Vancouver Juiced for Second Month

The market moves upward for a second month in a row after half a year of declining change in prices.

One possible explanation for the juice (much supported by anecdote, and some preliminary weekly data) is the high motivation for obtaining a 35 year mortgage imposed by a March 18 deadline. A lot of sales continued to trickle through the stats in the week after, btw.

April 3rd's numbers from Will's Weekly numbers at VCI indicate a sharp drop in sales two weeks after the rule amortization rule change. (Scroll down for second spreadsheet.)

If we assume the rule change was responsible for the leap in the market, what will prices look like if the previous trend returns in April?

REBGV HPI Projected Out April-Dec Based on Previous Trend

April should be informative on the reasons for the leap in February and March.

April will also be interesting on another front: 18th is the date after which CMHC will no longer insure HELOCs. I, personally, believe this is more significant as it will most likely shrink access to home equity for the BC residents who are using equity to remain afloat (BC has been at a negative savings rate for years).

China Crash Predictions, Part 7 - Katsenelson

A long interview with Vitaliy Katsenelson.
Business Insider Interview from November 2010 - The Only Question About The China Crash Is When

Re: measuring the bubble: the real estate price to income ratio

This ratio is important because it helps put the scale of the Chinese real estate bubble in its proper context. In Tokyo, at the peak of the massive Japanese bubble, the ratio stood at nine times. In Beijing it’s already 14 times. In Shanghai it’s over 12 times. The national average for China is pushing 8.2 times right now. So housing affordability is very, very low, and the housing prices are extremely high.

Re: Chinese consumers picking up the slack

So on the one hand, you have U.S. and European consumers representing 20 trillion dollars in purchases, versus Chinese consumers at about 2 trillion dollars. In other words, U.S. and European consumers are 10 times the size of the Chinese consumers. As a result, a very small change in consumption in the U.S. and Europe has to be overcompensated by a huge increase in consumption in China . . .

Re: triggers, and what to watch for?

It’s very difficult to know exactly what’s going to be the straw that breaks the camel’s back. It could be a slowdown in the Japanese economy, or a double-dip in the U.S., or some other factors that are not apparent to us today. It could be just the simple fact that the Chinese government is trying to put the brakes on the economy and mistakenly does too much.

I don’t trust government-reported statistics, thus I’d watch numbers that the Chinese government is less likely to fudge: electricity consumption, which was down during the global recession, same-store sales of American fast food restaurants in China, tonnage of goods shipped through railroads, and, though they may lag, sales by American and European companies in China.

[Catch the rest of the China Crash Predictions Series]

China Crash Predictions, Part 6 - Hart

November 30th 2010 - Telegraph

[Mark] Hart, who runs Corriente Advisors from Fort Worth Texas, has told potential investors in a presentation that China is in the "late stages of an enormous credit bubble".
When this bursts, the financier said he expects an "economic fall-out" that will be as "extraordinary as China's economic out-performance over the last decade".

The article goes on to detail what is going on in each problematic sector. The only thing that is really new is Mark Hart's estimate of China's debt to GDP ratio, which is 107% under conservative estimates and may top 200%.

February 2010 - The FirstPost

Meanwhile, Hart and Gave have set up a fund to bet that the Chinese economy is over-stimulated and heading for a
significant crash, as predicted in my report yesterday.

October 2009 - Dallas News

"They have built more factories, shopping malls, condos, roads and bridges than could ever be put to good use, even assuming a dramatic upswing in global growth," Hart said. "Growth in actual wealth has dramatically lagged growth in credit, growth in money supply and growth in GDP. This is not sustainable."

[Catch the rest of the China Crash Predictions Series]

China Crash Predictions, Part 5 - Rickards

March 2010 Examiner.com

[Jim] Rickards explains his theory by comparing China’s central bank and economic management to that of a typical hedge fund. China is hedging some of its economic risk by “buying dollars and short-selling Yuan.” in hopes to offset risk in their economy. By doing this however, it is stopping the Yuan from gaining strength. The weakening Yuan could be the tipping point causing an inflationary risk to the market.

Ah, now we are getting into triggers. And what is China fighting right now?

Just today:
China's suspends diesel exports as country fights inflation

The decision by state-owned Sinopec will help meet domestic shortages blamed on a government conservation campaign and possible hoarding by state oil companies.
Politically sensitive food costs surged more than 10 percent as inflation jumped to 4.4 percent in October, well above the government's 3 percent target.
Diesel supplies ran low after thousands of factories bought diesel generators to cope with power cuts imposed by authorities to meet energy-saving goals. That boosted already strong fuel demand.

Speaking of misallocation of capital.

March 19 Analyst Wire Interview

Now, what they're doing is they're leveraging up in that sector. And there's a very large shadow banking system in China that's not well known. People look at the banks and they say well they're fairly healthy, and they are. But banks always look healthy until the values collapse and that's when they start to crash themselves.

But there are a lot of unregulated lenders. There's a lot of in affect defector banks that are lending and fueling and this. And then the local governments, the provincial governments are adding to the problem very much like Fannie and Freddie, which is that their source of revenue is from these property flips.

They need to get these local governments out of the business of, you know, stoking the flames of property speculation, so to speak, and raising interest rates would be another good way to do it.

Very similar to the United States, I mean what's developing in China in the property sector looks like the U.S. from 2002 to 2006. Again, there's a real economy there but there's this bubble growing on the side. We know when bubbles break the contagion spreads to other sectors and that's the concern.

[Catch the rest of the China Crash Predictions Series]

China Crash Predictions, Part 4 - Chanos

The earliest Cassandra in this little mini-series (so far), famed for seeing big problems early and cashing in on them, James Chanos. The articles below stretch all the way back to September 2009, long before the cool kids got into the making calls on China game.

AdvisorAnalyst.com September 2009

Major investors are starting to question whether Beijing is telling the truth. "I think the story is getting harder and harder to believe," says widely followed billionaire investor and hedge fund manager Jim Chanos.

Business Insider November 2009

Chanos is reportedly attempting to short the entire Chinese economy. What's fueling the short case against China?

The $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.
China seems to be cooking its books. For instance, it reports that car sales are surging while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-piling cars?

CNBC December 2009

Chanos points out a stark irony that investors who decry government involvement in US companies are bullish on the Chinese markets, despite the fact that the country's government can "fine tune" the economy to their liking. He is also skeptical of the country's GDP numbers, calling them "massively inflated by under-depreciating a very, very, very shaky capital asset base."

January 2010 NY Times

Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.”

I also liked his notion that GDP is a residual, not a target. By making it a Communist Party target, China guarantees excess growth.

Fortune November 2010 - Chanos: Right or wrong?

Housing prices are down in major cities while supply is growing: New residential real estate investment alone accounted for 14% of China's GDP in 2009, and housing prices have started to come down, though the overall supply is still growing sharply in 2010. Even Goldman Sachs forecasts a 10% to 20% housing price decline between now and the end of 2011.

The trouble the early warning folks have is being wrong, completely wrong, in the short to intermediate term. Many blogs and a small handful of economists came in for years of berating for their bearish calls on the U.S. real estate market. Years of it.

Don't underestimate China's ability to pump this thing up much longer than would seem possible to the reasonable mind.

Special award as always to Shaun Rein
Jim Chanos is wrong there is no China Bubble

There are, however, fundamental differences between China's real estate and consumer finance markets and those of the U.S. and Dubai, which Chanos compares them to. First, when buying residential properties, consumers in China have to put down 30% before taking out a mortgage. For a second home, they have to put down 50%, no matter what their net worth. Therefore, China doesn't have the reckless consumer behavior that occurred in the U.S., where people with bad credit were taking out huge loans from Countrywide with no money down, or were buying 10 homes without deposits in the hope of flipping them in a few months. People who buy homes can afford it.

People with $4k of annual disposable income are buying apartments priced at $150k because they can afford them, people. They can afford them so much they buy them and don't even live in them. And no one, but no one, is borrowing money outside the banks so they are all subject to these new restrictions, nor are they flipping houses within buying clubs or leveraging, or any of that stuff. No one. These people can afford these houses. Shew, glad to hear it. For a minute there I thought there may be a problem.

[Catch the rest of the China Crash Predictions Series]

China Crash Predictions, Part 3 - Shih

For the record, it does not appear that Shih believes in a crash, just a massive bailout. He believes the Chinese government will back up the banks and since everyone knows this, there will not be a panic.

March 2010, Victor Shih, quoted in Harvard’s Rogoff Gives Legs to China Crash Talk: William Pesek

Victor Shih of Northwestern University in Evanston, Illinois, is focusing on another $1.6 trillion figure. That’s how much debt he estimates China’s local governments are sitting on. If the argument Shih fleshed out in a Feb. 8 piece in the Wall Street Journal is correct, local debt alone is one-third of China’s 2009 gross domestic product and 70 percent of foreign- exchange reserves.

Also from March 2010, Victor Shih Sees Bank Bailout Redux

According to Victor Shih, assistant professor of political science at Northwestern University — and a regular contributor to The Wall Street Journal’s opinion page (see articles here and here) — the massive increase in new lending China’s banks embarked on last year may mean that in coming years China’s banks will be faced with a huge spike in nonperforming loans and will have to again turn to the government, cap in hand, to bail them out.

June 2010, Shih: Moral Hazard and China's Banks

In China, just as in the West, banks and businesses have grown accustomed to gambling with other people's money on the assumption that the government will bail them out if they lose.

[Catch the rest of the China Crash Predictions Series]

China Crash Predictions, Part 2 - Rogoff

Bloomberg July 2010 Kenneth Rogoff this round with the grabber headline of "Rogoff Says China Property Starting to ‘Collapse’"

China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund.

More comments from Rogoff from March, 2010 in this article. Harvard’s Rogoff Gives Legs to China Crash Talk: William Pesek

Video Here

"The data is not very reliable. . . . Exploding property prices and leverage. Doesn't mean you're going to have a crash tomorrow, it might be five years . . ."

[Catch the rest of the China Crash Predictions Series]

China Crash Predictions, Part 1 - Faber

I'm going to start my hunt for triggers by reviewing others' predictions.

From May 2010: (Marc Faber quoted in Businessweek) China May Crash in 9-12 months

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

No mention of what may trigger the actual collapse. Clearly it has only inflated since this prediction, which is due January through April 2011 to come true. Seems like it's got at least another Friedman Unit to a year ;-)

The crash itself will be money exiting the China zone. Money so far, continues to rush in, minus Chinese investments abroad (like financing Manhattan high rises).

Housing prices nationwide may fall as much as 20 percent in the second half of the year on government measures to curb speculation, BNP Paribas said April 23. Under a stress test conducted by the Shanghai branch of the China Banking Regulatory Commission in February, local banks’ ratio of delinquent mortgages would triple should home prices in the country’s commercial center decline 10 percent.

Something about this expectation that government curbs will actually do something. Speculators do not, by and large, work inside the system being curbed . . .

[Catch the rest of the China Crash Predictions Series]