How Emili Created Cracks in the Foundation of the Canadian Housing Market

Shaky foundations: How Ottawa's computers get Canadian home prices wrong Emili, the automated valuation system developed by CMHC for use inhouse, was released to banks in 1996 (for a $50 fee per lookup) and quickly became the standard, covering some 70% of valuations.

Emili's algorithms and data sources are secret, but it appears to rely heavily on assessing the borrower more than the property, leading to reinforcing the borrower's happy state of mind regarding their own overvaluation of their property. As well as opening up the possibility of flawed assessments due to lack of visual confirmation by a human assessor.

Emili's inputs are going to cause a lag in valuations actually reflecting the declining market. Although it may not matter as OSFI has set its sights on its widespread use.

Early warning on Emili comes from a little known California insurer, First American Financial Corp, who in 2009 and 2010 wrote policies to Canada's largest banks to insure against inaccuracies in Emili. The insurer was forced to pay out 45 million when mortgages soured and the appraisals did indeed turn out to be inflated. First American immediately stopped writing policies.

You have to ask yourself, if the banks--who are heavily covered by CMHC both through insurance at mortgage issuance as well as at the portfolio level--went shopping for *more insurance*, did they know they were skirting the edge of the risk pool? Why would you pay for more insurance if you were following CMHC's rules? The only reason I can think of is bridge insurance to cover the time between default and CMHC cutting a check. But still, double dipping on insurance . . . worried much?

Although the issue has been kept out of the public eye, documents obtained by The Globe and Mail show that concern about inaccuracy, flawed data, and risk within the system [Emili] has spread to the highest echelons in Ottawa and in the banking industry. In the spring, the federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), acted on alerts from industry insiders and ordered banks to stop relying so heavily on automated systems when approving mortgages.

The time had come, OSFI warned, for Canadian lenders to be more rigorous.

I seem to remember repeatedly hearing this myth (from everyone from ordinary Canadians to Mike Holmes) that the system was already rigorous. What happened with that?

“When we are dealing with mortgage brokers, we hear it a lot: ‘Can I get more? Get me more,’ ” says Mr. Sieb, the B.C. appraiser. “We actually have a broker who will e-mail us and say, ‘I need $500,000 on this, what do you think?’ The appraiser might say, there’s no way in hell. Then the broker just hangs up and phones the next guy until he gets the answer he likes.”

When the Bank of Canada flagged consumer debt as the “biggest domestic risk” to the economy this year, it said the habit of consumers taking equity out of their home was at the heart of the problem, and noted that such growth appears to have occurred “in a context of underwriting standards that are less than optimal.”

In tandem with low interest rates, lax appraisal standards fuelled this stunning rise in borrowing. In the case of mortgage refinancings, it was simply a matter of the banks “pinging” Emili to see if a house could support a bigger loan – say an extra $50,000, or maybe $500,000.

At a time when the U.S. has introduced new regulation to reform appraisal practices that are believed to have contributed to its housing crisis, Canada has yet to act. The concerns about automated appraisals, contained in the documents obtained by The Globe, are only starting to come to the surface. Relying on any one system too heavily – whether human or computer – is what ultimately creates problems, observers say.

I would say what creates problems is relying on a short term valuation for any property, i.e., recent comps. Long term, the valuation is far more reliant on what rent it can earn. The entire risk assessment system is narrow and flawed and therefore subject to the whims of recent market movement.

And CMHC officials say the system is designed to catch manipulation. “If lenders submit multiple purchase prices, this will raise a red flag in the system,” a spokeswoman said in an e-mail.

However, several banking industry insiders, speaking on condition of anonymity, told The Globe that commissioned staff within their ranks have been found gaming Emili in order to boost their bonuses.

OSFI’s request last March that lenders stop relying solely on automated valuations was the first hint of a problem with appraisals. The regulator ordered banks to conduct in-person appraisals or – at the very least – drive-by inspections to confirm basic details. In an interview with The Globe, OSFI superintendent Julie Dickson said the regulator grew concerned that some lenders weren’t “sticking to policies” on lending, particularly “in a market with froth.”

Finance Minister Jim Flaherty agreed. “Some financial institutions in Canada were accepting mortgages without proper due diligence,” Mr. Flaherty said in a recent interview.

What it means: The regulator is urging banks (federally regulated financial institutions, or FRFIs) to stop relying solely on computer models and databases to evaluate home values and loan risk, and to see the homes in person through on-site appraisals.

All that aside, if you still think comps rule the day, then you will always have bubbles. By definition.

Wenzhou prices down 18% Year on Year

Wenzhou's house prices drop 18% in Q3 Largest fall in the country.

Businessmen from the city, one of China's wealthiest, are well known for their speculative activities in various sectors, especially the property market.

. . .

"Compared with the housing price for 2009 and 2010, when it rose to the peak of about 60,000 yuan per square meter for certain luxurious apartments, the average price of those is now about 35,000 yuan, a decrease of nearly 50 percent," said Ding Yi, a developer of luxury homes in Wenzhou.

Canada is Destination for some indebted Chinese

For Some Chinese Fleeing Debt or Prosecution, Canada Beckons

Last week the B.C. government announced a suspension of the Fast Track nomination option in the business stream of the province's nomination program, but said that was to review the program to see if it's accomplishing its goals.

The province said so far 141 people have taken advantage of the program, but only 26 have completed their end of the deal since 2007.

Those that fail on their end keep their permanent resident status, but lose their deposit. If the money was borrowed anyway, this is still an excellent trade.

Countries like Canada, Australia, and the U.S. are slow to respond to the corrupting influence of mega money being thrown around, because they are usually the ones doing it, not on the receiving end.

The report quoted a Beijing-based emigration consultant claiming to know two customers who racked up loans through their companies, moved the money offshore, declared bankruptcy and were in Canada within months using immigrant investor programs.

When contacted by The Tyee, Aoji Immigration Company spokesperson Zhang Jian denied the information in the Global Times report and said he had no record of the person quoted in HR files.

Citizenship and Immigration Canada said it has temporarily closed its federal immigrant investment program, and said provinces are now in charge of any such programs. As China faces an economic slowdown, more business owners have been missing as they flee not just banks, but black market lenders.

The article implies there are two classes here, one of bad luck aggressive businesspersons and the other of intentionally fraudulent persons. Both will appear the same on the surface having run up shadow debt just prior to departure.

Trump Tower Developer Suing Investors

Trump Tower developer suing 7 disgruntled investors to close deals they now regret

Developers of Toronto’s Trump International Hotel & Tower have launched lawsuits against seven investors in an effort to force them to close on deals for condo-hotel suites some claim haven’t turned out to be the Hollywood gold buyers were expecting.

Trump's companies have filed bankruptcy 4 times. What were these people thinking?

Dozens of purchasers of suites in the 65-storey luxury hotel are now trying to get deposits back and renege on final payments averaging over $500,000.

At the same time a London Ontario doctor is suing Talon 750k for misrepresentation from the deposits on the suites he bought in 2009

Most were caught up in the get-rich-quick mentality of Toronto’s booming condo market and intended to flip the units or use them to generate retirement income.

Talon has been facing an escalating buyer revolt since last February as the glitzy Trump Hotel set to open and buyers found out that maintenance fees, property taxes and other incidentals on the project’s 276 hotel-condo units had skyrocketed from Talon’s earlier projections.

It's like they've never invested in real estate before.

Emergency doctor Ganesh Ram alleges in his lawsuit that his costs jumped 40 per cent, with property taxes alone (the hotel-condos are considered commercial rather than residential units) now at $30,000 a year. While revenues from the hotel were meant to more than offset those kind of costs, buyers say they’ve been told hotel occupancy is running anywhere from 10 to 50 per cent and room rates are averaging about $300 per night instead of the $600 and up Talon had originally touted.

Can anyone point to an investor hotel where the numbers did work out? They certainly haven't worked up in Whistler.

Toronto lawyer Javad Heydary has been advising eight Korean purchasers and has been contacted by representatives of more than 40 other buyers seeking to rescind offers. He’s had a team of eight lawyers examining the deals.

What Heydary found came as a shock, especially to some buyers who readily admit they were so blinded by the flash and cash of Donald Trump that they didn’t do proper due diligence: Buyers weren’t purchasing so much a condo as a share in a high-end hotel that, so far at least, is losing money.

Some buyers are sophisticated investors. But many others are hard-working immigrants who just want their life savings back — 20 per cent deposits now sitting in trust and due to be released to Talon on closing.

Even casinos have a minimum to get into the VIP room.

Is it different this time? Sydney Morning Herald asks

Is housing recovery just a pipe dream? They are just being cute here with the first line:
"CAN the Australian housing market recover as it has in the past or is it different this time?"

Is it different this time?

Ask any foreign money manager what scares them about Australia's stockmarket and they will invariably say the risk of a housing collapse because of gross overvaluations. It makes a lot of sense. Virtually all the Western world has seen house prices crumble since 2007 while Australia's residential market has defied gravity, recording only gentle declines. The median house price in Australia is six times the median household income - 30 per cent greater than the US and the long-term average.

The long-term economic impact of Australian housing on the general economy is hinged to how much oversupply there is, if any. Even if prices fall to 50% of peak prices. As long as there is still demand to build something employment will not take a hit.

The bulls like myself believe that history will repeat itself and lower interest rates will eventually trigger a building cycle that in turn will drive domestic economic growth. The bears counter this by saying it is different this time because household debt still sits at a lofty 172 per cent of gross income. They believe any spare income from lower interest rates will be used to pay down debts and not ploughed into the property market.

In the early 1990s, household debt was only about 50 per cent of gross income, providing a sturdier platform for a housing boom.

I saw a quote the other day that bears repeating. Legitimate methods for getting rich should not include running others into debt. (I paraphrase.)

Housing starts in Australia have sunk to a multi-year low of about 125,000 and are predicted to spike to 140,000 in 2013 with the moribund Sydney market, surprisingly, leading the charge. The long-term average for Australia is about 150,000 starts, but underlying demand is currently closer to 170,000 given population growth.

Bets are Investments, Investments are Bets

New Yorker examination of Macau (from April, 2012)
The God of Gamblers

In surveys, Chinese casino gamblers tend to view bets as investments and investments as bets. The stock market and real estate, in the Chinese view, are scarcely different from a casino. The behavioral scientists Elke Weber and Christopher Hsee have compared Chinese and American approaches to financial risk. In a series of experiments, they found that Chinese investors overwhelmingly described themselves as more cautious than Americans. But when they were tested the stereotype proved to be a fallacy, and the Chinese took consistently larger risks than Westerners of comparable wealth. (The gap applies only to investing; asked about decisions in health care and education, the groups were indistinguishable.)

Living in China, I’ve come to expect that Chinese friends make financial decisions that I find uncomfortably risky: launching businesses with their savings, moving across the country without the assurance of a job. One explanation, which Weber and Hsee call “the cushion hypothesis,” is that traditionally large Chinese family networks afford people confidence that they can turn to others for help if a risk does not succeed. Another theory is more specific to the boom years. “The economic reforms undertaken by Deng Xiaoping were a gamble in themselves,” Ricardo Siu, a business professor at the University of Macau, told me. “So people got the idea that taking a risk is not just O.K., it has utility.” For those who have come from poverty to the middle class, he added, “the thinking may be, If I lose half my money, well, I’ve lived through that. I won’t be poor again. And in several years I can earn it back. But if I win? I’m a millionaire!”

Unlike Las Vegas, where most of the profits come from coins fed into slot machines, three-quarters of the revenue in Macau is derived from the enormous bets made in the V.I.P. rooms, where high rollers play around the clock. Casinos rely on outside companies, known as “junkets,” to solve some of the practical problems inherent in running a casino in Macau. It is illegal to advertise gambling in mainland China, and Chinese citizens are barred from carrying more than the equivalent of about three thousand dollars on any single trip to Macau. Most troubling, from the casinos’ perspective, is that it’s illegal to try to collect a gambling debt in the People’s Republic. Working through junket operators is a legal bypass around those problems, because the operators will recruit rich customers from across China, issue them credit, and then handle the complicated business of collection. The system is an attractive arrangement for customers who need to secrete large quantities of cash out of China. If a corrupt official or executive wants to hide the proceeds, a junket is a way to hand over cash on one side of the border and recover it on the other, in chips that can then be played and cashed out in clean foreign currency. (Another option is to smuggle it by hand across Macau’s relaxed borders, a practice known in laundering circles as “smurfing,” for the army of small-time couriers involved.)

Night was falling, and Siu offered me a lift back to the station in his black Lexus S.U.V., parked in the dirt beside us. “There used to be a helicopter taking me to the Venetian anytime I wanted to go,” he said. “Now I’m getting my feet dirty. Real estate is even more lucrative. It’s better than gambling or drugs or anything.” He pointed out the new houses in progress. “It costs a few million to build one of these, and then I can sell it for ten million.”

And this is just pure entertainment gold:

When an F.B.I. agent named Jack Garcia posed as a representative of Colombian FARC guerrillas and asked for weapons, Horng sent him a catalogue, and Garcia ordered anti-tank missiles, grenade launchers, submachine guns, and AK-47s. To lure Horng and others to the United States for arrest, the agency staged a mock wedding for a male and a female agent involved in the sting. Horng and other guests received elegant invitations to a celebration aboard a yacht moored off Cape May, New Jersey.

“I was the best man,” Garcia, who is now retired, told me. “We picked them up for the bachelor party and drove them straight to the F.B.I. office.” Fifty-nine people were arrested. (Horng pleaded guilty and is serving three and a half to four years.) Based on that case and on other information, the Treasury Department blacklisted Banco Delta Asia, in Macau, for participating in money laundering. The bank denied the claim, but it has been barred from access to the U.S. financial system.

Buyers are becoming militant about pricing

Buyers have heard from economists that a 20% decline is coming and they would like to take it now, thank you. Toronto home buyers want back in the drivers seat

In another case, a three-bedroom semi was listed at $569,000, then reduced to $539,000 and sold for $534,000. “My client is motivated. It’s done,” says Mr. Babiak, who points out that other semis in the same area and price range are still sitting there.

He points to Peter Hall, the chief economist at Export Development Canada, who is expecting more robust growth in the U.S. economy than most of his peers. If he’s right, says Mr. Babiak, that should bode well for Canada’s housing market and the correction that has been taking place since the spring could indeed turn into a rebound by next spring.

Not sure I follow this. Demand for bonds seems to be the main thing driving the Canadian housing market.

A Leg in Vancouver, In Case One Breaks at Home

Wary of Future, Professionals Leave China in Record Numbers

Zhang Ling, the owner of a restaurant in the coastal city of Wenzhou, is one such worrier. His extended family of farmers and tradesmen pooled its money to send his son to high school in Vancouver, Canada. The family hopes he will get into a Canadian university and one day gain permanent residency, perhaps allowing them all to move overseas. “It’s like a chair with different legs,” Mr. Zhang said. “We want one leg in Canada just in case a leg breaks here.”

In 2010, the last year for which complete statistics are available, 508,000 Chinese left for the 34 developed countries that make up the Organization for Economic Cooperation and Development. That is a 45 percent increase over 2000.

China'a Exporters Say Their Situation Worse Than 2008

A drop in external demand is laying bare the failure to shift to domestic consumption.

On top of the effects from the downturn in Europe, production is moving closer to market or to places with cheaper labor costs. I don't see this trend reversing. Boutique manufacturing will only expand and that functions best close to home, and for goods requiring high labor costs, China is too expensive now. Chinese Exporters Fear Grim Outlook

China’s exports rose almost 10 percent year-on-year in September, according to data released at the weekend. But speak to Chinese exporters and they say the economic doldrums in Europe mean many are facing more daunting challenges than they were during the 2008 heights of the global financial crisis.

Shannon O’Callaghan, an analyst at Nomura, said: “At the start of the year most U.S. companies were saying they thought China would get better in the second half. But by the summer, it was clear it was not getting better. If anything, it’s getting worse.”

. . .

Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

Mr. Moore’s company has farmed out orders to Chinese-owned factories elsewhere in the country and opened a factory in Cambodia. Gross margins for the business bounced back from 6 percent in 2009 to 35 percent in 2010 “purely because I didn’t have this factory [near Shenzhen] sucking up all my wages,” Mr. Moore says. The move has given Scovill’s Asia business a new flexibility in managing costs.

Selling Organs to Pay Debts

Loan shark debtors in Malaysia (many of them Chinese) sell organs to pay their debts.

Gamblers owe Ah Long RM30 million this year

FOR the first nine months of this year, Malaysians have borrowed a whopping RM30 million from illegal moneylenders — mostly used for illegal online gaming activities.

That's $10 million USD.

“The Chinese make up the majority with 313, followed by 92 Malays and 39 Indians.”

Chong said the government should formulate a law which would also penalise the borrowers.

“These gamblers are loan defaulters and by not paying the loan, they place their family members in danger.

“Their wives, children and parents are actually the ones who become victims of the loan sharks.

Chong said this year, the bureau received four such cases and all the complainants confessed they decided to sell their organs after reading news reports from China and Hong Kong where people there were forced by loan sharks to clear off their debts.

Money Flows out of China Spark Change in How China Creates Money

Money flowed out of China in August for the third time in 2012. Their standard MO of buying foreign monies from their exporters in exchange for yuan is going to have to change.

Average monthly gains in Yuan holdings is 35 billion this year compared to 232 billion monthly last year. Market liquidity supply sees big change

"For a long time, Chinese banks' yuan holdings for purchasing foreign exchange have been a channel for the central bank to create money. Now the old pattern is about to change, which means the central bank needs to find new ways to issue currency if it wants to maintain stable money supply growth," said Cao Yuanzheng, chief economist at the Bank of China Ltd.

Yuan holdings among banks for purchasing foreign exchange, an important measure of capital flows, declined by 17.4 billion yuan ($2.75 billion) in August to 25.64 trillion yuan, marking the second straight monthly fall.

The depreciation tendency once again indicates that the yuan's exchange rate is close to equilibrium, he said. "We believe that capital flows related to yuan exchange rate expectations is the most uncertain factor affecting overall capital flows," said Wang Tao, head of China economic research at UBS Securities Co Ltd.

If you'll recall, a lot of money poured into Yuan purely due to the expectation that it would appreciate. Now that the signs are toward depreciation, this speculative bet is being taken off the table, triggering outflows.

"The financial account deficit plus a lower current account surplus means that China may have entered a new era, that is, the stagnant growth of foreign exchange reserves."

The central bank has been increasing its use of short-term money market tools such as reverse repurchase transactions to ease liquidity tension, after it last cut the RRR in May by 50 basis points to 20 percent for major banks. It injected massive liquidity through another round of reverse repurchase operation in the last week of September. From Sept 24 to 27, it injected 365 billion yuan, a record high weekly injection through open market operations.

Buying treasury bonds in the secondary market would become a major channel for the central bank to create money in the future, China Business News reported, citing an anonymous analyst close to central bank decision-makers.

But controlling liquidity through purchases and sales of treasury bonds requires a bigger and more mature secondary market. Otherwise, large-scale purchases made by the central bank would raise interest rates and spur the issuance cost of such bonds, said the analyst.

"Currently, central bank bills and treasury bonds are in separate markets. Only if China completely frees interest rates could the two markets be linked and the central bank could operate like the US Federal Reserve," Zhao said.

Before the sterilization of foreign exchange fluctuations became a mainstream channel to issue currency, re-lending to commercial lenders was the main tool of China's central bank to create money, accounting for 80 percent of newly injected money in the 1990s.

Wenzhou Property Speculators are Trapped

From boom to bust in Wenzhou

About 80 percent of speculators from the prefecture-level city in southeastern Zhejiang have been trapped by their property investments that have recently depreciated 30 to 50 percent from levels in 2010, state media reported.

"They will be insolvent either selling the houses or holding them," China National Radio said.

Their speculative activities domestically have been blamed for soaring real estate prices in China, where they have been nicknamed "locusts."

Hot money poured into the burgeoning real estate industry as a result of an investment of 900 billion yuan (HK$1.11 trillion) out of the 4 trillion yuan stimulus package into the sector, amid easy borrowing in a loose credit environment. From 2007 to 2009, Wenzhou's wealthy banded together to snap up floors of houses in Shanghai, Hangzhou and other cities.

Veteran Wenzhou speculator Zhang Ming said he borrowed 30 million yuan from friends and relatives, who put up their own firms and properties to secure mortgages from banks. "In 2010, I spent 38 million yuan buying four floors of houses in Wenzhou. But now, I cannot sell them for even 20 million yuan," he lamented.

But some analysts warned of a potential credit default by the end of the year, as more than 70 percent of the funds tied up in property speculation came from underground loans and banks.

Tune is Changing in Toronto: Gen Y should Rent

In 1981 62.1% of households owned by 2001 65.8% by 2006 68.4% did so. Since then it has most likely risen. (ref). New blood is essential to keeping that rate from falling. Why Gen Y should tough it out in the rental market

Renting is the obvious alternative for someone who is unready for the financial blood-sucking that home ownership entails.

Tell us how you really feel.

Renting isn’t a quick and easy alternative to buying, though. Canada Mortgage and Housing Corp.’s latest report on the rental market says the national average vacancy rate for apartments was 2.3 per cent in April, which compares to 2.5 per cent a year earlier and a long-term average of 3.2 per cent. Regina, Winnipeg and Montreal are among the cities with smaller vacancy rates than the national average, but Toronto stands out on the low side at 1.5 per cent in April. The city’s vacancy rate for condos is even lower at 1 per cent.

I personally know of Chinese condo owners who have given up on having renters. Hard to imagine with 58,000 condos coming in Toronto that the vacancy numbers are relevant except for house rentals.

CMHC measures rental costs in terms of two-bedroom apartments. Toronto’s average was $1,164 per month last spring, second to Vancouver’s $1,210. You could carry a $250,000 mortgage at today’s five-year rates for those rents, not that there’s much of anything in this price zone in either city.

As tough as the rental market may be, it’s still a better option for Gen Y than buying prematurely. Renting, at least, is a finite expense each month. Housing is infinite – there are fixed costs, plus endless discretionary expenses. Buying is not the solution to difficulties in finding a place to rent, at least not without further price declines. Instead, find a roommate and pool your resources to cut rental costs.

Tough love. Although, with tightened lending rules, this may be irrelevant advice anyway.

Financial Corruption from Bubble Still Haunts U.S. Years after Crash

The saying about the tide going out applies to transparency for the financial system as well. Profits gloss over a lot of corruption. And regulatory capture and blackmail by behemoth institutions adds another layer of inertia to a fundamentally flawed system.

As part of the settlement over bad mortgage practices the banks agreed to write down debt. Good news is, they are. Bad news is, it's debt that doesn't exist anymore.

How to Erase a Debt That Isn’t There

“You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America. Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

Cast your mind back to February. Five of the nation’s big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.

Neil Crane is a lawyer in Hamden, Conn., who represented Ms. Esposito and her husband in their bankruptcy. He says four of his other clients have recently received letters from banks claiming to forgive discharged debt.

The banks claim it is a phrasing problem. That they are simply noting that the lien has been released.

But even this is incorrect in Ms. Esposito’s case, Mr. Crane said. Her lien was actually eliminated back in 2009, during her bankruptcy proceeding.

The loan forgiveness is taxable for the former owner, so this could be a serious problem for those caught up in this.

All of this made me wonder: are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

And we can completely trust them on that.

An Expat Canadian: Returning home has become "downright frightening"

Human's are herd/social creatures. Bubbles are about socially constructed myths, making them harder to see from the inside. For the outsider, there is only the language of disbelief. Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada

Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop.

And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence.

It's all about the debt.

As was the case in America when I arrived here nine years ago, Canadians have for years been so desperate to avoid being left behind by a surging housing market that they've been stretching themselves beyond reasonable financial limits to jump in, thus of course ensuring continued surges.

In the process, household debt has doubled, going from a manageable 75 per cent of household income in the early 1990s to 150 per cent today.

Worse, as the Bank of Canada has been pointing out, Canadian debt is disproportionately concentrated in the most vulnerable households, defined as those devoting 40 per cent or more of household income to paying interest charges.

. . .

The central bank's analysis suggests that if interest rates rise to 4.25 by mid-2015, fully one fifth of all Canadian debt would be held by those households least able to finance it.

"My base case expectation would be that most markets in Canada over the next two years would see a pullback of housing prices of 10 to 15 per cent."

That's Don Drummond, former chief economist at TD. Back to Neil:

If you take that tax refund into consideration, prices in Ottawa are now approaching or equal to prices in Washington, DC., a city steeped in wealth and power. Seen from this distance, by a longtime expat, that is just unmoored from reality.

Big Drop for Vancouver Prices

Garth Turner gets a bit of coverage. Big drop predicted for Vancouver real estate prices

We'll have something around a 30-to-40 per-cent decline in prices.”

Sounds about right. Still pricy, but easier to sustain.

Despite his dire outlook, the market has been robust for most of the last decade and condo marketer Cameron McNeill believes Turner will be proved wrong. “The fundamentals that are driving the market below the surface are just too strong for any sort of bubble circumstance to happen,” says McNeill.

“The fact of the matter is, in Vancouver today, you can buy a condominium and you can rent it out and you will have 40 people in line trying to rent that condominium,” McNeill says. “If you have that much desire for people to live in a condominium, I think the market's got no problem sustaining itself.”

Well, I'm convinced by the power of that argument. It is just me or is McNeill from Brooklyn?

Australian Banks Pass IMF Stress Test

Pretty stringent tests assuming 5% decline in GDP and 35% fall in house prices. Australian Banks Pass IMF Stress Test

Australia's lenders came through the global financial crisis in relatively good shape helped by conservative lending policies, strong prudential oversight, and a firm underlying economy supported by a resources boom. The country's biggest banks also managed to steer clear of the kind of exotic structured-credit products that dragged down U.S. lenders.

The resources boom is just 4.5% of GDP and 1.5% of employment. As opposed to the housing market which is over 3x annual GDP in asset value. And construction which is 9% of the workforce. Both industries are bubble driven, but the first is driven by someone else's bubble.

While profit growth has slowed in the past year--as credit demand stays subdued and higher international funding costs squeeze margins--the big four remain among the world's most profitable lenders, and are routinely praised by ratings firms for their strong balance sheets and low mortgage-arrears rates.

The biggest risk isn't to the banks, it's to sustainability of prices. 30-40% of mortgage debt is being funded from overseas. If that dries up then prices have to adjust to match. It's the next buyer that determines the price, not the previous one under rosier conditions. Not to mention the pressure on the currency from having to service that foreign debt.

The IMF also considers that Australia's central bank has plenty of room to cut interest rates if the need arises to shield the country from a sharp downturn in the global economy.

Speaking of pressure on the currency . . .

Canadians buying up Florida Real Estate

Northern flight: Canadians gobbling up Southwest Florida real estate

From July 2011 to June 2012, foreigners accounted for 19 percent of the home sales volume in Florida, led by Canadians, according to an industry report by Florida Realtors, a statewide trade group. In that year, sales to foreigners in the state reached an estimated $10.7 billion — out of a total of $58 billion. Canadians accounted for 31 percent of those foreign purchases, putting them in first place among all nationalities.

In the Cape Coral-Fort Myers market, Canadians ranked as the top country for foreign home buyers in the year ending June 30, with a 56 percent share, according to the National Association of Realtors' 2012 Profile of International Home Buying Activity. That was followed by Germany with 17 percent, then the United Kingdom and Honduras, each with 6 percent.

I wonder what percent of these buyers are taking out equity back in Canada to fund these purchases?

Glen Bigness, a Realtor with Premiere Plus Realty Co., said in an email that he sees a great number of Canadians visiting his websites.

He's in regular contact with lenders who provide loans to foreign nationals.

"Most tell me money is tight, and qualification is very narrow and stringent for them, so most deals seem to still be cash at closing," Bigness said.

His company offers a "buy and fly" program to Canadians. Buyers who spend at least $200,000 get up to $500 at closing to pay for their flight to Southwest Florida.

If you can't afford a plane ticket, how can you afford to be a long distance owner?

When these foreign markets also adjust, U.S. housing is going to find another bottom.

Deflationary Pressures Increase in China

While the money supply growth is considered high enough to prevent deflation, other measures, such as PPI, industrial output and profits are flashing warnings. Industrial output and profits are expected to continue downward through the autumn. China’s Deflation Rears Its Ugly Head

The Producer Price Index, an indicator of production output prices, retreated to its lowest level in August since November 2009, a fall of 3.5 per cent from a year earlier. It was the sixth consecutive monthly decline as it reached its lowest level in 34 months.

When PPI declined 2.9 per cent year-on-year in July, it was a warning that manufacturing companies’ income had dropped rapidly, a development that might hold back additional investment in industrial sectors and further drag down the whole economy.

In the first seven months of this year total profits of big industrial enterprises declined by 2.7 per cent from the same period in 2011 to 2.68 trillion yuan.

“Fundamental problems in the Chinese economy are starting to show and the downside risk is very hard to control,” Yuan said pessimistically.

Uncertainty over overseas demand, retreating governmental supportive policies and tightening property control have all pushed the industrial companies into a chilling environment. However, deeper problems, such as the increase in labour costs and the slumping competitiveness of Chinese business, should be given more attention, Yuan said.

Vancouver luxury market -- it's only worth what someone will pay

Luxury homes are not the best indicator for the market in general because the price is always detached from fundamentals. But sentiment is easier to gauge because the market is smaller, is more closely watched, and the swings in price are more volatile. Vancouver real estate’s million-dollar question: What sells?

Mr. Christiansen, who routinely sells houses worth millions of dollars, hasn’t seen an August this bad for sales in his entire career. He says there were only 24 sales in West Vancouver in August, compared to 80 last August, and the usual August average of around 50.

So, at normal sales rates there would be inventory of 10.6 months. But at half that sales rate, the current reality, there is 20+ months of inventory. Luxury homes are generally less substitutable for one another, but that's a very crowded market. Too much choice leads to buyer complacency.

Still, he’s wary of pricing low to start a bidding war, because these days, the bidding war might not happen. There are currently 530 houses listed in West Vancouver and buyers – about 50 per cent of them from Mainland China, according to anecdotal realtor input – are choosy.

There’s the trick. Most sellers are living with yesterday’s sales figures in mind, and they want the old top dollar. The reality is, a house is only worth what this current market will pay for it – and sometimes, that’s anybody’s guess.

It's only worth what someone will pay for it.

Two CPI proposal, one for owner-occupiers

What Really is Happening with Housing Prices? The CPI Won't Tell You - C.D. Howe Institute

In "Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator," Philippe Bergevin points out the CPI has not usefully reflected the rapid run-up in housing prices in recent years. He proposes a new official inflation indicator for monetary policy purposes that would better reflect the prices of houses sold in the market.

"The use of assumed prices for dwellings rather than actual prices for houses and the inclusion of a mortgage interest component make the CPI less sensitive than otherwise to housing price changes," notes Bergevin. The main concern, he adds, is that the CPI's insensitivity to housing could potentially cause the central bank - reassured by its imperfect indicator that inflation is under control - to keep rates too low for too long.

This is an interesting idea. Especially since, imagine a time when there would be two CPIs: a high one for owners at the peak of the bubble and a lower one for renters. Wonder if that would get people to notice sooner that prices are out of line with fundamentals.

Early Warning for Canada

Year on year total home sales change and months of inventory provides early warning on prices for Canadian cities in August:

Vancouver	-31%	10.7 MOI
Quebec	-26%	12 MOI
Victoria	-17%	10.9 MOI
Ottawa	-14%	(Total inventory not provided)
Hamilton-Burlington	-13%	3.2 MOI
Edmonton	-11%	5.2 MOI
Montreal	-7%	10.8 MOI
Kitchener-Waterloo	-4%	(Total inventory not provided)
Calgary	+16%	6.3 MOI

Months of Inventory (MOI) over 6.5 is considered depressive on prices. Will prices decline? No real telling, I'm afraid, but MOI is generally a reliable belweather.

I have a suspicion that Hamilton is suffering from a product substitution effect where Toronto buyers, fed up with getting out bid near the big city, are shifting their buying that far afield and impacting that much smaller market. Hamilton only looks cheap I estimate it is 100k overvalued.

The Hamilton August MLS release is here They still haven't fixed the broken link.

Shadow Banking Blues in China

In the first six months of the year 58,000 private lending lawsuits filed in Zhejiang province (where Wenzhou is)
involving 28.4 billion yuan in private lending ($4.5 billion USD)
up 27% from 2011
highest in 5 years
600,000 lawsuits filed nationwide in 2011
valued at 110 billion yuan ($17 billion USD)
up 38% from 2010
376,000 filings nationwide first six months of 2012
up 25% from 2011
depositors seeking better returns withdrew 500.6 billion yuan ($79 billion USD) from banks in July
or 0.6 percent of total deposits.
30% of funds in Wenzhou's shadow system went to SMEs
60% went into real estate speculation and re-lending


You've probably heard the joke about the German tourist who puts a $100 bill on the front desk of the hotel and goes to look at a room. (The hotel pays the cook the cook pays the butcher the butcher pays the hooker the hooker pays the hotel and the German gets his money back when he decides not to stay.) It's an example of what it takes to unwind the tangled credit of an informal banking system where by some miracle everyone is made whole.

(Wall Street with its derivatives has become a giant informal system, one of the reasons it crashes rather than unwinds. But that's another topic.)

China's (no reserve) shadow banking system is in the middle of a great unwind. But given the chaotic nature of it, there is no feasible way to run a $100 bill through it to make everyone whole.

Shadow Bankers Vanishing Leave China Victims Seeing Scams

To live out his retirement years, He Zhongkui was counting on steady income from an investment that promised interest payments five times higher than what he could earn in a Chinese bank.

The Chinese are savers. The Chinese are savers. We hear that repeatedly in arguments against a crash. The proponents of this argument never seem to take the next step and explain what they are invested in. They are invested in their children's inflated houses and in schemes like this.

Now He, a 62-year-old former municipal official in Wenzhou who rides a rusty bicycle, is cutting back on food and gasoline, having found himself one of a growing number of victims of China’s nebulous world of shadow banking. A “friend,” who he said had been paying him 2,400 yuan ($379) a month after He gave him one-third of his 600,000-yuan life savings to invest in real estate, suddenly disappeared. So did the payments and principal.

China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments.

Chasing yield. Well, we can all feel for this guy.

“It’s time for payback for the unchecked growth of China’s shadow-banking activity,” said Yao Wei, a Hong Kong-based economist at Societe Generale SA, who estimates that as much as 2 trillion yuan of underground lending may default eventually. “The risks are culminating, and part of the system is doomed to collapse. On the flip side, this gives policy makers an opportunity to put in place oversight for a sector that should have been regulated a long time ago.”

Private lending between Chinese individuals is believed to be worth $1.3 trillion, according to Boston-based research firm IHS Global Insight (IHS), the equivalent of the 2011 U.S. federal budget deficit. Interest rates can reach as high as 100 percent.

In the heady days of blockbuster growth, maybe one's business could carry that kind of load. Maybe. The ones who couldn't rolled the debt, if they could.

The lending is part of a shadow-banking system that also includes the off-balance-sheet business of banks and trust companies and totals as much as $2.4 trillion, about one-third of China’s official loan market, according to estimates by Societe Generale. Shadow banking is prevalent in China because more than 90 percent of the nation’s 42 million small businesses are unable to get bank loans, while such investments offer returns at least several times higher than deposits.

The numbers just keep getting worse.

Another Wenzhou shadow-banking victim, Mao Renye, said he took out a 700,000 yuan bank loan last year at 10.8 percent annual interest, using his home as collateral, to help his son’s struggling clothing business. Enticed by a 36 percent interest rate promised by a city resident who ran a nationwide pharmacy chain, the 69-year-old former farmer-turned-businessman said he invested 550,000 yuan, only to find that the borrower’s company was on the brink of bankruptcy and dozens of creditors were chasing him for repayment. Mao didn’t get any money back.

The nightmare didn’t end there. As his bank loan matured in October, Mao had to borrow from friends, relatives and loan sharks to pay back the debt so his home wouldn’t be seized. Now he’s seeking to sell his 2 million-yuan home to pay off his borrowings. No buyer has shown interest, he said.

In Erdos, about 150 kilometers (93 miles) south of Baotou, 80 percent of housing-construction projects are halted after home prices tumbled to 3,000 yuan per square meter from a record 20,000 yuan per square meter, Caijing magazine reported Sept. 3. The biggest source of funds was private lending, and as defaults surged this year people began greeting each other by asking how much savings they were able to retrieve from their shadow- banking investments, the report said.

It goes on, read the rest

Australian House Prices to Fall 20% Over Two Years

A conservative assessment of Australian housing by the Wall Street Journal. Two years to decline 20% at this point in the market is about half the rate of decline of the U.S. That will still be painful.

Home Prices Tipped to Fall by up to 20%

Investec Asset Management strategist Michael Power said while Australian property prices had fallen six per cent since 2010, he expected them to fall further in the next 18 months to two years. "We're not seeing anything like the US, Irish or Spanish property bust here," the South African-based strategist told a business lunch in Sydney. "But I think over the next 18 months it could go down by double digits, 12 or even 15 (per cent). A 15 to 20 per cent (fall) would be my outside downside over the entire period."

He goes onto say that well, yes consumer debt is very high, the banks may be in trouble because of foreign debt financing, but there likely won't be any inflation.

I wish the article were longer because it would be interesting to hear how he thinks those conditions can possibly resolve without inflation. The chart below from oanda.com shows how buoyant the currency is. During the global liquidity freeze of the Great Recession the Australian dollar lost a lot, quickly, relative to the U.S. dollar. Australian foreign debt is ~1.2 trillion on ~1.6 trillion GDP.

Heard This One?

Based on the official housing statistics, you might have guessed that the sellers would have made out just fine, despite all the talk of a real estate slump.

House prices nearly tripled in the first half of this decade, and speculators, who are more likely than residents to sell a house in a panic, flooded into the area in recent years.

The truth is that the official numbers on house prices — the last refuge of soothing information about the real estate market on the coasts — are deeply misleading. Depending on which set you look at, you’ll see that prices have either continued to rise, albeit modestly, or have fallen slightly over the last year. But the statistics have a number of flaws, perhaps the biggest being that they are based only on homes that have actually sold. The numbers overlook all those homes that have been languishing on the market for months, getting only offers that their owners have not been willing to accept.

Unfortunately, there are also a lot of families that took on huge mortgage debts based on the ephemeral peak values of their properties. In effect, they cashed in on the housing boom without cashing out. As Ed Smith Jr., the chief executive of Plaza Financial Group, a mortgage brokerage firm near San Diego, said, “So many people picked up their homes, turned them upside down and shook them like a piggy bank.”

The withdrawals have been so big that the average household in Boston now has slightly less equity in its home than it did in 2000, according to an analysis by Moody’s Economy.com that took inflation into account.

All of the above are from this article: What Statistics on Home Sales Aren’t Saying New York Times 2006

Flash forward to 2012:

In addition to the level of debt, the way it is employed may also affect out- comes during periods of economic stress. If debt has been used to finance household consumption, for example, consumption may be constrained following a shift toward reducing debt burdens. In “Household Borrowing and Spending in Canada,” Jeannine Bailliu, Katsiaryna Kartashova and Césaire Meh focus on how the accumulation of debt is related to household expenditures, specifically consumption and spending on home renovation. They observe that the share of consumption financed by home-equity extraction has risen since 2000. They also note that a much larger share of spending on home renovation is financed by these debt flows. Home-equity extraction in turn has been supported by rising house prices and financial innovation. Simulation results suggest that a negative shock to house prices could have a relatively large impact on consumption.

--Bank of Canada

Check out the associated chart:

House prices have doubled, but Canadian housing equity has been falling. (Looks about level with 2000 values or up very slightly, but this is in an environment of greatly increasing "values". It's nuts.) Of all the parallels with the U.S. worth panicking over, this should be high on the list.

That crossover point where the growth in mortgage debt begins to exceed the growth in real estate values . . . that's interesting marker. That's the point where the central bank lost control through relaxation of mortgage standards.

Back to the article, the trigger for the angst was an auction of foreclosed property.

The highest bid on one three-bedroom ranch house with a pool was $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, received a high bid of $880,000, compared with $1.35 million a year earlier. On average, the bids suggested that the houses at the auction had lost about 25 percent of their value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the results.

More coverage from that era:

Realtors fume over property auction

Some local real estate professionals are livid. It’s bad enough that sales of single-family houses in the Naples area has dipped nearly 50 percent.

Now, an impending auction of 45 prime properties has locked up the market, Realtors contend.

. . .

However, the proposed auction has tied up the real estate market for the next few weeks, some Realtors protested in early October.

People have stopped buying so they can wait and see what they can pick up at the Oct. 21 sale, at which they can bid online or at the Naples Beach Hotel & Country Club for some 45 homes primarily in The Moorings, Lake Park, the northern boundaries of Old Naples and Cape Coral.

. . .

Real estate professionals say it is especially obnoxious because many of the properties that will be sold on the auction block — by seller desire, not because they can’t pay the taxes — were purchased by speculators who likely attempted to manipulate the market.

“The majority of investors are selling off with little or no profits. Look at the 11 homes (in Lake Park) going up for auction by an investor now,” says longtime Naples resident and Remax Elite real estate agent Jerry Krecicki.

Noting that assessed value and sales price are a matter of public record, Turner cited a house at 1121 10th Ave. N. that listed for $569,000 on March 5, 2005. Moorings resident Marjorie S. Dresner bought the house on March 7, 2005, and closed on it on April 26, 2005.

For $585,000, Turner said.

The Buyer Today is Going to Wait for Prices to Soften

The Naples News reports from Florida. “The deadline for closing on properties purchased in an Oct. 21 auction has been moved back to Dec. 6. Auction operator Paul Drake said he wasn’t aware that one of the properties for which he’d announced a high-bid price is now in foreclosure.”

“In legal ads printed in the Daily News, Washington Mutual Bank announced foreclosure on 1121 10th Ave. N., although the ads refer to it as Lot 22, Resubdivision of Block A, Lake Forest. The owner of record, Marjorie Dresner, had numerous properties listed in Drake’s auction.”

“Shortly after the event, Drake said that property at 1121 10th Ave. N. drew a contract price of $341,000. Public records show that Dresner bought the house in May 2005 for $585,000, with an April 26, 2005, loan from Washington Mutual. Mortgage documents show Dresner took out a loan worth $468,000 plus interest.”

“That is part of the problem, real estate professionals protested, before and after Drake’s advertised auction. It was unrealistic, because many of the top bid prices were far less than the mortgage prices, they said.”

“While Drake had denied financial hardship was involved for people who had put their properties up for auction, real estate analysts noted that a few days before the auction, Dresner had taken out a second mortgage on most of her participating properties.”

“News of the auction ignited debate about Naples’ real estate market, and whether sales prices were dropping drastically.”

Well, let's go take a look, shall we?

Zillow Map

Back to the 2006 NYT article:

Over the last few decades, the world’s financial system has endured a crisis roughly once every three or four years. There was the stock market crash of 1987, the Asian and Mexican meltdowns in the 1990s, the dot-com implosion of 2000 and, most recently, the aftermath of Sept. 11, 2001. We may now be living on both borrowed money and borrowed time.

Toronto City Detached House Prices Down 14%

Median detached house prices within the city of Toronto have been plummeting. In April 2012 the median was $656,000. This month it is $577,250. That's a decline of $79,000 or nearly 14%.

Detached for all of the TREB region ticked up slightly this month, but is still down 6% or $35,000. Imagine if interest rates normalized.

Total sales down 12% from a year ago, matching Vancouver's falling sales trend. Average was up, if you want some soothing news to go with your charts.

I've added Toronto to the Canadian City Price Peaks and Declines

On the condo front, things continue to slide.

The potential losses for speculators in condos, per unit, is not all that high in comparison to, say, Vancouver Richmond or West Van. From Shiller's interview on BNN (hat tip: VREAA). Corrected for inflation, condo prices Boston, Toronto:

Since 2000 the prices have risen 60% (20% of it in the last calendar year). Not extreme, but given the anecdotal stories of investors buying 3, 4, or even 5 at a time, many investors may have similar exposure as a Vancouver speculator holding only one property. The scale of risk may actually be the same.

For those keeping a scorecard, a 60% overvaluation is corrected by a 37.5% decline.

The Effect of Rate Cuts on House Prices

The Central Bank went for the save on Australian house prices in May, then had to spike the punch again a month later. I borrowed the chart from this Joye piece. Australian house prices stabilise in August

Rate cut dates marked by me

Rates were left alone last week, but a cut is expected by the end of the year. More on that here if you are interested.

Australian Construction Contracting Faster

Australian Construction Contracts Fastest Pace in 11 Mths

The construction performance index fell to 32.2 last month from 32.6 in July, a survey by the Australian Industry Group and the Housing Industry Association released in Sydney today showed. A reading below 50 represents a contraction.

“The near-term outlook for the construction sector deteriorated with a further fall in new orders,” said Peter Burn, the Australian Industry Group’s director of public policy, said in a statement. “The drop-off in new orders was particularly sharp for engineering construction and the apartment sub-sector.”

Thus begins the vicious cycle.

BHP Billiton Ltd., the world’s biggest miner, last month decided to delay approval of an estimated $33 billion expansion of the Olympic Dam copper, uranium and gold mine in South Australia. Fortescue Metals Group Ltd. (FMG), Australia’s biggest iron ore producer after Rio Tinto Group and BHP, this week cut its full-year capital spending forecast by 26 percent to $4.6 billion.

China's manufacturing sector entered contraction too.

Seeking Alpha: Short RBC

2 Canadian Banks To Buy, 1 To Short On Housing Bubble Burst

There is sufficient data to suggest that the red hot Canadian housing markets are now cooling down. In the wake of recent developments in the Canadian housing markets, we have buy ratings for Toronto-Dominion Bank (TD) and the Bank of Montreal (BMO). These buy ratings are justified on the basis of the banks' higher proportion of insured mortgages, lower proportion of mortgage lending to their overall lending portfolio, and attractive valuations. Since the Royal Bank of Canada (RY) has no insured mortgages, we believe it is poised to take the maximum hit if the Canadian housing market bubble bursts, which is why we are bearish on the bank.

There is a rundown of each major bank.

Royal Bank of Canada (RY)

The bank, with a Tier 1 capital ratio of 13% and a Tier 1 common ratio of 10.3%, is adequately capitalized when compared to BNS. RY relies approximately 70% on Canada for its revenues, while the rest accrue from other international markets where it has its operations. Fitch considers the bank to have considerable exposure to the Canadian housing markets and faces the largest risk, as it uses less mortgage insurance as compared to most of its peers in the Canadian Banking Industry. In their conference call, after reporting the results of the third quarter of the current year, the management noted that the bank has the lowest insured mortgages of all the banks in Canada. The bank also has a large portion of its domestic mortgage loans to its overall lending. Going forward, we believe the bank will face a challenging operating environment, however, the bank's concentration on its credit card and commercial businesses will partially offset any adverse impacts.

The Australian House "Auction"

House auctions are far more popular in Australia and New Zealand, where around 40% of sales are conducted this way. But the idea of an auction can get pretty whack.

Vendor bid auction reform needed

A high-profile Melbourne buyers' agent has called for the introduction of a limit on the number of vendor bids allowed to be placed at Victorian property auctions. There is no cap on the number of vendor bids at Victorian auctions.

Okay, let's back up a bit. Just to be sure we are all clear on this, a vendor bid is one the homeowner makes on his own house. During the auction. Yes, the homeowner bids on his own house. Did I mention whack?

Buyers' agent Frank Valentic’s call came after he attended a recent Clayton auction where the auctioneer placed three vendor bids.

“Should we allow only one like NSW?” Valentic tweeted.

Why is this even a debate?? How about no flipping vendor bids? What part of "auction" (a public sale where goods are sold to the highest bidder) isn't clear here? How can you "sell" something . . . to yourself?

Peter Mericka, who runs the Lawyers Conveyancing website, has noted previously that the legislation permits an auction to be "crippled" if mutiple permissible vendor bids are used by the auctioneer.

"Five is right out."

Many auctioneers are loathe to lodge more than two vendor bids, one to open and another to close proceedings where buyer interest is restrained.

Yeah, I'm still seeing Monty Python here. People are arguing the fine point of auctioning property off to yourself.

But last October there were three vendor bids when the West Hawthorn home of former Hawthorn AFL premiership captain Sam Mitchell was passed in at its weekend auction.

The onsite auction opened with a $1.05 million vendor bid. There was then a $1.1 million vendor bid. It concluded with a $1.15 vendor bid.

LOL.

This is termed "passed in". Then the house sold afterward for $1,049,500. This is true in many cases. And the article goes on to detail how fair or unfair the process is for handing post auction offers. This is even more whacked.

Thus, if a genuine bid is received before the final vendor bid an agent would have to deal with that bidder first rather than throw the process open to all comers.

The advice does not apply if no genuine buyer bids were received during the auction.

Wait, you held an auction, won your own house, then you . . . opened it up to bids . . .

Or worse yet you got one or two legit bids, overbid the highest yourself, then hoped those buyers would submit another bid afterward. Auction theatre?

REIV data shows that more than 40% of all properties going under the hammer are currently being passed in, with nearly two in three of them on vendor bids.

Aussie Apartment Permit Approvals Down 40%

Still in a two-speed economy down under. Australia Home-Building Permits Fall by Most in Almost a Decade

The number of permits granted to build or renovate houses and apartments slumped 17.3 percent from June, when they fell a revised 1 percent, the Bureau of Statistics said in Sydney today. That was the steepest slide since November 2002. Separate data on business spending showed mining investment rose by 10 percent last quarter, while manufacturing declined by 3.8 percent and other industries by 4 percent.

Today’s data “is a literal dog’s breakfast,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia.

Um, no. It's still figurative.

Permits to build private houses rose 1.6 percent to 7,329 in July from the previous month, the report showed. Approvals for apartments and renovations slumped 40.5 percent to 3,738.

Whoa. It's all in apartments. And despite calls for eliminating negative gearing, there hasn't been any news about official moves to do so.

The news gave a beating to the Australian Dollar.

oanda.com 90 day Australian Dollar to US Dollar

Sales of new homes in July fell to a near record. 

Sales fell 5.6 percent to 5,682 last month from June, when they gained 2.8 percent, the Housing Industry Association said Aug. 28, citing a survey of the nation’s largest builders. Detached house sales decreased 5.5 percent to the lowest level since 2000, while apartments weakened 6.4 percent, it showed.

Call to Eliminate Negative Gearing

Housing stimulus measure have a nasty habit of simply increasing the cost of housing. And then there is the issue of fairness. Why should one segment of the population subsidize others' real estate investments?

 Cut negative gearing to help poor: ACOSS

In a bid to combat soaring house prices, the Australian Council of Social Service (ACOSS) says the federal government needs to cut negative gearing, a tax break for mortgaged landlords.

"We do need the political parties to be having a stronger focus on what needs to be done to address poverty and inequality in Australia," ACOSS chief executive Cassandra Goldie told reporters on Monday.

The Hawke government scrapped negative gearing in the mid-1980s but the policy was reinstated after investors fled the housing market, leading to a shortfall in rental accommodation.

Now, that was an interesting outcome. Wouldn't the houses have shifted to owner occupied, reducing the demand for rentals? Was something else causing the crush? Possibly immigration?

From http://www.rba.gov.au/publications/bulletin/2007/sep/2.html

ACOSS makes a plea for the cost of housing to come down not so the homeless can buy houses, but so that service providers have a chance of assisting those in need to find shelter. Ironic that if houses become too much of the economy they become more out of reach.

If elimination of the policy isn't possible, perhaps allowing negative gearing only for areas in need? It is a subsidy after all (someone else is paying the skipped taxes). It can be policy directed.

Canadian Housing Even Less Affordable

Canada housing affordability drops in 2nd quarter

The cost of owning a home edged up 0.2 percentage points to 43.4 percent for a detached bungalow and by 0.6 percentage points to 49.4 percent for a two-story home, while the measure for condos was unchanged at 28.8 percent, the RBC Housing Affordability index showed.

Home ownership was least affordable in Vancouver, where the benchmark for detached bungalows rose 2.2 percentage points to 91.0 percent, followed by Toronto, where it rose 0.9 percentage points to 54.5 percent. Ottawa was unchanged at 41.9 percent, Montreal was down 1.0 percentage points to 40.4 percent, Calgary was unchanged at 36.7 percent, and Edmonton fell 0.1 percentage points to 32.4 percent.

This measure is a straight up percent of pretax income needed to cover homeownership costs. The top end recommendation for the U.S. is 35% and that is in a lower tax rate environment.

Wright said he expected the Bank of Canada to start raising interest rates early next year, assuming problems in Europe and the United States are addressed.

I don't know about that optimism but raising rates in 2013 puts the most number of borrowers at risk due to the boom of expiring mortgages from the rush to refinance in 2007.

Note that the scale is wildly wrong, but I don't have a fix for it. It's just an indicator of where the balloon of trouble is from the feeding frenzy when 35 and 40 year mortgages became insured. That old post on subprime mortgages in Canada can be found here

I expect Bank of Canada will hold off until most of these mortgages are renewed and out of danger.

China's Exports Hit Hard

The current climate is growing more difficult than the 2008 crisis. Profits slipped 5.4% year on year for July. China's export hub hit hard by global economic slowdown

In the first seven months of this year, profits for industrial firms fell 2.7 per cent from the same period last year to 2.68 trillion yuan. It is 0.5 percentage points more than the decrease for the first six months.

In the first seven months, state-owned and state- controlled industrial enterprises saw their profits fall 12.2 per cent from a year earlier to 784.7 billion yuan, (about $124 billion).

This is interesting. Non-state owned industrial, because of its long-term uncertain access to capital and influence, could be presumed to be operating more leanly.

But it has witnessed a rise in bankruptcies that is even "more serious" than the 2008-09 financial crisis, said Zhou Dewen, Chairman of the Wenzhou SME Development Association.

"We have about 3,000 members and more than 10 per cent have closed down and about 20 per cent are struggling," Zhou said.

These are SMEs. Larger companies are better able to adapt, based on the stats below:

According to a report released by the financial and economic committee of Zhejiang Provincial People's Congress, 140 out of 3,998 large enterprises in Wenzhou closed in the first half of the year while 57 percent of those large companies cut production.

Meanwhile Rate Swaps again hit a three month high. Reuters article. Those capitalists (just like in the rest of the world) just hanging on the government's every currency and liquidity move.

China's piles of unsold goods

All the makings of an overshoot. China Confronts Mounting Piles of Unsold Goods

But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”

Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.

Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

And municipalities are eager to limit registrations in a desperate attempt to cut traffic and pollution.

Chinese Manufacturing Slows Even More in August

Manufacturing in China Slows Further Preliminary reading falls to 47.8 from 49.3 last month. Anything under 50 demonstrates contraction. With the SME liquidity issues, this is not a surprise.

Many analysts had expected the August reading to stabilize, or even edge up slightly. Yao Wei, a China economist at Société Générale in Hong Kong, described the result as “just awful” in a research note.

I have no idea what made them think the number would go up. The government has signaled repeatedly that they will not stimulate enough to cause more bubbling in the economy. We're still in bubble stage now, so there is only softening the landing.

New export orders, which are also captured in the monthly survey, sagged sharply as the crisis in Europe ate into export demand, indicating that Chinese exports are likely to languish for some time. Exports edged up just 1 percent in July compared to a year earlier, official data released earlier this month showed. Further cause for concern, Mr. Qu noted, was that domestic demand, also failed to show a meaningful improvement in August.

Gravity is making itself felt on property prices worldwide

Gravity has taken hold of property markets around the world. And this is still under the effects of unusually low interest rates.

Searching for Solid Ground

AFTER years of dizzying ascents, a big dose of gravity has hit residential-property markets around the world. According to The Economist’s latest round-up, year-on-year prices are now falling in 12 of the 21 countries we track; in five of the other nine, prices are rising at a slower rate than they were a year ago.

The standouts on overvalued:
Hong Kong 64%
Canada 54%
New Zealand 44%
Belgium 55%
Singapore 58%
France 43%
Australia 36%

Even places like Sweden and Netherlands at 25% overvalued have some pain coming before they reach ground level. And Spain still has nearly that far to go despite already falling 22%.

Bank of Canada Speech on Debt and Risk

A summary of the speech is here: The BoC’s Coté On Risk & Household Debt

If interest rates were to rise to 4.25% by mid-2015, then: the share of highly indebted households would rise from slightly above 6% in 2011 to roughly 10% by 2016 the proportion of debt held by these households would rise from 11.5% to about 20% over the same period.

Something to note on this chart. In the late nineties during the dot com era, far more credit growth was directed at business than households. The lines swap just as the housing bubble gets going in Canada, which is around 2002. Same thing back in the eighties. They were a time of heavy investment in business.

Economies make a choice, as directed by policymakers creating incentives, to either borrow from the future for industry to make things better and cheaper, or for larger houses with more granite and imported tile. Or in the case of Toronto, a spare 10-20,000 shoeboxes in the sky.

Delving into REIV's reported median price rise

Median quarterly prices are up 26% in Balwyn. Or are they?

How to separate facts from fluff about Melbourne’s property market: Mal James

The REIV’s June quarter median was based on 43 sales – fully 25% had no sale price recorded next to them. Not just undisclosed. But blank. Agents voluntarily provide this information. So the REIV had to ignore a full quarter of the June quarter’s transactions to come up with its median house price.

Why so many unrecorded prices? Well, in a weaker market like we’ve got now, agents and sellers become reluctant to record all sale prices for reasons of ego or business.

The way the REIV came up with that price was to take a statistical average of the two middle sales. One of those sales was $1.37 million (40 Jurang Street with Jellis Craig) and the other was $1.71 million (6 Eyre Street with Kay and Burton). That’s a huuuuge gap, a difference of nearly 25% – so some may say it’s a bit of a stretch to say Balwyn had a $1,540,000 median price based on those two sales.

What if one more of those mysterious Balwyn unrecorded price results had been recorded, and it was below $1,370,000? That would have made the “median” price in Balwyn to $1,370,000, and the median price “growth” would have dropped from 20% to 7%.

If another four or five of those undisclosed price sales had been in the lower half of the pool of results the median price results may well have been lower than the previous year’s median in Balwyn. In other words, what we may well have had is not an increase but a fall in price June quarter 2011 to June quarter 2012.

Developer hacking the mortgage rules

Colwood developer offers 'new kind of mortgage'

"The equity mortgage is the next revolution in homepurchase financing."

Homebuyers will need 10 per cent of the purchasing price, but League Financial will then loan them an additional 10 to 25 per cent in order to qualify for a 65 to 80 per cent conventional mortgage.

Shades of U.S.A. circa 2006. The developers aren't sacrificing anything. Nada. They set the price, you'll recall. All they have to do in this scenario is set the price higher by the amount of the "gift". And voila, the developer books a sale and someone else is on the hook for the risk. Although, not clear who in this case. Is the bank's nose plugged up enough to think this passes a sniff test?

Part of the reduction in risk reflected in a larger downpayment is not some magical higher equity number it is the risk exposure to the buyer's personal capital investment during the buying decision processes as well as a test of ability to save.

Gant said League's equity mortgage results in monthly payments up to 40 per cent lower than a CMHC-insured 25-year mortgage because no payment of interest or principle is required.

"Equity mortgage covers the majority of the downpayment, but ... there is no monthly payment for it," he said. "Relying solely on debt is old fashioned and just plain dangerous."

I can't come up with a response to this except to observe that satire is dead.

Hat tip: Patriotz commenting at vancouvercondo.info

Yuan weakness may preclude more easing

Here's a shift, the Yuan might soon be OVERvalued. According to this article, the market is pricing it in. China’s softening yuan could block rate cuts

Recent data showing that China is experiencing capital outflows as its economy slows could mean an important shift is taking place, he said, noting that the yuan’s long upward march against the dollar appears to have ended earlier this year.

China is already facing a battle to attract new investment.

Data released Thursday showed foreign direct investment of $7.6 billion in July, a drop of 8.7% from a year earlier.

“It now seems that the effort was also aimed at stopping investors from pulling money out of China, suggesting that the government is more concerned than it is letting on. Whether liberalization continues or capital controls reappear amid fears of a financial crisis is an open question,” said Chan.

Canadian National House Prices Down Year on Year

CREA Stats

Average sale prices in July were up from levels one year ago in about seven of every 10 local markets, but declining sales activity in Greater Vancouver continues to impact the national average price. The actual (not seasonally adjusted) national average price for homes sold in July 2012 was $353,147, down two per cent from the same month last year. Excluding Greater Vancouver from the national average price calculation yields a year-over-year increase of 1.1 per cent.

Nationally, listings are down and sales are up. The market is bifurcating with Vancouver and Lower Mainland and Montreal (and PE) on one side and everyone else on the other.

I added the 2011 inflation rate to show the real gains.

There's been a lot of squawking in the newspaper comments about use of averages (now that averages are falling so fast, not anytime before then). The national HPI and the average are pretty related as you can see in this graph. The underlying data are skewed so of course the average runs higher, until a decline is being signaled, and then it undershoots, implying that high end sales suffer first and hardest.