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

"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

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

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

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

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

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

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

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

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

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.