Canada has about the worst house price bubble in the world

Why Canada has just about the worst house price bubble in the world

Canada has a new worthwhile initiative. After years of booming prices, that bastion of politeness north of the border is looking to avoid a catastrophic housing bust for something more, well, boring.

Chart from the Economist

Central banks typically raise rates in these situations, the "hard-hearted" approach. But Canada is trying a quieter approach, essential given the high rates of debt.

But by keeping rates where they are and slowly tightening mortgage requirements, Canada hopes to engineer a more gradual price decline that won’t set off a vicious circle. In the best case, prices wouldn’t fall, except below the rate of inflation, so that real prices decline without hitting household net worths. This strategy is hardly unique — China has done the same the past few years — but it has the very Canadian name of “macroprudential regulation.”

Corrupt Chinese Officials Panic Selling (UPDATED)

But still buying gangbusters in California

The great China corruption fire sale

Thousands of Chinese communist officials have been panicked into a fire sale of their illicit properties and billions of pounds have been smuggled overseas as the country's new leaders intensify a campaign to root out corruption.

The CDIC report, which was obtained by the Economic Observer newspaper, suggested that nearly 10,000 luxurious homes had been sold by officials in Guangzhou and Shanghai last year. It also claimed that $US 1 trillion, equivalent to 40 per cent of Britain's annual gross domestic product, had been smuggled out of China illegally in 2012. Economists and experts cast doubt on the figure, but said the flow of money was dramatic. Li Chengyan, a professor at Peking University, suggested that about 10,000 officials had absconded from China with as much as pounds $US100 billion.

The CDIC said 1,100 government officials had fled China during last year's national holidays in October and that 714 had been successful in getting away. In the United States, the National Association of Realtors said properties worth more than $US7 billion had been bought by Chinese in the US last year. Some high-end homes were now built for rich Chinese, with ponds for koi carp and a second kitchen for pungent cooking.

UPDATE

The threat stated in the above article came from the creation of a property database. Officials Offload Property Original article in the Economic Observer

According to a university professor who has been helping a city government in Anhui Province set up a home ownership database, officials with a greater degree of political awareness are unwilling to deal with the new property register.

The professor didn't give a clear response when asked why anyone would refuse the simple task of entering data into a computer. Instead, he tactfully noted that "The best solution to the problem is to pass the work on to a university, get them to submit a report, and, once funds have been allocated, find some students to do the work. In this way, both research and work can be done, and they won't have to worry about the risk of leaking information."

A person in charge of a real estate agency told the Economic Observer that since November last year, the instances of officials hurriedly offloading their properties had increased around the country, and these properties are often luxury residences, sometimes worth more than 10 million yuan if they're located in first-tier cities.

Only a portion of these houses are being sold through real estate agents.

Some property owners prefer to let state-owned institutions or even professional agents handle the sale. In this way, they won't need to expose themselves during any part of the process.

According to statistics posted on the website of the Beijing Municipal Commission of Housing and Urban-Rural Development, 7,940 contracts for second-hand housing deals had been signed in the first half of January 2013, an increase of 360 percent over the number of transactions completed in the capital over the same period last year.

Hat tip: UBC in Crisis Mode commenting at Vancouvercondo.info

Hong Kong most unaffordable English-speaking, Vancouver second

Demographia's 2013 survey is out. Demographia 2013 International Housing Affordability Survey

All numbers are median multiple, which is the median house price divided by the median income for the given geography.

Hong Kong 13.5
Vancouver 9.5 (and improvement from 10.6 last year)
Sydney 8.3
San Jose 7.9
San Francisco 7.8
London 7.8
Melbourne 7.5
Adelaide 6.5
Perth 5.9
Toronto 5.9 (a surge from 5.1 last year)
Brisbane 5.8

California appears to be re-inflating the bubble. If interest rates aren't normalized soon, the U.S. is going to repeat the cycle already. 20 major markets were ranked as affordable down from 24 last year.

Demographia is pretty single minded about what causes housing in-affordability. For example, in the report Honolulu and London are mentioned as being severely unaffordable, no reason is given why this might be true in Honolulu, but London's dear market is caused solely by restrictive land use policies. The report doesn't mention what any local could tell you: outside money is pouring into both markets. Basically, capital inflows is not discussed in these reports and cheap credit given only a nod.

Each of Australia's major markets, with the exception of Sydney had housing affordability within the 3.0 Median Multiple norm during the 1980s, before the widespread adoption of urban containment policies, which is referred to as "urban consolidation" in Australia.

Somehow (not explained why) these policies had negligible effect on prices for a decade and a half. Then, suddenly, oddly enough, when financial markets were deregulated at the end of the 1990s and into 2000s, the end result of which cheap mortgages were being pushed at anyone and everyone, then prices soared into unaffordable range.

Land use policy is a symptom. Municipalities engage in it to reduce externalities and improve quality of life. Something Demographia doesn't want to grasp. I get the sense reading their reports that they resent that developers cannot always socialize so much of their costs. Or I guess they dream that if people could just build at will on the side of old spatter cones, and in tsunami inundation zones, Honolulu's high prices would just magically vanish.

Royal LePage admits Vancouver prices vulnerable

BMO economist says prices in Vancouver could fall a further 5% in 2013

Royal LePage would only cop to a 3% decline due to weakness in the luxury market. (By the way, your average prices should be the luxury market, one sign of structural issues in said market.)

Vancouver house prices to decline further, real estate panel predicts (updated)

Housing prices are about 10 times average family incomes, Guatieri said, putting "Vancouver in the upper echelon of overvalued housing markets, not just in Canada, but across the world."

But only a five percent drop off that? Over twelve months? Does he have a mandate to prevent panic?

"There is some speculation that wealthier foreign buyers are waiting to see if the government will restart that program before they purchase a house in Vancouver," Guatieri said. "What has supported Vancouver's housing market, at least in the past five years, is not income, it's wealth. A lot of that is foreign wealth, although we can't quantify that."

Which brings us to the Suitcases full of Cash article on Yahoo Suitcases of Chinese cash flooding Canada’s borders (Hat Tip Anonymous commenting at Vancouvercondo.info)

Nearly $13 million in cash was seized during that period, the newspaper reported, citing Canada Border Services Agency data obtained under the country's access to information legislation. Most of the money was returned. In one case at Vancouver's airport, a Chinese man was found with $177,500 in the lining of his suitcase and stuffed into his wallet and pockets. He was fined. The financial penalty was roughly $2,500, a relatively small price to pay for evading strict foreign-capital controls imposed by Beijing.

Back to the Sun article:

Royal LePage forecasts that fewer high-end sales will cause average prices in Vancouver to drop three per cent by the end of 2013. Nationally, Royal LePage forecasts a one-per-cent gain in the average home price by the end of the year.

Let's look back at what Royal LePage predicted for 2012, shall we? Royal LePage Predicts Further Home Price Appreciation Contrary to Recent Talk of Decline

Royal LePage expects average price growth to continue through 2012 and predicts national average prices to increase by 2.8 per cent by the end of the year.
. . .
At the end of 2012, average house prices in Ottawa are forecast to be 3.3 per cent higher than 2011.
. . .
At the end of 2012, average house prices in Toronto are forecast to increase 2.6 per cent over 2011
. . .
At the end of 2012, average house prices in Vancouver are forecast to be 2.3 per cent higher than 2011.

Let's see how they did. December to December 2011 to 2012
Ottawa all prices were up 1.22% and residential class were up .6%
Toronto all prices all TREB were up 6%, detached up 6.2%, Toronto detached up 2.9%.
Vancouver is up 1.3% on average according to yattermatters.com's numbers.
I don't think Royal LePage imagined how lofty Toronto could get. Median prices in Toronto are down 6-14% since April, depending upon area/type.

Vancouver's average is down 14% since February, which show you how volatile averages can be. February's numbers will be a better comparison to last February. Vancouver's prices have not shown a strong annual cyclic behavior (sales and inventory have, but not prices).

City of Toronto Detached Prices Down $94,000

According to TREB Market Watch Median house prices in the City of Toronto have fallen $94,000 since their peak in April 2012. The median price then was $656,000 and this December 2012 it has fallen to $562,000.

U.S. GDP per capita is significantly higher, why are house prices lower?

Global MetroMonitor Interactive Graph from the Brookings Institute

A chart of "real GDP per capita and employment change for the largest 300 metropolitan economies"

As a little thought experiment, do a cross-border comparison of GDP per capita between the U.S. and Canada. Seattle: 65k, Vancouver: 41k. Or more startling Toronto: 43k, Buffalo: 58k.
Where in the world is the wealth generation supposedly coming from to justify double the house price in Canada?

China banks unprepared for interest rate liberalization

Bank profits fading as interest rate reform begins

About 52 percent of surveyed bankers said that interest rate liberalization should take place in the period from 2015 to 2017, while only 2.8 percent of the bankers agreed that 2012 is the right time, the report showed.

The result indicates most of the bankers were not prepared when the central bank made the first move toward a more market-driven rate by doing away with a universal fixed deposit benchmark interest rate. The central bank lowered the benchmark on June 7, and allowed rates to fluctuate up to 10 percent above the benchmark for commercial banks.

Real banking reform would impact the economy broadly, the copper "carry trade" would be put out of business, all the way up to the savers' subsidizing of state and well-connected industry. Whether banks will shift to providing funding to SMEs as hoped isn't clear. Default rates are high and it seems unlikely banks will allow rolling of principal and back interest into a new loan as they do for project funding.

At the same time Japan's new PM Abe has made noise about raising the target inflation rate there. What's moving Japanese markets?

In my opinion, a higher inflation target by the Bank of Japan is not particularly interesting. After all, the Bank of Japan can't hit the current "goal" of 1 percent inflation. I don't have much faith that renaming the "goal" a "target" and increasing it to 2 percent will be like waving a magic wand. But something much more significant is afoot - the possibility of explicit cooperation, albeit perhaps forced cooperation, between fiscal and monetary authorities. The loss of the Bank of Japan's independence to force the direct monetization of deficit spending is the real story.