Not so Hot: Tracking "Hot Spots"

The Australians are especially property crazed, and the heavy sell of hot spots, areas that are promoted in the same glowing terms as penny stocks in a spam email are a feature of the landscape. Well, turns out they aren't always so hot. The 21 property hotspots that weren't

Melbourne was expected to do well with the five suburbs, Broadmeadows, Thornbury, St Kilda, Brunswick and Balaclava, all appearing. Broadmeadows house prices fell 9.2% and unit prices dropped 13.9%. In Thornbury, house prices fell 4.2% and units fell 2.9%. In St Kilda house prices fell 3.2% and unit prices fell 2.8%. Brunswick house prices fell 6.5% but unit prices rose 2.4%. And in Balaclava, house prices fell 9.8% and units increased 0.3%.

So from the 21 offerings, only Gladstone houses and Geraldton units withstood the current downtown. With double-digit growth, they stand, at the moment, above all other nominations.

Canadian Banks' Rating Hostage to Interest Rates

Because of mortgage insurance, this is not a capital risk, just an earnings risk. Canadian banks are already underperforming. Things that could trigger the actual downgrade, not just a warning: prolonged downturn in house prices, employment degradation or follow thru on the threat to raise interest rates, thereby putting debt servicing at risk. S&P warned that a race to the bottom for market share by the banks might also trigger a downgrade. Consumer Debt Eroding Canada Banks’ Edge as S&P Cuts Outlook

In addition to Royal Bank of Canada and Toronto-Dominion Bank, S&P cut to negative its outlook on Bank of Nova Scotia (BNS), National Bank of Canada (NA) and Laurentian Bank of Canada (LB), based in Montreal, Vancouver-based Central 1 Credit Union and Home Capital Group Inc. (HCG) of Toronto. It said it was affirming the credit outlooks for Canadian Imperial Bank of Commerce and Bank of Montreal (BMO), among other banks.

Debt of Canadian financial companies returned 0.5 percent in July, Bank of America data shows. Only Japanese banks, at 0.4 percent, returned less among the 35 countries’ lenders measured in the index, which averaged returns of 1.6 percent. Peru was the highest at 3.5 percent.

Carney has kept the central bank’s benchmark lending rate at 1 percent since September 2010, the longest period without a change since the 1950s. The ratio of household debt to disposable income reached about 154 percent in the first quarter, higher than the U.S. figure of 141 percent.

Consumer debt has increased to more than 90 percent of gross domestic product, from 70 percent over the past decade, S&P said.

S&P, which said it might lower the ratings on Royal Bank of Canada (RY) and Toronto-Dominion one level, said it “will continue to consider the impact of recent government and regulatory policy initiatives to curtail potential systemic risk arising from the housing sector as well as assess Canada’s relative performance vis-à-vis its global peers.” Royal Bank of Canada and Toronto-Dominion are rated AA- by S&P, the fourth-highest level.

Corporate Dollar Demand in China Weakening Yuan

As markets turn bearish on yuan, Beijing becomes the bull

Chinese commercial bank clients bought $3.5 billion more dollars from commercial banks than they sold in June, official data shows, compared to a monthly average surplus of $66 billion in the first five months of the year. "There has been a shift in clients' mentality. Companies are no longer so eager to trade in their dollars for renminbi," said a trader at a large Chinese bank in Shanghai.

Bottom Calling in Australia

ABS (Australia Bureau of Statistics) is the most trusted name in Australian property data, everyone else is selling their book. But Australian Property Monitors has a new release that has inspired the WSJ to make a bottom call.

June quarter house prices back RBA governor's view

Nationwide, house prices gained by 0.4 per cent for the three months to June, while prices for apartments fell 0.8 per cent, according to figures released by Australian Property Monitors yesterday.

He said most capital-city housing markets had bottomed out in the December quarter.

"This trend can be expected to continue in most capital-city markets over the second half of 2012, underpinned by the prospects of an active spring selling season signalled by recent improvements in auction clearance rates and recent interest rate cuts," he said.

In a speech on Tuesday, Mr Stevens said he did not anticipate a fall in house prices and fears of a US-style collapse were misplaced.

(here's the APM report from March) The most affordable mainland capital city in Australia is Brisbane at $427,933.

Let's put that in perspective by comparing GDP per capita (international dollars)
U.S.: $48,387
Canada: $40,541
Australia: $40,234
The relative national house prices are: (in U.S. dollars)
U.S.: $204k
Canada: $439k
Australia: $555k
GDP source (IMF numbers show much less of a gap than World Bank numbers, IMF are used here.)

Bad Loans in Wenzhou at Ten Year High

Non-Performing Loans in Wenzhou Surge to Ten Year High

The ratio more than doubled from 1.33 percent in January to 2.69 percent as of the end of June. Zhang Zhenyu – the official responsible for regulating Wenzhou banks – said commercial banks in the city are well positioned to absorb NPL ratios as high as 4 to 5 percent, according to Caixin Online. He also said only 0.5 percent of the NPL's or less than 1 billion yuan were expected to default.

The numbers seem low, overall, given other quotes that sour loans to SMEs are 30-40% of book. If one assumes the numbers are fabricated and then numbers can be reported as anything, then this seems like a strong signal from the banks to the powers that be that something has to change.

It's clear that investments are starting to go bad in the traditional banking sector in Zhejiang, and that could be ominous for the country's enormous shadow banking system, which comprises around 20 percent of all of renminbi-denominated loans in China. After all, shadow banks lend to much riskier borrowers who can't typically get loans from traditional banks.

. . . many of them appear to be no more than a leveraged play to arbitrage between official (low) interest rate and market driven (high) interest rate. With this type of business model, the music tends to stop when loan demand starts to weaken and their investments start to go bad. Their thin capital base can be wiped out fairly quickly when this happens.

On China's fudged data, Lying Libor Is Nothing Compared to China’s Fake GDP: Report

Annual gross domestic product came in at 7.6 percent in the second quarter, according to China’s government on July 13th. The report was better than investors expected, easing concern of a dramatic slowdown for the world’s second-biggest economy and sparking a bid in risk assets like stocks that has lasted for two weeks. But slowing imports and industrial production, as well as harder-to-fudge electricity usage data, points to much slower growth, according to McDonald and other investors. Barclays believes the number should have been more like 7.15 percent.

Add onto that recent reports of coal piling up at power plants because electricity demand is falling.

Noted: RBC Says Toronto Condos not a Bubble

Toronto Condominium Market Not In Bubble, Royal Bank Says

The country’s largest city needs more condos because legislation aimed at restricting urban sprawl has cut the supply of new single-family dwellings, according to a report by Royal Bank Senior Economist Robert Hogue. The record 44,100 condos and apartments that the government’s housing agency said were under construction in May compares with the 38,000 new households being formed in the city each year, Hogue said.

How many of these households want to start a family, and how many 3 bedroom condos are there to accommodate them? Kind of a mismatch there, eh?

Clearly families should just buckle down, cut costs and buy two. That'd only be a $million. Totally affordable.

“The strong presence of investors in the condo market raises the risk of a mismatch among the types of units supplied and ultimately demanded for occupancy,” Hogue said in the report. “At this point, we do not equate this risk with a bubble.”

I guess without a definition of bubble, why not?

Original Report at RBC

For comparison, these were the new highrise condo sales (according to: bildgta.ca) for all of GTA
2003: 11,871
2004: 13,750
2005: 17,693
2006: 17,617

Household formation graph from RBC

Based on RBC's own graph of household formation, the difference between the rate of formation in 2001 to 2006 and 2006 to 2011 is about a 14% increase. How does the growth now rather than then justify a more than doubling (possibly a trebling) of condo completions?

Meanwhile prices across Canada continue to rise according to housepriceindex.ca. I continue to be amazed that despite obvious examples right next door, a bubble simply has to run its course, no matter what. It must run out of participants, which means it will always cause maximum collateral damage.

China's Rebalancing Act

To increase consumer's contribution to GDP China must raise wages and cut the implicit tax savers pay. This won't happen without a hit to growth. Can it happen at all under the current environment? (The article writer sounds downright optimistic.) A slowdown is good for China and the world

And this seems to be happening. Beijing has reduced interest rates twice this year and reluctant policy makers are under intense pressure to reduce them further, but with inflation falling much more quickly than interest rates, the real return for household depositors has soared in recent months, as has the real cost of borrowing. China is repairing one of its worst distortions.

China’s investment growth rate must fall for many years before the household income share of GDP is high enough for consumption to replace investment as the engine of growth.

Can it do that on the back of a collapsing asset price bubble?

But won’t slower growth create social dislocation in China and economic dislocation around the world? No, not if it is managed well. Remember that Chinese rebalancing requires household to income grow faster than GDP for many years, and if Chinese growth slows even to 3 per cent, as I expect it will, but household income continues growing at 5-6 per cent, this is far from being socially disruptive.

Who is Buying US Real Estate?

I missed this report earlier. But it's a good one.

It's the Profile of International Home Buying Activity

International buyers are a mere 10% of the market in dollar terms, $82 billion out of $846 billion in sales. But they tend to buy in states that the domestic market seems to be shunning, or that is so grossly oversupplied that domestic demand cannot make an appreciable dent in the supply. (Florida, Arizona, etc.) And 82 billion is a significant increase over the 66 billion of last year.

The international home sales market in the U.S. isconcentrated in terms of purchasers ’ home country andpreferred destination. International buyers came from nearlyall over the globe, but five countries (Canada, China (PRCincluding Hong Kong), Mexico, India, and the United Kingdom)accounted for 55 percent of transactions in the recent study.There is international activity throughout the country. Fourstates (Arizona, California, Florida, and Texas) accounted for 51percent of the purchasers

So, while ~10% does not seem sufficient to drive any market, even one set on the margins, they are disproportionately represented in the areas where they are shopping.

I really wish they had this by absolute dollar as well because it is difficult to discern if investment from the UK, for example, is really declining or just flat in absolute terms and being out muscled only by percentages.

Forty-five percent of international purchases were under $250,000. There appears to bea gradually increasing trend towards purchases in the $250,000 to $ 500,000 range. There was a jump in the sales of homes valued at $1 million and up

The median for all sales in 2012 as 165,000 and the median for international was 252,000. A big jump and sales of 10 million plus homes is said to be surging. 62% were cash purchases due to difficulties getting financing in the U.S.

 If only there were such a report for Canada, eh?

Australia's fictional housing shortage

Every bubble has a myth, and shortage is a common one, but in Australia there was an actual number. But was it real number? Australia's fictional housing foundations

There was only one small problem: the purported shortage of 85,000 dwellings was complete fiction. In order to arrive at the shortage, the NHSC had to employ a methodology of the most dubious nature – a travesty of basic science. The shortfall of 85,000 dwellings was composed of the following: 1) 9000 to address homelessness of those sleeping rough; 2) 35,000 to address homelessness of those staying with friends and relatives; 3) 13,000 to house marginal residents of caravan parks; 4) 26,000 to increase the rental vacancy rate to 3 per cent, and; 5) An extra 2000 to round up to the nearest 5000!

The fourth category is an interesting one because it assumes that data sourced from the Real Estate Institute of Australia and its state-level affiliates are also based upon sound methodology. As I have covered elsewhere, the reported vacancy rates are likely to be severely biased downwards given the appalling methodology, data-gathering techniques, and lack of independent oversight (auditing). The last point is self-explanatory: who on earth rounds up to the nearest 5000?

Little more could be expected in the 2010 and 2011 reports. The NHSC performed a backflip, admitting that it was uncomfortable with its previous methodology given the obvious problems with it. It is unlikely that the NHSC would have changed course if not for the barrage of ridicule it experienced from those who read the report and were honest enough not to give their silent approval. Each report provided an increasingly dismal prognosis as the shortage had increased to 185,000 in 2011 and, if present circumstances remained the same, there is expected to be a shortage of 640,000 dwellings by 2030.

But nothing changed. The NHSC had to find another pretext for the pre-supposed shortage, this time by creating a category called “underlying demand”, driven primarily by immigration and other demographic factors. This would appear to be a more sound methodology if not for the fact that the numbers were simply made up again.

The problem with this argument is it can’t explain why prices started to rise in 1996 and have skyrocketed onwards, especially during 2001 to 2004. Annual population growth between 1996 and 2005 registered at approximately 1 per cent, but dwelling growth (adjusted for demolitions and discontinuations) was greater over this period. In fact, 2007 was the first time since 1950 that population growth was higher than dwelling growth. If the housing shortage argument was correct, housing prices should’ve started to rise from 2007 onwards, not 1996.

Going back to the point first made in the introduction, the 2011 Census revealed Australia had 7.8 million households, 900,000 lower than the NHSC’s figure, with population also growing by 300,000 less than previously estimated. These figures have come as such a shock that the NHSC chairman has reported that an undersupply could be incorrect. In fact, Morgan Stanley researchers have found that the current 228,000 dwelling undersupply has now become an oversupply of 341,000, a huge turnaround.

High Quality or just Super-Sized?

Why the Australian Property Bubble is Only the Beginning

. . . The houses they are building actually depreciate. On top of that, the quality of construction is often cheap. So that’s what’s behind the negative equity.’ Say it ain’t so? Aussie homes are built on the cheap? For years property spruikers told you the reason Australian house prices are so high is because of the high quality of Aussie housing.

‘First, the quality of the housing stock is high. Australia has the largest dwellings in the world, and they are of high quality. Estimates suggest that the average Australian dwelling is 214 square metres, and the real expenditure on new dwellings is now 60 per cent higher than it was 15 years ago, reflecting the increase in both the size and quality of dwellings.’

At the time, Kris Sayce didn’t buy the spruikers talk. He told Money Morning readers in his article Another Housing Market Myth Busted, ‘To our mind Bloxham had confused quantity of housing (the size of houses), with quality of housing (how good they are).’

Unless you have intergenerational property investment, the quality doesn't enter into the equation. The general economy can only tolerate some small % (7 or so) of total resources being directed at an economic dead end like housing before the economy in general suffers. That is the key point. Hauling granite and limestone around the world to carefully glue inside them, doesn't matter. Building the ceilings nice and high, doesn't matter. It's shelter. Beyond shelter, it's sucked up more than its share of resources.

If you are going to shift to the European model of concrete, built for 200 years and the next 5 generations will not need to buy, then you can begin to argue quality is paying out. That's not what is happening here. Wood frame houses typically have an economic lifespan on the order of 40 years. I could not find data on Australia's current new housing stock, but it is not poured concrete, so I'm going out on a limb and assuming the number is closer to 40 than 200 and therefore closer to viable for a single generation than inter-generational. So, what you have is extra resources sunk into sector that does not return anything for it. And you are bragging about that.

Yes, there will be a Canadian decline, a small, gentle one

Interesting how the default narrative has shifted to "yes there will be a decline" but not a big one. Or a sudden one, at worst case. No worries, mate.

Home prices in Canada continue to find support

External demand for our commodities isn’t providing the support for growth that it has on occasion in the past.

This only matters are part of the ballooning debt, for keeping the CAN$ strong and for encouraging foreign purchase of bonds. It's support for debt growth. Maybe that's what you meant but it doesn't quite read like that's what you meant.

It’s a possibility that has even been mentioned specifically by Mark Carney, Governor of the Bank of Canada – a too-rapid deterioration in the housing market.

Note the word "rapid". A deterioration is a given. What now matters boys and girls is the speed of it.

Even a worst-case scenario for housing in Canada, however, is not likely to yield anything like the catastrophe experienced by the sector south of the border.

It came about because too many low income earners were enticed into home ownership by sub-prime and variable-rate mortgages. Those borrowings were bundled into debt instruments that were sold between financial institutions with the promise they carried Grade A credentials.

You weren't paying close enough attention. Subprime came and went as a crisis. The rest of the 6 years of this was prime mortgages. Just like Canadian ones. Overpaying for houses that's what causes the crisis. Turns out lacking subprime, this tulip bubble style game can go on even longer than anyone imagined. Subprime broke the back of a the bubble. It didn't fundamentally cause the bubble.

Canadians can keep patting themselves on the back and insisting they are different (despite amortization lengths and 2.5% cash back mortgages that would make Countrywide blush). But Fannie and Freddie were banned from subprime mortgages and CMHC *specializes* in them. How is that for different? But, honestly, the rules don't matter except for the one that lets a bank appraise on recent sales. If banks think a given house's value is based on the previous nearby bubble-level sales then you will eventually get an unsustainable bubble. Subprime doesn't have to enter into it, only ever-increasing affordability measures like falling interest rates and higher leverage. Both of which Canada has mastered for year after year. You don't get to 70+% ownership without scraping the barrel sides for some crud. It doesn't matter what financial mechanisms get the market there. If it got there, it's vulnerable to shock.

There may be a moderation in Canadian home prices, it’s true, but the adjustment isn’t likely to be much more than 10% at most. (The decline in the U.S., peak to trough, has hovered near 33%.)

I love how these analysts never say, so, hm, what is the fair, long term sustainable value of Canadian housing anyway? Stop for a minute and look at where a 10% decline leaves the market. Oh, grossly overvalued based on rent, incomes and historical norms? Oh, totally reasonable estimation then.

A 10% fall, eh? Oh, so noted.

Canada’s healthy labour market will provide a backstop to housing demand. The unemployment rate nation-wide is now only 7.2%. ..d That’s not shabby, considering that even when the economy is performing at maximum capacity, the percentage of idle workers rarely falls below 6.0%.

Are you sure you're an economist? The fraction of GDP and employment contributed by the housing market is one of those things that will be cut in half with the crash. Oh, sorry, deterioration. I realize that's why housing starts are your one and only metric you are obsessing over, but you have to take it one more step out. What happens after housing starts decline? See the problem? Any reason you didn't take it out to that logical conclusion on your own?

Any taxi-cab driver will tell you that visitors to the city are amazed by the number of building cranes dotting the skyline.

So, you are a Friedman economist. Reams of actual data and you are using the Taxi Cab Rider Incidental Conversation Index.

Several other cities across the country have maintained healthy existing home price increases, including Halifax (+7.5%), Winnipeg (+7.2%) and Hamilton-Burlington (+7.1%). Edmonton (+4.7%) and Calgary (+3.2%) have also recorded good year-over-year advances. The average resale home price in Calgary, however, remains nearly one-quarter higher than in the province’s capital. Statistics Canada’s new housing price index (NHPI) for May was even more upbeat.

Upbeat? Okay, now we know who you are working for. Why is requiring households to sign themselves up for crippling debt slavery upbeat? It's not upbeat. It's increasing debt.

Here, rephrase it: 1257 homes exchanged hands this month in the 416 area code, the drag on those buyers' financial future increased 10% year over year, decreasing their odds they will invest in their children's future and their own retirement. Also significantly increasing the risk that they will be unable to sell at will without bringing additional money to the transaction. Sound upbeat to you?

In annual terms, there were a couple of declines, but they were confined to Victoria (-0.9%) and Vancouver (-3.2%). In the important Toronto market, the year-over-year change was a nation-leading +5.5%.

Yeah, it's not a housing market with long term and short term qualities it's the Kentucky Derby.

Unexpected Decline in Home Loan Approvals, Australia

Australian Home-Loan Approvals Unexpectedly Declined In May

The number of loans granted to build or buy houses and apartments declined 1.2 percent from April, when they rose a revised 0.5 percent, the statistics bureau said in Sydney today. The median estimate in a Bloomberg News survey of 18 economists was for a 0.8 percent increase in approvals.

The value of lending to owner-occupiers gained 0.2 percent, the report showed. The value of loans to investors who plan to rent or resell homes dropped 4.6 percent.

“Stubbornly cautious consumers are proving reluctant to get into debt with heightened global uncertainty, despite 125 basis points worth of rate cuts,”

Vancouver Housing Market Tipping Downward, Royal LePage

Royal LePage Survey: Canada's Housing Market at a Tipping Point

The first-time buyer segment of the population, which represents up to half or all transactions and where activity strongly correlates to low interest rates, is expected to be slowed by recent regulatory changes that will reduce access to insured mortgages.

Half of all transactions are first time buyers. HALF. The tweaks to the mortgage rules will impact half the buyers. Yeah, the market is going to notice that. Although, putting the kibosh on the massive intergenerational transfer of wealth that was going on, wasn't a bad thing.

Below is a handy chart from the report of prices changes by market by segment across Canada.

Royal LePage From this PDF

Below is another handy chart showing the previous downturn. This chart is not adjusted for inflation, that's why these downturns appear flat. The last one was far more significant than it appears. Royal LePage is again calling for a flatlining in real dollars. Given the extremes to which prices have risen this time, that's a bit mysterious, but hope springs eternal. They don't state it in the materials provided with the links, but for it to be flat this time again, inflation will have to surge.

Here's the juicy stuff, the market survey forecast. Canadian Housing Trends

All of the metros on here are pretty optimistic, except for the last one. 6.5% down by the end of the year for Vancouver. That doesn't sound like a lot, but just the loss on a million dollar bungalow would buy you half a house in most of the U.S.

Other notable declines from Q1-Q2 2011 to 2012 from the Basic Data Chart:

      Moncton detached -8.6%
      St. John NB Condo -8.1%
      St. John NB Two-Storey -6.7%
      Longueuil detached -5.4%

Lots of places still bubbling away. That's unfortunate. Every tick upward is farther it has to fall to normalize again.

Ongoing shadow banking risks

Not a very well written article, but it revives some points I find interesting. Formal lending in the past has only helped fuel shadow lending, but through other mechanisms than those mentioned here. If you are a state owned enterprise, this is easy: Get a loan for just about anything, turn around and lend the money as a loan shark. If you are not a SOE and you are under financing restrictions: get a loan for copper, buy copper, then use proof of its warehousing to obtain new money that has no restrictions on it. Whether new formal lending is fueling more shadow banking . . . there isn't proof of that in the article. Other articles cite a seizure of the shadow banking system in Wenzhou, where no one has the funds to pay anyone else. If any one player in such a chain gets access to formal funding and uses it to cover their shadow debt, I'm not sure the other players in the chain wouldn't just breathe a sigh of relief and continue to hold their remaining funds close and keep trying to collect on what is owed them. As to the non performing loan ratios. They are clearly wrong, as the bad loans from the previous bank crisis in the late nineties are still on the books and would represent something like 30% NPL by themselves. I take that as some kind of political signal that they are rising at all. That's interesting, given that the numbers are whatever they want them to be. China's Shadow Banking Risks Are Spreading Through The Financial System

Non-performing loans in Zhejiang banks continued to rise. Investigations by the regulatory authorities looked at 170 companies which obtained loans from banks, and found that 70% of these companies under investigation had signs of over-capacity, involvement in real estate investment and informal lending, with 90% of loans classified as “bad”. In fact, non-performing loans have been rising in Wenzhou for 11 consecutive months to RMB4.5 billion, with the NPL ratio at 2.43% at the end of May, and far higher than the national average (if both numbers are to be trusted, of course).

Asian Buyers Still Swooping in for Pre-Sales in Australia

Like all data, the 90% of buyers cited here is anecdotal. But foreigners wanting to buy in Australia have been pushed into the new construction market; it's all that's legally left.

Australian property: Asian investors swoop

"There is a lot of talk about Australian property being overvalued but when you do look at property in places like Shanghai and Hong Kong. - it remains extremely expensive," said Rees.

Australia, the Hamilton of Asia.

"Very Difficult to Escape"

The RE industry estimated 230,000 house undersupply has been calculated by the latest census to be instead a 340,000 unit OVERsupply. 55,300 houses for sale in Melbourne in June (But it's not a crisis, according to Brian Welch, head of the Master Builder's Association, who has no particular bias on this topic.)

The video with this one is a cheerleader's special and has nothing to do with the article. Something odd about an Australian trying to speak extra clearly. Really has to open his mouth wide. (Just a random aside...) Maybe it's a spruiker thing?

Home owners face repayment disaster

Property analyst Mark Armstrong predicted appreciation would be slowest for home owners in outer suburbs, who could see negative to zero growth in values for as many as 20 years.

''It's the perfect storm of conspiring factors,'' the director of iProperty Plan said. ''The average plot of land in the outer suburbs is [worth] half what it is in the middle suburbs and it is the land that appreciates, albeit slowly on the fringe. The houses they are building actually depreciate.

''On top of that, the quality of construction is often cheap. So that's what's behind the negative equity.''

It's not the slowing of credit after a bubble that leads to negative equity, it's building a cheap house on valuable land. That's a different viewpoint...

Bear with me a second, if the land holds all the value, and the building is a liability, wouldn't you want the cheapest building possible on the land in order to best maintain the total asset value over time?

Kevin Bailey, principal at Shadforth Financial Group, said his warnings three years ago of a ''homegrown subprime crisis'', created in part by inflationary first home buyer incentives, are now playing out. He said the schemes enticed mostly young people, without savings, to borrow heavily and pay a premium for low quality housing in poorly serviced locations.

''Lots of baby boomer parents who have made money out of property gave sage advice to children to pour their money into bricks and mortar because prices double every seven to 10 years,'' he said.

''Young people who were sold that lie will find it very difficult to escape and it's a tragedy.''

You sold your children's future to the bank. Feel good?

Hamilton Ontario House Prices are $100,000 Overvalued

I've seen far too many people claiming that it's safe to buy a house in Hamilton, Ontario the last month. This goes to show how distorted the average view of real estate prices has become. Sure, relative to Toronto's $645,000 average, prices look "reasonable" in Hamilton at $305,000. But, turns out, that's not the issue. Every market has its own mean it will revert to. Every market has a local wage base households can draw on to afford housing.

We have been living through an unprecedented period of cheap and free flowing credit. This has set "affordability" measures off kilter and driven up prices. This credit situation has gone on a long time, but it is temporary. When it changes, prices will begin to revert to their mean. Just because you can't lose as much in Hamilton as you would in Toronto, doesn't mean you won't get burned.

Hamilton Ontario Historical House Prices Inflation 2000-2012

Here is a chart of the price index from housepriceindex.ca along with the inflation adjusted index number starting from 2000, using the Bank of Canada inflation calculator.

You'll notice that the last time prices rose the same as inflation was 2000-2001. That gives us our base price. The mean price that future prices will try to revert to. The actual index (blue line) and inflation adjusted index (red line) have been plotted together to show how badly real prices have diverged from the sustainable line. You'll notice the graph is even zero based on the Y axis and still see how much diversion there is.

So what's the risk? In 2000 the average price of a freehold was $160,000, give or take a rounding error. As of last month the price is now $305,000. If we hop on over to the BoC's handy inflation calculator and look up what 160k is worth today, it comes up with $207,000. That's where prices should be. Turns out they are just about $100,000 above that. Or, about 50% overvalued and needing a 33% decline to bring things back to normal.

But, hey, what's a $100,000 loss?

China's leadership intent on stimulus not raising property prices

China Must Prevent Rebound In Property Prices, Wen Says

Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province . . .

Wen’s comments underscore the government’s determination to maintain restrictions on housing purchases even as it cuts interest rates and boosts infrastructure spending to reverse a slowdown in the world’s second-biggest economy. China’s new-home prices rose for the first time in 10 months in June, according to SouFun Holdings Ltd. (SFUN), owner of the nation’s biggest real- estate website.

“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said.

The government must “promote the study and implementation of changes to the property-tax mechanism, and to speed up the establishment of a comprehensive long-term mechanism and policy framework for controlling the property market,” Xinhua cited Wen as saying.

Definition of Buyers' Market

The Vancouver Sun posts a dry, rational analysis of buying real estate. Shocking, really.

This is a semantic issue. Technically, as soon as sellers are at a disadvantage in the transaction negotiation, it's a buyers' market. The fact that the Van Sun chooses to push the definition out implies they are trying to dissuade people from grabbing for a falling knife based purely on the delicious term "buyers' market". Which is rather different of them. It's not a buyer's market until prices drop

It's not a perfect analogy but let's compare real estate to the stock market. Equities traders look at volume as an indicator of interest in the market or in a particular stock but many prefer to sit on the sidelines until a trend is con-firmed by price movement. Trading volume is more useful for catching illegal insider trading rather than as a signal to buy or sell. A sudden surge in volume, followed quickly by news that moves the stock price up or down, alerts the securities commission to launch an investigation.

Volume can also suggest a stock or index is trading on momentum, rather than fundamentals, a situation value investors tend to avoid. Real estate speculators may want to flip a property in a market driven by momentum, but the vast majority of homebuyers are value investors, hoping to acquire a quality asset at a good price.

And there is a big speculative component to this, given that owner-occupier presumably intends to gain when they sell. Because if they assumed they would lose, they'd be inclined to rent instead, rather than be faced with a balloon payment of unknown size to sell.

Toronto Detached Median House Price falls 5% from May

Based on the TREB report for June, the Toronto City Detached house price median (which isn't usually terribly stable) has declined more than 5% from May, 6.5% from April. Here it is in chart form:

Chart of Toronto House, Condo and Townhouse prices

TREB detached overall is down 2.5% since April or $13,000. If the decline continues next month, I'll add it to the Canada Cities Price Peaks and Declines page

Prices in Durham continue to rocket upward, which may be a substitution effect. Buyer perception of "reasonable" prices and unaffordable extremes drive them into purchasing a substitute, and in doing so push the price of the cheaper substitute good upward.

Chart of Toronto Condo Prices

Vancouver Stumbles Hard - Update

While we await whatever digested numbers from the Real Estate Board of Greater Vancouver,

REBGV's Benchmark single family detached is now -10% in just two months, from 1.064 million to 962,000, for a total decline of $103,000. (I wonder if they regret not sticking with the previous HPI?)

We look to some other sources of data. Yatter Matters has the following for June 2012:

Detached Average Prices down from June 2011 $1,215,265 to $1,061,067 a decline of 13% or $154,000.
Detached Active Listings up 27%
Detached Sales down 37%

On another note, to demonstrate that BC is not different, or not in a good way. Here are the numbers for debt and income.

Not only does BC have a median family income lower than Ontario and Alberta, it has far higher average consumer debt. Yes, BC is different, people are digging a bigger hole just to stay in the same place.