What Markets are Above Fair Value? DB Report

A chart from Alan Ruskin at Deutsche Bank showing the countries that having housing markets that still have not adjusted to fair value by the usual measures of price to income and price to rent ratios.

For the text record the worst remaining un-busted housing markets are:
Belgium
Canada and Norway in a close tie for second
France Australia vying for fourth
NZ and Netherlands
UK
Spain
Finland (overvalued strictly on Price to rent)
Denmark
Italy (overvalued mostly on Price to income)

Of housing booms and busts

The problem for the likes of Spain, the UK, Denmark and NZ, is that even after the adjustment, these markets are still substantially overvalued at least by these widely used metrics. The Spanish data would tend to point to an adjustment in these ratios by a further 25% before fair value is reached – presumably mostly through house price adjustments. This is before any overshooting, related to constrained policy, is considered.

The only thing that could save the Spanish banks at this point given the extreme pain from the small correction so far is polar melt causing the gulf stream to shut off precipitating a mass migration. (How's that for a doomer angle on it?)

Hat tip: VREAA

Moody's worries Canada's tightening is too late

Moody's warns on mortgage debt

The federal government’s attempt to cool the housing market “may have come too late” to prevent a harsh landing for residential real estate, Moody’s Investors Service is warning.

Given that the numbers are roughly equivalent to the U.S. before the crash there, I'd say that's a safe call.

“The government’s moves may have come too late, owing to the buildup in consumer debt that has already occurred,” Moody’s said in a research note Monday. “Canadian consumers’ reliance on low interest rates to support high debt loads remains a risk.”

But, but, it's all about the monthly payment, right?

“Previous rule changes had some effect in countering the stimulus provided by historically low interest rates but failed to stop Canadian household leverage from increasing,” Moody’s analysts William Burn and Andriy Stepanyants said in the report.

“Low interest rates are actually creating a domestic imbalance in terms of excessive household debt,” Toronto-Dominion Bank chief economist Craig Alexander said. “Ultimately you’re going to have to ween households off the drug of low interest rates.”

Debt is a drug. Cheap debt is meth.

For all the whining in the mortgage industry about the proposed changes, you'd think the rules were getting tighter than normal, rather than still being set at a paltry emergency interest rates and minimum down payments. Goes to show how recency makes people forget history.

China softening property restrictions in areas not horribly overvalued

The FT reports that the government is making some small changes to the blunt instrument restrictions they put on the property market. Some areas, they point out, are not as crazy overvalued, but are caught up in the restrictions. China moves to lift property market

Aware of the dangers, the central government has started to loosen its reins ever so slightly. It has encouraged banks to offer discounts on mortgages to first-time home buyers and has prodded developers to increase construction of cheaper homes.

"Prodded"? The central government has been commanding developers to build affordable housing, and the numbers on units they break ground on is questionable. There is no funding to build the units and developers accustomed to juicy margins have not been receptive to charity work.

In China, economists see a house prices-to-income ratio of about 7 as reasonable, as was historically the case in fast-developing Asian economies. The norm in rich countries is closer to 4. Ms Yao of Dragonomics says the good news is that the nationwide market is fast approaching the preferred level as housing prices edge down while wages climb. The price-to-income ratio for houses peaked at 8.1 in 2009, but fell to 7.4 last year and will decline further this year, according to the Shanghai E-House real estate research institute.

7 was the ratio before 100 million rural dwellers moved urban and another 240 million were expected to migrate. That means new housing needs to be for the median salary, not the top 2%.

The bad news is that the price-to-income ratios in China’s leading cities are still extremely high: 12.4 in Shanghai, 11.6 in Beijing and 15.6 in Shenzhen.

Restrictions on buying a second home have shrunk demand. Well, that certainly implies that the top few percent drove the market up buying in bulk and prices will not find a landing until the ratio is much lower. Maybe not the 2.75 to 3.5 in the Western world, but given the shift in population, lower than 7.

Vancouver market was in trouble before the rule changes

The rule changes (and Europe, for some odd reason, not China) have been getting the pre-emptive narrative blame for what is going to be a painful crash in the Canadian housing market.

But for the record, Vancouver's market has turned well into bearish mode already. Nails meet coffin.

VHB on Vancouvercondo.info via Vancouverpeak.com provides these running statistics.

For June 2012:
Sell-list so far 44.1%
Projected month-end sell-list 44.3%
MONTHS OF INVENTORY
Inventory as of June 21, 2012 19346
Current MoI at this sales pace 7.98

Anything over 6.5 months is contractive to pricing. Now solid buyer's market.

How serious is a sell-list ratio of 44%?
Here's the last ten years of Junes:
year sell list sell/list
2002 2689 3850 69.8%
2003 3525 4301 82.0%
2004 3501 5594 62.6%
2005 4333 4742 91.4%
2006 3951 5460 72.4%
2007 4244 5533 76.7%
2008 2425 6546 37.0%
2009 4259 5372 79.3%
2010 2972 5544 53.6%
2011 3262 5793 56.3%
Mean 3516 5274 66.7%
median 3513 5496.5 72.4%

The only worse year for an imbalance in supply and demand: 2008. This is not a balanced market, it is a teetering one  And the kicker: Inventory has been building all year and with the rule changes is poised to make 2008 look like a cake-walk.

Let's be careful out there, people.

Thanks to b5baxter for keeping the inventory graph updated.

Australia's households vanish

If you use the U.S. experience as a model, households can easily compress down much farther. Two things are temporary: equity and household size. Debt is forever.

Vanishing Households Undercut Claim Of Australian Home Shortage

The Pacific nation had 7.8 million households, data released yesterday from the 2011 Census showed. That compared with estimates of 8.7 million as of June 2010, according to the latest figures used by the National Housing Supply Council, a group created by the government in May 2008 to monitor housing demand, supply and affordability. Australia’s population also grew by 300,000 less than previously estimated, to 21.5 million.

Australia faces a shortage of about 369,000 homes by 2016, under a medium household growth scenario, which assumes the nation will have 9.7 million households by that time, the council said in a report released last week. While home prices across Australia’s eight state capitals fell for a fifth consecutive quarter in the three months through March, the longest stretch of losses on record, the Council has maintained that the gap between supply and underlying demand has widened.

Water usage rates suggest Melbourne is awash with unlisted vacant properties

Soos says the homes his report found are not identified by REIV's rental vacancy rate and says the listing of these homes on the rental market would alleviate rental problems in the city. He says 5.9% of homes he looked at were vacant and says the bulk of these are speculative homes, which rely on capital gains rather than rental incomes.

New limits on CMHC backed mortgages July 9

I had a feeling given the watering down of new OSFI rules that Flaherty would be forced to take some other action to limit growth in mortgage debt. And he's smart enough to make the timeline short so as to not goose the market too much in anticipation of the punchbowl getting yanked. (As noted on other blog comments, will this juice listings more than sales? Possibly. Depends on where we are in the in the general perception of a bubble. We might be about to find out where we are.)

Max borrowing against the home 80% down from 85%
(I presume this is under a re-finance, not HELOC, which is covered under OSFI at 65%)
maximum gross debt service ratio to be 39%
maximum total debt service ratio 44%
CMHC cap of $1 million
Max CHMC insured amortization of 25 years

Annoying the articles like this one credit Flaherty for his rounds of tightening without pointing out he was the one to loosen them in the first place.

Financial Post coverage

The reduction to a 25-year from 30-year period is equivalent to about a 0.9 ppt mortgage rate increase (assuming a 3.3% 5-year fixed rate and a $290k mortgage after 20% down on an average-priced $363k home). Notably, the impact is bigger than the switch from 35- to 30-year mortgages, which at current mortgage rates, would be equivalent to about 0.6 ppts of tightening. It’s also important to keep in mind that the amortization change won’t impact affordability across the entire market, but rather those that would be taking a 30-year amortization—according to the Canadian Association of Accredited Mortgage Professionals, that made up 40% of mortgages for purchase during 2011/12 (up to May).

Just out of curiosity. Why didn't they take action before household debt levels reached crisis point (as defined by where the U.S. crashed). It's not like they couldn't have known. And it's not like they didn't have 5-6 years of warning.

New Housing Starts (Dwelling Commencements) in Australia Down 25%

New dwelling commencements are down 25% year on year and 13% quarter on quarter. More alarming for the renter class, new private sector residential is down 38% year on year and 22% quarter on quarter.


Chart from ABS

Will some housing areas be protected in a decline?

The short answer is yes. The long answer is: it depends on what you mean by "protected". In LA, California, there is an area called Manhattan Beach. It is a very desirable neighborhood. As a result, there is slightly more pent-up demand for houses there than in many other areas of LA. Declines in prices are seen as an opportunity to move in, therefore it attracts imported wealth from other parts of LA.

So, let's take a look at the two markets. Here is a random house in LA on zillow  The house value isn't important (apparently I clicked on a flipper special, i.e. the $ signs marking sales. Odds are I was going to). What we care about are the other two lines. LA as a whole peaks at 605k and troughs at say 365k. That's a 40% decline.

 
 Meanwhile on the second graph of Manhattan Beach. Peak to trough it went from 1.5 million to 1.1 million. That's only a 28% decline.


So, yes, desirable areas will do a bit better. For some measure of "better."

About that 15% Drop TD warned about

The TD prediction that prices will fall 15% (or more) has really made the rounds. It's like they found the right price decline point to get attention. Telling people it's overvalued by 35% is too scary to pass along in the media. Vancouver home prices to drop 15 per cent in two to three years: TD Bank

"Some observers might point to the recent data in Vancouver as evidence that housing activity is going through a long-awaited correction. But the jury remains out. As we've pointed out, despite the recent pull-back in sales, the market remains in balanced territory and underlying prices are continuing to expand," wrote TD economists Derek Burleton and Leslie Preston.

I don't know what an "underlying price" is. But I'm just tossing this up here as an example. Funny thing about housing declines. The general masses don't notice/acknowledge/believe in the decline for 12 to 18 months. That shift in mentality, once in place, really makes the correction take hold.

Let's look back at the U.S. correction. That was a burst bubble, right? Everyone agrees with that, I expect.

Case Shiller Peak to Current Prices

The graph above shows the peak index (April 2006) to present (plus a little before the peak). Bottom line shows percent decline from peak. Let's zoom in on the 2 years after the peak.

Case Shiller Peak to 2 years from peak  

The percent decline lines begin at the start of the bubble bursting. You might notice something interesting. The bursting bubble doesn't hit 5% decline until July 2007, a full 15 months after the bubble "burst". It didn't hit the dreaded 15% TD is warning about until January 2008, 21 months after the bubble "burst".

While I think it is disingenuous to claim one can't see bubbles before they burst (as if reversion to the mean isn't something that always happens with asset prices and one can certainly, especially in the modern age, pull of a long-term chart to see what the long-term mean is supposed to be, and without too much effort figure out what kind of correction is required to get there) I do agree that one can't tell that it was a burst until it happens, rather than a slow decline. The difference between the two is where the feedback loops come in (rising unemployment in the FIRE economy, buyer attitudes growing grimmer, possible credit crunches).

Sure, you can't say when and for certain that the decline will set in with a vengeance, but on the other hand if you were a new homeowner in the U.S. and it was February 2007 would you be feeling great about that non-existent bubble? If you were Kristin Annable, you probably would be feeling pretty good.

A Most people won’t be affected at all because they are living in their homes with no intention to sell, so they don’t care. It’ll alarm people, but unless you have to sell your house in the next six months it won’t matter. Also, it is self-correcting. People … who have been waiting five years to buy their first home and couldn’t afford to are now thinking, this is the time to jump in. Then that drives the prices back up.

Ah, I needed a good laugh. It's called the "bull trap". It even has a name. And, by the way, everyone in the U.S. who said this didn't think that after the fact. People hate being trapped. Being trapped in your own house, unable to take that better job across the country, not the greatest way to live.

Q This report says Toronto will not see a bubble, just a correction – what does that mean to you? A I hate the word bubble. Other than in retrospect, you won’t know there was a bubble until it already popped. Some people say that Vancouver was a bubble. But, what does that even mean? It has no definition, it is like diagnosing a disease with no treatment. Really all that matters is what happens in the next year.

If you hate the word bubble now, you are one sad camper. And who is this young lady? And I say young because she clearly wasn't around for the crash in 1990. "KRISTIN ANNABLE I am currently an intern at the National Post from Centennial College. I have an educational background in journalism, history and global studies." Eh, I was going to note this one, but it isn't even worth it.

Pilot Lending Program in Wenzhou Falling Short

Worst of Chinese Slowdown Seen in Wenzhou as Stimulus Limited 

Jiang Xiangsong has 18 days to pay a 2 million yuan ($314,000) bank debt or his suitcase company in eastern China will go bankrupt. He's close to tears as he realizes his last hope, a government-backed office, won't help.

Wenzhou's more than 400,000 businesses make everything from shoes in dusty side streets to synthetic leather in dilapidated factories, much of it financed by unregulated lenders that spread during China's record 2009-10 credit boom. The decline of so-called shadow banking in the city, triggered by Wen's move to rein in a national property bubble, has left Wenzhou bearing the brunt of the country's economic slowdown.

I don't know about that particular cause and effect. The shadow lending bubble could have collapsed on its own. It is all mixed up with property, which was being liquidated to pay business debts.

"This is the worst year," he said as he waited for customers to buy sneakers from his half-empty shelves. "This place used to be packed with buyers from around the country, now it's full of unsold shoes."

On a recent morning, a single coach pulled out of Wenzhou's main long-haul bus station into an almost empty street. A few years ago, the road was a permanent traffic jam, clogged with buses and migrant workers arriving from other provinces, according to Liu, a taxi driver who like many people in China declined to give his full name.

All of this investment has been toward the goal of assimilating the Chinese peasant into the modern urban world. A reversal was not planned for.

Businesses are suffering because of weak demand, higher raw material costs and rising wages, as well as the breakdown in the system of unregulated money lenders who fund much of China's enterprise, said Zhou Dewen, head of the Wenzhou Small- and Medium-size Enterprise Association.

"Wenzhou's private lending system was built on trust, and now that trust is gone," said Zhou. He estimates there is about 1 trillion yuan of idle private capital in the city because "nobody is willing to lend to others."

Suitcase exporter Jiang, 45, said that before last year he would have had no problem raising the 2 million yuan he needs with a few phone calls to friends and fellow businessmen. Now, nobody answers the phone. Last week, Jiang's landlord refused to give him more time to make a payment on the 200,000 yuan rent for his factory because the landlord himself is short of cash after closing down his apparel business.

"Everyone around me is struggling," said Jiang, whose company's sales have dropped 60 percent this year.

Waiting to get into the market?

Waiting to get into the market can be a frustrating adventure. You weathered the mass hysteria and now everyone who thought you were an idiot is avoiding you at parties because they are afraid you are going to say "I told you so." (Believe me, many will claim they also saw it all along. Get used to it.)

Buying is 99.9% about emotion. Bolster that .1% of logic to make it as strong as possible. You are your own worst enemy.

When housing prices fall the economy enters a deflationary period. This is not a condition you are used to. Interest rates remain rock bottom, but cash is king. How much sense does that make?

Decide on your entry point. This will bring sanity back to your life. To pick an entry point, first decide what kind of recovery you think the market is going to have.

• Given global economic conditions and long-term emergency interest rates which can barely get lower, do you think government stimulus is going to bring housing back all at once? How likely are additional round of first time buyer stimulus checks that juice the market just a little longer?
• Do demographics increase demand ongoing or decrease it? (Will a large influx of young buyers will appear relative to retirees?)
• Is the immigrant policy going to change? (Note: most immigrants are poorer than the average Canada-born citizen, Rich home buyers get all the press, but they are not the norm.)
• What do you expect Canadian five year bond rates will do? (This determines how much total mortgage debt is allowed to grow. No growth == price declines no matter what else is happening. Low rates means credit will not be weighing on prices.)

If you expect a V shaped recovery, then you need to be ready to jump. Get your financial house in order so you qualify for the best mortgage possible. If not, you can take your time and shop relaxed and save save save. The U.S. market is six years ahead of Canada and makes for a possible price model. (A pretty good one, I think, but this is your call.)

Familiarize yourself with past bubbles as fortification for your emotions. Here is a classic asset bubble price chart, along with the dominant emotion in the market.

Here is a link to an interactive chart of some major bubbles since 1976: http://www.macrotrends.org/1311/asset-bubbles-since-1976 You may feel alone, but you are just the latest participant in a centuries old grand tradition of economic cycles. Nothing has changed, and barring some significant wisdom on the part of policymakers, it never will. So cheer up. This is just the way it is. Those who ignore history, etc etc...

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Things to consider when choosing a property in a down market:

Do not buy from someone who bought near the top. They didn't have any money for maintenance. Keep an eye on past sale dates before you fall in love. Hidden damage from poor maintenance will cost you more than a lower price.

You will have your choice of properties, but don't buy in the middle of quality if this is your first home. Spend more for something in great shape with no overwhelming maintenance issues, or spend low for something in need of repairs where you have lots of cash left to make them. Don't buy in between. It's the worst of both worlds. If you are thinking of the house as a canvas for expressing yourself, no reason to pay the premium for quality you are going to rip out. Contrarily, if you are buying because your family is expanding and you will not have time or energy, spend the extra up front for something you can neglect for a decade.

First home buyers who plan to move up. PLAN TO MOVE UP. Don't buy everything you would ever want in a house in your first house. It will break you. Like your first car as a teen, buy a house that is cheap to repair (simple rooflines, well landscaped for drainage) rather than one that makes you feel good about yourself. This is shelter, first and foremost. You can still overspend in a down market by moving upmarket because you keep thinking you can get so much more for just a bit more money. Don't get stupid now of all times after you were so smart earlier.

If you may be exiting the property while the Boomers are still buying, buy a retiree friendly house. This submarket will do better over the medium-long term. That would be a house that can be lived in strictly on the ground floor. Wide hallways and bathrooms that a walker can navigate. And a host of other features you will want to research before purchasing. If you must buy before you feel it's the bottom, buying in this segment will help the house hold value.

Other thoughts

Once automatic annual gains are gone, you should switch to a mode of preserving capital. Until prices absolutely bottom, real estate will not even function as a hedge against inflation. Do the calculations for your situation. Rent vs. Buy calculator (under revision at the mo) or this one in the interim. Remember as you examine all the scenarios that you are preserving wealth by exchanging renting property for renting money. Always remember you are leveraging when you buy. Something you almost never do and as a result do not instinctively take account of the outsized downsides. (A 100% price gain is wiped out by a 50% price decline without leverage. A 20% downpayment is wiped to zero by a 17% decline with leverage.)

Your downpayment is not the price of admission. Its loss has real impact as missed investment capital. Imagine you hate the house you are thinking of buying and calculate this purchase to death before pulling the trigger. If prices fall another 15%, where will you be financially vs. where you would have been without buying.

Put less down and keep some cash for emergencies. At least 10k. Houses can bite you overnight. Do not become cash poor just because you bought a house. It will not increase your quality of life.

How skewed are BC's housing prices?

Some quick stats to demonstrate the scale of the precipice in British Columbia, Canada.

GDP of Canada 1.6 trillion
GDP of BC 190 billion
BC produces 12% of Canada's economic output

Total residential housing valuations of Canada 3.5 Trillion
Total residential housing valuations of BC 1 Trillion
BC holds 29% of Canada's housing valuation

How does it do it? It imports wealth and households are in greater debt than their peers. But mostly the first. From where: 1) the rest of Canada, but inter-provincial immigration has reversed as of Q3 2011, 2) China, India dominated the family and skilled worker classifications (according to 2007 BC stats for Vancouver).

Here's your take home question. Which two BRIC countries are suffering the most right now?

BC is a lot like Hong Kong in that flow of funds will make or break prices.

G&M Debate on the Existence of a Canadian Bubble

Part 3 of a multipart debate in the Globe and Mail. Mandani knows his stuff. Where are Canadian real estate prices heading?

Many housing experts thought that U.S. house prices at the peak would keep rising because of strong demand and housing shortages. Many experts also dismissed what traditional price-to-income and price-to-rent ratios were warning them.

One important lesson from the U.S. experience was that the strong demand caused by changes in household formation created "perceived" housing shortages. These perceived shortages (or pent up demand) eventually led to excessive new home building and speculation in existing housing markets, pushing house prices too high. But now that the bubble has burst, the housing shortage problem has vanished.

The above should be printed in giant flashing letters. The speculative bubble creates the very conditions that make the speculative bubble seem rational. But those conditions are just as ephemeral as the equity they are artificially boosting.

CMHC has artificially boosted household formation rates, reflected by the decade-long upswing in Canada's home ownership rate, to almost 70 per cent from roughly 63 per cent over 10 years ago. This is a big change over such a short period of time.

And it can revert even faster.

It will end whenever buyers perceive that prices are no longer going up. Hence bubbles carry the seeds of their own destruction.

This. TD's prediction of a 15% fall ("at least 15%") seems wildly optimistic. Once the "get in now or be priced out forever" is shown to be the lie that it is, why would anyone overextend rather than wait?

Then Helmut follows up with one of the classic: We're running out of land!

Research shows that markets with a restricted land supply experience larger swings in prices when demand changes, since the supply curve is relatively inelastic. The boom/bust cycle in markets associated with more land restrictions is largely due to these fundamentals not to speculation.

Helmut, seriously, there has been a shortage of condos in Toronto and Vancouver? No, there have been a lot of underutilized condos stacked like poker chips at the table. Mandani has it right. Look at China. 64 million empty apartments later and the price STILL wouldn't have fallen if the government hadn't put restrictions on purchases. Oversupply does not slow price growth if credit is ballooning. Why does the U.S. have 7-11 million empty houses, post-bubble, if supply was constrained during the bubble? This is such a dead argument, but it always gets hauled out by the pave-the-earth crowd.

High turnover in existing housing markets is not sufficient evidence of speculation, unless turnover is defined as short-term buy and sell transactions, rather than the buy and hold transactions of most home purchasers.

The mantras of "buy now or be priced out forever" "get on the property ladder so you can leverage up" imply buy and hold with a strong speculative component. Do you have *anything* new to say, Helmut? This is the same beaten-to-death stuff that was just disproven in the U.S.

Prices can be high because of economic and market fundamentals. Market excesses can develop and occur under certain conditions.

Yadda yadda, paradigm shift (yawn). Yes, and when those "certain conditions" end? What then? That *is* the bear argument point, which you avoid taking your logical conclusion out to. "Certain conditions" are temporary. By the way, any specifics that actually apply or just macro-speak? [glancing down] Nope.

Conservative practices by mortgage lenders, tighter mortgage insurance conditions, and more regulatory oversight since the last recession mean tighter, not easier credit.

Ah, this is different, at least. We have a lot of anecdotal evidence otherwise, but nothing more. Because CMHCs books are not open. Open CMHCs books (hey, the public owns them, right?) then you can toss out assertions like this in the face of 70% ownership rates in Vancouver living cheek to jowl with prices that require the average household to spend 90% of their pre-tax money on a mortgage.

Toronto’s apartment condominium market is undergoing high levels of new investment and overbuilding could occur. If so, it is likely to be limited to that sector and have little or no effect on other markets.

"It's contained." You hauled that one out? Oh, dude, so noted.

The next housing recession will occur with the next economic recession and not because the price-income ratio is high. The trigger for every post-war housing recession in Canada has been external to housing and the next time will be no different.

This would explain why the bull analysts in Canada already blaming Europe for the downturn. Okay, let's step through this: If prices are in line with fundamentals, why are they so fragile? In a downturn, there is a flight to safety. If houses are so overwhelmingly safe, and prices are not in excess of fundamentals (based on some new paradigm) why would they fall at all in the face of a recession? You can't have it both ways.

Truth is, houses do have a real value, it's based on rents. In the U.S. we've watched house prices grind downward to the point at which a landlord will scoop them up for a 5-6% cap rate. Those buyers materialize no matter the environment (even with bank lending frozen). In a downturn where a bank account pays 0.1% interest, rentals make great investments. Trouble is, you are trying to claim that there is a new "fundamental" that is not based on economic return but on leverage of a misinformed, emotionally manipulated consumer. That's why the price is fragile. That's why its in a bubble. That's why a recession will change the price. If a recession is capable of changing the price (as you yourself stated) then you are acknowledging the existence of a cycle and acknowledging that prices are above true economic fundamentals. You just can't bear the word "bubble," but you just admitted it existed. Why you bothered, I don't know. All of that macro hot air, and your conclusion is: "well, sure, prices will fall, when there is an external shock to the system that forces prices back to true fundamentals." Right. Can't disagree with that.

Btw, that's not the only way it can happen, you can also tighten lending, cutting off the market's access to untapped greater fools. But keep blaming Europe if it makes you feel better.

Australia's real net disposable income on the decline

Look, it's 2008 all over again I wonder what house prices will do?

If Australia's numbers look so good, why doesn't the economy feel good? Here's why. Australia's Hidden Economic Indicator

If you look at the chart below, you'll see that real net disposable income surged in 2010 on the back of China's stimulus. During this time RBA Governor Glenn Stevens raised interest rates consecutively despite complaints of a struggling economy.

Now the situation has reversed. During the March quarter, seasonally adjusted real net national disposable income was flat...as in zero growth. The terms of trade fell 4.8% in the March quarter. That's why Stevens has cut interest rates.

So while the headline number shows the Australian economy humming along, this hidden measure tells you the real story of what's going on. And that is a story of a sharply slowing economy driven by a credit bust in China.

Given the market's neutral to negative reaction to China's finally dropping interest rates, things don't look to be improving soon for Australia.

Toronto's Condo Bubble in Seminar

325 project on the market
173 additional towers under construction
15 years of relentlessly rising prices

Toronto braces for a deflating condo bubble

Industry stakeholders stress that the potential for a crash is slight, and most of the talk at the Queen's University seminar was about the strengths of the market. But as construction cranes swiveled outside the windows, the discussion repeatedly circled round to the danger signals that have become impossible to ignore, similar to pilots explaining why they are packing parachutes to take onboard.

Who are you gonna believe . . . me or your lyin' eyes? Wait, is this parachute packed properly?

The developers talked about tighter financing and affordability. The real estate agent wondered about a growing gap between new condos and the resale market. The bankruptcy specialist worried about high supply and few players. The salesman talked about skittish investors and bad press. While it sounds like Canada may be importing the 2008 housing bubble from its neighbors to the south, nearly everyone in the industry argues that Canada is different.

The U.S. is more different from Spain and Ireland than Canada is from the U.S. Did that help? No. Overpaying is overpaying. Loaning in excess to the underlying economic value of a property is a bad idea no matter the structure of the regulations and the culture.

Toronto, with an area population of 5.8 million, accepts about 100,000 new immigrants every year. The bulk of them are from countries where dense urban living is common, and a hard-to-determine number of foreign buyers are helping to prop up the market.

The average immigrant is making 60% of what a native born is making. (source). The median household income in Toronto is $78,000 (source). Assuming the same rate of multiple income households (which would be a generous assumption given cultural differences) then the immigrant household median is $42,000.
Assuming a high downpayment of $20,000 the TD mortgage calculator says the median immigrant household can afford $150,000. Based on the TREB May 2012 stats, there were 18 condo apartments sold under 100k and 272 sold between 100 and 200k. Given the skew is upward (700+ were sold in the next two ranges) we'll say 1/3 of those were under 150k. That means that in the month of May, 100 or so condos were sold in a range affordable to new immigrants.

This is your great salvation? Selling 100 condos a month to new immigrants? This is the biggest delusion running right now in the industry.

Mortgage rates that start at 2.4 percent and don't rise beyond 6.75 percent have boosted affordability, especially compared with pricier single-family homes. The average condo price is C$368,000 (US$378,000) less than half the C$821,000 (US$844,000) it costs to buy a house.

See, again. Just because they look cheap in comparison, they aren't affordable. Not even to the median Canadian-born household in Toronto.

Canderel is focused on inner Toronto and has no plans to change. "I think we will continue to focus on downtown, because when things do change, they probably will fall from the outside in. In our opinion ... the margins will still be ... downtown," Rogowski said.

Does this guy actually look at the stats? The core is degrading the fastest. The others fared better, finally eeking out new highs. This could be a peak market sales mix shift, where demand, locked out of the high end, finds a substitute. Could be timing on projects. Could just be the bubble goes on.

Drost says a huge pipeline of supply is one concern, but believes the big players will weather a cooling in the market. "I think it will slow down but I don't know if we're going to see a lot of failures, frankly," he said, noting he has lived through several corrections and knows the signs. "I think probably the ones you will see or hear about are smaller developers who haven't managed their marketing well, that have maybe cut corners where they shouldn't have, and have not really matched up the project to the target market."

Noted.

Wild West Wenzhou Part II

There are things the Chinese have not seen in this lifetime. They've never seen real estate prices fall (mortgages were only allowed in the late nineties) and they have apparently never seen a pyramid scheme. I wonder where Guo Chuanzhi landed? Was he already a naked executive? (meaning has he already sent his family overseas). E-commerce boss stole US$158m, then vanished

The victims said they paid a lot of money in hopes of high returns. The site charges a commission fee for each transaction but does not ask for proof that goods were sold. An agent surnamed Ye, who paid more than 60,000 yuan in the past three months, said it appeared profitable as every 575 yuan paid, including commission, could earn 365 yuan a year in return. She said that agents also could earn money by recruiting other agents.

1 billion yuan or $158 Million is a pretty good take in a country averaging $4000 income a year.

The Wild West of Wenzhou (Update)

Update: They have arrested this guy

Lin and his six partners were captured in Zhuhai, a city in southern Guangdong Province, on June 9, more than two weeks after he disappeared.

Since he is not a cause celeb, I doubt there will be a stay of execution this time.

---

Back in March there was this amusing story:

Wenzhou businessman's bank acquisition a fraud

Lin Chunping, a member of the Wenzhou Municipal Committee of the Chinese People's Political Consultative Conference (CPPCC), made headlines last month when he said in a report that he successfully acquired a failing U.S. bank in Delaware.

Lin did not provide the name of the bank in the initial report. After rising to fame for having supposedly broken ground in becoming the first Chinese national to own an American bank, he was asked to provide details about the acquisition.

"Under the pressure of the public opinion, I have to release the name of the U.S. bank that I negotiated with: Atlantic Banking Corporation. I could be fined of a large amount of money due to the leaking of secret," Lin wrote on his micro-blog.

Wait, what? He then said that he had changed the name of the bank to USA New HSBC Federation Consortium Inc. I love that name. It's such a beautiful intersection of bluster, pretentious false legitimacy, and copyright ripoff all rolled into one.

Short version of the story, someone actually goes and checks the records, conveniently online and realizes he's making all this up. This brings up questions as to the mentality here. Does he not realize records are public? Does he expect his bluster will keep anyone from checking?

Well, Mr. Lin is back in the news and has disappeared.

Wenzhou investor wanted by police in possible tax scam

"Police have confirmed that Lin has fled the city," said Zhang Xunting, deputy director of the information office of the city government of Wenzhou, Zhejiang province. Local police believe the 42-year-old Lin was involved in requesting several companies under his control to illegally issue value-added tax invoices to cheat tax authorities of export tariff rebates, according to Xinhua News Agency.

Lin's case may deal a new blow to Wenzhou's small businesses, which have already been trapped by the aftermath of the financial crisis and the meltdown of the city's once prevalent shadow lending.

"What Lin had done has brought down the reputation of businesspeople in the city," said Zhou Dewen, chairman of the Wenzhou Small and Medium-sized Enterprises Development Association.

Giving business bluster a bad name.

Worldwide Housing Price Roundup

Global house price downturn accelerates: Q1 2012

During the latest quarter the downturn appears to have accelerated, with house price falls in 26 countries, and house price gains in only 10. In nominal terms only 16 countries experienced house price falls during the year, while 20 countries recorded house price rises. But the Global Property Guide's statistical presentation uses price changes after inflation, giving a more realistic picture than the more upbeat nominal figures usually preferred by real estate agents.

Europe is deteriorating faster. (There's a surprise.)
The correction continues to maul inhabitants of one of the most absurd bubbles: Ireland is down 19% year on year after falling 13% the year before. That's what massive oversupply will do to a market on the downside. On the upside all those houses are just more poker chips for the table. The extra houses do nothing to stem the bubble being blown because people are not buying out of a need for shelter. The sight of all the construction only seems to add to the frenzy.

There was also an alarming increase in momentum of house-price declines in Athens, Greece (-11.68%); in Warsaw, Poland (-10.94%); in Portugal (-10.45%); in Spain (-9%); in the Netherlands (-6.05%); and in the Slovak Republic (-5.89%). All saw bigger house-price declines this year than the previous year.

Netherlands was a bit of a sleeper in that the correction was long delayed. A big banking country that blew prices up 80% over from 96 to 2001, 111% in Amsterdam over that time. (source)
India-Delhi appears to have topped out, the rocket drifting on the wind way up high.

Charting Vancouver's Latest Numbers -- Wah?

I put the latest REBGV numbers into my spreadsheet, tidied up my graphs (which looked a bit droppish) and I was going to post them. Then I noticed something odd. My graphs showed a decline, year on year. REBGV showed an increase. Thinking that was something I should investigate before posting, I discovered that a whole series of numbers from the old releases (which were all changed when the HPI methodology was changed) appear to have different numbers for 2011 than I did (at least 2011, that's all I've checked so far). This is even stranger as my spreadsheet has all the right sales and listing numbers and all the numbers I enter in a row off the release, so hard to imagine getting all of some right and all of the others wrong.

Being a diligent person, I saved that old data and began pasting in anew, putting in the currently published data, which shows an increase year to year by having last year's numbers lower. Well, fine. Then I took a look at the older HPI releases (these are the ones you get to by going here). And those Benchmark numbers do not match the ones in the press releases which don't match the ones I entered previously. So, now I have three numbers. On the more recent releases, the HPI link and the news release link numbers do match.

Mass confusion. Cats and dogs living together. But, I think it all comes down to this, below.

These are snapshots from the stats packages. (Kindly provided by Mike Stewart, a Vancouver Realtor)

This is April 2012.
 

This is May 2012.


The benchmark price for all residential for Greater Vancouver in May is $625,100 and in April it was $683,800 which is a decline of $58,700 or 8.6%. What does the column say for 1 month Change %? A 6 tenths of a percent (0.6%) increase.

Same on the benchmark for Detached. I calculate a $97,300 or 9.1% plummet. The chart says it's 4 tenths of a percent (0.4%) increase.

So. I think I have to spend a bit more time with these numbers before I post any final graphs that alarming. Not that I don't think rising inventories and falling sales is going to knock the market down. I just can't see it knocking it quite like this.

Added: The difference in the Benchmark numbers and the % Changes probably has something to do with this:

BENCHMARK PRICE:

Estimated sale price of a benchmark property. Benchmarks represent a typical property within each market.

PRICE INDEX:

Index numbers estimate the percentage change in price on typical and constant quality properties over time. All figures are based on past sales.

In January 2005, the index = 100

"It's a long way down."

China's `Bubble' Is Starting to Break, Wolff Says Interview with Patrick Wolff, founder and chief executive officer of Grandmaster Capital Management

The thing that is really striking about China is that there is an extraordinary double standard in the world today. You know, what you have in China is a state dominated, really state controlled, economy. It's, you know, it's not really capitalism by any stretch; it's something different. And it's very striking to me that the same people who would probably be apoplectic at the idea of the US government tightening regulations even a little bit in some area--that I know you were talking about the Volker Rule earlier where obviously there is a lot of debate on that as their should be--but the same people who would be really really upset about that, somehow come to believe that the fact that China's government controls everything in China is a good thing. I don't think it's a good thing; I think it's a bad thing.

I think there have been years and years of debt-fueled mal-investment. And it's come to a head. And when it breaks, as it seems to be breaking now, it's a long way down.

Moody's: Australia has a significant fall yet to come

Australian houses 'overvalued' (The British English scare quotes are single quotes. How quaint.)

Moody's says that despite a 7% slide, Australian houses are still significantly overvalued. Any chart that goes back 30 years will tell you that. How about this one from the Economist:

Yes, that is a three fold increase from the very stable decade from 89 to 99.

The agency has warned it is considering cutting its credit rating on three of the leading Australian businesses that provide mortgage insurance.

. . .

Moody's is reviewing its "insurance financial strength ratings" on QBE Lenders' Mortgage Insurance, Westpac Lenders Mortgage Insurance and mortgage insurance run by Genworth Financial.