Is it different this time? Sydney Morning Herald asks

Is housing recovery just a pipe dream? They are just being cute here with the first line:
"CAN the Australian housing market recover as it has in the past or is it different this time?"

Is it different this time?

Ask any foreign money manager what scares them about Australia's stockmarket and they will invariably say the risk of a housing collapse because of gross overvaluations. It makes a lot of sense. Virtually all the Western world has seen house prices crumble since 2007 while Australia's residential market has defied gravity, recording only gentle declines. The median house price in Australia is six times the median household income - 30 per cent greater than the US and the long-term average.

The long-term economic impact of Australian housing on the general economy is hinged to how much oversupply there is, if any. Even if prices fall to 50% of peak prices. As long as there is still demand to build something employment will not take a hit.

The bulls like myself believe that history will repeat itself and lower interest rates will eventually trigger a building cycle that in turn will drive domestic economic growth. The bears counter this by saying it is different this time because household debt still sits at a lofty 172 per cent of gross income. They believe any spare income from lower interest rates will be used to pay down debts and not ploughed into the property market.

In the early 1990s, household debt was only about 50 per cent of gross income, providing a sturdier platform for a housing boom.

I saw a quote the other day that bears repeating. Legitimate methods for getting rich should not include running others into debt. (I paraphrase.)

Housing starts in Australia have sunk to a multi-year low of about 125,000 and are predicted to spike to 140,000 in 2013 with the moribund Sydney market, surprisingly, leading the charge. The long-term average for Australia is about 150,000 starts, but underlying demand is currently closer to 170,000 given population growth.

Bets are Investments, Investments are Bets

New Yorker examination of Macau (from April, 2012)
The God of Gamblers

In surveys, Chinese casino gamblers tend to view bets as investments and investments as bets. The stock market and real estate, in the Chinese view, are scarcely different from a casino. The behavioral scientists Elke Weber and Christopher Hsee have compared Chinese and American approaches to financial risk. In a series of experiments, they found that Chinese investors overwhelmingly described themselves as more cautious than Americans. But when they were tested the stereotype proved to be a fallacy, and the Chinese took consistently larger risks than Westerners of comparable wealth. (The gap applies only to investing; asked about decisions in health care and education, the groups were indistinguishable.)

Living in China, I’ve come to expect that Chinese friends make financial decisions that I find uncomfortably risky: launching businesses with their savings, moving across the country without the assurance of a job. One explanation, which Weber and Hsee call “the cushion hypothesis,” is that traditionally large Chinese family networks afford people confidence that they can turn to others for help if a risk does not succeed. Another theory is more specific to the boom years. “The economic reforms undertaken by Deng Xiaoping were a gamble in themselves,” Ricardo Siu, a business professor at the University of Macau, told me. “So people got the idea that taking a risk is not just O.K., it has utility.” For those who have come from poverty to the middle class, he added, “the thinking may be, If I lose half my money, well, I’ve lived through that. I won’t be poor again. And in several years I can earn it back. But if I win? I’m a millionaire!”

Unlike Las Vegas, where most of the profits come from coins fed into slot machines, three-quarters of the revenue in Macau is derived from the enormous bets made in the V.I.P. rooms, where high rollers play around the clock. Casinos rely on outside companies, known as “junkets,” to solve some of the practical problems inherent in running a casino in Macau. It is illegal to advertise gambling in mainland China, and Chinese citizens are barred from carrying more than the equivalent of about three thousand dollars on any single trip to Macau. Most troubling, from the casinos’ perspective, is that it’s illegal to try to collect a gambling debt in the People’s Republic. Working through junket operators is a legal bypass around those problems, because the operators will recruit rich customers from across China, issue them credit, and then handle the complicated business of collection. The system is an attractive arrangement for customers who need to secrete large quantities of cash out of China. If a corrupt official or executive wants to hide the proceeds, a junket is a way to hand over cash on one side of the border and recover it on the other, in chips that can then be played and cashed out in clean foreign currency. (Another option is to smuggle it by hand across Macau’s relaxed borders, a practice known in laundering circles as “smurfing,” for the army of small-time couriers involved.)

Night was falling, and Siu offered me a lift back to the station in his black Lexus S.U.V., parked in the dirt beside us. “There used to be a helicopter taking me to the Venetian anytime I wanted to go,” he said. “Now I’m getting my feet dirty. Real estate is even more lucrative. It’s better than gambling or drugs or anything.” He pointed out the new houses in progress. “It costs a few million to build one of these, and then I can sell it for ten million.”

And this is just pure entertainment gold:

When an F.B.I. agent named Jack Garcia posed as a representative of Colombian FARC guerrillas and asked for weapons, Horng sent him a catalogue, and Garcia ordered anti-tank missiles, grenade launchers, submachine guns, and AK-47s. To lure Horng and others to the United States for arrest, the agency staged a mock wedding for a male and a female agent involved in the sting. Horng and other guests received elegant invitations to a celebration aboard a yacht moored off Cape May, New Jersey.

“I was the best man,” Garcia, who is now retired, told me. “We picked them up for the bachelor party and drove them straight to the F.B.I. office.” Fifty-nine people were arrested. (Horng pleaded guilty and is serving three and a half to four years.) Based on that case and on other information, the Treasury Department blacklisted Banco Delta Asia, in Macau, for participating in money laundering. The bank denied the claim, but it has been barred from access to the U.S. financial system.

Buyers are becoming militant about pricing

Buyers have heard from economists that a 20% decline is coming and they would like to take it now, thank you. Toronto home buyers want back in the drivers seat

In another case, a three-bedroom semi was listed at $569,000, then reduced to $539,000 and sold for $534,000. “My client is motivated. It’s done,” says Mr. Babiak, who points out that other semis in the same area and price range are still sitting there.

He points to Peter Hall, the chief economist at Export Development Canada, who is expecting more robust growth in the U.S. economy than most of his peers. If he’s right, says Mr. Babiak, that should bode well for Canada’s housing market and the correction that has been taking place since the spring could indeed turn into a rebound by next spring.

Not sure I follow this. Demand for bonds seems to be the main thing driving the Canadian housing market.

A Leg in Vancouver, In Case One Breaks at Home

Wary of Future, Professionals Leave China in Record Numbers

Zhang Ling, the owner of a restaurant in the coastal city of Wenzhou, is one such worrier. His extended family of farmers and tradesmen pooled its money to send his son to high school in Vancouver, Canada. The family hopes he will get into a Canadian university and one day gain permanent residency, perhaps allowing them all to move overseas. “It’s like a chair with different legs,” Mr. Zhang said. “We want one leg in Canada just in case a leg breaks here.”

In 2010, the last year for which complete statistics are available, 508,000 Chinese left for the 34 developed countries that make up the Organization for Economic Cooperation and Development. That is a 45 percent increase over 2000.

China'a Exporters Say Their Situation Worse Than 2008

A drop in external demand is laying bare the failure to shift to domestic consumption.

On top of the effects from the downturn in Europe, production is moving closer to market or to places with cheaper labor costs. I don't see this trend reversing. Boutique manufacturing will only expand and that functions best close to home, and for goods requiring high labor costs, China is too expensive now. Chinese Exporters Fear Grim Outlook

China’s exports rose almost 10 percent year-on-year in September, according to data released at the weekend. But speak to Chinese exporters and they say the economic doldrums in Europe mean many are facing more daunting challenges than they were during the 2008 heights of the global financial crisis.

Shannon O’Callaghan, an analyst at Nomura, said: “At the start of the year most U.S. companies were saying they thought China would get better in the second half. But by the summer, it was clear it was not getting better. If anything, it’s getting worse.”

. . .

Economists say the seemingly buoyant trade numbers released on Saturday were skewed by seasonal factors such as the rush to get Christmas shipments out before week-long national holidays in early October.

Mr. Moore’s company has farmed out orders to Chinese-owned factories elsewhere in the country and opened a factory in Cambodia. Gross margins for the business bounced back from 6 percent in 2009 to 35 percent in 2010 “purely because I didn’t have this factory [near Shenzhen] sucking up all my wages,” Mr. Moore says. The move has given Scovill’s Asia business a new flexibility in managing costs.

Selling Organs to Pay Debts

Loan shark debtors in Malaysia (many of them Chinese) sell organs to pay their debts.

Gamblers owe Ah Long RM30 million this year

FOR the first nine months of this year, Malaysians have borrowed a whopping RM30 million from illegal moneylenders — mostly used for illegal online gaming activities.

That's $10 million USD.

“The Chinese make up the majority with 313, followed by 92 Malays and 39 Indians.”

Chong said the government should formulate a law which would also penalise the borrowers.

“These gamblers are loan defaulters and by not paying the loan, they place their family members in danger.

“Their wives, children and parents are actually the ones who become victims of the loan sharks.

Chong said this year, the bureau received four such cases and all the complainants confessed they decided to sell their organs after reading news reports from China and Hong Kong where people there were forced by loan sharks to clear off their debts.

Money Flows out of China Spark Change in How China Creates Money

Money flowed out of China in August for the third time in 2012. Their standard MO of buying foreign monies from their exporters in exchange for yuan is going to have to change.

Average monthly gains in Yuan holdings is 35 billion this year compared to 232 billion monthly last year. Market liquidity supply sees big change

"For a long time, Chinese banks' yuan holdings for purchasing foreign exchange have been a channel for the central bank to create money. Now the old pattern is about to change, which means the central bank needs to find new ways to issue currency if it wants to maintain stable money supply growth," said Cao Yuanzheng, chief economist at the Bank of China Ltd.

Yuan holdings among banks for purchasing foreign exchange, an important measure of capital flows, declined by 17.4 billion yuan ($2.75 billion) in August to 25.64 trillion yuan, marking the second straight monthly fall.

The depreciation tendency once again indicates that the yuan's exchange rate is close to equilibrium, he said. "We believe that capital flows related to yuan exchange rate expectations is the most uncertain factor affecting overall capital flows," said Wang Tao, head of China economic research at UBS Securities Co Ltd.

If you'll recall, a lot of money poured into Yuan purely due to the expectation that it would appreciate. Now that the signs are toward depreciation, this speculative bet is being taken off the table, triggering outflows.

"The financial account deficit plus a lower current account surplus means that China may have entered a new era, that is, the stagnant growth of foreign exchange reserves."

The central bank has been increasing its use of short-term money market tools such as reverse repurchase transactions to ease liquidity tension, after it last cut the RRR in May by 50 basis points to 20 percent for major banks. It injected massive liquidity through another round of reverse repurchase operation in the last week of September. From Sept 24 to 27, it injected 365 billion yuan, a record high weekly injection through open market operations.

Buying treasury bonds in the secondary market would become a major channel for the central bank to create money in the future, China Business News reported, citing an anonymous analyst close to central bank decision-makers.

But controlling liquidity through purchases and sales of treasury bonds requires a bigger and more mature secondary market. Otherwise, large-scale purchases made by the central bank would raise interest rates and spur the issuance cost of such bonds, said the analyst.

"Currently, central bank bills and treasury bonds are in separate markets. Only if China completely frees interest rates could the two markets be linked and the central bank could operate like the US Federal Reserve," Zhao said.

Before the sterilization of foreign exchange fluctuations became a mainstream channel to issue currency, re-lending to commercial lenders was the main tool of China's central bank to create money, accounting for 80 percent of newly injected money in the 1990s.

Wenzhou Property Speculators are Trapped

From boom to bust in Wenzhou

About 80 percent of speculators from the prefecture-level city in southeastern Zhejiang have been trapped by their property investments that have recently depreciated 30 to 50 percent from levels in 2010, state media reported.

"They will be insolvent either selling the houses or holding them," China National Radio said.

Their speculative activities domestically have been blamed for soaring real estate prices in China, where they have been nicknamed "locusts."

Hot money poured into the burgeoning real estate industry as a result of an investment of 900 billion yuan (HK$1.11 trillion) out of the 4 trillion yuan stimulus package into the sector, amid easy borrowing in a loose credit environment. From 2007 to 2009, Wenzhou's wealthy banded together to snap up floors of houses in Shanghai, Hangzhou and other cities.

Veteran Wenzhou speculator Zhang Ming said he borrowed 30 million yuan from friends and relatives, who put up their own firms and properties to secure mortgages from banks. "In 2010, I spent 38 million yuan buying four floors of houses in Wenzhou. But now, I cannot sell them for even 20 million yuan," he lamented.

But some analysts warned of a potential credit default by the end of the year, as more than 70 percent of the funds tied up in property speculation came from underground loans and banks.

Tune is Changing in Toronto: Gen Y should Rent

In 1981 62.1% of households owned by 2001 65.8% by 2006 68.4% did so. Since then it has most likely risen. (ref). New blood is essential to keeping that rate from falling. Why Gen Y should tough it out in the rental market

Renting is the obvious alternative for someone who is unready for the financial blood-sucking that home ownership entails.

Tell us how you really feel.

Renting isn’t a quick and easy alternative to buying, though. Canada Mortgage and Housing Corp.’s latest report on the rental market says the national average vacancy rate for apartments was 2.3 per cent in April, which compares to 2.5 per cent a year earlier and a long-term average of 3.2 per cent. Regina, Winnipeg and Montreal are among the cities with smaller vacancy rates than the national average, but Toronto stands out on the low side at 1.5 per cent in April. The city’s vacancy rate for condos is even lower at 1 per cent.

I personally know of Chinese condo owners who have given up on having renters. Hard to imagine with 58,000 condos coming in Toronto that the vacancy numbers are relevant except for house rentals.

CMHC measures rental costs in terms of two-bedroom apartments. Toronto’s average was $1,164 per month last spring, second to Vancouver’s $1,210. You could carry a $250,000 mortgage at today’s five-year rates for those rents, not that there’s much of anything in this price zone in either city.

As tough as the rental market may be, it’s still a better option for Gen Y than buying prematurely. Renting, at least, is a finite expense each month. Housing is infinite – there are fixed costs, plus endless discretionary expenses. Buying is not the solution to difficulties in finding a place to rent, at least not without further price declines. Instead, find a roommate and pool your resources to cut rental costs.

Tough love. Although, with tightened lending rules, this may be irrelevant advice anyway.

Financial Corruption from Bubble Still Haunts U.S. Years after Crash

The saying about the tide going out applies to transparency for the financial system as well. Profits gloss over a lot of corruption. And regulatory capture and blackmail by behemoth institutions adds another layer of inertia to a fundamentally flawed system.

As part of the settlement over bad mortgage practices the banks agreed to write down debt. Good news is, they are. Bad news is, it's debt that doesn't exist anymore.

How to Erase a Debt That Isn’t There

“You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America. Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

Cast your mind back to February. Five of the nation’s big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.

Neil Crane is a lawyer in Hamden, Conn., who represented Ms. Esposito and her husband in their bankruptcy. He says four of his other clients have recently received letters from banks claiming to forgive discharged debt.

The banks claim it is a phrasing problem. That they are simply noting that the lien has been released.

But even this is incorrect in Ms. Esposito’s case, Mr. Crane said. Her lien was actually eliminated back in 2009, during her bankruptcy proceeding.

The loan forgiveness is taxable for the former owner, so this could be a serious problem for those caught up in this.

All of this made me wonder: are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

And we can completely trust them on that.