quebec, relative to national prices, are cheap, but still badly overvalued.

“Despite the latest erosion in affordability, provincial levels generally continue to stand near their long-term averages, suggesting that owning a home remains affordable or, at worst, slightly unaffordable across Canada—with Vancouver being a notable exception,” said Robert Hogue, senior economist, RBC.

Can someone explain this one to me? He's saying if we throw the downtowns, the suburbs and the countryside into a giant pile it doesn't look so overpriced? Not desperate to shine up those numbers any way possible, are they. If that's the case, then why say with the exception of Vancouver, it's not a province.

The Globe and Mail also jumped on the bandwagon

The last time housing accounted for such a high percentage of household income in the city was in 2008, just before prices tumbled in a recessionary swoon. The city’s real estate market has since recovered and gone on to set new records, but the recent climb has market watchers worried that the gains are unsustainable.

“What’s happened this year in British Columbia is puzzling,” said Robert Hogue, an economist at the RBC. “The increases we are seeing just aren’t justified by market fundamentals. I feel like this is something we have to flag.”

Nice of you to notice now that it's utterly too late.

The only soft landing you could engineer at this point is to *require* every homeowner who is underwater relative to a price at 13x annual rent to sell out to a Hot Foreign Money Buyer de jour. Then they can buy their house back in 5 years at firesale prices.

Canadians are largest foreign buyers of U.S. real estate

Canadians bought $9.4-billion worth.

Canadians biggest foreign buyers of U.S. real estate

Canadians were the largest foreign buyers of U.S. real estate in the 12 months ending March 31, according to the U.S. National Association of Realtors annual survey, accounting for 23 per cent of all sales to foreigners.

China moved into second place at 9 per cent, while Mexico, Britain and India tied at 7 per cent. Together, foreign buyers spent $43-billion.

Prices Paid

	average	median
Foreign Buyers	$315,000	$200,000
All Buyers	$218,000	$170,000

Value of Outstanding Mortgages Relative to GDP, Canada, Australia, in context

Australia	95.0%
UK*	80.5%
USA*	72.2%
Canada	66.8%
Germany*	46.1%

Canada's mortgage debt is $1.07 trillion and is growing by $100 billion a year. By next year, if GDP growth remains 5.6% the value of outstanding mortgages relative to GDP will be 69.2%, and the year after 71.2%, which given the ongoing shrinking market in the U.S. will most likely surpass them. This assumes the bubble continues apace.

According to the Australian Mortgage Report
"In the last five years, the value of outstanding mortgages has more than doubled, increasing by $617 billion to $1.16 trillion."
That breakneck pace has slowed: "Annual system growth continues to decline, with the 7.4% growth for the year to December 2010 the lowest for the past five years."
With GDP growing 3.3% a year, next year the outstanding mortgage relative to GDP for Australia will be 101% of GDP. That sounds like a completely reasonable number, doesn't it? o__O

*source Milken Institute

Random Thought Experiments from May CAAMP Survey

May CAAMP Survey

The total value of owner-occupied housing in Canada is estimated at $3.17 trillion
(up from the $2.94 trillion estimated a year ago). Mortgages and HELOCs on these homes total $1.07 trillion, leaving $2.10 trillion in home owners’ equity. This equity is equal to 66% of the total value of the housing.

If the value of houses falls 33%, homeowner equity and homeowner total mortgage debt will be equal. (33% would be comparable to the total expected U.S. decline/correction.)

11% of mortgage holders missed at least one payment "that was allowed". Unfortunately the question was phrased "ever" missed, and the time range is multiple years. If there are a lot of repeat offenders in this group, a meaningful number of mortgage holders are pushing their amortization periods out 5 years by skipping one allowed payment a year. Can't really tell from this data, however.

More telling on that same table, the 2006-2011 initiated pool of mortgages 7% reported missing a not-allowed payment. Of the 2000-2005 vintage 4% reported this. This compares to 3% and 1% for the older pools, implying that the newer the pool the more at-risk the borrower, which bolsters the parallels one might draw with the U.S. debacle.

Individuals with HELOCs only have an average 65 per cent equity in their homes

A 33% decline would mean these households need to bring a check to closing to get out of their house.

This is the bubble in a nutshell. Increased access to credit. Don't think that line looks worrisome, eh?

There's the problem. Banks are lending ahead of productivity. Every extra dollar borrowed to bid up a house is a promise of future labor. At some point, there aren't enough productive hours in the day for Canadians to pay this back.

Positive factors include the enormous wealth that is being generated by rising housing values and resurgent stock markets, which are bolstering confidence of consumers and businesses. Continued very low interest rates are also strongly supportive.

Mass delusion is a positive?

The real gem in this report is the interest rate susceptibility. To CAAMP's credit they really delved into this this round.

The survey asked mortgage holders to indicate “the amount at which, if your mortgage payment increased this much, you would be concerned with your ability to make your payments”. Among the mortgage holders, 42% indicated that they “don’t know”. Among the 58% who provided specific responses:

• 3-4% indicated that they have no room (the affordable increase is $0).
  
• A further 5% indicated their room is $1 to $99.
  
• 8% indicated that their room is $100 to $199.
  
• 17% reported room in the range of $200 to $299.
  
• This leaves 66% whose capacity is $300 per month or more.
  

You had me at 42% indicated they don't know. I don't know whether to laugh or cry. 17% of households selling in distress will take this market all the way to the bottom. But, interest rate changes are not a necessary precondition to the market falling. To buy you have to first sell, to sell you must have a move-up buyer to take your place. Prices move out of reach of first time buyers (even with exceedingly cooperative bank lending) and that's the end of the game.

Among those for whom the estimated tolerable interest rates are below 5%, an estimated 11% have less than 10% equity. This very small group – representing about 25,000 households – would have the least ease of selling out of a problem. 6% (about 10,000 households) have 10-14.9% equity and 13% (about 25,000) have 15-19.9% equity. A substantial majority (69%) has 20% or more equity.

This analysis precludes any decline in prices. Yes, these are small numbers of households, it's the one-dimension thinking that gets analyses into trouble. A 33% decline is on the extreme end. 20% is a given.

How Many Canadian Households Own Without A Mortgage?

The trend has been downward, worrisomely. This population provides stability to the system by not locking up capital that would be better used in actual economically productive sectors. They also have more spending money to boost the consumer economy.

2006 Census: Changing patterns in Canadian homeownership and shelter costs

More homeowners with a mortgage

Nearly 6 out of every 10 households that owned their home had a mortgage in 2006.

Of the 8.4 million households that owned their dwelling in 2006, 4.9 million, or 57.9%, had a mortgage, the highest level since 1981 when baby boomers were entering the housing market. This was an increase from 55.2% in 2001. At the same time, the proportion without a mortgage fell from 44.8% in 2001 to 42.1% in 2006.

Most of the increase in the proportion of households with a mortgage was due to renters moving into homeownership, but some can only be accounted for by homeowners taking on new mortgages or adding to existing ones, possibly to finance renovations or other large purchases.

Provincially, Alberta had the highest proportion of households with a mortgage (62.1%) and Newfoundland and Labrador had the lowest proportion (44.8%).

That's 3.5 million mortgage free households of out of 12.4 million total households. Putting the mortgage free/rent free at 28.2%

In the most recent CAAMP survey there is this:

Profile of Mortgage Holders
There are currently about 9.45 million home owners in Canada, of whom about 5.7 million have mortgages. An estimated 3.75 million home owners are mortgage-free, although they may have other forms of debt.

If the homeownership rate is 70%, that means there are now 3.75 million mortgage free households out of 13.5 million total households. Putting the mortgage free/rent free percent at 27.8%

Based on the CAAMP data, at least, the number has not declined significantly. The next census will be a better comparison.

Added: Later on in the CAAMP report is this little bombshell.

Some of the mortgage-free home owners (750,000 to 800,000) have Home Equity Lines of Credit (known as “HELOCs”).

Some? 21% is not some. It's a significant minority.

I always wanted to get censored

All the greats got censored. Some got threatened with burning at the stake. I can dream, right?

All traffic from China to this blog has come to a hard stop (according to google stats). Anyone gets this from China, let me know.

High-End Home Sales Up Sharply in Canada

Rising wealth drives improved demand for luxury homes across Canada: Re/Max

In terms of percentage increases over the four-month period, Metro Vancouver – where foreign investment has played a major role — lead the way with a 118-per-cent increase, from 343 $2 million-plus homes sold in 2010 to 747 $2 million-plus homes sold in 2011.

That was followed by Ottawa (59 per cent), Calgary (51 per cent), Halifax-Dartmouth (27 per cent), Winnipeg (24 per cent), Hamilton-Burlington (13 per cent) and Greater Toronto (nine per cent).

Despite the assertion in the article title, they don't state the statistical indicators that rising wealth is the explanation. Where were these wealthy people last year this time? Is real wealth up as sharply as the sales?

Re/Max noted that the number of millionaires is rising in Canada, and that they’re investing more in real estate.

Yeah, inflation alone would make a few more millionaires. And as to Vancouver, GDP actually fell in BC from 2008 to 2009. Did it really go up enough to support this new wealth since then? Or is this wealth not real? Honest economists don't count real estate equity in household wealth calculations, btw. Did you leave it out like good little analysts? From the original report: "Of particular interest, residential real estate holdings have increased among high net worth individuals, as they express a clear preference for tangible assets." Nope, you did not. So you have this ephemeral valuation on property and you are so happy because people can use that valuation to justify having their name on the title of that overvalued property. Got it.

Let's go to the original report and see what they have to say.

Demand for luxury homes intensifies amid rising Canadian and global wealth

“The strength of the upper-end segment continues to defy expectations,” says Elton Ash,

Yeah, that's a warning sign. Fundamentals are something you can see and touch. And probably smell too.

“That demand remains largely domestic speaks to the solid underpinnings of the market,

It speaks to access to credit. Period. Again, what fundamental changed from last year this time to this year? Anything, anything? Beuller?

“Three key factors—serious equity gains, stock market recovery, and improved economic performance—have been behind the push for luxury housing product across the country,” says Michael Polzler, Executive Vice President, RE/MAX Ontario-Atlantic Canada.

Oh that's so cute. Improved economic performance of what, exactly? Is that a dodgy way of saying commodities are high? If it means something else, any data to back that up?

Equity gains as an excuse is an interesting one. Say a family in a 500k house can now sell for 900k and in the meantime have not HELOCed themselves out of existence and have paid down 100k on their own. A bank will happily lend them 600k (because they earn more than last purchase), which puts them in reach of a house priced at 1.1 million. Sounds like a great deal, eh? Right. Until the increased maintenance costs and taxes eat away their monthly budget that is. This move up is a move down into house-poor. Something no realtor will tell them. If this is the "wealth" driver of this report, that's not going to turn out well.

Did Australia Really Beat Canada to a Top?

I thought Australia had crossed the housing market peak line clearly in first place, but this article from Canada is full of desperate excuses by the real estate industry for why sales were down 14% in April.

Mortgage rules take wind out of house sales

Changes to mortgage regulations that took effect in April, 2011, likely sidelined a number of first-time home buyers,”
The association said comparisons with April, 2010, are difficult because of “several transitory factors artificially boosting sales” in that month.
“This included the impending tightening of mortgage rules, speculation about higher interest rates and the looming introduction of the HST in some provinces.

I seriously did not expect to smell this kind of fear-sweat this early in Canada.

Boys and girls, I think we better go back up to the box and wait for the film from the photo finish.

Australian Pundits Hoping to make Knifecatchers out of Sidelined Buyers

Should I make a meta-post about a meta-article? Why the heck not. It's not all right to discuss falling real estate in polite company so we shall discuss the discussion of the buyer's market discussion.

Some good stats buried in the article, nevertheless.

Soft is pundits' new hard-sell
In summary: Clearance rates are down
Melbourne is in massive oversupply
If you are a buyer, act like you are in control of the transaction
Money is going overseas to where the markets aren't so insane.

Is the Vancouver Market Bifurcating?

Given the market declines at the edges (Kelowna and Victoria for example) I was curious if Greater Vancouver was starting to bifurcate. So I took the Real Estate Board of Greater Vancouver Year over Year change in HPI for the submarkets over the last year, smoothed them over 4 months, and plotted them.

Some interesting things going on. Notice Richmond has a life all its own, as well as Squamish, both looking like wall flowers getting asked to dance by the cute guy just as the band is winding down. Burnaby never spent a party shifting nervously from foot to foot by the wall, but she sure is kicking up her hells now while everyone else is looking a little peaked. Maybe someone offered her a Red Bull and coke.

Other interesting things of note, if you want someone to personify the entire market, Van East is your girl. She's sticking tightest in the posse following the grey HPI line. And, yes, the salmon colored line for Port Moody is correct, even smoothed. Port Moody swung from -18% to +19% in just one month (suspiciously just as the mortgage rule warning came out) then kicked her ruby red slippers another month for a 21% gain, year on year. Warning for those in this market. She's returned to her senses and is back to a -7% loss year on year now that the mortgage party was crashed by the cops.

1.5% Decline in Lending Surprises Australian Economists

Economists were expecting a 2.3% increase.

Maintaining balance in a funny old boom will be no easy task

But there appear to be more powerful forces at work. For it is the two resource capitals, Brisbane and Perth, where house prices have fallen the most.
Both capitals chalked up declines of 4-5 per cent in median house and unit prices compared with a year ago, outdone only by Hobart units, which dropped an alarming 8.5 per cent.

Home owners would do almost anything to avoid default and were only too willing to be gouged by onerous fees and charges.

Banks said that in the U.S. too.

For almost 20 years, the banks have fed a real estate boom with cheap, overseas credit and have grown fat on the proceeds. But their loan books now are bursting with mortgages over residential real estate.

New HELOC Rules in Canada Having an Impact

An anecdote.
Imagine

So this week I helped a couple with $2 million worth of security get a $350,000 investment loan, and we needed personal lubricant to get the deal through. No more prime – now it’s a full point higher. No more simple loan with interest-only payments. Now it’s an amortized borrowing with principal repayments. And every year these people have to reprove that they qualify – even though they could pay the sucker off with 15 minutes’ notice.

You see the difference CMHC insurance makes? Bankers man up real fast. They learn again what risk means. And it scares the poop out of them.

Left unchecked, banks freewheeling with HELOCs can really come back to bite.

Talk about Equity Withdrawal

The view is spectacular, but what is even more amazing is the previous owner paid $1.5 million in 2000 and owed over $5 million at foreclosure. Wow ... over $3.5 million in equity withdrawal. As Jim the Realtor says, the collection agencies will probably be calling.

Debt is a drug.

Warehouse Financing Scam in China Unwinding

Silver speculators take a bath

Which brings us to a "warehouse financing" scam in China which now appears to be unwinding, forcing speculators to liquidate their real estate and commodities positions. Behind the scenes Beijing is furious with the speculators.

Essentially, the scam involves speculators getting loans which are supposed to be for buying base metals such as copper. Instead, they buy land then sell it before they have to settle on the commodity purchase.

It works like this. You are a property developer in China. You are already over your gearing limits and can't get more finance at home. You can't get the approvals to borrow offshore either. So, you use trade credit finance to fund your real estate deal. An associate then buys a stake to give you cash to pay for your copper. Later, the loan is repaid with the development proceeds.

A rising market hides all kinds of flaws. And fraud. Lots of fraud.

Western Australia Slump Deepens

WA Property Slump Is Now the Worst in 20 Years

Activity in the housing market has fallen 15 per cent in just 12 months and more than one-third since the height of the boom in 2005-06, according to Landgate, the government's official land information authority.

Landgate chief executive Mike Bradford warned the state was on track to record the lowest number of property transactions since the early 1990s.

"In April we had about 18,000 properties for sale so we're oversupplied to about 50 per cent.

China Jan-Apr Real Estate Investment up 34%

China January-April Investment In Real Estate Development +34.3% On Year

China's statistics bureau said Wednesday investment in real-estate development totaled CNY1.334 trillion in the January-April period, up 34.3% from a year earlier.

At the same time . . .

China's commercial realty boosted by property crackdown?

There are lots of people who want to buy apartments as an investment who can`t. But they can buy commercial properties. So we are seeing a surge of money coming from what we believe is the residential investors into the commercial sector," Alastair Hughes, Asia-Pacific CEO of the firm told CNBC.

And meanwhile . . .

China's industrial output, inflation slowdown in April

Consumer inflation eased modestly to 5.3% in April from a 32-month high in March of 5.4%. The outcome topped expectations but still underlined the view that price pressures are peaking and may start to ease in the second half of 2011.

Industrial output rose 13.4% from a year earlier, but that was more than a full percentage point below both expectations and a strong pace in March. Retail sales growth eased more than expected while annual increases in money supply and outstanding yuan loans hit their lowest pace in 29 months, signs that measures to slow the economy are starting to bite.

Value of Unsold Houses in China Rose 40%

China’s real-estate developers struggle with debt

Debt carried by the nation’s developers was 1.05 trillion yuan ($162 billion), the Xinhua News Agency reported on Monday, citing figures compiled by the Shanghai-based data provider, Wind Information.

The figures were based on the 113 mainland-listed developers and their first-quarter filings.

The value of unsold houses was up 40.2% to CNY903.5 billion, the Xinhua report said.

903.5 Billion CNY == 139 Billion USD

Uninsured Mortgage Specialist Company Wary of Vancouver, Downtown Toronto

Amazing how banks adjust to risk if you remove moral hazard.

Home Capital ramps up uninsured mortgage lending

He said the company is being cautious when considering loans that will go toward properties in Vancouver or downtown Toronto, because the markets are showing signs of overheating. The company would rather lend in a stable market, than one that is posting swings in either direction.

The company reported earnings Wednesday after the markets closed, saying adjusted profit rose to $45-million in the quarter. Impaired loans represented 0.29 per cent of all loans, down from 0.47 per cent a year ago.

Chief executive officer Gerald Soloway said the lower delinquency rate is likely to due to a housing market that continues to perform well, after a period of softness through the recession. Homeowners who get into trouble are now selling on their own, instead of waiting for Home Capital to foreclose.

DING! The rising house prices are masking many many flaws in the economy and household balance sheets.

Hat tip: T.O. Bubble Boy at Greaterfool

China Foreign Direct Investment in U.S. Is Small But on the Rise

This is an analysis of Chinese Foreign Direct Investment (FDI), not so much residential real estate. But I thought the numbers illuminating.

China’s investment wave heads to U.S. shores

“China’s current outward FDI stock of $230 billion still accounts for a mere 1.2% of the global FDI stock, on a par with Denmark and only slightly above that of Taiwan,” the report said. “Japan, for instance, has a stock three times that of China, while the United States has $4 trillion, or 20 times, the OFDI assets of China.”

Included in that worldwide wave of Chinese investment was $2.3 billion worth of direct spending in the United States at the end of 2009, the report said, citing the U.S. Bureau of Economic Analysis — a minor amount compared with total FDI stock in the United States in 2009 of $2.3 trillion.

Nevertheless, the authors noted, “the average annual compound growth rate of China’s outward FDI in 2004-2008 exceeded 130%.” Why? The report cited a shifting business climate in China as one reason for the go-abroad trend.

China's Citic Bank: Severe Risk in Real Estate (update)

If someone is not seeing severe risk, what are they looking at?

China Citic Bank Sees Severe Risk in Real Estate

"We especially are paying attention to risks in the funding chain for developers. We believe as tightening continuously gets stronger, the true real estate risks will appear," Shi said.

Citic Bank aims to reduce its real-estate loans this year by a third, he said. "We are being more prudent, and the risk is controllable."

The article implies this is new lending they are cutting, not their existing loan book, but it would be nice if that were clearer.

Added: Ask and ye shall receive. WSJ added this to their article:

Citic Bank aims to reduce the amount of new real-estate loans it issues this year by a third compared to last year, he said. "We are being more prudent, and the risk is controllable."

Back to the Marketwatch article:

Separately, the CBRC said Tuesday it has no plan to issue new regulations governing property trusts in May, refuting earlier reports it may impose further tightening controls on property trusts to curb risks in the real-estate sector. The regulator said it has been consistently asking trust companies to conduct property-related business while exercising proper risk management.

Many property developers have turned to property trusts for financing in the face of lending curbs and restrictions on developers' capability of raising funds from the stock market, but there has been increased regulatory scrutiny on such activity as the authorities seek to contain credit risk.

Vancouver House Price Change Chart April 2011

Real Estate Board of Greater Vancouver Statistics Package has been released. Here is the latest house price change chart for April.

Vancouver House Price Changes, April 2011

It appears as if the previous trend line is trying to reassert itself. Last month, I suspected that it may do so now that we are fully clear of the mortgage change deadline and any late reporting from it.

The actual numbers off that projection were $620,000 for April up from $616,000 in March for all transactions and $877,000 for April up from $867,000 in March for detached transactions. That was just shy of the actual numbers of $623,000 for all and $879,000 for detached. April was always going to be higher than March because April was the highest month in 2010. Now, May, that will be a real test for the new trend line. In 2010 May was $8,000 lower than April for detached and $3000 lower for all transactions.

So, to go out on a limb, under the old trend line with April's data inserted, May would be $614,000 for all and $860,000 for detached, and continuing on that, hit zero gain year on year in August/September. Or, we could see another big discontinuity this year, like we had between May and June of last year and hit the speculative zero sum wall in two months. Such a matching drop would in fact erase the February/March surge from the chart and put us back on the earlier trend line.

China, 77 of 100 cities record price gains in April

China Housing Inflation Slows

SHANGHAI—Residential property prices in 100 major cities in China were up 0.40% in April from March,
less than March's 0.59% increase, China Real Estate Index System said Tuesday.

Not sure I'd trumpet a drop that's probably within the margin of error of the survey.

And With High Inventory, Down Go Clearance Rates

High inventory is hitting clearance rates.

Melbourne, Sydney, Brisbane Clearance Rates Charted April 2011

Melbourne, Sydney, Adelaide, Brisbane Clearance Rates Chart Smoothed April 2011

Australia House Price Change Chart March 2011

Based on the XLS file available here.

Australia House Price Change Sydney, Melbourne, Brisbane, Adelaide, Perth March 2011

Only Perth seems to be putting the brakes on the plummet in price change. Not quite ready to stick a fork in this bubble, but as of this quarter, don't expect to get more for a house than you paid for it last year, unless you upgraded it (i.e., the speculative portion of this bubble is dead).

Hobart, Canberra and Darwin would also be piled onto that pack at ~0.5% year on year if I had plotted them.

Added: Because of revisions, prices for Sydney and Melbourne are changing even more radically than my silly little prediction.

Added 2: This is a good time to recall that price change is not symmetric--a 100% increase is wiped out by a 50% drop.

Australia Capital Cities House Prices Down 1.7%

Australian Bureau of Statistics Report

	Dec Qtr 10 to Mar Qtr 11	Mar Qtr 10 to Mar Qtr 11
Established house prices	% change	% change
Weighted average of eight capital cities	-1.7	-0.2
Sydney	-1.8	0.8
Melbourne	-2.5	1.1
Brisbane	-2.5	-3.6
Adelaide	-1.0	0.9
Perth	0.5	-3.2
Hobart	0.4	0.6
Darwin	-1.0	0.5
Canberra	-0.4	1.1