Thursday, May 31, 2012

Australia's Prices Riding on Shortfall, 6% Underwater, 42% at Double Value

Australia Housing Escapes Peril On Undersupply: Mortgages
Australia’s central bank, which reduced its key rate by a half-percentage point to 3.75 percent on May 1, will cut the benchmark to a record low 2.75 percent by September to bolster growth amid stagnant consumer sentiment, debt markets expect. About 90 percent of mortgage-holders have variable rate loans.
That makes for quite a bit of excess cash for consumers.
Only 6.4 percent of homes across Australia were valued at less than their owners paid for them as at Dec. 31, while 41.7 percent were worth at least double their purchase price, according to RP Data.
Australia has had a cumulative shortfall of 186,800 homes since 2001, with the number expected to widen to 640,200 dwellings by 2030, the government’s National Housing Supply Council said in its State of Supply report in December.
The discrepancy between the reported shortages and rents that barely move upward is hard to figure out. Rents are pretty reliable indicator for raw demand for shelter. I thought I'd look at the bios of the council members, but this is what it says: "Further details about the members will be included on the website shortly." I was thinking of the CMHC situation, where the board is overweighted with home developers. Well, a quick glance at googling the remarkably distinctive names of the council's board gives us an economist, someone working with vulnerable populations, then a land planning person, so hopefully not the CMHC situation.

I have to admit that the shortage numbers they report would seem to be untenable, resulting in visible social problems. And high rents. From the U.S. I can report that shortage is highly susceptible to speculative flipping leaving housing underutilized, and household size. Both of those can change rapidly. Average household size is far smaller than it used to be. That probably used to be two parents and two kids, but it's easy for it to return to a post uni kid and a grandparent along with those two near retirees.
From the gov of australia
ABS's projection for household size

I hate to harp on this, but again, this doesn't look like a trend in a country with a stunningly high shortage of shelter. Well, time will tell on this. As long as money is still flowing into bonds it certainly is possible for Australians to bid houses back up and to blow the total mortgage debt balloon up again.

On the other hand, the most dangerous number is the 42% who are at double the price paid. If prices continue to erode despite increased access to financing, those owners might decide to cash out just to be sure to lock in their gains. There is no sticky there. They present a ceiling on this market unless it makes a definitive move upward with this interest rate drop.

Monday, May 28, 2012

A trip down Vancouver's Memory Lane

It's memorial day here in the States, so I thought we should take a moment to remember the past. Thanks to b5baxter, we have the following housing inventory chart for the Greater Vancouver Area.

You may notice we are pushing record inventory again, but only for the last ten years. Up at the top is a little blob labeled 1998 when inventory was in excess of 22,000 a number that dwarfs the financial crisis inventory numbers. I thought given the holiday (okay, for me) we should cast our eyes back to that time. Perhaps to the blogs of that era. Imagine it's 1998. Mr. Cheng would like to sell you a Vancouver house.

He's a hard working fellow, on the cutting edge of technology. He's actually an engineer, but a more lucrative occupation has pulled him away from being productive in his trained field.

He not only has a website, he has a blog. (VERY cutting edge.)
May 28, 1999 -- Vancouver's house prices fall, bucking North American trend
Average house prices in Vancouver drop six per cent, while California homes appreciate 10 per cent.
Vancouver house prices have dropped a notch to being the fourth most expensive in North America, according to a Canadian Mortgage and Housing Corp. survey released Thursday.
The average price in April for a detached house in Vancouver fell to $357,029 causing the city to be overtaken for the third place by the $382,082 average in the Orange County-Anaheim area.

Better yet, it's a multi-lingual blog.

You see, something has been happening in the Vancouver housing market. Vancouver has always been home to many Chinese and Chinese immigrant descendants, but there has been a flurry of activity due to the turnover of Hong Kong to the Chinese mainland. But that turnover was completed in 1997 and very little actually changed in Hong Kong. It was a panic for nothing. Now the surge in overseas buyers has died out. And it turns out the value of a house is only worth what the next person will pay for it, or for what the bank and CMHC will allow the next person to leverage up to, or what the next person can afford to leverage up to based on the wider market's appetite for five year Canadian bonds.

This is memory lane, so let's take a peak at the prices, shall we. (click to zoom in)

Remember, this is only 14 years ago. If your kid was born that year, he or she is not driving yet.

Saturday, May 26, 2012

New Restrictions on Chinese Officials' Travel and Money

What took them so long? The report and $120 billion cited in the article were prior to 2008. Prior to the massive stimulus which dumped even more unchecked money into the system. The numbers must be much much higher by now. Chinese authorities restrict officials' overseas travel
The Communist Party of China has placed travel restrictions on officials, their spouses and children in anattempt to prevent them from fleeing the country and transferringfunds abroad.

The CPC Central Commission for Discipline Inspection introduced the restrictions at a meeting that took place May 23, according to Chinese media reports.

In addition, anti-money laundering inspections will be conducted, as well as monitoring of cross-border finances, fighting underground loan sharks and stopping capital from flowing abroad.
Claw backs would be really fascinating to watch.

Friday, May 25, 2012

Falling Prices Put a Dent in Demand

A bit late on this one, but it's an excellent example of the flip side of the speculative bubble expansion. Falling prices should not suppress demand for a good. Think about it. Nor should rising prices increase demand. Both of those are circus-tent-sized flapping red flags warning of a speculative environment. If people are buying for consumption, the opposite will be true in both cases. Just a note for future reference. We will hit this full cycle again in the future. Job security, falling prices dent housing demand: RBA
Capital city home prices have fallen 4.5 per cent over the year to April, according to RP Data, even as the latest labour data showed the unemployment rate dropped to 4.9 per cent in the same month, from 5.3 per cent in March.

. . .

Home loans rose 0.3 per cent in March, after declines in both January and February although overall activity in the housing market remains subdued. In making its big interest rate cut on May 1, the RBA noted that credit growth for households “had been marginally lower over the past year than over the previous year.”

“Despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction,” the RBA said. In the May meeting, the central bank cut the cash rate to 3.75 per cent from 4.25 per cent in a bid to stoke demand in the economy. The major banks passed along only about 37 basis points out of the RBA's 50 basis-point cut.

Thursday, May 24, 2012

New Lending by China Banks Falling Precipitously

Take China's growth numbers with a grain of soy sauce. Lending is falling rapidly, even with padded numbers. In an economy that lives or dies on growth, this is contractive. China Banks May Miss Loan Target For 2012, Officials Say
New bank loans last month dropped 33 percent from March to 681.8 billion yuan, missing the 780 billion yuan median forecast of economists surveyed by Bloomberg News. A third of April’s new credit was also so-called discounted bills, or short-term loans often used by banks to pad the total figure.
This month may be worse. The four biggest banks -- which account for about 40 percent of lending -- had advanced only 34 billion yuan as of May 20, Liu Yuhui, a director at the government-backed Chinese Academy of Social Sciences, said in an interview this week, without saying where he got the data.
Still, as recently as last month, policy makers were indicating the target was 7.5 trillion yuan to 8 trillion yuan. Lenders in China’s eastern province of Zhejiang, for instance, will aim to increase new loans to about 670 billion yuan, accounting for 8.4 to 8.9 percent of the nation’s total increase, the government-backed Securities Times newspaper reported on April 26, citing Liu Renwu, head of the PBOC’s Hangzhou branch.

Wednesday, May 23, 2012

BIS Shrapnel Analyst Predicts Price Growth for Sydney, Long Soft Landing

House prices unlikely to decline, expert says
But BIS Shrapnel managing director Robert Mellor is one property analyst who believes that strong population growth and a shortage of homes will ensure Australian house prices do not collapse.
"I've never seen a time where the market responded and softened so much in one year as it has in the last 12 months, basically because there's a lack of investors in the market," he said.
Investors? I thought owner occupiers were the salvation of your market? (strong population growth)
'Modest growth' Mr Mellor says people will not sell a house unless they absolutely have to if they are going to get less than what they paid for. "Only people who are forced to sell, whether they be owner-occupiers or investors," he said.
Sure, but at 10% growth per year (up to two years ago), anyone who bought five years ago can sell for 20% off, anyone who bought ten years ago can sell at any price. Now, wealth effect will make them not want to, but if it's just a matter of taking a loss relative to purchase price, that still leaves a lot of sellers.
"I'd be very conservative in terms of forecasting price growth going out the next five or 10 years, for many markets, particularly places like Melbourne, price growth is going to be minimal." He says prices will struggle to rise more than 1 per cent per annum in the next three or for years.
That is, in effect, a serious decline. Inflation is a low 1.6% Q1 2012 but it's been averaging 3% over the long term. Gains of 1% against a 3% inflation rate over ten years results in a loss of value of about 23%. That would be a soft landing, but it would still be a major landing in house values.
"But markets like Sydney, Perth, Brisbane, where there's massive amount of pent up demand and very low vacancy rates, we will see over the next six to 12 months a return to modest growth - not 10 per cent plus but more in the 3, 4 per cent to 6, 7 per cent range.
"Unemployment would have to go up to 7 or 8 per cent to even get a 5 or 10 per cent decline in house prices."
Noted. I also note there is nothing on credit markets, commodity prices, Europe. Australia IS an island, in all ways.

Tuesday, May 22, 2012

China won't back off the property restrictions

Prices fell in 46 of 70 cities tracked. This compares to drops in 37 cities in March.
Prices fell the most in Wenzhou, 12.3% year on year.
Stimulus measures like Beijing offering first time buyer mortgages below the benchmark rate. Yangzhou will offer subsidies up to .6% of purchase price. Attempts by other localities to lift the central government's property curbs were stopped within a week. Home prices in decline in record number of Chinese cities
Private data also showed the home market continued to cool. April home prices fell to a 14-month low, SouFun Holdings Ltd., the nation’s biggest real estate website owner, said on May 2. Residential values decrease 0.3 per cent last month from March, the eighth month-on-month drop, said SouFun, which began compiling the figures in July 2010.

A gauge tracking property shares in Shanghai fell 1.7 per cent at the close of trading, compared with a 1.4 per cent loss for the Shanghai Composite Index.
Industrial & Commercial Bank of China Ltd. suspended a 15 per cent discount on mortgage lending for first-time home buyers nationwide, the official Xinhua News Agency reported on May 5. The suspension was made to address tight liquidity and deposit instability and other Chinese banks may follow suit, Sophie Jiang, a Hong Kong-based banking analyst at Religare Capital Markets, said in a May 7 report.

“The government won’t back off from the property restrictions,” Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, said before Friday’s release. “If they lift the restrictions and the market keeps falling, which it will, they’ve lost the fig leaf that enables them to say they’ve got everything under control.”

Credit Suisse Report Warns Australian Banks About Lowering Standards to Gain Customers

Credit Suisse report Australian banks may be raising Loan to Value ratios to gain market share.

Commonwealth and Westpac are most exposed with 60% of their lending in home mortgages.
"The risk we see in the Australian mortgage credit market is that revenue pressures, especially in decelerating housing credit growth, lead to the commencement of the next cycle of degradation in underwriting standards," Mr Martin said. "Our industry liaison suggests that this process is starting to occur but it hasn't slackened to the extent seen in the pre-crisis era.

"Banks (are) selectively retaining mortgage credit risk that previously would have been transferred to the lender's mortgage industry."

Mr Martin said before the downturn most of the lower underwriting standards and high loan-to-valuation ratios were offered by smaller players and non-bank lenders.

Monday, May 21, 2012

Bank Risk Halved by Taxpayer Backed Mortgage Insurance

In this limited stress test RBC and CIBC were the most exposed to mortgage risk (based partly on the size of their mortgage book relative to other lending)
BMO and TD were the least exposed (partly to do higher use of mortgage insurance) Canadian banks' residential mortgage exposure manageable
As of Jan. 31, 2012, the six largest Canadian banks (The Big Six) had $912 billion of exposure to the domestic residential mortgage market through residential mortgages ($730 billion) and home equity lines of credit (HELOC, $182 billion). Fitch used a single-factor stress test to assess the impact of a real estate shock on the banks and, more broadly on the system.

Fitch applied three-year cumulative losses of 1%-10% on the residential mortgage and HELOC exposures of the six largest Canadian banks. Cumulative gross losses for the Big Six varied from $9.1 billion-$91.3 billion depending on the magnitude of the stress, but declined to net losses of $4.1 billion-$41.5 billion after taking into account mortgage insurance provided by mortgage insurers owned or backed by the Canadian government.

Sunday, May 13, 2012

Demographicman will save the day in Toronto

I would have said that you could recognize Demographicman by his red cape with a chart printed on it, but there aren't any charts in this article.

Demographics make big city condos hot

Housing starts in April (expected to have lost some activity to a warm March) were a surprise 244k, 40k higher than estimates.
Average house prices in Canada are 84% higher than in the U.S. (that is on lower average post-tax income, btw)
Multifamily unit starts are up 27% year on year.
So clearly it doesn't take a statistics degree to read the numbers and unequivocally declare the Canadian housing market is overheated and in particular, the condo market, right? Wrong.
You can trust these guys to never disappoint.
First off, CMHC's recently released annual report stated: "Clear evidence of a bubble is lacking [and we] continue to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets."
All of the above, plus household debt, plus mortgage debt, plus recent gains in price far in excess of GDP or personal income are, of course, not evidence of anything.

And what are those demographics that will absorb tens of thousands of excess condo inventory, just this year? (Oh, he didn't say the rescue was this year, just in "the coming years")

Retiring Boomers will move into condos
Every new immigrant (despite much lower salary and higher unemployment) will RENT condos (apparently below carrying costs because otherwise, wouldn't it be cheaper to buy?)
And young people will flock downtown to work and form families (apparently happy with 600sqft to do it in).

There. See. You bears are so wrong about condos in Toronto.
Therefore, my feeling is that big city condo values will continue to rise in general and that house prices in some urban areas will fall as a broad trend, with average home prices across the country potentially flat in the years to come.
Your "feelings"? Seriously? Also, "soft landing" is the term you are avoiding here for some reason.

Saturday, May 12, 2012

High Inventory in Australia

The Slow Death of Australian House Prices
The rate cuts in November and then December were supposed to save Australian house prices.

Yet less than six months later, recent economic data suggest things are getting worse.
Aren't banks there claiming they are having funding problems? (Evidence of which is reportedly scarce, but nonetheless, it would explain the lack of stimulative response in the market.)
But ever the optimist, RP Data called this decline in April a ‘renewed softness’.
According to the RP Data Report transactions are steady at 31,000 a month, but that is down from 45,000 in 2009. Correspondingly, inventory is high, 2x what it was in 2007. Now, population grows about 1.4% per year, so over a little of that is natural growth. But the upswing in hopeful sellers from the GFC never quite got out of the market, and now we have another upswing in hopefuls for the market to try and digest.
Quick back of the envelope MOI would be just under 10 months of inventory (MOI), a highly contractive number. (Balance is considered to be 6.5 or so.)

Wednesday, May 9, 2012

Comparing Canada's CMHC to the U.S. Fannie/Freddie

At the bursting of the U.S. housing bubble in 2006 Fannie/Freddie had $4.3 Trillion in mortgages held or securitized. GDP of the U.S. that year was $13.1 Trillion, for a ratio of GSE holdings/GDP of 33%.

North of the border is Canada where CMHC is bumping up against $600 Billion on mortgages ($540 as of Q3 2011). GDP last year was $1.75 Trillion, for a ratio between 31%-34%.

Those look pretty comparable. Scary comparable.

Fannie/Freddie have used between $190 and $641 Billion in bailout money (depending on how you want to measure it). They just booked a profit of $2.7 Billion this last quarter and Freddie a profit of $577 Million. Only 6 years after the crash began.

By the way, the reason it is hard to measure the bailout is the treasury bought the mortgage securities off of the GSE's books, but they didn't turn out to have zero value. Hence the discrepancy.

Where was I? Oh yeah, those two liabilities look awfully, frighteningly similar. If we assume the same ratio of losses (and given the other stark similarities of: total growth in house prices, consumer debt load, total growth in mortgage debt, this isn't a stretch) That would be $415 Billion (averaging the bailout range) in losses out of $4.3 Trillion in mortgages or 10%. So perhaps CMHC is looking at needing a $56 Billion bailout by the time the market reaches bottom.

A few other things. A lot of Canadian newspapers (especially!) but analysts too, oversimplify what happened in the U.S., to the point of misleading. So, some points I'd like to make here, because they become relevant, post-crash:

1) Fannie and Freddie were not the primary cause of the market bubble in the U.S. The Private Market was. Try on this chart from this UNC report

You will note that Fannie/Freddie were actually blocked from issuing many kinds of mortgages. They dropped significantly out of the market just as the bubble was taking hold. Private Issue Subprime took off. That is your market destroyer, price bubbler, evil dark lord of financial nightmares.

Another view of the same data by total amount, not just percent of market share.
Finally, who was issuing the crap, really? Turns out Fannie/Freddie were not allowed to deal in subprime, although because the executives in this frankensteinian, half privatized, half nudge-nudge wink-wink taxpayer backed monstrosity were losing out on insanely fat bonuses their banking buddies were all getting and were having a serious sad about that, they DID weaken their requirements and started accepting NEAR-prime in an attempt to compete with the insanity.

[That is another thing, the role of executive compensation in the bubble has never been addressed, which is a tragedy. It was a huge factor in the short term thinking of all parties involved in finance, from the heads of the GSEs right down to the loan brokers.]

But back to the garbage, er, delinquency rates. Massive trouble on all scales. But notice the bottom blue line. That is Fannie/Freddie's Overall Book. It barely topped 5% deliquency. Which is horrible! No doubt about it. But it is peanuts compared to Wall Street's fraud machine, which cranked out enough garbage to hit 30% with their subprime issuance. Even their Prime issuance is worse than Fannie/Freddie's overall book.

Back to the topic. Cast your eyes back to the first graph. Notice what happened to the two pink lines after the crash. THAT my friends is why CMHC will not die. It is going to prop up the market, it will BE the market, when everything private label is frozen. Yeah, irony is long dead.

Toronto Condo Prices Peaked in September/October 2011

Toronto Condo Median Prices from TREB

Condos in the TREB area are down 1% from the peak (still, but just barely) or $2500
Condos in Toronto City are down 1.5% from the peak or $5100
Condos in Toronto Central are down 4.4% or a loss of $17,000, which is enough to put a 5% down buyer well underwater not including transaction costs.

Currently about 3 months of inventory.

Including transaction costs, all recent buyers with minimum downpayments will need to bring a check to sell.

Condos are more like cars than houses. When the manufacturers are regularly turning out new cars/condos, there is no reason to go to the used car/condo lot to spend more money. Anyone wandering into the used car/condo lot is going to expect a discount.

data from: TREB Market Watch

Australia March Quarter ABS House Price Index Charts

ABS Australian Established House Price Index Chart
Below is the Year over Year change in price. Sydney's downturn appears to have taken full hold.

ABS Australian House Price Change Chart

Tuesday, May 8, 2012

CMHC contemplated selling mortgage insurance business

You know these guys have to have the data about what's to come. I just can't believe they are sailing along the way the appear to from the outside. CMHC considered selling mortgage insurer as housing bubble fears grew
The board of Canada Mortgage & Housing Corp. considered selling the home loan insurer last year, according to former Chairman Dino Chiesa, who’s term ended in March. CMHC, set up in 1946 to promote home ownership, also studied the sale of Australia’s government-owned insurer and presented the findings to the Bank of Canada, according to documents released to Bloomberg News under Canada’s Access to Information Act.
CMHC analyzed Australia’s housing finance system, where the government-owned mortgage insurer was sold to the private sector in 1997. Since the 2008 credit crunch, Australian homeowners pay “relatively higher margins on their mortgages than do Canadians; the lending industry has become more concentrated and less competitive,” according to the documents obtained by Bloomberg News, which show the analysis was presented to Bank of Canada officials last June.

Monday, May 7, 2012

West-Side Realtor: 90% foreign buyers last year now 10% of market

Sky-high housing prices in Vancouver’s west side short-lived
“Banks are now requiring borrowers to disclose incomes and assets before mortgages are approved, as of the last six weeks,” said west-side realtor Marty Pospischil, who specializes in selling single-family homes owned by long-term residents. Last year, he says 90 per cent of his 100 house sales were to “offshore buyers” – people not living here yet, who flew in to buy. This year, it’s less than a tenth of that. “We’re now seeing a 50-per-cent collapse rate in deals, when it’s usually more like 5 per cent,” he said.
There is just so much win in this paragraph. It's all subprime and off-shore sales until it isn't. Really, it had to be. You can't sustain a market at prices that require 100% of average income. Reality, meet the west side.