Australian Housing Bubble is Driven by Debt

Well, of course it is, but sometimes ya gotta pound 'em with chart after chart to get that through their thick skulls. Apparently.

Misnamed article. Title only refers to the lead-in.

Another Sign That The Huge Aussie Housing Bubble Is Popping

I differ with the 20 who predicted positive price growth for one simple reason: I focus on the role of debt in driving house prices. Having argued that debt drove prices up over the last 15 years, I now expect debt to drive them down again.
The mechanism is simple—but it’s not part of conventional “Neoclassical” economics, which is why Chris and his surveyed market economists don’t consider it. Aggregate demand is the sum of income plus the change in debt, and this is spent on both goods and services and assets. There is thus a link between the change in debt and the level of asset prices (and the fraction sold, and the quantity produced, but I’ll focus just on just house prices for now).

Hat tip: Aussie Roy commenting at greaterfool.ca

Bank of America Pulling out Half of Stake in China Construction Bank

They are doing this to raise capital due to litigation over bad mortgages and other souring financial deals and it cuts their holding from 10% to 5%. But circumstances forcing their timing is probably going to be in their favor. This was the first opportunity they had to sell the H-shares they bought using a call option in 2008. Although, it's not clear why the timing mattered, unless the original stake from 2005 was also encumbered in some way.

Bank of America sells half of its stake in China Construction Bank for $8.3B to raise capital

The nation’s largest bank by assets is selling roughly 13.1 billion shares in the Chinese bank for $8.3 billion to a group of investors it did not name. The sale should generate an after-tax gain of $3.3 billion, and should close by the end of next month.

They acquired a 9% stake in 2005 for $3 billion and another ~2% stake in 2008 for just under $2 billion. That's a pretty profit, unless I'm missing something here.

More at Wikipedia

On or about 5 June 2008, Bank of America purchased 6 billion H-shares for approximately HK$2.42 per share using call options under a formula in the initial acquisition agreement. Bank of America now holds about 25.1 billion H-shares, representing about 10.75% of CCB's issued shares. Bank of America may not sell the 6 billion shares that it purchased from Huijin using the call option before 29 August 2011 without prior consent of CCB. Bank of America still has the option to purchase additional shares.[8]
In May 2009, speculation was raised that $7.3bn worth of CCB shares had been sold by BoA, to help bolster capital during stress testing.

Livestock Style Auction for Victoria Ski Resort Real Estate

Developer makes a sharp exit from Falls Creek resort, selling 74 properties and 3 retail spaces for just under $13 million.

Hot bargains in ski market

'I think that all we did was we brought a lot of people in and we established the market price.
''And that's the real price up there, that's the value,'' he said.
Mr Schwartz and Mr Fraser developed the three Falls Creek resorts St Falls, Huski and Silverski between 2005 and 2009 at a total cost of $100 million.

China Aggressively Removing Bank Liquidity in Inflation Fight

The banks will need to raise capital, but by how much is unclear. The are being forced to include $700 billion of margin deposits, of guarantee and letters of credit in their required reserves calculation. The move will remove ~$125 billion in liquidity by one estimate.

Exclusive: China plans to mop up bank liquidity

Some banks have received the order notice from the People's Bank of China, which requires them to pay deposits to the central bank in batches, the sources said.

Capital Economics said in a research note that it had previously expected two 50 basis point RRR hikes later this year in order to sterilize the central bank's foreign currency interventions.

The Australian Decline is a Given

The permabull WSJ noticed Australia, but for odd reasons.

Australian Property, Long an Outlier, Joins Decline

Wage growth from Asia's appetite for commodities, a rise in immigration and slow homebuilding drove the price of the average home in Australia up 150% from 2001 to the start of this year, according to RP Data.

Yeah, that's the myth everyone told themselves as consumers leveraged up higher and higher. But in reality, it's total credit issued that feeds the rise in prices.

Household debt from ABS

Among the different types of debt, housing debt as a proportion of housing assets rose from 11% to 29%, which means overall, households have come to own a relatively smaller proportion of their houses. (It goes on to talk about equity, which is fleeting as hell.)

Between 1990 and 2008, debt for investor housing increased from 11% to 27% of all household debt. Debt for owner occupier housing was consistently the largest component, ranging
from 56% to 67% of debt (59% in September 2008).

Can't expect the WSJ to shake a convenient dead narrative, I suppose.

Back to the WSJ:

A downturn in Australia's real estate market will add to concerns of a two-speed economy in the resource-rich nation. Mining profits are surging due to heavy demand from China and other fast-growing Asian countries, but consumer businesses and manufacturing have faltered under the weight of the swollen Australian dollar, which is trading near 30-year highs to the U.S. currency.

if you weren't too distracted by superficial shiny things to use the Google, you'd have noticed that Agriculture and Mining together make up a whopping 10% of Australia's GDP. That's an engine to hang a future on. That adds up to a speed and a quarter economy, not a two-speed.

Mortgages in which payments are 30 days or more late reached an all-time high in the first quarter of 1.8%, according to ratings firm Fitch Ratings. However, that level is still well below that of the U.S., with an 8.4% figure during the quarter ended in June, according to the U.S. Mortgage Bankers Association.

You are comparing a market passing the peak with one five years beyond the peak. SRSLY. False equivalency much?

Tangible Common Equity of Canadian Banks as Bad as Europe's Worst

Is The Next Domino To Fall.... Canada?

As the chart below shows, which is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4% a whopping 30% are those situated in Canada, the same place where nobody thinks anything can go wrong, and which has been completely spared from the retribution of the bond vigilantes. Something tells us Canadian sovereign CDS, not to mention Canadian bank CDS, are both about to go quite a bit wider...

From the chart at Zerohedge

Bank	TCE ratio
Canadian Imperial Bank of Commerce	2.84%
National Bank of Canada	3.30%
Bank of Nova Scotia	3.37%
Royal Bank of Canada	3.43%
Toronto Dominion Bank	3.60%
Bank of Montreal	4.19%

Tangible Common Equity -- A ratio used to determine how much losses a bank can take before shareholder equity is wiped out. From: Investopedia

Checking in on Other Housing Bubbles

The wonderful Economist continues to update their Clicks and Mortar interactive chart.

Compared to rents, let's take a look at who is the most vulnerable.

Elevated house prices relative to rents: Britain, France, Sweden, Australia, Canada

If the markets continue their plummet (for a quick sobering up, see Turning Japanese: SPX vs Nikkei Index (10 Year Lag)) a second looming credit crisis is going to be felt disproportionately by some consumers, specifically in countries with elevated house prices.

The U.S. and Ireland have almost worked through their house price correction. Others are still flying high on Icarus wings.

On another note, I've been seeing lots of articles with this spin:
Slow stock markets help fuel Asian real estate boom
Especially in Australia. Is the investment market so distorted by policy that this is more than wishful thinking? Were they all asleep in 2008 when the credit bubble that fueled the price gains in the first place popped and the spattered remains froze and shattered? We're still in the same crisis, guys. I've been pondering the thesis in these articles, but just can't see it as anything other than belief in a fairy godmother.

Real Estate Agents in Ultra-Quiet Shanghai Hope for Turnaround

Speculators and agents are pinning their hopes on a changing of the guard in Beijing next year.

China Property Slowdown Stings Agents

Many investors are sitting tight, waiting for government restrictions to ease. "I regret not selling my apartment in Xintiandi earlier, when prices were much higher," said one property investor from Wenzhou, a prosperous city in Zhejiang famous for its real-estate speculators, who gave his name only as Mr. Fang. Apart from his apartment in Xintiandi, one of Shanghai's ritziest neighborhoods, Mr. Fang says he owns at least 10 other properties in the city.

This gambler, and many many others, are confident the government will bail them out, policy-wise or otherwise.

Thwarting the mortgage limits in China

Couples fake divorces to buy homes in China

There, some couples have to fake their own divorces so they can get third mortgages and bank loans to buy properties. And others are actually getting real divorces worried that a fraudulent divorce might come back to haunt them.

In other cases, real estate agents are helping couples with forged marriage licenses and documents to prove local residency and allow buyers to purchase more properties.

The strategies are all designed to thwart the Chinese government’s efforts to prevent a price bubble in the housing market. In recent months the government has taken dramatic steps to curb an ever escalating housing market, including limiting the number of properties a family can own.

Victoria BC at Nearly 10 Months of Inventory

Rounded, 5100 units in inventory and 520 sold. That's definitely a buyer's market. (Generally 6.5 months of inventory is balanced.)

Victoria housing tilts toward buyers

In July, for the second straight month, the number of homes for sale remained at 15-year highs while the average selling price dropped in all categories.

Number of New Permits in Australia Continues to Fall

Don't miss the chart at the link.
Australian Dollar Erases Gains on Continued Construction Weakness

The fall in building approvals pointed towards a still-languishing construction sector in the southern country. Year-over-year approvals have fallen off since the peak set in early 2010, fueled by the burgeoning mining industry. Additional Chinese slowing, which may cut into the demand of Australian raw materials exports, could add more headwinds for the sector.

China July House Prices Up Less (for the month) and More (from last July)

China house prices up only .25% for the Month, but up 6.8% year on year (up significantly from June to June's 5.2%).

Month on month, prices rose in 66 cities, fell in 33 and remained fixed in 1.

China's July home prices rise slowest in year

The data provider said a survey of property developers and real estate agencies showed that average home prices last month rose to 8,874 yuan (S$1,656) per sq m from 8,856 yuan in June.

That's $128 per square foot.

House Price Change Chart Canada Major Cities May 2011 Data

It's going to be a few weeks before we see June's matching price change data for Canada, so here is May.

Canada Vancouver Toronto Calgary Halifax Ottawa Montreal House Price change chart (smoothed over 4 months)

Click for a full-size view. Compared to the post before this, you can really see that Calgary is the Northern Hemisphere Perth, right down to the steeper decline/correction. The smoothed 6-city composite for May came in at 4.1% gain year on year, just a hair above the inflation rate for that month of 3.7%. Anything below the inflation rate is in decline in terms of a portfolio where real estate is the inflation hedge.

Now is probably also a good time to remind the good people of Calgary that a 50% gain is wiped out by a 33% decline. The downside is brutal.

Australian Change in House Prices 2nd Quarter 2011 - Charts!

Yay! Data. Nom nom.

Australia Large Capital Cities Price Index Chart June 2011

(If you are unfamiliar with indices, realize that the zeroing point (notice they all cross 100 at more or less January 2004) is an arbitrary point. The markets were not equal at that time. But the numbers are comparable relative to that point. 200 would indicate that each market doubled from there, but Sydney from a median of approximately 500k and Perth from a median of approximately 250k.)

The Index chart is a little boring, really. That's why I prefer the price index percent change chart.

Australia Large Capital Cities Price Index Year on Year Change Chart June 2011

Perth and Brisbane are moderating as they approach -3 to -4% change year on year. That doesn't sound like much, but relative to a median of $520k in April 2010, that's a $20k haircut in Perth. That's enough to shift perception on the wisdom of the short term hold. One would expect. Even the groggy speculators are going to be skipping the next round and peering through the smokey haze for the glowing green sign.

From the Accompanying PDF

The preliminary price index for established houses for the weighted average of the eight capital cities decreased 0.1% in the June quarter 2011. Through the year to the June quarter 2011, the index decreased 1.9%. This was the largest through the year decrease since the March quarter 2009 (–5.5%).

Lacking a global crisis, the decline in prices is much less severe. That does make the correction more manageable, from the banks' perspective, but it also makes it longer.

In contrast, the preliminary estimate for Sydney (+0.4%) was the first increase in the index since the June quarter 2010. Decreases in the subsequent quarters resulted in a through the year decrease of 0.7%. This was the first through the year decrease since the June quarter 2009 (–0.8%). Most of the positive contributions to the capital city quarterly increase were concentrated in clusters with median prices between $600 000 and $1 500 000.

Some other (fairly significant) revisions on the March data are described in the PDF.