World Housing Bubble - China, Australia, Vancouver Real Estate News

Triple Whammy on Deck for Australia

2012-03-02T11:05:00.001-08:00

China is slowing and represents 23.7% of Australia's exports
Fixed capital expenditure in Mining represents 10.5% of Australia's GDP
Construction represents 7.5% of GDP and 9.1% of employment
Relative to fundamentals house prices are insanely lofty (my paraphrase of the charts)
Australians have been borrowing foreign money to sell each other houses and the exit from that will drop the Aussie Dollar

Australia's Economy May Suffer 3 Major Blows

All of Canada Is in a Bubble - The Myth of Containment

2012-02-29T08:35:00.003-08:00

"We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though." -- Ben Bernanke, July 2005

The Canadian housing market is moving firmly from denial to anger and bargaining based on the sudden appearance of the mantra of "the bubble is only in Ontario and BC" (or Vancouver and GTA) not the whole country. (So . . . it really doesn't impact things? I guess is the subtext . . .) Well, whether the subtext can be supported or not is academic. This desperate bargaining is just plain naive.

Teranet latest numbers are out for December 2011. They are charted below in all their glory. Let's take a look.

Canadian Cities House Price Index History

Here we have all of the Teranet Cities and the two Composites. Yes, there is some variance. So let's zoom in for a closer look.

Canadian House Prices All Cites compared to growth in GDP

Well, some interesting things emerge. One, all cities have greatly exceeded the growth in GDP, just since 2005. (All charts are indexed to 100 on the same month). Interestingly the drop in Toronto prices during the Great Recession returned prices to the sustainable growth level, but just briefly. It's the only city that managed this.

Second thing to notice is the pairing of Vancouver and Toronto as the guilty parties doesn't make any sense. Winnipeg wins the day for most bubbly prices relative to 2005. Vancouver is second, but well into a price slide. Toronto is no where to be found with the top dogs. It is packed into a bundle well below the composite grey lines, battling it out with Ottawa and Victoria, both of which are sliding, Victoria with gusto.

Also problematic is Quebec and (just below the composites) Montreal, which no one ever lists with Toronto and Vancouver, which is strange when you look at the actual numbers. Montreal easily has Toronto beat for hot prices.

Every city on this chart has grown substantially in excess of national GDP (although one could argue that select cities may be undergoing an economic structural change (such as due to resource extraction (how long will that last?))), but in places like Edmonton and Calgary, you will notice that's long since been priced in and, in fact, caused massive overshoot, which is still being worked out of the market.

Contained? Keep ~~bargaining~~ dreaming.

Officials Aided Loan Shark So They Could Recover Their Investment

2012-02-29T00:53:00.000-08:00

Officials Sued over Fundraising Promotion

The Taishun County government and police security bureau are accused of promoting the Liren Education Group's fundraising activities despite knowing the company was hugely in debt.
More than 7,000 individuals lent 4.5 billion yuan to the company between 1998 and 2011, China Business News reported yesterday.

ccording to the lawsuit, this explained why the local government turned a blind eye to Liren's fundraising activities. It also alleged that, faced with Liren's alarming debt, top officials went on local television to encourage people to help the group.
More than 80 percent of the households in Taishun County became entangled in the fundraising fraud while other victims came from the neighboring Jiangsu and Fujian provinces and north China's Inner Mongolia Autonomous Region.

China's lending scam victims seek state compensation

The county government and police turned a blind eye to Liren's lending scam, especially allowing the company to gather nearly 900 million yuan from private creditors on the false promise of high returns in the final four months before bankruptcy, according to the litigation, adding that some officials even participated in the scam themselves.

When Liren's real businesses could no longer pay back creditors, the whole thing turned into a Ponzi scheme -- the company started offering even higher interest to draw more money and then use investors' money to pay returns to earlier creditors, they added.
Liren's downfall again raises concerns over the risks in private financing, which is booming in China, especially in Zhejiang where private businesses have become a pillar of the prosperous local economy.
Last year, a survey found that more than half of the 2,835 investigated companies in Zhejiang have sought financial help from private creditors because small companies have difficulties securing loans from banks.

Burned

2012-02-28T10:21:00.004-08:00

Composite of graphic from dead-tree and online editions

Macleans is taking a stab at a seminal cover.

Since 2008, Canada’s ratio of debt to after-tax income has exploded. By the third quarter of 2011, Canadians owed an average of $1.53 for every dollar they brought in, up 40 per cent in the past 10 years and just below where the U.S. was before its housing crash. By the end of 2010, the average homeowner had just 34.3 per cent equity in their home, the lowest level in two decades and a 20 per cent drop in just four years.

And that equity is ephemeral, based as it is on bubble valuations. That's what makes this creeping credit bubble so pernicious, for the middle class especially.

You are poorer than you ever imagined.

Earlier this month, the couple settled on a new build, paying “in the mid-to-high 500s.” But Austin says taking on a larger mortgage than expected was a fair tradeoff for finding a house in their chosen city. The couple say they expect prices to crash, but that doesn’t matter much since they plan to be in their home for at least 10 years.

The mantra of the future walk-aways.

With an average price topping $348,000 in January, Canadian homes are now worth a total of $3 trillion, nearly twice the country’s GDP.

Gosh, too bad housing is a non-productive asset.

“The point of the CMHC is not really to get people into their dream house off the backs of taxpayers,” says Rabidoux.

Why is it someone talking sense sounds so much like an alien from another planet?

The housing boom has helped prop up Canada’s construction industry, which now represents 7.4 per cent of the labour force, higher than it was in the U.S. at the height of its boom. Add in other housing-related industries, such as real estate agents, mortgage brokers and insurance companies, and the sector represents a staggering 27 per cent of the Canadian workforce. In the U.S., those same numbers peaked at 23.5 per cent.

Cut the sector by merely a quarter and what is the resulting unemployment number? Then the downward spiral begins. The growth numbers in this sector were always going to be temporary.

All of the numbers bulls celebrate: low unemployment, high equity, low defaults, they all depend directly on the bubble itself.

National Bank Senior Economist Wants You in Debt up to Your Eyeballs

2012-02-25T01:30:00.002-08:00

Matthieu Arseneau, a senior economist with the National Bank, likes mortgage payments as the best yardstick. That's because the evidence tells him that the rise of interest rates from today's bargain-basement levels will be moderate. Based on this, he thinks it's silly to foresee a housing crash, since monthly payments won't get into distress territory even by the time rates peak in about three years.

That's why Arseneau dismisses apocalyptic talk about a housing crash in Canada. As a cautious analyst, he doesn't rule out any scenario absolutely, but Arseneau said Monday that this one is awfully unlikely: "I think there will be no collapse unless there's a worldwide recession and credit crisis."

Banks have already completed several rounds of scraping the margins of qualified buyers to push ownership to 70%. Where is the next buyer at these inflated prices supposed to come from? This is the inconvenient part of beanie baby trading; your holdings only have value if that next buyer is ready and waiting to buy, with approved financing, at a price at least tracking inflation, just in order for the house of cards to stand as is. For the current owners to continue to hold, overextended as they are, rather than exit, properties must at least track inflation on their already inflated values. So not just gaining 3.25% on the true economic value of the property as measured by what it would produce in rent, but on the extra $150,000-$400,000 above that.

In order for that to happen, the banks must find yet another round of even more marginal buyers to get into the market. This has nothing to do with interest rates beyond the inability to drop them further as part of helping qualify this next round. See how that works. If total debt load has been tossed out the window as part of qualifying buyers you can keep a bubble going a long time on eroding rates. That's why ignoring total debt load is such a terrible idea.

The other thing roundly ignored by the "interest rates must rise to cause a crash" crowd, is that housing is unique in that buyers are also sellers. Say you live in Toronto, in a house now valued at 800k, and some buyer out there currently in a 400k condo would like to buy it. And you also want to move up. Where are you going to move up to? You don't qualify for a 1.2 million mortgage at any interest rate. So you are stuck. At the extremes of the market that mythical property ladder stretches out and the rungs become too far apart to climb. This is why new buyers (and the symptomatic rise in ownership rates) are essential to keeping the house of cards from collapsing.

Even without interest rates moving, there are limits on the market: Running out of even the dodgiest of marginally qualified buyers and the inability to assemble a chain of buyers and sellers to make transactions happen.

Creditors Register in Liren Collapse in Wenzhou

2012-02-25T01:08:00.000-08:00

This case is a harbinger of what is to come as part of a messy unwind in China. Wenzhou is the epicenter of publicly funded lending.

Firm risks bankruptcy amid lending fight

The Beijing-based newspaper Economic Information reported on Friday that more than 7,000 people have registered as being creditors of Liren Group, but local authorities said the number is much smaller.
"We started to register creditors on Tuesday, and more than 200 people register each day on average," said the director of Taishun county's information office.

Liren Group, a company that started by opening a private school and later came under suspicion from authorities during a government campaign against illegal fundraising, may have to declare itself insolvent, the auditing firm said on Friday.

"I expect its net assets are lower than half of its debts, which surpass 4.5 billion yuan ($700 million), according to the company's financial statement," said Liu Xuhai, chairman of the Zhongyuan Auditing Firm.

Apparently this is one of the warning signs of an imminent collapse in one of these schemes:

In November, the company announced it would stop paying off debts in cash, citing "financial difficulties". Instead, it offered to repay creditors using debt-to-equity swaps, property and free school tuition.

(Liren was originally a school. Before it got into real estate and mining and a host of other things.)

This Is the Whole Problem in a Nutshell

2012-02-25T00:57:00.000-08:00

Debt-service ratio of 7.5 per cent suggests crisis talk overblown

Since mortgages account for the lion’s share of Canadian debt, it makes sense to assess risk based on whether homeowners’ earn enough money to comfortably carry their mortgage debt.

Allowing mortgage debt to surge upward to the limits of carrying cost completely negates the stimulative effect of low interest rates, which would much better be used to reduce debt load, setting the consumer up for a decade of plenty. As a policy course this free wheeling debt issue is a stunningly shortsighted, take the bank profits and run, scheme. The middle class consumer IS the economy in Canada, and thanks to the mentality exemplified in this quote, it has just been burdened the with half an adult lifetime of debt servitude. Congratulations.

And these rates aren't fixed for the life of the loan! There is no mincing words on this. These people are crazy-dangerous.

Canadian Consumer Spending Sensitive to House Price Shock

2012-02-24T10:14:00.004-08:00

Consumers led the way out of the recession, accounting for half of economic growth, but how long can they keep it up, given that it is funded by debt?

A drop in consumer spending will lead to increased unemployment which will lead to an additional drop in consumer spending which will lead to...

The ratio of mortgage debt to disposable income has increased to almost 100 percent from about 50 percent over the last 30 years, the central bank report said. That gain has come with increased home ownership rates, house prices that have risen faster than incomes and low mortgage rates, the bank said in the Review. Home prices adjusted for inflation have increased 88 percent since 1980.

88% adjusted for inflation? 1980 was a slightly below average year for prices, but not exactly bottom of the barrel low.

“The Canadian housing market has not exhibited the excesses seen in other countries,” the bank said. Last month it forecast that the ratio of household debt will continue to set records after reaching 153 percent in the third quarter.

Wait, what? Someone needs to define "excesses" and while they are at it "bubble". Maybe what we have here is a semantic problem.

House-Backed Debt

Families are taking on more debt that is backed by their houses, with such loans accounting for about half of consumer credit in 2011, up from 11 percent in 1995, the bank said today. Increased marketing of such loans, their relatively low interest rates and rising home prices have contributed to the increase, the report said.

Half of new consumer credit is HELOC or cash out refi of some sort. Lovely. So, equity is vanishing. That part about the long term benefits of lower rents via ownership is apparently not one anyone really cares to reach in Canada. Renting directly is a heck of a lot cheaper and less risky than renting money and holding title. Eh, they'll learn.

CEO of ING Direct Canada Says "Uncategorically" No Bubble

2012-02-23T09:29:00.000-08:00

Peter Aceto on Debt, BMO & Bubbles

“Uncategorically, I would say no, I don’t think we have a bubble like we saw in the U.S.”

"Uncategorically" is a malapropism, usually taken to mean "categorically", the term from logic meaning unconditionally. Is that what he meant? I guess we'll say it was. (note: I don't have a good enough connection to watch the video at the moment to scope out more context.)

"…We have some issues....It's not a national issue. It’s more of a British Columbia issue or an Ontario issue. Prices are very high.”

Um, you mean, there is only a problem in the two provinces where 18 of the 34 million Canadians live? Well, that's a relief. How anyone could miss the runup in Montreal prices, or this insane run up in Alberta I don't know, but we'll note his concerns.

Condo valuations are “pretty high on top of the list of things we are watching very, very closely.”

Wait, another trouble spot? Maybe he did mean uncategorically, a new term which means "with caveats" . . . ?

Month's End Cash Hoarding Sends Inter-bank Rates in China Soaring

2012-02-22T22:32:00.000-08:00

China money rates soar on maturing repos, month-end caution

The weighted-average 14-day bond repurchase rate
surged by 141.55 basis points to 6.4274 at
midday, just shy of the level it reach on the day before the
Spring Festival holiday.
The price for benchmark seven-day repo loans
also strode higher by 42.10 basis points to 5.5238 at midday and
reached as high as 7.00 percent for individual transactions.
The People's Bank of China (PBOC) injected cash into the
banking system last Friday via unannounced seven-day reverse
repos with selected banks in order to ease an acute liquidity
shortage, the China Securities Journal media previously
reported. Those repos are now set to expire.

Mortgage Fraud in Canada Up 150% Year on Year

2012-02-21T08:54:00.001-08:00

According to Equifax, mortgage fraud is up 150%, $400 million in total, and that's just what they found for their clients, meaning it's a low estimate.

An analyst the other day pegged subprime of new originations through the broker channel (correction) in Canada at 15%. Where we stand. He had a very good point that tightening of mortgage rules will have a disproportionate impact on prices because the marginal buyers are the only growth areas left, (implying that) without them, the market must contract (or at least cease growing, which for a bubble is still death).

Mortgage fraud hits 'eye-opening' level in Canada, report says

Numerous criminal groups across Canada are involved in a wide range of mortgage frauds at varying levels, the CISC says, sometimes with the help of industry insiders such as property agents, mortgage brokers and lawyers.

One growing trend is people setting up fictitious identities, building up credit for those fake people and then using the credit to borrow.

Equifax says that five years ago, it had identified 300 such fictitious identities in its national database. Now there are over 2,500.

Look at this Happy Buyer! The Lie as a Sign of the Market Top

2012-02-20T06:28:00.000-08:00

Australians will be familiar with this ploy. Newspaper needs to write real estate pumping article and as a result must find suitable subject for article. Really, you'd think they'd wise up and choose someone with a relatively common name? Not so much.

Street Smarts: Toronto’s Yorkville, heart of the city

She won’t be taking possession for at least two years, but Vickie Zemelman is already excited about her new pied-à-terre.

The North York mother of three school-aged children has just bought a one-bedroom, $500,000 condominium at the New Residences of Yorkville Plaza, Camrost Felcorp’s 32-storey, 500-unit tower on the site of Toronto’s renowned Four Seasons Hotel. When it’s complete in 2014, Ms. Zemelman plans to use it as her weekend getaway so she and her husband can have some alone time or entertain friends on their terrace. Her parents, who winter in Florida, have bought a similar unit down the hall and will use it whenever they’re in town.

House Listing at 146 MacArthur
entry at serviceratings.ca

Funny how the article didn't mention what North York Mother of Three did for a living. . .

With hundreds of brand new condominium suites up for grabs in Yorkville, developers are banking on people such as the Zemelmans to snap them up; the purchases will afford them an exciting entry into Toronto’s growth.

They are banking on Real Estate agents buying everything? Seems kind of a niche market . . .

If you couldn't find any neutral ~~suckers~~ examples to interview, what does that say about the market, exactly? If Australia is any precedent, it says we're just ratcheting past the top.

Hat tip: GTA Girl, OwlEyes at Greaterfool.ca

Loan Shark Depositors in China Protest in Hopes of Getting Their Money Returned

2012-02-20T05:26:00.000-08:00

I've harped on this before (Loan Shark or Borrowing Walrus) but this is the first time it's shown up so baldly in the mainstream press. Ordinary people have pulled their money out of safe bank accounts and put it into high stakes shadow lending.

China's unofficial lending falters, savers protest

Ms. Zhang, a schoolteacher in the central city of Anyang, lent $43,000 last year to entrepreneurs who couldn't get loans from state banks. Now as growth cools and Beijing cracks down on informal credit, Zhang and thousands of other small lenders are unpaid and angry.

Underground lending by ordinary Chinese like Zhang flourished over the past decade, providing trillions of yuan (hundreds of billions of dollars) needed by private companies that create China's new jobs and wealth.

The most recent pyramid failure in Wenzhou officially sunk 1000 investors, unofficially sunk 5000. That's a brutal multiplier effect.

"We have no other investment options and bank interest rates are too low," said Zhang, . . .

You and everyone else, my dear. You and everyone else.

. . .who asked not to be identified further. Hopes of getting back the 270,000 yuan ($43,000) she lent are pinned on the courts so long as the government is willing to let a case proceed.

Entrepreneurs were struggling with slumping global demand when Beijing clamped down on a credit boom to cool its overheated economy. State banks cut the small amount of private sector lending they were doing while continuing support to state industry. Private companies failed and the survivors cut payrolls.

Only 19 percent of bank lending last year went to small businesses, while total loans fell 6 percent from 2010 to 7.5 trillion yuan ($1.2 trillion), according to the official Xinhua News Agency.

The underground credit market is estimated by China's central bank and private sector analysts at 2 to 4 trillion yuan ($325 to $650 billion), or as much as 7 percent of total lending. In some areas, informal lending exceeds that of official banks.

Regulators started to worry about underground lending after high returns drew state companies and civil servants into the business, blurring the line between banks and informal lending, according to Guo.

"They could easily borrow from banks and earn a profit by re-lending the money," he said. "If a problem happened, it would become destructive."

In Zhejiang province on the southeast coast, an export center hit by an avalanche of bankruptcies, 11 people have been sentenced to death since 2009 on charges of "illegal fundraising," according to news reports.

Wait, the central authority turned a blind eye to it as necessary, but it's actually illegal and can trigger the death penalty. What a business environment.

Ordinary Chinese savers still have powerful incentives to take part.

Banks pay 3.5 percent on deposits, while inflation stood at 4.5 percent in January and was as high as 7.1 percent in July. Food prices are rising by double digits, adding to the urgency of earning a better return.

Zhang, the schoolteacher in Anyang in the central province of Henan, said she lent money last March to five local companies after friends put her in touch with the owners. She said such arrangements have been routine in Anyang for more than 10 years.

"There were no problems in the past two or three years, so people believed they could make money from it," she said by phone from Anyang.

The borrowers paid 4 percent interest each month but when the six-month loan came due in September, they said they had no money left, she said.

"It was just gone," Zhang said.

Sounds like a pyramid scheme, all right.

Thousands of frustrated lenders in Anyang took to the streets on New Year's Day, demanding the government recover their money, according to Hong Kong news reports.

Police blocked some who tried to board trains to Beijing to complain to the central government and authorities in Anyang are investigating hundreds of people suspected of involvement in investment schemes.

The propaganda department of Anyang's Communist Party branch said investigators have detained 160 people and recovered 1.8 billion yuan ($290 million) out of 4.6 billion yuan ($741 million) sought by lenders.

That would be almost $2 million per detainee. Either they work really fast or they are tossing out numbers to quell panic. Or the article is talking about the Western New Year, not the Chinese one . . .

I think the boundary is, don't lose money, then it's legal. But how likely is that in a collapsing economy?

Real Estate in all tracked Chinese cities fell in January

2012-02-19T13:10:00.000-08:00

The Lunar holiday was a bust for the top four cities.

China Jan. Home Prices Worst in a Year

Prices in 47 of the cities fell, while home values in the remaining 23 were unchanged from December, the National Statistics Bureau said in a statement on its website on Feb. 18. New home prices in the nation’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou declined for a fourth month. None of the cities posted gains in home prices for the first time since the government began releasing at the start of 2011 prices for 70 cities surveyed instead of a national average.

The eastern city of Wenzhou posted the biggest drop for the third month, with home prices declining by 0.6 percent in January, according to the Statistics Bureau. A credit squeeze on smaller businesses in the city prompted a visit and pledge of financial aid from Wen in October.
“Wenzhou and other eastern coastal cities are liquidity- sensitive,” said Alan Jin, a Hong Kong-based property analyst at Mizuho Securities Asia Ltd., adding that prices dropped in these cities as “entrepreneurs with high-yield debt may have just sold off their properties for cash.”

Why the top of a housing market is tough to spot

2012-02-19T07:01:00.000-08:00

Everyone is eager to spot the top of a housing market, but it is difficult to do because the sales mix clouds what is really happening as the market transitions. The sales mix is not represented in the average and median and even the HPI the Van RE folks are so happy to trumpet.

As the market peaks, the speculative buyers gradually fall back and the real buyers (those shopping for shelter, especially former bears capitulating) buy whatever they can afford. The shelter buyers end up in housing of a much lower grade than they would prefer, and they overpay for it. This last part is critical. You can see this happening in Toronto, the <500,000$ sales are the main thing moving. This pulls the average down, as well as the median once the total sales become significant, but it forms a false peak in the average and median because these buyers are still badly overpaying for what they are getting, just the total $ changing hands is lower, pulling the stats down. Still firmly a bubble, but one running out of participants.

Zip ahead a bit. The market fully turns and those with a speculative component to their ownership, and those who have overextended and really want out, rush into the market to sell. Now we get the opposite effect. Those on the sidelines suddenly see bargains (that won't look like it later, but that's another post) and jump on them. The "bargains" they are getting are things like formerly 900,000$ houses that are being fire sold for 700,000$. These bargain hunters are happy to overextend to get into the market. Happy happy! And this repeats itself across the price spectrum, and the average and median are pulled upward by it, when in fact, the market for any given house type is firmly in plummet mode.

HPI, which measures the price of a single house type, will eventually show this peak, but not until stage 2 above. In stage 1 above, the price won't change (or it may inch upward), but sales will decline because buyers are participating in a different tier than the one being tracked. (HPI doesn't report the number of houses that qualified for the calculation in any given month.)

The teranet sales pair measure WILL pick this up, but you won't see the report until 3 months after the fact.

You could probably spot the peak early if you had access to sales data with square footage, and neighborhood quality to run a regression. I don't have access to that data for Canada or Australia.

China's U.S. Treasury Holdings Falling

2012-02-19T07:00:00.000-08:00

Doom was supposed to descend when China stopped buying Treasuries, let alone started selling them. Turns out, not so much. Japan will overtake China as the largest holder.

What Happens When China Stops Buying Our Debt?

Of the $5 trillion rise in debt owned by the public in the past decade, $3.3 trillion was financed by foreign investors, half a trillion by U.S. individuals, half a trillion by pension funds, and the rest by banks, mutual funds, and state and local governments. Since 2000, China has increased its Treasury holdings by about $900 billion, and Japan by roughly $700 billion.

It's also possible that the recent numbers are deceiving. China has been known to funnel some of its Treasury purchases through money managers in the U.K. When it does, the Treasury counts the U.K., not China, as the owner until the data is reconciled once a year. Last March, for example, the Treasury increased China's estimated holdings of Treasuries by 30%, and the U.K.'s down by an equal dollar amount, to reflect who truly owned the assets. But it doesn't look like that's happening this time. Since July, both China and the U.K.'s Treasury holdings have declined. In fact, total foreign ownership of Treasuries fell in December by almost $20 billion -- one of the only net monthly declines in the last five years.

Canada Poised for Severe Drop -- Bloomberg

2012-02-17T12:40:00.000-08:00

Nice correlation. Housing is an economic dead end. Remember that the next time a real estate pumper tries to tell you how great it is that swapping houses spurs people to buy new furniture, new roofs, hire lawyers and movers and, of course, brokers. That's money not heading into an industry that will increase productivity and build the economy.

Canada Housing Poised for ‘Severe’ Drop

“Whenever this ratio goes over 7 percent, it signifies overinvestment in housing and two or three years later, we have a severe correction.” . . . Canada’s ratio of housing investment to GDP has averaged 5.8 percent over the last 50 years and is currently at about 7 percent, based on Statistics Canada figures as of the third quarter of 2011, Athanassakos said. Housing investment includes spending on new homes, renovations and real estate transaction fees.

Strangely Familiar Story in New Zealand

2012-02-17T07:55:00.000-08:00

School Boosts Home Values in an Auckland Neighborhood

The suburb, a real estate agent said, is popular with the wealthy Asian immigrants who have been coming to New Zealand in increasing numbers in recent years, and particularly with the Chinese.

Last December, Mr. Fong sold a luxurious, five-bedroom house in Epsom to a buyer from China. The residence, which was bought for 2.56 million New Zealand dollars, or about $2 million, covers 448 square meters, or about 4,800 square feet, on a 937-square-meter lot. It is larger than most properties in Epsom, but there are other homes of similar size.

Also, larger properties are considered more of a security risk, because neighbors are not nearby.

“The more privacy you have — for instance, if you’ve got trees all around and no one can see you — at the same time, it’s easier to get a burglar as well,” he said, explaining that a wife and children will often settle in New Zealand for schooling purposes while the husband is still working overseas, so security is important.

Ehem.

The Only Bubble Is Small and It Is Over There

2012-02-17T06:35:00.000-08:00

Jay Bryan: Inevitable housing crash? It's been called off

At a time when job growth in Canada is throttling back, as consumer spending slows, we're going through a delicate transition that could be badly derailed if there were a hard landing in real estate markets.

Just out of curiosity . . . what is the point of an article (editorial?) like this anyway? Comment fishing can't be worth this embarrassment. Appeasing the Real Estate Advertisers is the next most reasonable explanation I can come up with.

And I love how the only meaningful number cited is the 10% overvalued as opposed to basic journalism which would involve presenting countering stats. He doesn't even bother summarizing how the 10% calculation came about (I've never seen it accompanied by an explanation, so maybe there isn't any).

Yeah, Mr. Bryan, the market is a mere 10% overvalued after going up that much nearly every year in the last decade while inflation was less than a third of that.

Let's recast it this way: Let's say you are divorced and paying alimony. And every year since 2000 the judge has ordered you to pay your wife 10% more than the year before. If you and your friends are out at the bar drinking, would you assert to your drinking buddies that your wife's share of your monthly paycheck is only 10% overvalued?

Doesn't that sound foolish?

Pro-tip: the need for the "delicate transition" (that must be an economic term of some kind) is caused by misallocation of capital, into houses. If houses are so amazingly perfectly valued, you wouldn't be fearful of government policy damaging the value. You've just undermined your entire assertion by screaming "Hey, don't blow on that house of cards. That would be a really bad idea right now while the rug is on fire and the dog is eating the cat!"

While we're now getting a growing boost from exports to the thawing U.S. economy, the slowdown in consumer spending on housing needs to be gradual if Canada's growth is to avoid a shock. Happily, this is pretty much what seems to be happening.

Yes, and when the speculative component is gone from the market, people will still totally be cool with paying twice as much as an American for the same shelter. On lower post-tax income, no less. What troopers.

A few cities, including Montreal and Ottawa, saw bigger sales declines, but their prices remained firm. rising a little faster than the national pace of 2.7 per cent for the past 12 months.

Oh yeah. Year on year we're good, folks. Nothing to see here. Montreal is down 5% just since July, but all's well. And hey, it's only 10% overvalued. So we're halfway there. Yippy. (And I know the production of your little advertiser happy meal wasn't meant to take up too much of your time, but you need a comma there, not a period.)

Not coincidentally, Toronto is the one market with a segment that could be flirting with speculative instability, suggests Douglas Porter, deputy chief economist at BMO Capital Markets.

Great news, those 10.5x income to price ratios in Vancouver are totally reasonable. Montreal, of course, with it's median multiple up 60% since 2004 to 5.1x (according to demographia) is not a bubble, either. Mr. Bryan wouldn't miss a bubble in his own back yard, would he?

Still, the broader market looks increasingly sustainable as price gains slow down to a national pace that no longer outruns people's income growth, Porter notes.

"No longer outruns" So . . . there is no reckoning for the previous binge on mortgage debt? Canadian households are just going to limp along under record debt loads, sacrificing stuff for their kids, vacations, etc, forever?

Given this benign outlook, it's a little baffling that we're still seeing scary reports about Canada's bubble - a situation where price gains accelerate as they feed on themselves.

Sorry, what's baffling? You just said it. Prices outran income, employment is shaky, and now carrying costs and debt are going to crush consumers. It's called an unwind. You imagine it will happen in an orderly fashion based mostly on the assumption that the overvaluation is small. Your tiny dream overvaluation which is already exceeded by the declines in Edmonton, Victoria, and Calgary. But you don't supposition that all's well nationwide because some places have already adjusted that whole amount. Why not? It's almost like you don't actually know that.

While it's sad to see a renowned publication [the Economist] sink to such a level, perhaps it's not surprising.

I agree, calling it a balloon is comically silly. When you let go of a balloon, what does it do? Flies around smacking into all kinds of things. You are hanging your hopes on a METAPHOR. On the other hand my metaphor can beat up your metaphor might make a cute bumpersticker . . .

Porter, who's been tracking all the predictions of disaster with bemusement, theorizes that people just can't understand why, if the U.S. had a huge crash, next-door Canada had its own big housing boom, but no crash.

It's not a mystery. 40 year amortization with 0% down. Securitization of 90% of mortgage debt growth over the last 4 year. Banks giving 7% cash back on a 5% down mortgage. Mystery solved.

The answer, of course, it that a bubble-and-crash cycle isn't easy to produce.

What? Since the dawn of civilization, bubble and crash cycles have been the norm. But they are hard to produce. That's new.

First, a true speculative bubble requires impressive levels of irresponsibility from banks and regulators, something that took a long time to develop in the U.S. Canada never matched this achievement. A mere 10-percent or so of overvaluation, which is roughly what we have in Canada, is no bubble.

Show me the fiscal irresponsibility in Ireland, in Spain, in the UK. Bad news, buddy, the problem is overextending credit, period. Subprime and mortgage fraud simply broke the back of the system sooner in the U.S. You will please note that Jumbo mortgages (in excess of $1 million, all Prime mortgages issued to people more than able to pay, and still able) lead the growth in foreclosures right now. Up nearly 600%. Overextended buyers will not keep paying once those dreamed-of gains vanish. Once people realize there is no "investment" in buying a house, they will realize they are no more than renters paying too much rent, and carrying all the risk, unlike a real renter.

Apart from some overheated niches in the market, history suggests to him that we'll likely see home prices that simply go sideways for several years, allowing incomes to catch up.

"History suggests?" Really? Porter should point to a single case where this has happened, you know, in history.

The Five Stages of Grief as Applied to a Housing Crash

2012-02-16T10:21:00.000-08:00

Kübler-Ross' model of grieving:

Denial
Anger
Bargaining
Depression
Acceptance

As we move from denial to anger, you can expect the following:

News media and bloggers will be blamed for causing the downturn. (Pointing out the irrationality of the market is incendiary stuff!)

Neighbors who have to sell and therefore drop their price will be considered unneighborly for doing so. "They are setting a low comp. What are they thinking?!"

Bear behavior will be targeted as irresponsible: "The market is in a dip, why aren't you taking advantage!?"

The bargaining phase will be accompanied by:

Assertions that the situation in those areas where the price is falling, over there, doesn't apply to my area. It's different there than here. "Real Estate is local". Once more areas are falling, this will be repeated at suburb level. "Beachfront will never drop, even if it went up 85% in the last five years. Everyone's been lining up for decades to live here. There is pent up demand." Then it will move the the street level: "Houses on that street have those power lines". Then: "In that house that just sold the third bedroom is really a den. Our house is clearly nicer."

People will demand that the government do something. (In Australia, this has mostly been the realtor/broker industry insisting that first time homebuyer deals be extended, or that interest rates really need to come down.) In Canada it would be something like more funding for CMHC or looser mortgage standards so those poor locked out people can "get on the real estate ladder" while "the market is a bargain".

Depression will be marked by:

The bulls will vanish from arguments at work, parties, and internet comments. Many will turn out to be secret long-term bears. Very secret.

Discretionary spending will be severely curtailed. Those with cash will be kings.

Speculators Mail in the Keys in Formerly Hot Areas of BC

2012-02-16T06:52:00.000-08:00

I like the subtext in this quote from Mr. Ash. It doesn't count because it's speculators, not families. And/or unlike families, speculators know how to cut their losses.
Home foreclosures skyrocket in Kelowna

Elton Ash, the vice-president of Remax Realty in Western Canada, says most of the foreclosed properties are from people who were trying to flip homes during the hot market a few years back.

"People weren't able to achieve their goals in doing this and so they quit making payments," he said.

Also, credit where it is due, Jason Neumann had a blog post about this several days before.
Kelowna and Okanagan Foreclosure Property Sales For January 2012

There are currently 171 active foreclosures (as of February 10,2012) amongst the entire listing inventory (3,934 properties) for the Central Okanagan. There are currently 82 active foreclosures (as of February 10,2012) amongst the entire listing inventory (1,792 properties) for the North Okanagan.

Those are rates of 4.3 and 4.6%

The Myth of Fixed Affordability Tracking Interest Rates

2012-02-15T07:44:00.000-08:00

In Canada and Australia the bulls have argued that expensive houses are still as affordable as ever because of low interest rates. (Ignoring that those rates aren't fixed for long, but that's a separate issue.)

This chart from today's Macrobusiness Blog demonstrates that credit has been issued in excess of the monthly nut affordability measures. Interest payments on mortgages as a fraction of disposable income has been on a steady rise since 2000. The GFC really threw a monkey wrench into what appears to have been non-linear growth in interest relative to disposable income. Goes to show that a system where a lot of people make money on the status quo will not get fixed or addressed without a shock to it.

I'll take a look around, see if I can find similar data for Canada.

Welcome Back Kohler

China Daily on the State of Private Lending

2012-02-13T18:24:00.000-08:00

Borrowers face costly payback

The Supreme People's Court deems private lending illegal when the interest rate is four times higher than that of a commercial bank. Yet, while the current average is from 6 to 7 percent a year, some underground banks are lending at an annual rate of up to 90 percent.
According to the survey of Zhejiang businesses, roughly 9 percent of respondents said they "frequently" borrow from private lenders to ensure cash flow, with 47 percent doing it "occasionally".
The most recent data from China's central bank also supports this theory. It stated that private lenders had loaned 3.38 trillion yuan ($536 billion) last year by May.

With the rising costs of labor and materials and the tightened bank policies, he said that the government crackdown on private lending had been the last straw. "We just hope something concrete can be done sooner or later," he added.
According to Zhou's association, Wenzhou until recently had about 160 private lenders and "guarantee organizations", which are companies or individuals who stand as guarantor on loan applications. Today there are no more than 20.
One lender, who gave his name only as Fu, said he will not even lend money to relatives nowadays, explaining that once the money is "out of my hand, I have little chance of ever seeing it again".
Nine out of ten lenders mostly bankrupt bosses will take the money and flee, he said, adding: "It's a vicious circle."

OECD and Deutsche Bank Rank the Most Overvalued Countries

2012-02-13T12:24:00.000-08:00

The Most Overpriced Housing Markets In The Developed World
Country - Over valued by:
Italy - 10%
Denmark - 17%
Finland - 22%
Sweden - 25%
Spain - 33%
UK - 34%
Netherlands - 36%
Australia - 39%
France - 42%
New Zealand - 44%
Norway - 48%
Canada - 54%
Belgium - 56%

I don't actually agree with this analysis that the U.S. is 9% undervalued. I would have put it at 7-8% overvalued. But given the wide differences between markets, it probably comes down to the weightings. For example, because Las Vegas and Arizona overbuilt without regard to lower population, many of those houses simply shouldn't count in the analysis. Also, if they are using average incomes, that completely ignores that most of the gains in the last decade went to the top few percent and isn't available to the middle class at large to invest. But this isn't about places finding a bottom. It's about those that are doing an excellent impression of Wile E Coyote.

Toronto Bubble Risk Naysayers Collected

2012-02-13T06:52:00.000-08:00

In one handy reference guide from Bloomberg.

Toronto Bubble Risk Topping New York in Condos

Canada’s housing market is about 10 percent overvalued, with inflated prices primarily in Vancouver, Montreal and Toronto, [Sheryl King, an economist with Bank of America Merrill Lynch] said in a telephone interview. “We would call it a bubble,” she said.

10%? The median is already down 4%. Does that mean Toronto's market's already 1/3 of the way to the bottom? Have you noticed that Edmonton, Calgary, and Victoria have already fallen at least that far but somehow you didn't mention that they were overvalued in the first place.

A record 27,504 condo units in the City of Toronto were under construction at the end of last year, according to Canadian Mortgage & Housing annual data, adding to the city’s total of 199,000 units.
“If builders stopped building today, there’s five years worth of supply that is about to be delivered, relative to what normal population growth is,” Bank of America’s King said.

But it's only 10% overvalued? And downtown Central Toronto condos have already fallen 7%. Where in the world did you get that number?

Banks are also cutting their funding costs by selling covered bonds, a form of corporate bond backed by assets such as home loans. Bank of Montreal and Bank of Nova Scotia sold $4.5 billion of the securities last month, after a record $25 billion of sales in 2011. Relative yields on the covered bonds fell to 130 basis points on Feb. 9, down from 170 at the start of the year, according to Bank of America Merrill Lynch data.

Someone has to finance that ever expanding bubble of credit. Thanks bondholders. You do realize that Canada, unlike Greece and Ireland, are perfectly capable of currency devaluation, right?

Investors represent a “significant portion” of Toronto’s condo market, with 20 percent to 30 percent or higher for some projects, the report said.

Doesn't sound that high, honestly...

“In absence of another recession, we’re not expecting demand to fall,” Canadian Mortgage’s Hildebrand said. “We’re expecting it to hold steady so long as the economy holds steady.”
Toronto is home to about 2.5 million people -- more than double that including its suburbs -- and accounts for about 11 percent of Canada’s economic output, according to the City of Toronto.
. . .
Realtors and others in the industry say the record condo units under construction will be easily absorbed by 100,000 immigrants streaming into the city each year, wealthy foreign investors looking for a haven to park their money and young urbanites demanding to work near the financial industry that is the backbone of the city’s economy.

Where did that number come from? The highest annual growth number I can find is .4%, which would be double the average census number from 2000 to 2006. Against a population of 5 million, that's 20,000 people a year. Or, for the next twelve months, 1.35 condos coming on the market, per immigrant. If the financiers have their way, however, they will happily let every one of them buy three a piece, so there you go. No overhang.

“There are reasons why people want to spend time in Toronto, and that’s part of what supports these real-estate markets,” said William Strange, RioCan Real Estate Investment Trust Professor of Real Estate and Urban Economics at Rotman School of Management in Toronto. “Toronto tends to be a pretty good place to do business and, with respect to Canada, it also tends to be a place where people want to live.”

Noted. It's different here. Really it is.

Toronto isn’t facing a bubble because price increases have been steady, said Ben Myers, executive vice president of Urbanation, a Toronto-based real-estate research firm.
“We’ve seen the same level of increase in the market year- over-year in terms of index pricing in 10 of the last 15 years,” Myers said. “If we didn’t have an explosion of the bubble in those years, I’m not sure what would cause it to happen now.”

Awesome. Bronze that quote.

Fallout from Toronto’s construction boom may not surface immediately, according to Queen’s University’s Andrew.
“It’s going to be three-and-a-half to four years from now when these loans are all coming up and you’ve got a number of people who say they can’t afford to refinance it, so they’ll just sell,” Andrew said. “They’ll find out that 40 units in the building all went on the market in the same month, and now they’ve got a big problem.”

The lag in the reckoning is based on how creative the banks were getting in the last year with financing people who are already overextended on debt. The slow bleed and unusually high levels of variable rate financing will push distressed properties on the market sooner than that.

ANZ Raises Rates Despite Central Bank Staying Put

2012-02-12T06:59:00.000-08:00

ANZ goes it alone with rate rise

MICHAEL JANDA: Well ANZ said explicitly at the end of last year that it was moving away from setting its rates in response to the Reserve Bank decisions. It just so happens that their second Friday of the month meeting happened to be the same week as the RBA's meeting this week but it won't always be so.

That's why it decided to independently put up its variable mortgage rates by 0.06 of 1 percentage point to 7.36 per cent. That'll add about $13 a month to a $280,000 mortgage.

ANZ Goes It Alone On Rates, Sparks Govt Outcry

The controversial decision has repercussions for Australian monetary policy, as it will factor into central bank considerations on the scope of any future interest rate moves. Australian Treasurer Wayne Swan was immediately critical, noting that Australia's banks remain "very profitable," and telling ANZ's customers that they had a right to be angry.

"You do have the capacity to walk down the road and get a better deal," Swan told reporters.

Give us a break from the squeeze

The ANZ made it clear it was freeing itself from Reserve Bank interest rate movements when it said it would make its own announcement on the second Friday of each month.

Thousands of jobs have been lost across Victoria and higher interest rates will further depress consumer confidence. The banks should show they understand people's problems and absorb the pain.

Did any of these people raise a complaint while these same banks spent the last four years issuing overvalued mortgages in the middle of a world-wide crisis?

Real Estate Bull Insists Rents Should Not be Adjusted for Quality

2012-02-10T08:13:00.000-08:00

And he calls it a "fallacy". Awesome. So noting this one.

Analysing Toronto’s Real Estate Market: How Can So Many Be So Wrong?
Because this is the largest credit bubble in world history, maybe and therefore utterly unprecedented?

Oh, nevermind, Mr. Pasalis does not acknowledge the impact of credit on prices. I see given his little list of things that impact prices. (Hint: it is not the same as low interest rates. Interest rates were formerly used as a mechanism to control appetite for credit, but that does not make it a requirement to control access to credit. They really are independent. With regulation, that is. What we have is a massive symptom of lack of regulation.)

Also, if the house price gains were real wealth, they wouldn't be balanced out on the other side of the equation by an equal gain in debt. Think about it.

These new condominiums are completely different in size, style and condition from old purpose built apartments. They are usually in more premium locations and have modern finishes and amenities that you do not find in an older apartment building. As a result, condos will usually rent for roughly 40-50% more than older apartments.

Condominium rentals are not a luxury upgrade that only a select few choose. This is the new standard in Toronto's rental market. With vacancy rents hovering around the 1% level in Toronto, most renters have no option but to pay this premium.

The vacancy rate right now is 1.4%. (More accurate given the huge error incurred in rounding to actually include that digit, btw.)

But you need to take it to the next logical step. Given the ultra low vacancy rate and the ability to double and treble up in these amazing new standard flats of glory, why haven't rents gone up more? You're crying foul because rents have remained commensurate with quality. If your thesis were correct here, they would have exceeded it. Greatly.

I'm just glad this guy isn't talking his book. Ehem.

Related Links: Ontario Vacancy Rates

Sentiment on Housing in Australia Seems to be Shifting

2012-02-09T08:12:00.000-08:00

Comments are from this article:
A property crash? Don't bet on it.

For me, the main fundamental of any investment is RETURN. I am flabbergasted on how little attention is given in the RE debate here in AUS on the fact that property investments that show negative returns (as is widely the case because of our high interest rates) would have to be a NO-GO investment at times of flat or falling property values!
. . .
Commenter ReneThalmann

I have never seen things this bad before. I work for a major bank and am noticing some really bad signs. The bank is in the process of cutting the number of lenders back from 1-2 per branch to 1 for every 3 branches - that is how slow the mortgage business is. Professional valuations are coming in lower than purchase prices - which is virtually unprecedented. Applicants can't borrow as much as they could previously so this is taking buyers out of the higher segments of the market and having a downward concertina effect on pricing. Properties that could have fetched $1.5m in the boom are now NOT selling at $900,000. I am not saying that every property has or will drop by 40% in value - but many of us know of examples -particularly Gold Coast & Sunshine Coast - where this has already happened. So I find it hard to really believe the crux of the article & so question the credibility of the views expressed. There will be many more jobs lost in a variety of sectors so unfortunately I think there is worse to come. All the money that fled the US & Europe in 07 & 08 got sunk into Chinese assets - looking for the next big thing - so although China will grow (similar to the tech sector) their assets are overvalued. When that money comes back out of Asia then we will be at the bottom of the cycle.
Commenter mich2210

Ian, surely you are aware that the rises in unemployment in other countries (US, Ireland, Spain, etc.) occurred AFTER house prices started dropping and hence contributed to the acceleration in price falls.
The equation is simple. Less demand for (or availability of) credit leads to less money in the economy which leads to a contraction of demand and a rise in unemployment.
This feedback loop started to kick in around 18 months after house prices started falling in most countries. ...
Commenter AB

There is only so much of the pie we can pay towards a mortgage and still buy pie to feed ourselves, so the view that property values can continue to increase is ridiculous. But that doesn't necessitate big falls, given the supply side. Hence we are in for a slow grind. until yields inevitably draw investors back in. With an ageing population more dependent on income generation from their assets it makes sense that investors shift focus to steady income streams rather than capital growth anyway.
Commenter Mike

So your sideways slide may struggle keeping its sidewaysness if you actually needed to sell right now or in the short or medium term (hope your properties are fully paid off, or your income remains steady, you don't fall sick, don't divorce, don't have any accidents, have good insurance). In the current climate only property holders that must sell or wish to offload depreciating assets are in the market offering stock. It's bad news to have to join them in the hussle right now.
. . .
Commenter Mega Fox

Hasn't this been the role of the media through the entire boom though? Placate the mindless masses and act as unofficial advocates of the property market interests, talking up ANY potential market gain (no matter how dubious the source) whilst downplaying any market swing?
The entire global housing bubble was one born of two major contributors; cheap debt and propaganda.
. . .
Commenter Educated Cititzen

5% this year, 5% last year, 5% the year before, it just keeps going down, and we haven't hit the really tougth times yet. Keep going China or we'll be up to our eyeballs in it.
Commenter Deano
Deano,
you forgot to subtract the loss to inflation, which was about 3%. So its not 5%, its more like 8%.last year, 8% thist year, 8% next year......
Cheers
Commenter That Sinking Feeling

If the average fall was 4.8%, add in inflation of 3% - that's nearly 8%- in one year? One or two more years of that and we'll be crash territory...
Commenter Paddy

So it's finally come to this has it?
We're at the stage of debating a 'pop' v 'an orderly retreat'. And then we're supposed to digest talk of 'a sideways slide' and of course the real big one, "negative growth'.
The only people who really have skin in the property game are buyers and sellers and those considering buying or selling. I can 100% guarantee that if you're a seller it matters not one single jot if it's an orderly retreat or a disorderly retreat. The direction is the same...DOWN!
. . .
Commenter pp

. . .
As the old line has it : 'My real estate agent and bank manager sold me a two story house- one story before the sale, another after.'
Commenter Reality versus real estate

Sentiment is a key part of a bubble. I'd say the myth structures have shifted. Note that it took somewhere between 10 and 18 months for this to happen.

[VREAA does this sort of post to great effect (so I admit I'm stealing the idea).]

Year of the Dragon Buying in Vancouver may be a Bust

2012-02-09T06:58:00.000-08:00

Couched in a metaphor (although, not much of a stretch, given the speculative nature of buyer expectations ...) Real Estate agent Larry Yatkowsky gives his view on the much anticipated and hyped buying spree that would accompany the Chinese New Year.
Vancouver Real Estate Games

Proclaimed was that this Chinese New Year – the Year of the Dragon, would see many overseas players arrive to play their hand in the high stakes game known as Vancouver real estate.

See, if I wrote that, I'd be called a bear...

Current sentiment amongst some Vancouver Realtors® is that those few who came to play were in possession of Li’s ‘flip side’. Those Realtors® have suggested that ‘strong-headedness’ may have dictated that our guests would not play the high priced stakes of Vancouver real estate deciding instead, to leave Vancouver’s real estate’s gaming table empty.

Canada's Housing Bubble as Envisioned by the Philadelphia Church of God

2012-02-08T07:57:00.000-08:00

A very nice summary article from The Trumpet.

Canada’s Housing Bubble Is Stretched to the Limit

Talk about being a slave to your house. The average Canadian is forced to spend almost 100 percent of their income just on “ownership” costs! How do people feed themselves?

Of course that is why single-income families rarely buy houses in Canada anymore. To buy a house, both spouses need to work. One full salary goes toward paying for the house. The other salary goes toward feeding the family, paying for vehicles, paying other debt, and life.

But how dangerous is that? In the past, if the family breadwinner lost his job, the wife could temporarily get a job to keep the house from being repossessed. Today, if just one person loses their job, the family loses the house.

Since America’s housing bubble popped in 2007, Canada’s house prices have risen an astounding 22 percent. That has to be the definition of insanity—piling into the very investment that made your neighbor and most important economic partner virtually collapse.

But perhaps the biggest sign of a Canadian housing bubble is debt! Rising debt is the gas that fuels all bubbles. The average debt burden of Canadian families stands at a remarkable 153 percent of disposable income—and growing. It was only 150 percent three months ago. Canadians are now one of the most indebted people in the developed world, and just about as indebted as Americans before their bubble burst.

And in a report released last week, cibc argued that the people least likely to be able to afford new mortgages are the ones taking on new debt. One third of debtors hold about 75 percent of all personal debt. And who is this one third? According to cibc, it is boomers nearing retirement and those already burdened by high debt.

What I really like about this article is how he just states the obvious, like it's so obvious. Yeah, Brother, Preach it!

From the About Us page, regarding The Trumpet. (bolding mine)

The Trumpet uses a single overarching criterion that sets it apart from other news sources and keeps it focused like a laser beam on what truly is important. That criterion is prophetic significance. The Trumpet seeks to show how current events are fulfilling the biblically prophesied description of the prevailing state of affairs just before the Second Coming of Jesus Christ.

Wenzhou Company Boss Arrested with Billions in Debt

2012-02-07T13:52:00.000-08:00

China detains Wenzhou exec in city's debt crisis

Police detained Dong Shunsheng, chairman of the Wenzhou Liren Educational Group and froze the firm's assets, the newspaper said.

The company had earlier announced that it owed debt of about 2.2 billion yuan ($349 million) to about 1,000 people, the newspaper said.

There are far more IOUs floating around than there is capital to pay them. The great unwind sure seems unlikely to come off smoothly. If you are the Chinese, how do you even go for the save, no matter how much money you are willing to dump in?

the company has CNY 2.2billion outstanding, not all are convinced by this number, and one lawyer estimated that the total debt raised from these non-bank sources amounted to CNY7-8 billion over the years. As the Wenzhou mess hit hard last year, the company went bust, and since November last year, the company has stopped paying down debts and interests. While the company is being restructured, not all creditors are happy. At the end, the chairman of the company and 6 other directors arrested.

Hat tip: ATP at VREAA

Dragged into the Swamps, Wenzhou Tries an Experiment in Regulated Loan Sharking

2012-02-07T13:33:00.000-08:00

The solution to a run-away loan pool lending is regulated loan pool lending. Or, that's what Wenzhou is going to try.

Shadow banking is huge in Wenzhou. 90% of households are involved for a total estimated capital of $16 billion USD. This compares to total exports out of Wenzhou in the first ten months of 2010 of less than $12 billion. If we assume that pace continued, that'd be about $14.4 billion on the year (probably less, since Christmas orders are in that first ten months), which implies that the total shadow banking debt alone in Wenzhou exceeds the total exports on the year and exports are 95% of the total industrial revenue. Their total shadow debt to total industrial revenue is about one to one. Imagine what it would be with banking debt added in.

And this is China's golden child of manufacturing. Seriously.

Wenzhou calls for capital to come home

This city, a pioneer in the nation's private-sector economy, is about to embark on another experiment: a banking platform meant to ease the financial woes of thousands of companies that teetered on the edge bankruptcy last year.
The financing platform aims to have cash-rich local entrepreneurs set up microfinance agencies that would be regulated and supervised by the government, local officials said on Wednesday.

Wenzhou's economy is largely dependent on exports and private business. Among all companies in Wenzhou, 99.5 percent are privately run and exports account for 95 percent of the city's total industrial revenue.
However, faced with a tough export climate, increasing costs and difficulties in borrowing from banks, entrepreneurs have said that since mid-2011, the situation became even worse than during the 2008 global crisis.
Many people abandoned their manufacturing or export businesses and invested in underground lending for high returns.

However, Wenzhou's per capita GDP was $4,413 in 2010, ranking just 9th out of the 11 cities in Zhejiang province, one of the richest regions in China.

Dealing with an Industry that Lives on Transaction Fees

2012-02-07T10:30:00.000-08:00

A minor case, involving fairly low amounts of money, but a reminder that when you are dealing with people who get paid to make you sign, and get nothing if you don't, you must treat them as a hostile party. Yes, you must pay more to protect yourself; you must hire your own counsel, your own inspector, and even then if you have any questions, hire another to review that one's work. Start from a position of pessimism and distrust. Especially in a bubble, buyers get starry-eyed and they are such easy targets, and there is so much money to be made on the extra churn it attracts additional shady operators, so your odds of finding a trustworthy one get lower and lower.

If you feel pressure. Walk away.

Real estate penalty a joke, say thwarted pair

The advertisement said relocatable houses were permitted on the sections.

They bought one of the sections with the intention of putting a relocated house on it and using it as a holiday home.

Mr and Mrs Wild said they twice asked Ken Adam, owner and branch manager of Perpetual Real Estate's Te Anau and Manapouri Fiordland branch, if there were any restrictions on the sale. Mr Adam told them both times there were no restrictions, they said.

However, after they purchased the section they found out a covenant was in place prohibiting secondhand transportable homes from being put on the section.
. . .
He admitted there had been an oversight in the newspaper advertisement's wording.

It was also an oversight that the Wilds' contract did not feature the covenant saying no relocatable houses were permitted on the section.

Checking in on France's Housing Bubble

2012-02-06T16:48:00.000-08:00

The loans granted in January plummeting (warning google translate)

The amount of loans granted by banks recorded a very sharp decline in January, falling 25.7% over the corresponding month of 2011, according to a study by the Observatory Credit Housing / CSA published Monday, February 6.
"The year 2012 did not start very well. In a sluggish economy, the backlash movement anticipation of the end of 2011 is significant," notes the study. On a monthly basis, the collapse is indeed brutal: - 49.4% between December 2011 and January 2012 (after already falling by 34.1% between December 2010 and January 2011). "It's a blow. The fall is comparable to 2009, when the U.S. subprime crisis, "said Michel Mouillart , professor of economics at the University of Paris West and industry expert.

Surprised they held out that long, given the environment there.

As you can see from the Economist's Clicks and Mortar graph. France is between Canada and Australia for bubbling on the measure of prices relative to incomes.

Oh my, that doesn't capture the situation.

Borrowed from bulle-immobiliere

Hat Tip: Makaya commenting at Vancouvercondo.info

Added: per discussion of Australia's line on the chart

Australia house prices 1970-2003
Chart from Abelson, Joyeux, Milunovich, & Chung

Looking at this, you can really see the market cycle peaks. 1974, 1981, 1989, ????. And what a markedly V shaped "recovery" in 1987. No wonder people want to jump into houses at the first sign of a upward move in Australia, they have been trained to it.

Here is a chart of disposable income. On a log scale.

Real Gross Disposable Income, Australia 1970-2003
from Abelson, Joyeux, Milunovich, & Chung

It looks like there was a burst in wage levels from 1970 to 73. By 74/75 that growth had stabilized to what became the normal rate for the next two decades. The peak in the market above is 1974. Looks like there was an overshoot on prices in that year, or overbuilding that left the market saturated. Or both?

I turned on a few more lines for reference. This chart is zeroed to 1984, which makes it easier to see. 83, 84, 85 were pretty stable years for prices.

Vancouver Charts January 2012 New Numbers

2012-02-06T14:52:00.000-08:00

You want data? You can't handle the data.

Vancouver's Realtor Board has changed the models they are using to estimate the "true" price of houses. The data only goes back so far and the prices have shifted around. Biggest difference seems to be that the relatively acceleration of the detached is much higher in the new index, soaring to a steamy 1 million and beyond. Oh, that and the recent declines in the old index have turned into noise. Although, it is noise with a downward trend with October 2011 as a peak.

This is it. That's as far back as it goes in the current archive.

Not sure why the porcupine effect here that emerges in Jan/Feb 2010. Strange.

Nothing to see here. Market is completely stable.

Last Old Numbers Report on Vancouver House Prices, January 2012

2012-02-06T13:34:00.000-08:00

Well, a few days ago someone posted to vancouvercondo.info what appeared to be the REBGV press release with January's numbers. If it was fake, someone did a stunning job with it. I put the numbers into my spreadsheet and waited, figuring I'd check them when the official release came out. Well, it never did. Reality needed a good kick in the head apparently and REBGV was just the guy to do it. These are the graphs including the numbers off that release.

UNOFFICIAL NUMBERS FOR JANUARY USED HERE. Do with it what you will.
(The sales numbers from the "leaked" release are close enough to the real one that I'm strongly inclined to believe it. Sales were bad, btw. Only Jan 2007 and 2008 was worse, and inventory is looking to beat the record for the decade by April if it continues apace.)

According to these unofficial numbers, the detached MLS was $871,034, which is a $30,500 decline from the peak in June 2011, or a 3.4% decline. The All sales HPI dropped $19,000 from June for a decline of 3%.

Vancouver House Price Graph January 2012

Vancouver Year over Year House Price Change to Jan 2012

“We’re seeing trends emerge in our market that favour buyers, such as increased selection and more stability in pricing compared to this time last year,” Rosario Setticasi, REBGV president said. --january's official release

It doesn't benefit buyers when their equity is going to vanish and their debt is not. Picture Rosario here in a pink and green plaid suit, wingtip shoes, greased hair, and standing next to a grey spray painted Ford Pinto with a bondoed left quarter panel and drilled out trunk lock, cuz, that's what I'm doing right now.

You want to be trustworthy. You have to act trustworthy. Transparency would be a really good start. Means and medians, please. And, btw, the bubble dates to half a decade before you are deciding the world started.

What's with the new MLS Index in Canada?

2012-02-06T13:09:00.000-08:00

Interestingly, just as prices in Vancouver and Toronto and Montreal are turning downward, we get, tada! a new index for house prices in Vancouver and Toronto and Montreal (and some other places that are along for the ride).

Up at the REBGV site there is a handy pop-up window that promises to explain everything. There is little in there but pablum about how great it will be for everyone. Here's a selection:

Combined with the knowledge, experience and skills of your REALTOR®, the MLS® HPI allows you to better understand these trends — and how they can affect the market value of your home.

Anything that supports our cartel is good.

More importantly, though, it helps you approach one of life’s most important decisions — buying or selling a home — with greater confidence.

We can't have you getting scared now, can we? Record debt, Bank of Canada wetting their pants about systemic risks, employment numbers degrading, heck, China slamming on the brakes . . . Not to mention Europe floundering. No, no, we want you confident. That makes you such a better customer when considering highly leveraged speculative investments with high transaction costs. Oh, please write that transaction cost check to us, thanks.

The MLS® HPI tracks changes in home prices by comparing price levels at a point in time with price levels in a base (reference) period. The base period value is always 100.

For example, if the base period for single-family homes is 2005, and the MLS® HPI value for single-family homes in December 2011 is 149.1, you know that the value of single-family homes is up 49.1%, compared with 2005 (149.1 − 100 = 49.1%).

It's all about the gains. It's not a house. We're not even pretending it's a house. It's like a stock, but one that only ever goes up. In fact, look at this example, it went up a boat load. Don't you want to get in on that?

This means that price changes calculated using the MLS® HPI are less volatile than those derived using common measures like average and median, which can swing dramatically in response to changes with high-end or low-end sales volumes over time.

That IS what the median is for, avoiding the dramatic swings. Unless your dataset is very small, average and median are still highly meaningful numbers to report. They are no longer even going to report those. Because why? Let me take a stab: Buyers are children who can't handle getting confused by all these numbers.

And you can't cry housing mix issues if you are throwing away anything older than 2005. Seriously. That's a decades problem.

However, the MLS® HPI is new, in that it is the first Home Price Index to use MLS® data to track trends in home prices in markets across Canada.

Everyone knows that the MLS is absolutely accurate when it comes to reporting house features.

So, we start over in sussing out where these markets are. Maybe with the advent of redpin and hopefully more competitors someone will have real raw data. It's not like Averages and Medians are hard to compute, but you need access to the data, and you can't get that from the outside.

Cartel 1 Homebuyers 0

And it looks like REBGV recoded all the old HPI reports to the new system, because they don't match my spreadsheet. Nice. You know who else was fond of re-writing history?

On the upside TREB has nary a word about this on their site. Good for them, they publish gorgeous reports (recently anyway).

IMF Downgrades China Growth Prediction

2012-02-06T08:33:00.000-08:00

IMF shaves growth estimates for China from 9pc to 8.25pc

THE International Monetary Fund is the latest group to warn of lower growth for China, cutting its forecast for this year to 8.25 per cent from a 9 per cent projected in September.

The IMF's call follows a slew of growth downgrades by economists and a warning by the World Bank that the global economy could slip back into recession.

Any further deterioration of the situation in Europe would further hit China's growth rate, which last year dropped to 9.2 per cent from 10.4 per cent in 2010.

Sorry, you are worried about exports, which are 5% of the Chinese economy instead of fixed asset investment, which is somewhere above 30%, depending upon the analyst? Also, so many of these stats are manipulated. Who knows what's going on inside China.

Who's to Blame?

2012-02-06T08:07:00.000-08:00

There seems to be a movement afoot to place the blame for the coming debt reckoning in Canada on the doorstep of issuance of lines of credit, secured and unsecured. The perpetrators seem to be those making their dime on churn in real estate.

Lines of credit gone wild: Readers tell their stories

Canadians have gone from a standing start 20 years to owing $219 billion on lines of credit today. Credit line use is growing faster than mortgage debt and now accounts for 12 per cent of all consumer debt owed by Canadians.

Correlation and cause are not the same thing. Maybe, just maybe, people are taking on more unsecured debt in order to live under the excessive burden of their housing costs.

Downturn in Australian Prices an "Increasingly Menacing Risk"

2012-02-06T07:12:00.000-08:00

Moody's may be trying to make up for acting as enabler to that little spate of massive scale U.S. mortgage securities fraud.

Australia in blast zone of Europe implosion

It says a downturn in the Australian property market is one of five "increasingly menacing" risks that need to be closely watched in the coming year. The report says mortgage insurance and low loan-to-value ratios provide Australian banks with some protection against falling house prices.

But, if the property market does tumble, the resulting fall in foreign investor confidence would hit the banks' heavy reliance on offshore funding, it says.

When money starts exiting it is really all over. At least Australia can make those foreign bondholders take a haircut the old fashioned way, by devaluing the currency. Pity Ireland and Spain, they can't.

And in case you didn't see it, this is a great chart from the RP Data Blog that really illustrates the psychology of the cycle. Sitting where Australia is right now, the mentality is "it's a little adjustment" sitting at month 36 for the U.S. and "it's a crash! run for your lives!" But you'll notice, it's the same line on the chart.

Toronto, Especially Condos, Show Signs of a Price Slide

2012-02-05T08:03:00.000-08:00

Toronto House, Condo, Apartment, Townhouse Prices Graph to Jan 2012 -- Data from TREB

Thanks to the new medians published by TREB we can better track what is happening on the ground in Toronto. Since the most recent peak in November 2011, Toronto Detached for all of TREB have fallen nearly $21,000, or 4%. Given the large sample size, this is a pretty stable measure. Housepriceindex.ca is also showing a local peak at this time for Toronto. I'm going to hold off adding it to the Canadian Peak Bubble Cities List for another two months to be certain.

Other goings on in the Toronto shelter market: Condos in all of TREB appear to have peaked in October of 2011, and have since then fallen $13,000 or 4.2%. Same with condos in Toronto City, which have fallen $17,500 since October or 5.2%. And the category most firmly showing a solid peak, Toronto Central Condos, which peaked way back in September 2011 and have since fallen $27,000 or 7%. Anyone who bought a condo in q3, q4 of 2011 in Toronto with 5% down is at risk of being underwater. Individual properties, of course, vary. But the environment has definitely gotten tougher.

Rush to the Exits?

2012-02-03T14:05:00.000-08:00

Is mortgage industry running out of money?

Through the wonderful blue sky of 2.99-per-cent 5-year fixed money, however, is a storm of international and national constraints that may cause a slowdown in mortgage and housing markets.

This made me wonder if the recent rush into low interest rate mortgage offers wasn't just a means for the banks to try and grab the last of the available CMHC insurance pool. Just pondering.

Lessons to be Learned by the Canadian Banks

2012-02-03T06:40:00.000-08:00

“Risk-Off” in the Canadian Mortgage Market

“There is a false comfort in loan-to-values.” It’s often better to have more room to service debt, than more equity, said the above source. “If I’m choosing between an 80% LTV with a 42% TDS and a 95% LTV with a 30% TDS, I’ll take the latter.”

This is was an expensive lesson the American banks learned (and have probably since forgotten) . . . it's about credit-worthiness, not Loan To Value or even downpayment. I've been seeing a lot of anecdotes of about friends/relatives getting approved in Canada for very high loan to income ratio mortgages based on large downpayments (20-30%). If this is more than a handful of cases, it is going to come back to bite the banks in the behind.

Just noting something for later

2012-02-01T18:57:00.001-08:00

Need a good laugh, here's one for you.

By the way, even if it takes 5 years to decline 40%, it will still look like a crash after the fact.

Banks Max Out Their CMHC Credit Cards

2012-02-01T08:51:00.000-08:00

Imagine the banks as drunken college students and the card is in mom and dad's name. The banks have been binging on CMHC insurance (insurance the banks themselves bought, not that purchased by buyers) and the $600 billion limit imposed in 2008 to deal with the crisis is soon going to be hit.

This is what creates a bubble, ever increasing debt. The next round of house price increases requires accelerating volumes of credit. Without that, the party is over. Imagine you just bought your house for 800k and you dream of selling it in 5 years for 1.2 million. That means total outstanding mortgage credit for the entire country of Canada will have to continue to grow by 8% per year. When the GDP is only growing by 3%. Total mortgage credit has been growing at nearly ~100 billion per year on a base of ~1.1 trillion, that is ~10% growth. If that continues, total mortgage debt for the country will be 1.8 trillion and GDP will be 2 trillion. How likely is that?

Setting a fixed amount of debt, even sky high already, will end this bubble quicker than anyone imagines. Prices are set at the margin on ACCELERATING debt. The accelerating part is critical. So keep an eye on the CHMC limit. It directly impacts that excessive credit issuance through securitization because securitization is not allowed without insurance.

The first house sold for less because of limits on credit will reset the price for that entire area. Multiply that by every sale. Then wait 6-10 months (if Australia is any precedent) for a general realization of what is happening to sink in, then watch the rush to the exits. If these 800k houses are going to lose 10% in a year, many more owners than normal are going to want out, because the loss is so large because the leveraged bet is so high. Because of sky high values, buyers are under threat to lose 200% of their of their cash investment if they only put 5% down. Suddenly the house doesn't look so dreamy perfect anymore, it looks like a giant battle ax hanging over the head of one's net worth.

And believe me, lots of people in California said: "I don't care whether the value goes down, I'll just keep making my payments and ignore what is happening." These people changed their minds. Being underwater means you are stuck. Trapped, even if payments are affordable because of your situation, is not a state humans particularly like living in.

CMHC backing fewer loans

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

One of the great myths of Canadian banking: We aren't making the same mistakes as the U.S. like securitizing mortgages. Right. You can't blow a bubble without excessive capital pouring into housing. In Canada that excess has been from securitization for more than the last three years. This isn't new.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

I really really hope CMHC audits every one of the claims from the banks. I fear they will be used as a bailout mechanism, like last time. Sadly.

CMHC gave no indication it would seek an increase in its limit.

Well, that would be something.

CMHC Insurance Limits: A Wake-up Call for Lenders

Mortgage default insurance is typically only “required” when someone with less than 20% equity gets a mortgage.

Despite that, almost three-quarters of CMHC’s outstanding mortgage insurance is low-ratio (i.e., 20% equity or more). That’s largely because banks have been buying portfolio insurance in gobs to insure against defaults on low-risk conventional mortgages.

Wait wait wait. Seriously. 3/4 of their book? Holy moly.

(Incidentally, the biggest bulk insurance customer recently has been Scotiabank, which reportedly had an abnormally large and predominantly insured $17+ billion mortgage-backed securities issuance in December.)

Wow, it's getting ugly out there folks. Be careful.

(If anyone knows what it costs banks in Canada to process a typical foreclosure, please drop a note in the comments. Thanks.)

Australia Q4 2011 House Price Charts

2012-02-01T06:57:00.000-08:00

The Australian Bureau of Statistics has been hard at work. Here are the December 2011 charts of Price Changes and Index Price.

Australia, Sydney, Melbourne, Brisbane, Adelaide, Perth, House Price Index Chart

Australia, Sydney, Melbourne, Brisbane, Adelaide, Perth, House Price Change Graph

The change chart, partly due to old data adjustments at the ABS (there were quite a few) shows a return to a nosedive in the change in prices for Melbourne and Adelaide. Perth appears to be trying to stabilize at a moderate decline of -5% year over year. Based on these latest numbers, Sydney is no longer a bulwark against the coming reckoning.

Brisbane Slid 6.8% Last Year

2012-01-31T08:39:00.000-08:00

Brisbane Paces Australia Home Price Slide With 6.8% Drop in 2011

Brisbane home prices plunged the most among Australian capital cities in 2011, as lagging demand weighed on an oversupplied market.

An oversupplied market? Wait, where'd the chronic housing shortage go? It's just possible that speculators were holding them. Just like every other bubble.

House and apartment prices in Brisbane fell 6.8 percent last year, according to a RP Data-Rismark report released today.

This reminds me that RP Data hasn't issued a new press release since May. What is going on there? Maybe Joye can't bear to write yet another negative press release while simultaneously pumping in the press.

[Queensland] also had more development land in receivership than anywhere else in the country, according to a report by real estate broker Colliers International. The company handled 106 distressed property sales in Queensland last year, more than half of the total across the country, and similar numbers are expected to be put up for sale this year, it said.

I added a page for Australia House Price Declines and Peaks.

Housing Welfare for Middle Class Americans

2012-01-30T10:54:00.000-08:00

Why exactly should renters in the U.S. be subsidizing homeowners? To the tune of $140 billion per year. This is, by the way, far less than half what is spent on food stamps in a year ($65 billion in 2010). All the subsidy does it drive up the price of housing, which makes it even harder for those renters (who on average have lower income) wanting to own, to actually do so. Especially since the real sweet benefits are reaped at the top of the middle class pile, not at the margin.

Anyone complaining about the "welfare state" in America, needs to look at their tax return and see whether they aren't a worse offender.

Despite Benefit Disparities, Middle Class Supports Mortgage Deduction

Tax Expenditure of the Week: The Mortgage Interest Deduction

The mortgage interest deduction helps millions of middle-class homeowners.[3] But it helps wealthy families much more.

If the purpose of the deduction is to encourage homeownership, one way to gauge its effectiveness is to see how well it targets the so-called marginal homebuyer, for whom a tax subsidy could mean the difference between being able or unable to afford a home purchase.

It turns out the mortgage interest deduction is poorly targeted according to this criterion. Households with incomes between $40,000 and $75,000 receive, on average, $523 from the mortgage interest deduction. Households with incomes above $250,000 receive $5,459, or more than 10 times as much.[4]

Checking in on New Zealand's Bubble

2012-01-30T08:45:00.000-08:00

Hope springs eternal.

New Zealand's long-term average is 78,000 property sales a year, but sales "dropped like a stone" from 100,000 to 50,000 after the market peaked in 2007.

Helm said the release of KiwiSaver funds was providing some buying stimulus, but the main reasons for the demand were continuing low interest rates and a return to 95 per cent bank mortgages.

"Since we bribed the market, it will stay afloat a little longer."

The Kiwisaver referred to here is a scheme where withdrawals from a work-based savings program can be subsidized up to $5,000 toward a first home purchase. And better yet, multiple parties with multiple subsidies can pool together on the purchase.

"Certainly there are hot spots around the country but that doesn't mean the market's overly buoyant or getting inflated and I think the Reserve Bank will be pleased to sense that is happening, because they must be worried about these low interest rates."

Nothing to see here. Go about your business.

"Back then 6 per cent of the housing stock turned over in a year and now it's 3.6 per cent.
"Whether that's a structural change or just a reflection of a really slow climb back after two recessions, only time will tell."

I really like how they've stretched the graph out sideways to make it look like a *doubling* in the index over five years is just a gentle rise. This is an index, inflation has been removed. Indexes typically should be flat, barring a structural change.

Related links:

BNZ Guidance On EUR500 Million 2015 Covered Bond, Swaps +1.25 Area
Pricier than expected
Fitch puts Australia banks on review for possible downgrade over funding costs

Q+A-Will a big exposure to mortgages hurt Australian banks?

Mortgages drive overall loan growth at National Australia Bank (NAB.AX), Commonwealth Bank of Australia (CBA.AX), Westpac (WBC.AX) and Australia and New Zealand Banking Group (ANZ.AX).

Between them, they have lent A$1.1 trillion worth of home loans, the equivalent of 60 percent of their loan books. This compares with about 15 percent among U.S. and UK banks, but that is an understated exposure as it excludes securitised mortgages.

The Market Doesn't Care How Much You Thought It Was Worth

2012-01-25T06:00:00.000-08:00

'The fact that a seller needs a certain amount of money out of this is relevant to the home owner but not relevant to the market.'

Opening the doors to days of difficult sales

Augmenting the difficult financial and emotional pressures surrounding the vendors they deal with, the market's current downturn has, according to Albone, not yet registered with many. ''Buyers' expectations are still very high,'' he says. ''But the market has changed. And I don't think people have had the chance to adjust to that. They still want the same amount of money. It's been difficult trying to manage those people and tell them their house isn't worth that much.''

The market has been falling for more than a year. In Melbourne, specifically, it's been falling since December 2010.

Forced Sales and Receiver Initiated Listings Surge in Australia

2012-01-24T16:31:00.000-08:00

31% of major investment properties advertised in Queensland Oct-Nov from mortgagee, receiver or administrator
26% of major investment properties advertised in NSW Oct-Nov from mortgagee, receiver or administrator

Listings increased in the year to December by
48% in Queensland
41% in NSW
37% in Victoria

Cut-price homes on the market in Australia as receivers order fire sales

In Noosa this week, new three and four-bedroom homes that last sold for $1.5 million are now in the hands of receivers and have price tags of between $395,000 and $450,000

But Joye want's you to ask yourself if House Prices [are] Set to Soar?

For most of this year Australians have had to read asinine media articles reporting purported experts predicting catastrophically large 20 per cent, 40 per cent and, last week, 60 per cent falls in domestic house prices.

Nothing like opening with an ad hominem. Disagreeing with Mr. Joye is "Asinine". Good to know.

Aussie house prices will have tapered by around 3.5 per cent over the course of 2011.

Yes, but real estate is supposed to track inflation. And the inflation rate to September was 3.5% on the year. That adds up to a loss of 7%. Given that savings accounts in Australia pay 5.5 to 6%, that's quite a difference. (Yes, American readers, Australians get paid to save money. Can you imagine?)

And now we have mounting evidence that the housing market is staging a slow recovery, as I’ve projected in these pages for some time. The key catalyst appears to have been the RBA’s decision to swing 180 degrees from expecting to hike interest rates to cutting them in November and again in December. A low core inflation result from the ABS today would significantly increase the prospect of a third delicious rate cut for home owners at the RBA’s February board meeting.

Wait, you totally admit that access to credit sets house prices? So . . . "recovery" for you is the same as "mounting debt loads" for the country. Noted.

The first tangible signs of the recovery derived from RP Data-Rismark’s November house price index release, which reported a marginal 0.1 per cent increase in seasonally-adjusted dwelling prices.

Ah, I needed a good laugh. Your dream-date-barbie rate cut resulted in a 0.1% increase?

The final nail in the affordability argument is, of course, mortgage rates. The RBA’s munificence has bequeathed borrowers with home loan rates that are now well-below their averages.

I still can't fathom this. In the U.S. where mortgage terms are fixed for 30 years, affordability could arguably be detached from total debt load. (See how well that worked out for us though?) But in Australia where mortgages are fixed for up to at most 5 years, qualifying on payments is a massive trap. Affordability shouldn't change significantly with the interest rate. But here Joye is, encouraging financial suicide. And based on the article above, apparently that's becoming clearer to the banks and borrowers too.

If the RBA cuts again in February, and further thereafter, as some analysts believe they will, expect to see the return of rapid house price appreciation.

You got a .1% increase out of a .5% fall in the mortgage rate? Just what kind of wild rate cut are you expecting here to get rapid appreciation?

Is the Canadian Housing Bubble More Widespread Than That in the U.S.?

2012-01-20T12:07:00.000-08:00

Interesting that unlike the vast difference between the U.S. 10 and 20 city composite graphs the Canadian 6 and 11 are essentially the same. This might be evidence that the bubble in Canada is more widespread than in the U.S. Remember those insane Vancouver #s are a larger percent of the Composite 6, yet despite that it hasn't caused that line to pull away from the Composite 11.

According to the 2011 Demographia Survey, Montreal is the second most expensive city in Canada relative to incomes. That's also a bigger component in the Composite 6. The Teranet numbers are all about gains in prices, not absolutes. Unsustainable gains are what forms a bubble.

Why isn't there more variation between the Composite 6 and 11?

Here are the 6 cities with their weightings
Vancouver: 23.3% Calgary: 9.9% Toronto: 41.4% Ottawa-Gatineau: 6.8% Montréal: 16.8% Halifax: 1.8%%

And the 11 cities with their weightings
Victoria: 3.2% Vancouver: 19.5% Calgary: 8.3% Edmonton: 5.2% Winnipeg: 2.2% Hamilton: 3.7% Toronto: 34.6% Ottawa-Gatineau: 5.7% Montréal: 14% Québec: 2.1% Halifax: 1.5%

The additional 5 cities have a combined weighting of 16.4% in the Composite 11. One might argue it is too small to tweak the graph, but why are these additional five cities tweaking the line *upwards* if this bubble is confined to only Vancouver and Toronto?

2% rate hike would spell trouble for 2 million Canadian homeowners

2012-01-19T22:24:00.000-08:00

2-point rate hike would spell trouble for 2 million: TD

TD estimates that a rise in interest rates of two percentage points would mean trouble for about 10 per cent of Canadian households with debt, in terms of meeting their commitments. That, Mr. Alexander said, is because more than 40 per cent of income after tax would be earmarked for debt servicing.

"This is not the bulk of Canadians and it does not suggest a U.S.-style problem, but it does represent close to 2 million households," he said.

Prices are set at the margin on the way up and the way down. That's a whole lot of distressed selling.

"Given the fact that Canadians are increasingly viewing the prevailing level of interest rates as normal, there is an extremely high probability that it will be very unsettling to Canadians when interest rates do rise, even if they do so gradually," he said.

This is truly U.S.A bubble-esque. Banks qualifying on carrying costs, not total debt load. Only after the crash will it be obvious why this is such a problem. It should be obvious to more than this one analyst, right now.

Hat tip: Jsan commenting at Greaterfool.ca

U.S. Real Estate Advisor Super-Bearish on Australia

2012-01-19T22:18:00.000-08:00

"The market has slowed substantially but residential prices are likely to fall up to 60 per cent, possibly even more, within five years."
The outlook is even grimmer for land investments, which Mr Wirsz said are more speculative and will plummet by as much as 80 and 90 per cent in value.
Commercial property will also take a hit in line with the residential sector shedding at least 50 per cent of its value.
Mr Wirsz pointed to artificially low interest rates, high loan-to-value lending practices, overinflated property prices, unrealistic vendor expectations and Australia's large number of second mortgages.

HSBC’s chief economist Paul Bloxham said for property values to crash there would need to be sharp rises in interest rates, unemployment and housing stocks.
That combination is not on the cards, he said.

None of those things were necessary for the crash in the U.S. Yes, we have high unemployment now but that started 3 years after housing plummeted.

Mr. Bloxham (if that's his real name) has more of the usual fun things to say in the article.

2012-01-19T21:19:00.000-08:00

European Hedge Funds line up bets on China downturn

"We're quite sceptical and worried," he added. "China needs a healthy U.S. ... consumer and it's not getting it right now.... China could be a catalyst for a severe leg-down in markets," he said.

He also cited recent cases of fraud in China and the country's booming real estate sector as issues.

"Corporate governance and the rule of law is very different from the West," he said. "(And) there's a huge bad loans issue in banks. The real estate market is probably in the biggest bubble in the world we have right now."

"(China's) tried to pop the property bubble that's forming," he added. "They have so many reserves they can increase infrastructure spending."

No, they can't. Not without devaluing the Yuan that they traded for that foreign currency. Only 400-500 billion of their holdings are unencumbered in this way.

(All right, that's a lot, but only if they don't let another 120 billion vanish with fleeing corrupt officials.)

Is the U.S. Heading into Solid Recovery?

2012-01-19T12:33:00.000-08:00

As a de-facto pessimist I'm slow to believe things are good. But as a small investor I also don't want to miss any macro shifts. Inflation numbers and other government numbers can be questionable, other raw measures that reflect activities tend to be more reliable.

Hiring Outlook for 2012 Remains Cautiously Optimistic, CareerBuilder's Annual Job Forecast Finds

Full-time, Permanent Hiring
Twenty-three percent of employers surveyed plan to hire full-time, permanent employees in 2012, relatively unchanged from 24 percent for 2011 and up from 20 percent for 2010. Seven percent expect to decrease headcount, the same as for 2011 and an improvement from 9 percent for 2010. Fifty-nine percent anticipate no change in their staff levels while 11 percent are unsure.
Small Business Hiring
Small businesses are reporting more confidence in both hiring and retaining headcount in 2012. Plans to downsize dropped two percentage points across small business segments while plans to hire increased two percentage points among companies with 50 or fewer employees.

Another set of economic measures is the trucking and rail indexes based on freight rates and fuel usage.
The next BTS Transportation Services Index will be released in February, covering December. It measures freight over road, port, air, ship, everything, basically.

Then there is the Ceridian-UCLA Pulse of Commerce Index

What is the Ceridian-UCLA Pulse of Commerce Index®?
In conjunction with economists at UCLA Anderson School of Management and Charles River Associates, Ceridian has launched the groundbreaking Ceridian-UCLA Pulse of Commerce Index® by UCLA Anderson School of Management, which is a first of its kind indicator of the state and possible future direction of the U.S. economy. The index is issued monthly, is based on real-time fuel consumption data for over the road trucking, and closely tracks to the Federal Reserve’s Industrial Production Index. By tracking the volume and location of diesel fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers.

Pulse of Commerce Index Measures Trucking Fuel Consumption

A contrarian investor would possibly say that general attitude is far more negative right now than the underlying numbers justify. By not jumping back full tilt in a V shaped recovery, I think we may have gained stability to the recovery. At least, I hope, and I'm a pessimist, so that's pretty painful that hoping thing.

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Negative Equity in Australia at 5% Nationwide

2012-01-19T11:27:00.000-08:00

This is an increase from 3.7% at the end of the previous quarter.

Some areas are seriously hurting with high negative equity rates:
North Queensland 20.2%
Gold Coast 14%
Sunshine Coast 13.5%
Queensland overall 9.2%
Western Australia overall 6.3%

Local Owners Looking at Negative Equity

Hat tip: Aussie Roy commenting at Greaterfool.ca

Case Schiller vs. Canada and Vancouver Chart Overlay

2012-01-16T21:49:00.000-08:00

Sorry about the crude overlay; I don't have the raw Case-Schiller data. The two charts were marked equivalent at March 1999. Note, the prices were not the same at that time in Canada and the U.S. and Vancouver, that is just the comparison point for price growth after that.

Case Schiller U.S. House Prices Compared to Canada and Vancouver Chart

Canadian Subprime Mortgage Offers

2012-01-15T21:05:00.000-08:00

Cash back mortgages, some in excess of the required downpayment.

I'm screenshotting these for posterity.

Why are these subprime? Because they are affordability products, not wise borrowing. They are, in essence, 0% down payment financing. Get a float loan from a relative for the downpayment, pay the relative back with the cash back, even pocket some money in the process . . . at the expense of future payments and vastly increased risk of going underwater.

TD Canada Trust

RBC

CIBC

You're richer than you think. Until you aren't.

Hat tip: Durr commenting at VREAA

China Q4 Growth Expected to be 8.7% Outflows Increasing

2012-01-15T17:10:00.000-08:00

China a harbinger for global slowdown

Data on Tuesday is expected to show growth in China, the world's second-largest economy, cooled in the fourth quarter to 8.7 percent from a year earlier, against 9.1 percent in the prior quarter. It would be the slowest pace of growth since mid-2009 when the global economy was crawling out of a deep recession.

Anything under 9% is generally considered by analysts and watchers to be too slow to properly transition the workforce from rural to urban and eventually to consumer.

China posts third consecutive month of outflows

China's central bank and commercial banks sold a net 100.3 billion yuan ($15 billion) in December in foreign exchange in December, Reuters calculation based on official data showed.

That followed a net sale of 27.9 billion yuan in November and a net sale of 24.9 billion yuan in October.

Foreign Exchange Holdings declined $21 billion in Q4.

One month of flat prices has Australian analysts back to heavy breathing

2012-01-14T22:53:00.000-08:00

Implicit in all of these outlooks is the assumption that household formation should involve maximum debt. That's supposed to be a positive.

However, the HIA says the general outlook is positive - and doomsayers should respect the fragility of the recovery.

After November and December's official interest rate cuts, "there is every chance we may see a return to dwelling price growth", it said.
-- adelaidenow.com.au

I have no idea what "respect the fragility of the recovery" is supposed to mean. Something like, don't breathe near the house of cards, please! (?)

"The rise in Australian capital city house prices is proof that the RBA’s rate cuts have had a real impact on immediate market recovery," Bouris said. "We believe today’s data is just the tip of the iceberg when it comes to positive house price movement heading into 2012 and it looks like for the first time in a long time, Australian home owners are taking back the market."
-- brokernews.com.au

This guy takes the spruiker cake:

But these situations are dynamic and when the dust settles from the holidays there could be sufficient people wanting to take advantage of two interest rate cuts, to kick start the auctions.

Moreover, property is an asset measured in 10-year cycles and there has not been a decade since the end of World War II where property values have not risen. Modest asset growth will return when you measure it decade by decade – we just won’t see the asset inflation we saw in the 2000s.

Property prices turned upwards in November 2011, so now could be a good time to be in market. Even if you can’t afford to buy where you want to live, you can buy an investment property and continue to rent in the suburb of your choice.
-- telegraph.com.au

I could quote Joye, but he is always heavy breathing.

Ottawa House Prices Peaked May 2011

2012-01-13T13:05:00.000-08:00

Canada House Prices, Peaks and Falls has been updated to include Ottawa. (On housepriceindex.ca it looks like Montreal and Quebec peaked at about the same time, but they seem to be getting a second wind so I'm holding off on those.)

As of December 2011 the OREB average residential price was $356,267 down from $378,228 in May 2011
A decline of 5.8% or $22,000.

Insiders at RBC Selling Shares

2012-01-13T11:22:00.000-08:00

Yesterday, Jim Westlake, Chairman and CEO of RBC exercised just over 275k options for a profit of $6 million.

Source: Canada Insider.com

Hat tip: City Slicker commenting at Greaterfool.ca

44 Detentions in Chinese Pyramid Scheme

2012-01-12T20:30:00.000-08:00

"It's so wealthy there now, they drive expensive luxury cars." --my friend returning from a recent trip to China.

"Wealth" != "Access to excessive credit"

What was the loan shark scheme based on? Housing projects, of course. The usual story, participants in the scheme borrowed money and sold goods to put as much cash as possible into the loan pool.

44 arrested over loans in 'the village of BMWs'

MORE than 40 residents in "the village of BMWs" in east China's Jiangsu Province have been arrested in connection with a multi-million yuan loan shark and pyramid scheme.

Some 200 million yuan (US$31.65 million) has been retrieved, according to Xinhua news agency.

In not dissimilar news, Arthur Laffer, the supply-side God, is accused by investors of selling his influence to help prop up a Ponzi scheme based initially on what? Real estate.
Investors Say Supply Sider Arthur Laffer Backed a Ponzi

HOUSTON (CN) - Fifty-two investors claim fund managers associated with supply-side economist Arthur Laffer took $3.1 million to prop up a Ponzi scheme, then said nothing as their money was "wasted with no reasonable expectation of recovery."
...
It continues: "The limited partnerships are investment vehicles run by defendants Wallace and Bajjali, with endorsement and participation from Laffer. They started out primarily in real estate investments, and solicited investors for their various real estate investments. In September 2006, WBIF II made its first investment in Business Radio Network, LP ('BizRadio') in the form of advancing convertible promissory notes. By December 31, 2006, WBIF had advanced to BizRadio $1,493,170.00, and by June 30, 2007 the invested balance in BizRadio was up to $3,157,170.00. LFWEOF [Laffer Frishberg Wallace Economic Opportunity Fund] has contributed significantly more than that. At that time, BizRadio was looking to purchase radio stations in both Houston and Dallas/Fort worth at an estimated cost of $12,000,000.00.

Garth Lays Out What Happens Next in Canada

2011-12-21T13:24:00.000-08:00

This man sounds optimistic.

Careful

I said recently (for a variety of reasons) the average house price could decline 15%, then enter a long comatose period. That seemed to disappoint some and enrage others, who believe real estate must (and therefore will) decline until they can afford it. So they pile on and forecast a 30-50% rout, taking a SFH in 416 to $450,000 and in Van to half a million. The justification (other than their own finances) is Phoenix or Vegas or Miami.

Well, ain’t gonna happen. Nor should you wish it. A halving of housing prices would drop our GDP by 5%. That compares with the sharp 2.6% contraction in the US economy in 2009 – enough to throw 14 million people out of work and gut the government. So imagine the consequences of a slowdown twice as severe in a country with one-tenth the population, and a commodity-dependent currency, run by people who want to buy more fighter jets and prisons.

In fact, it seems many of our delusional visitors have no idea what 15% means. First, this average number would translate into a 0% change in, say, La Broquerie or Chicoutimi (or Fredericton and Thunder Bay), but something closer to 20% in Brampton and 30% in Surrey. Given local conditions, there’d even be individual neighbourhoods exceeding that.

Whacked

This might seem, like, weird. But there’s a reason stuff costs money. Some things should be earned. Our debt today, and the housing reversal it’s about to cause, is the direct result of unbridled consumptive lust, usually by those virgins. Home ownership without equity is called renting, but without the freedom or mobility tenants enjoy. Those who will suffer the most from the coming correction – whether it’s 5% or 30% – will be the ones who couldn’t wait to buy, and traded their hormones for indenture.

Yes, but this is always true. That's why financial policy should take it into consideration. And if it doesn't take it into consideration it should be automatically assumed to be a policy to suck the middle class dry to the monetary benefit of the people who move assets around inside computers. And the real estate agents and developers. A handful of lucky sons of will fund their retirements, but that will be an accident of the setup.

The system is designed to do what it is is doing right now . . . indenturing the young and impoverishing the middle class.

Stats from China's Crash

2011-12-20T19:46:00.000-08:00

22 months unsold inventory in Beijing
21 months unsold inventory in Shanghai
Chinese steel production down 15% since June
100 local governments had land auctions fail last month
The average wage earner would have to work 36 years to buy an average home in Beijing
18 years in Singapore
12 years in New York
5 years in Frankfurt
Transaction volumes down 50% percent year on year in Shenzhen
57% in Tianjin
79% in Changsha

Foreign Affairs: China’s Real Estate Crash

Because the industry kept on building [believing like previous cooling measures that the government would have to back off them], there has been no negative impact on GDP. Real estate investment has continued growing at nearly 30 percent annually. But inflation began to rise from 1.5 percent in January 2010 to a peak of 6.5 percent in July 2011, and authorities began to sweat. They broadened their cooling efforts. The central bank tightened credit expansion, and China’s economy began to slow. As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts.

Ironically, as Chinese investors start pulling their money out of property, many are putting it into bank- and trust-sponsored “private wealth management” vehicles that promise high fixed rates of return but channel the proceeds into investments — like real estate developers and local government bonds — whose returns are themselves predicated on ever rising property prices. Many fear this repackaging of real estate risk is laying the foundation for a follow-on crisis that some are labeling the Chinese equivalent of Wall Street’s collateralized-debt-obligation mess.

Interesting follow-on prediction. There are no safe landing places for the money, not even Yuan, which will decline as China has to realize the bad loans on the banks' books.

The China Burst is Here

2011-12-19T18:13:00.000-08:00

China's epic hangover begins

China's $3.2 trillion foreign reserves have been falling for three months despite the trade surplus. Hot money is flowing out of the country. "One-way capital inflow or one-way bets on a yuan rise have become history. Our foreign reserves are basically falling every day," said Li Yang, a former central bank rate-setter.

The reserve loss acts as a form of monetary tightening, exactly the opposite of the effect during the boom. The reserves cannot be tapped to prop up China's internal banking system. To do so would mean repatriating the money – now in US Treasuries and European bonds – pushing up the yuan at the worst moment.

The economy is badly out of kilter. Consumption has fallen from 48pc to 36pc of GDP since the late 1990s. Investment has risen to 50pc of GDP. This is off the charts, even by the standards of Japan, Korea or Tawian during their catch-up spurts. Nothing like it has been seen before in modern times.

Those Mortgage Downpayments in China, They Be Borrowed

2011-12-19T07:12:00.000-08:00

Sorry to continue to harp on this; it's a pet peeve of mine.

Nod of Approval for Black Lending

Niu Wei, marketing director for a start-up company, used a private lending firm to pay the down payment for her third apartment in Beijing. She had to make a down payment of 400,000 yuan ($61,538) in 30 days but only had 300,000 yuan ($46,153) on hand, including the money borrowed.

"I had already asked all my friends and family members, but still lacked 100,000 yuan ($15,380). Then a friend of mine recommended Creditease," Niu said. Niu provided her personal ID, monthly salary certificate and the property ownership certificates. Within a week, she got what she wanted at an interest rate of 1.42 percent per month, 18 percent a year.

The article also has a little overview of private lending:
Small credit companies charging 2.5-3% per month (backed by a mortgage)
Small credit companies charging 6.8-10% per month (no mortgage)
Peers and business partners 6-12% per month
Illegal banks, loan sharks, money launderers 70% per year (although that's not worse than the other at the extreme ends)

Like this article, there's been a lot of talk about the government banks turning their back on SMEs lately. Based on my reading, I think this is a bit of mythologizing. Banks report default rates to SMEs of 30-40%, so clearly they made some. These numbers always seem to raise up whenever orders come from the central government to make more loans, as a kind of shield, I presume. I suspect what has changed more is the interest rates on private lending have risen, making the gap between the official bank rate and the underground rate more painful. As borrowers have jumped from one lender to another, to cover the last loan's principal *and* interest, the risk premium has increased, and now all loans are unsustainable. I think this theory has some support in the risk premium in the interest rate list above, in the jump between 2.75% average to 8.5% average with and without collateral.

Some "historical" (2003, SO long ago...)
At the Mercy Of Loan Sharks

Although he had plenty of collateral in the form of sales contracts, machinery and inventory, lenders wouldn't grant him even a small line of credit. So potential customers, he fears, have gone to state-owned companies with better access to capital. "The government sees state enterprises as its sons, so it helps them," Mao says. "Someone else will drink up my market."

Ha, look at this kernel of inconvenient fact. I have not seen this so bluntly stated in the press this year unless someone is quoting Chanos:

China's four biggest banks are technically insolvent because they are owed an estimated $500 billion in nonperforming state-enterprise loans, but 70% of their new loans still go to state companies.

The article mentions pawn shops lending at up to 5.7% per month (with collateral like industrial machinery or a luxury car) That was the only interest rate number I could find in 5 pages of google articles.

This is how shadow banking runs its course. The lenders think intimidation substitutes for wise lending and there is always another loan shark to lend again, to cover that loan and unpaid interest. Until there isn't.

You had me at "Copy of Manhattan"

2011-12-18T14:15:00.000-08:00

China Debts Dwarf Official Data With Too-Big-To-Complete Alarms

A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout.

Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.

There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 billion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.

OR, there is a lot more debt out there, unaccounted for. I think "Unaccounted For" is going to be the phrase of China 2012.

And with these loans essentially secured by future land sales, falling prices are the start of a self-feeding downward spiral.

The financing companies accounted for almost half of the 10.7 trillion yuan in all local government debt tallied by the official audit.

Go big, or go home. And debt from reviewed issuers rose 10% year on year. It does not appear to be slowing down, despite central government warnings to the contrary.

Furthermore, the data doesn't add up, implying that totals are most likely higher than disclosed.

Yao Wei, an economist at Societe Generale SA in Hong Kong, says another 7 trillion yuan of debt will be needed to finish projects in the government’s five-year plan through 2015.

“It’s very likely that senior government leaders have no way of knowing which numbers provide the best picture of the evolving lending binge China’s banks seem to be on,” said Carl Walter . . .

The number of loans going bad will rise because of the borrowers’ poor cash flow, according to a November report from London-based HSBC Plc. Around 68 percent of 184 local financing companies that have sold bonds analyzed by HSBC had a return on capital lower than 5 percent, the benchmark lending rate last year, compared with 37 percent for all 499 corporate issuers it studied, the report said.

For example: Gansu Provincial Highway Aviation Tourism Investment Group Co. did not have sufficient cash flow to cover even interest this year, fortunately they will just take out another loan to cover the interest and they will keep doing this until 2019 at which time they will owe 130billion yuan.

Gansu Highway’s situation encapsulates the problem of local government borrowers, which often have minimal or no plans to repay debt aside from borrowing more money, says Fitch’s Chu.

Noting Australian Bubble Denialists

2011-12-17T13:15:00.000-08:00

Just noting some predictions.

Houses to fall 10% next year? Tell him he's dreaming

Australian Property Monitors' property market outlook, senior economist Andrew Wilson tipped 3 to 5 per cent growth in median house prices nationally and for Sydney
...
Brisbane, the worst performer this year with prices down almost 7 per cent mainly due to the devastating January floods, would bounce back between 5 and 10 per cent off the back of the resources boom. Likewise, Perth and Darwin. But Melbourne, due to big price rises in 2009 and 2010 and an apartment oversupply, could expect growth of between 0 and 3 per cent.

Monique Sasson Wakelin, managing director of Wakelin Property Advisory, said the two recent interest rate cuts would be the catalyst for growth and agreed with the APM forecast for Sydney and Melbourne. . . . ''I can't see a national drop of 10 per cent, there hasn't even been that this year,'' she said.

Another property expert, Mark Armstrong of the auction tipping competition Property Tycoon, was also optimistic about next year. . . . ''I think it will grow by 5 to 10 per cent

Shane Oliver, the head of investment strategy and chief economist at AMP Capital Investors . . . expecting a weak start to 2012 because of economic uncertainty. Over the year, he says prices could drop 1 or 2 per cent nationally but he is more optimistic about Sydney. ''I'm expecting modest gains over the year of maybe 1 or 2 per cent for Sydney,'' he said.

Gambling Rates High Among Foreign Students in Australia

2011-12-16T09:52:00.000-08:00

Problem gambling among foreign students is 6.7% in contrast to 1% for the general population.

Vice of the dice: learning the hard way
(boy, the Aussie journalists sure like their puns)

Australia offers international students opportunities as well as temptations. While low-level social gambling is accepted in parts of Asia, legal gambling opportunities are restricted in the countries where most of our international students are from: China, India, Korea, Indonesia and Malaysia.
Gambling Research Australia estimates that between 17 and 45 per cent of previously non-gambling international students gamble once they arrive on our shores.

The Gambling Research Australia report identifies Chinese and other Asian international students as being particularly vulnerable to gambling addiction. While Asian students are by no means alone in having gambling problems, the report's authors say Chinese and other Asian students, and particularly males, have many risk factors that predispose them to addiction. These include inexperience, isolation and disconnection from family and friends. Close to 50 per cent of the international students in Australia are aged between 20 and 24 and most are under 30. This makes them particularly vulnerable to risky practices such as gambling. Add to these Australia's liberal gambling culture (bursting with casinos, pokies, horses and dogs) and tens of thousands of inexperienced, unsupervised young people with ready access to large amounts of cash (usually provided by their parents for living and tuition expenses) and you have a combustible mix.

Isn't It Subprime to Need a Loan for a Downpayment?

2011-12-15T19:35:00.000-08:00

Housing industry shy on new rules

The government did move about three years ago to require Canadians to have a 5% down payment, increasing from zero. However, most of the major banks allow for a cash back option. Mr. Clark’s own bank will give you 5% of your mortgage principal up front if you lock in a mortgage for five years or longer.

“A really damaging move would be significantly increasing the amount of cash a young family would have to have to qualify for a mortgage. It would take a lot of transactions out of the marketplace,” said Mr. Soper.

According to the article, the RE industry is more open to returning amortizations to 25 years than they are on tightening rules about downpayments. I guess that follows. 0% down at 30 years is leverage at 186:1 (total mortgage over first payment) and 0% down at 25 years is 170:1. Whereas strict downpayments at 5% is 20:1 leverage. It's the leverage the industry (which lives and dies on churn) can't bear to have touched.

Nevertheless the government has targeted condominiums during this housing boom. It now forces investors to have 20% down to qualify for mortgage default insurance, up from the 5% it requires for owner-occupied buyers.

Still there remains some scuttlebutt the government will tweak the condo rules again with one suggestion being that 100% of condominium fees count towards debt obligations when considering how large of a mortgage a consumer can get.

Wow, they are actually doing something to tame speculation.

Gregory Klump, chief economist of CREA, said the figure is misleading if you look at the number of unoccupied condos as an absolute number. But if you normalize it as percentage of unabsorbed inventory, it’s not historically high.

I have no idea what that means. Anyone?

Hong Kong, 4% Fall July to October, Transactions Down 64%

2011-12-15T19:19:00.000-08:00

The Shine Is Off Asian Properties

Hong Kong, which has seen home prices surge almost 75% since the beginning of 2009, recorded its first fall in property prices in three years in July. From July to October, prices fell 4%. In November, the number of residential property transactions in Hong Kong fell 64% from a year earlier, according to Land Registry data.

"The drops in home prices in China and Hong Kong are moderate partly because there are simply not that many transactions. Property owners are holding onto their properties and refusing to sell them cheap in bad times," said Nicole Wong, regional head of property research at brokerage firm CLSA.

Hong Kong Chief Executive Donald Tsang said Friday that the government's measures to curb speculative activity, including an additional tax on buyers who sell within two years of purchase, will remain in place.

I'll just wait it out. Prices will rise again. How long did it take for the bubble to reform from 1997? 14 years then. Well, I'm sure all of these owners can comfortably wait that long.

Only 191 Vancouver Properties Valued Below $500k

2011-12-15T14:43:00.000-08:00

Living in Vancouver comes at a price

An architectural firm that recently mapped virtually all properties in Vancouver could find just 191 valued at less than $500,000. About 40 per cent were worth more than $1-million. The benchmark price for a home on the city’s west side is now more than $2-million. On the east, it’s $863,183, according to the Real Estate Board of Greater Vancouver.

In Canada, the issue is particularly acute in markets such as Toronto and Vancouver, where real-estate prices long ago made home ownership a dream for everyone except the wealthy.

This is a misleading assertion. Affordability has eroded substantially in just the last decade. In Toronto, house prices have doubled since 1999 while in the same time incomes have increased 45%.

Checking in with South Africa

2011-12-15T08:10:00.000-08:00

On the Economist Clicks and Mortar chart snapshot below, you can easily see South Africa. It's that high flying line that dwarfs even Spain for non-linear growth.

House prices - In the doldrums
Still overvalued

Auction Alliance estimates that up to 50000 repossessed and foreclosed homes could hit auction floors and the sheriff’s office over the next year. That’s in addition to the 10000 or so distressed properties currently for sale.

With so many more cash-strapped homeowners expected to dump properties they can no longer afford on the market, prices will no doubt come under pressure. Estate agents say average house prices are already down by an average 15%-20% from pre-2008 highs.

SA is estimated to be overvalued [by The Economist] by an equally hefty 17%.

Very similar tone to Australian analysts. It's different here. It will soft land.

Rode expects house price growth of no more than 2%/annum for at least the next five years. That implies a cumulative real price fall of 15%, assuming an average inflation rate of 5%/annum over the next five years.

The luxury end of the market is meanwhile setting records, a trend that pans out across a range of capitals, including London. Big money is still getting parked from abroad without regard to the broader real estate trends.

Nice Overview Article on the Unfolding Banking Crisis in China

2011-12-14T17:22:00.000-08:00

China: Banking crisis looms from Chinaworker.info

The last period has seen a phenomenal expansion of the shadow banking system, in which many state-owned companies and local governments are active players. Part of the shadow banking system is comprised of private ‘underground’ banks and trusts that charge usurious rates of interest mainly from privately owned small and medium enterprises (SMEs).

These illegal financial institutions have grown rapidly, exploiting the government squeeze on the state banks. According to the central bank, underground banks hold around 2.6 trillion yuan (US$410bn) in loans, but this is likely an underestimate. They attract investments from other capitalists and from wealthy government officials (who also provide protection), drawn by the high returns from interest rates of up to 100 percent. Xinhua quoted the owner of an 800-million yuan illegal bank, who said that 80 percent of her depositors were local government officials.

Chart showing China GDP per person and Components of Government Debt as a % of GDP

It's long and broad and I recommend reading it all if you are new to the issue of China's financial situation.

The broken image for the chart of Chinese M2 versus U.S. M2 can be seen here

Land Confiscation Leads to Protests

2011-12-14T08:32:00.000-08:00

In China, local governments arrange unrestricted financing through selling land to developers. Insider deals and fraud are rife in a system lacking transparency. Compensation to existing landholders is reputed to be insufficient, at best. Inflation, the end result of national monetary policy, has left many households struggling to buy food let alone anything else. Eventually it boils over. Mass incidents are at 180,000 per year.

Inside Wukan: the Chinese village that fought back

For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.

“Almost all of our land has been taken away from us since the 1990s but we were relaxed about it before because we made our money from fishing,” said Yang Semao, one of the village elders. “Now, with inflation rising, we realise we should grow more food and that the land has a high value.”
Thousands of villagers stormed the local government offices, chasing out the party secretary who had governed Wukan for three decades. In response, riot police flooded the village, beating men, women and children indiscriminately, according to the villagers.

“I have just been to see my 25-year-old son,” Shen Shaorong, the mother of Zhang Jianding, one of the four, said as she cried on her knees. “He has been beaten to a pulp and his clothes were ripped. Please tell the government in Beijing to help us before they kill us all,”

Her son was one of the 13 representatives the government agreed to negotiate with.

Australian Real Estate Investor Borrowing Falling Faster than Owner-Occupier

2011-12-14T07:16:00.000-08:00

Investor borrowing fell 5.5% between October and September while owner-occupied fell 1.2%.

30% of all mortgages are on investor properties.

1.2 million out of 1.7 million investors fail to cover costs with rents.

Property Dreams Strain Australian Market

Compared with live-in homeowners, landlords are more likely to put properties up for sale when things go wrong—a surge in properties for sale could cause disarray in the broader market.

Abandoned Large Projects in China

2011-12-13T09:39:00.000-08:00

Abandoned large projects stretch back farther than the GFC.

Abandoned Fake Disneyland near Great Wall

Although, I'm still partial to Thames Town Maybe because it's finished but empty. Any place can be unfinished and empty.

Hat tip: Mish

Li's Parents Were Savers, They Saved Their Whole Lives

2011-12-13T08:13:00.000-08:00

And their son lost it all in less than a month buying an overpriced apartment.

China's housing bubble is losing air

The swift turnaround has stunned buyers such as Shanghai resident Mark Li, who thought prices had nowhere to go but up. The software engineer closed on a $250,000, three-bedroom apartment in August, only to watch weeks later as the developer slashed prices 25% on identical units to attract buyers in a slowing market.

Outraged, Li and hundreds of others who paid full price trashed the sales office, scuffled with employees and protested for three days before police broke up the demonstration. Walking away now would mean losing the $75,000 down payment that he borrowed from his working-class parents.

"I still haven't told them," Li, 29, said of his home's plummeting value. "It will just make them worry, and it's already too late."

And Chinese aren't nearly as leveraged as Americans. First-time buyers are required by law to come up with down payments equal to 30% of a home's purchase price; many put down more.

Wait, wait, the buyer just 9 paragraphs up in the same article is rather leveraged. You just described him. Did you forget him already?

Li plans on marrying his girlfriend this time next year, when the apartment is scheduled to be finished. He'll have to devote half of his $1,500 monthly salary to pay the mortgage.

?? We're missing some debt or downpayment here. $750 a month at 7% interest only gets you a 75k mortgage. Either he plans to put down more than the article stated, or they've got his salary wrong. Presumably he hasn't needed to come up with the rest of the money yet, since he hasn't taken delivery on the apartment and won't until next year. At which time he has to come up with 100k to get his mortgage to be a mere half of his salary. If he can come up with a 100k in a year, why is he pawning off the parents?

Either way, buyers putting 30% down since 2009 when prices have fallen 40% means they are already are 13% underwater. What about after the next round of price cuts?

Debt-strapped home buyers have been dubbed fang nu, or house slaves.

But the Western analysts and press insist they aren't over-leveraged. Who to believe?

The Inequalities that Result from Government Policy to Inflate House Prices

2011-12-12T12:15:00.000-08:00

A little cry in the wilderness here.

Why falling house prices aren’t the calamity the media would have you believe

By contrast, those households living in rental accommodation are subsidised by $3.2 billion. For individual homeowners this subsidy amounts to around $8,000 per year, investors are subsidised by $4,000 while concessions to private renters amount to just $1300 per household and public housing tenants $1000 per year.

Recent analysis published by the Australian Bureau of Statistics estimates that the median net wealth of households who rent in 2009 was just $55,265 whilst householders who own their home but are paying off a mortgage had a median net wealth of $487,183. Those homeowners who own their property outright had a median net wealth of $737,394 – 13 times greater than the median wealth of those who rent.

It is an uncomfortable truth that government policies have been instrumental in maintaining housing inequality. The current taxation arrangements serve the interests of homeowners and rental investors, and politicians are reluctant to advocate reforms that might damage their electoral prospects.

ABS: Total Value of Dwelling Commitments down 2.5%

2011-12-12T07:01:00.000-08:00

Loans slim down as buyers shun debt

But, in a ray of positive news for the other property market, the number of new home loans offered to owner-occupiers climbed, 0.7 per cent to 51,981 on a seasonally-adjusted basis.

The ABS said the total value of all housing finance offered to homebuyers fell 2.5 per cent from September to October, to $20.46 billion.

The headline isn't supported by the data. Houses cost less. Total value of home loans is down. That, by the way, sounds like a good thing. Unless you are a journalist, I guess.

Also, your "ray of positive" isn't one either, necessarily. According to the ABS report it includes refinancing. All we know is at best people have gotten a better deal on their mortgages, or at worst, took equity out of their homes. They might have bought more homes, but we don't know that. (I assume that's what got the writers all excited.) We don't know what they did. We only know more mortgages were written.

Loan Shark or Borrowing Walrus?

2011-12-09T10:55:00.000-08:00

I think this comparison to a loan shark is being broadly misunderstood. Yoram Bauman, the standup economist, summarizes the situation here:
Is America a Loan Shark or a Borrowing Walrus?

For a longer answer, note that the U.S. runs a trade deficit with China: we buy more from them than they buy from us, so Chinese companies end up with about $25 billion a month in U.S. dollars that they "don't want". The Chinese government weighs in by effectively buying these U.S. dollars, i.e., it gives these companies Chinese yuan in exchange for their U.S. dollars. And then the Chinese government turns around and uses all those dollars to buy U.S. treasury bonds, currently over a trillion dollars' worth.

It all sounds a bit odd, almost as if the Chinese are loaning us money so that we can buy stuff from them. And there are definitely tensions on both sides. Many people I talk to here in China -- regular folks like taxi drivers and restaurant managers -- know all about the U.S. Treasury bonds that China owns, and they're not happy about it. One man told me that the U.S. was a "loan shark" (at least that's how my dictionary translated "gao li dai"), when in fact the U.S. is more like a borrowing walrus, floating in an ocean of our debt.

First thing one needs to understand is people in China give money TO loan sharks. Between 50% and 90% of households (Wenzhou is the 90%) loan money out to others in various setups, from loan circles to lending through a loan shark. They even take mortgages out on their properties to generate more cash to loan to loan sharks, with the expectation that they will be paid back their principal plus a gain in great excess of the prevailing bank savings rate. Now, the comment from the taxi driver is cast into a different light.

To wit: The U.S. took China's money and gave them treasuries and now isn't going to pay as much back (due to devaluation of the dollar). Voila, the U.S. is acting like a loan shark who not only refuses to pay any gains to the funder, but doesn't even return all of the principal.

Another thing that's been irking me, the notion that Chinese mortgages are safe from a price crash because they put 30% down. What this ignores is that the 30% is also borrowed, just not borrowed from the bank. Or, from that bank, anyway.

Shanghaied Home Buyers Turn Protesters as Shattered Dreams Vex Government

Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago. Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.
. . .
For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.

Quick calculation has him making about 19k and the wife just under that at 18k (in $). Just the mortgage is 4.6x total household salaries. The house itself is 6.6x household income, and his total debt service, including mom and dad and the boss is 6.3x, most of it at nearly 8% interest.

And yet, the Chinese are touted as savers. Yes, they are, but where are they saving? They aren't keeping their money in guaranteed bank accounts, they are keeping it with the kids trying to get into a grossly overvalued real estate market on the verge of collapse, or worse yet with the equivalent of Bernie Madoff in the form of a loan shark, who may or may not have loaned the money to a run-away shoe factory boss.

The banks this year have suffered an exodus of tens of billions in deposits that went directly into the shadow banking system, to the loan sharks. TO the loan sharks. This "savings rate" and the "large deposits" on real estate mortgages are considered the reason that the property bubble bursting will "be contained" and not impact ordinary Chinese. Believe it?

The lack of understanding of why the U.S. looks to a Chinese taxi cab driver like a loan shark really demonstrates why the general media doesn't seem to grasp what is going on.

Canadian Banks Heavily Involved in Re-Hypothecation

2011-12-08T16:42:00.000-08:00

Re-hypothecation (where client collateral is used again to obtain funds for a financial firms own trades) and churn (where the counterparty RE-uses the collateral to obtain more funding, and so on) is the West's least known shadow banking system. The unlimited re-hypothecation of funds mostly through the UK (which has no limits) and a bit through the US (which has relaxed their limits since the late nineties and into the 2000s (funny, just the same time they were relaxing every other limit on shady financial activity)) results in a money multiplier effect backed by, on average, 25% capital.

Canadian banks appear to be deeply involved in dipping into their client's assets to obtain funding for themselves, a la MF Global. Note, once your bank or brokerage has sent your assets to the UK and a firm there has then re-hypothecized them, you will not see them again if your financial firm's bets go bad. The regulation is so poor it is up to the individual investor to arrange limits on their financial firm's actions regarding their own assets.

MF Global and the great Wall St re-hypothecation scandal

firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

Prices down 60% in Kangbashi, Near Ordos

2011-12-08T09:07:00.000-08:00

Satellite Pictures Of The Empty Chinese Cities Where Home Prices Are Crashing
If demand is zero, the bottom price should be something closer to zero, unless someone can invent some other economic use for these places. Long term warehousing?

The bigger issue, however, will be if declines reach the major cities. "The degree of price declines you are seeing in Kangbashi give a preview of what you will see in major cities. I would expect price declines of 20% nationwide over the next 1-2 years," Tulloch said.
Tulloch points to plunging transaction volume as evidence of a property slowdown. His firm expects a hard landing, with China slowing to zero GDP growth for several quarters.

Anything below 9% is disaster for China. 0% would be devastating.

Germany Props Up Their Banks' Reserves

2011-12-08T07:57:00.000-08:00

Germany Set to Offer Banks Help on Reserves

Germany plans to revive the government fund it used in 2008 to rescue banks, in order to help some German institutions increase their reserves, the Finance Ministry in Berlin said Wednesday.

It's 2008 all over again. Why? Because after the U.S. bailed out AIG and AIG bailed out the European banks structural change didn't happen. Well, it happened, a little, with change to take effect far in the future. It's almost like they hoped with continued high leverage the banks might roll the dice and gamble themselves out of the corner they were in.

Last month Commerzbank said it would sell assets and temporarily stop issuing new credit through its troubled EuroHypo unit to meet tougher capital reserve requirements. The bank, which reported a loss of 687 million euros, or $920 million, in the third quarter, said at the time it would also look at other options to increase its reserves.

All these German Hypos going under. And remember, Germany had no housing bubble. They didn't even have a housing blip. This is all high leverage killing them on bets outside their borders.

The German newspaper Handelsblatt reported that the revived fund would be able to issue up to 400 billion euros in guarantees and 70 billion euros in credit to banks. According to a proposed law to be considered by Chancellor Angela Merkel’s cabinet next week, banks could be forced to accept the money to expand their reserves.

Oh, and that old game. Pretend they all need a bailout to hide the worst offenders. (Although in the U.S. it turns out (we just found out in the last months) all the big banks needed the bailout, public statements to the contrary notwithstanding.)

Vancouver House Prices Continue Slow Slip

2011-12-08T07:25:00.000-08:00

June 2011 continues to be the peak month for detached prices. And this month the overall price slipped more than detached, which did slightly better than holding firm.

The odd vacillating pattern continues. It's strange enough, I wonder if it's not some manifestation of the HPI calculation.

Vancouver House Price Chart, Detached and All 2010, 2011

On the price change chart, you can see that the overall prices are pulling down harder this month, as the year on year for detached increased.

Year on year change in house prices, Vancouver, Detached and All

We are running right on the five year average for inventory and sales.

House for Sale Inventory Vancouver over 5 years

House Sales Detached Vancouver over 5 years

One Million Dollar Price Cut

2011-12-02T18:47:00.000-08:00

The season to be jolly
It says the price has been slashed by $1 million, but all I can think is: Is that a house with glass walls on the bedroom?

There is a metaphor here, somewhere.

And the rest of the article can be summarized with: feel free to bargain, especially at the high end which is down 15-20% year on year.

Be careful out there.

Royal Bank of Canada and Bank of Nova Scotia Most Exposed to Consumer Debt

2011-12-01T09:21:00.000-08:00

Safe as Canadian banks, eh?

Concern over Canadian bank exposure to overleveraged consumers

According to David Beattie, Moody’s analyst and author of the report, the Royal Bank of Canada is the most susceptible with 24% of its total managed assets made up of uninsured loans. Next is Bank of Nova Scotia at 21%, CIBC at 20%, Toronto-Dominion Bank and National Bank of Canada both at 18%, with Bank of Montreal the most protected at 14%.

“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Mr. Beattie. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”

Canadian Bank exposure from the Financial Post article

Canadian Personal Debt overlaid with U.S. Personal debt (orange line).

Financial Post chart has been overlaid with the U.S. chart from here. Both are charted as a percent of disposable income, although the U.S. is Gross and the Canadian one is marked Personal (which isn't clear if that's post or pre personal tax) so use the chart only as a trend. The blue field in the background chart is U.S. consumer debt relative to GDP.

As you can see the Canadian consumer has continued to rack up additional debt while south of their border, the U.S. consumer has been trying to repair their personal balance sheet.

Hat tip: Kevin commenting at Greaterfool.ca

"That's why we have to depend so much on the Chinese."

2011-12-01T07:54:00.000-08:00

Comments during a luncheon by property developer Harry Triguboff.
Crisis will force Greeks back: Triguboff

He said that most of his customers were from China because the costs imposed by authorities and interest rates ''made it very difficult for Australians to buy''.

''That's why we have to depend so much on the Chinese.''

Chinese House Prices Down a Third Month in a Row

2011-12-01T07:34:00.000-08:00

China Home Prices Drop for Third Month in November Amid Curbs, SouFun Says

Home prices dropped 0.28 percent last month from October, when they retreated 0.23 percent, according to SouFun, the nation’s biggest real estate website owner. Prices slid in 57 of 100 cities tracked by the company, including in all 10 of the country’s biggest cities such as Shanghai and Beijing, it said in an e-mailed statement.

Markets are very excited about the Reserve Ratio requirement cut of 50 basis points (.5%) except that's a cut from 21.5% which was a record high ratio. I believe it is the signal it sends, rather than any delusion that at 21% reserve ratio could be said to encourage growth, that the markets are reacting to. This is expected to add 350 billion yuan ($55 billion) to the economy.

This is in contrast to the move in August to require banks (as part of a phased in policy that doesn't come to full fruition until February) to hold reserves against margin deposits (letters of credit) which was expected to remove 800-900 billion yuan out of the system over the course of the implementation. That contraction of credit is still ongoing. Of course the amount the banks need to hold against those deposits just went down. (old marketwatch article on this)

Generation Squeezed in BC

2011-11-30T15:17:00.000-08:00

Housing, child care stings 'Generation Squeezed'

With a combined income of $92,000, he and his wife could qualify for a $500,000 mortgage. But Atkinson said the minimum $25,000 down payment is too rich for him and his young family.

Banks are approving at a 5.16x multiplier of salary in a country where there is no such thing as a 30 year fixed mortgage? And people claim there is no subprime.

"We'd have to save up for at least five, six years just to get a decent down payment…and that's really frustrating," he said.

I have bad news for you. If you can't save up for a down payment, then you certainly can't save up for the emergency fund you need to keep a house operating. Houses can ding you for 25k with no warning. If you aren't that liquid, you need the security of the kind of predictable monthly expenditure that one can only get through renting.

A recent study from the UBC Early Learning Partnership found that young families are bringing in roughly the same income as those before them did nearly 30 years ago, even though most families are now duel-income.

Kershaw said while household incomes have flat lined, housing prices have not -- rising 76 per cent in the same period since the 1970s.

THIS is the real issue for this generation. Relative to their parents, where does all the wealth this couple generates working end up? Is it going into more expensive advanced health care? Is it going into supporting the now larger generation before? Is it being distributed upward to a greater degree? Or, most likely, a mix of all of the above?

The wealth shifted away from the pocketbooks of the middle class, but for some crazy reason, house prices continued to mount. That is the essence of the problem. Debt has been substituted for wages and excessive credit issuance is reflected clearly in the rise in price of the most widely leveraged asset: the family home.

"Squeezed" doesn't quite cover it.

Canadian House Price Index Shows Stall

2011-11-30T14:49:00.000-08:00

Housepriceindex.ca has published the September data.

The only remaining city still truly defying gravity is Winnipeg. Ottawa and Quebec City are showing peaks.

In other, possibly related news, the major central banks of the world are again mistaking a solvency crisis for a liquidity crisis, and the markets are ecstatic about this.

Vancouver Realtor: 90% of High-End Buyers are Foreign

2011-11-30T06:11:00.000-08:00

Another data point in the foreign influence debate.
Should there be restrictions on ownership of real estate in Metro Vancouver?

Moore says almost 90 per cent of higher-end house buyers are foreign.

“They seem to find Vancouver and the Lower Mainland to be a safe place to live, in terms of worldwide, and they do like our weather, and it doesn’t seem to be slowing down since they began looking for homes in the ’80s,” says Moore. Condominiums are a different story, though, where he estimates it to be more of a 50-50 mix, although he admits 26 of the 28 units he sold at a new complex on Royal Oak recently went to those of Asian descent.

There's the rub with an informal survey. Asian descent doesn't tell you anything about foreign money.

Although much of New West is high on a slope, it hasn’t seen the same pressure from foreign buyers.

. . .

However, Goodwin has noticed many of the South Asian builders that buy land in Burnaby to construct big homes and sell them, are now targeting New Westminster’s West End for its big view lots.
Pilothouse Marketing’s Craig Anderson has been project manager for three recent new developments that went on sale in the city—Brickstone Walk, 8 West and 258, and he estimates 35 per cent of the buyers for the last two were mainland Chinese.

The Real Estate Board of Greater Vancouver doesn’t track specifically where foreign buyers are purchasing homes. However, president Rosario Setticasi says a regular informal poll of up to 400 realtors reveals only about 10 to 12 per cent of home purchases are by foreign buyers.

10-12 percent is enough to boost a market. It's certainly enough to utterly juice a few select submarkets.

Vancouver is a Balanced Market

2011-11-29T18:37:00.000-08:00

Have to note this for the future. Brian Morton. We'll check back in on him later.

“The threat of a bubble has largely dissipated,” senior economist Robin Wiebe said of Metro Vancouver. “But, really, there never was one.

“When prices rise, new supply is attracted to the market. And that's what's happened.”

Actually, when the supply increases during a speculative frenzy, you just get more objects to trade with in a speculative frenzy. The laws of supply and demand left the building exactly when the increase in price triggered an increase in demand.

According to the index, the average price in Metro Vancouver was $774,000 in October, two per cent more than September and 15.3 per cent more than October 2010.

A gain in excess of inflation is not balanced.

The Fraser Valley was in a balanced market, with prices up 9.6 per cent year-over-year to $494,000, but Victoria was considered a buyers' market, with prices down 7.1 per cent year-over-year to $490,000.

Why is falling prices a buyers' market exactly? Sounds like a perfect wait for a better bargain market.

No mention of how much additional credit needs to be issued to sustain these gains "with sales of the expensive homes having moved through the system." (read: foreign $) and where that credit is going to come from to even match the recent gains ongoing. If the shift in buyers is real (they admit it is) where is that money going to come from?

Hat Tip: Smokin' Jayne commenting at VREAA

Jim Chanos on His Trip to Australia and Hong Kong

2011-11-28T09:28:00.000-08:00

Video at the link below.
Chanos Says China Bank System `Extremely Fragile'

Our concerns about what we saw in Australia: an economy clearly tied to China, has hitched its wagon to the tail of the tiger.

The banking system in China is extremely fragile. . . . In fact because of what happened in the last two crisis in 99 and 04 when non-performing loans went crazy in China, without even a recession, the Chinese banking system was not recapitalized like ours was, it was papered over. So going into this credit expansion Chinese banks are sitting on lots of bonds from these so called asset management companies from 99 and 04 and they are keeping them on their books at par, at full value. In the case of Agricultural Bank of China, which we are short, those restructuring receivables are equal to over 100% of their book.

And when they talk about those foreign reserves of 3 trillion dollars, what everyone forgets is there is liabilities against that. And everyone seems to think it is just a free and clear open checkbook. It's not.

There is a growing sense that the Chinese government will ease. What we point out is their credit this year is going to grow between 30 and 40% of Chinese GDP. If that's tight, I'd hate to see . . . [Betty: what loose would look like.]

OECD Notices China Has a Problem

2011-11-28T09:11:00.000-08:00

And they don't mince words.

Real-Estate Risks Overshadow China’s Economic Prospects, OECD Report Shows

“While the exit of small developers would not pose a problem, the failure of large promoters could put some bank lending at risk, perhaps triggering negative chain reactions,” the Paris-based OECD said in a report today. “A key risk is an overly quick liquidation of unsold property.”

And there is a lot of unsold property, not including up to 64 million empty apartments.

China’s economy, the world’s second biggest, will expand 8.5 percent next year even as export growth is pulled down by weak demand and a decline in the nation’s competitiveness, the report said.

Elsewhere in Asia Pacific, Australia has scope to cut interest rates should Europe’s sovereign-debt crisis stall global growth, the OECD said, a scenario investors already are betting on.
If downside risks to the international economy materialize, “monetary policy should be eased significantly to sustain demand in the context of moderating inflation,” the OECD said. Australia’s government could also boost spending, it said, though that would delay a pledged return to a budget surplus in 2012-13.

So, imagine this. Australia cuts rates, but that only applies to the domestically funded 2/3 of a mortgage. International appetite for Australian mortgage debt will not necessarily increase proportionally to track the same rates. In terms of funding mortgages, Australia's central bank is not in full control.

Affordability Index for Vancouver at 90.6%

2011-11-28T08:57:00.000-08:00

Real estate becoming more affordable: RBC
Everywhere except the large metropolitan areas, that is.

For example, an affordability reading of 50% means that home-ownership costs, including mortgage payments, utilities and property taxes, take up 50% of a typical household's monthly pre-tax income.

The index in Vancouver stands at 90.6%, Toronto 52.1% and Montreal 40.9%.

This Sure Doesn't Sound Like a Place with a Housing Shortage

2011-11-27T17:03:00.000-08:00

Empty Richmond houses attract metal thieves

Thieves are breaking into abandoned Richmond residences to steal valuable metals such as copper and aluminum, RCMP said on Tuesday.

It's so common it's called urban mining.

The thieves break into empty homes and take copper pipe and wiring, radiators, appliances and aluminum-framed doors and windows for the metal to sell to scrapyards.

Housing Starts in China, Including Affordable Housing at 2.2% year-on-year

2011-11-27T15:45:00.000-08:00

Also, the manufacturing sector is expected to have fallen into contraction. And since exports are up nearly 16%, this points to a pull back in domestic demand, the only thing that can rescue the economy.

China May Find It Hard to Break Fall

Wang Tao, China economist at UBS, estimates that new housing starts fell to 2.2% year-on-year in October. More alarming, that number includes government investment in affordable housing that was meant to ride to the rescue as private investment slowed.

This certainly implies that the big central government push for affordable apartments has failed.

Can China Rescue Its Economy?

Most worrisome, it appears that the factory sector is shrinking due to weakness in domestic, as opposed to export, orders.

Unfortunately for Beijing, its technocrats have already expanded their money supply to stratospheric levels. China’s M2 was 34% larger than America’s at the end of last month, even though its economy was less than half the size of ours. China’s money supply increased rapidly in the last three years, creating today’s high rates of inflation. Inflation, which came down rapidly last month according to the Bureau of National Statistics, is still uncomfortably high, perhaps more than twice the official figure.

In view of this, Beijing’s only real option is to buy GDP growth by direct spending, what some call “tidal wave investing.” The center can spend, but China has already built its “ghost cities” and other unviable projects, from one end of the country to another. A signal from Beijing that it was spending again would definitely buoy sentiment, yet technocrats no longer run a command economy and have limited means of forcing investors into projects that look unprofitable.