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)