Wednesday, February 29, 2012

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


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

China's lending scam victims seek state compensation

Tuesday, February 28, 2012


Composite of graphic from dead-tree and online editions

Macleans is taking a stab at a seminal cover.

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.

The mantra of the future walk-aways.

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

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

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.

Saturday, February 25, 2012

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.

Friday, February 24, 2012

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.

Thursday, February 23, 2012

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" . . . ?

Wednesday, February 22, 2012

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.

Tuesday, February 21, 2012

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).

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.

Monday, February 20, 2012

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

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


House Listing at 146 MacArthur
entry at

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

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

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

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.


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?

Sunday, February 19, 2012

Real Estate in all tracked Chinese cities fell in January

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.
“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

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

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?

Friday, February 17, 2012

Canada Poised for Severe Drop -- Bloomberg

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

Strangely Familiar Story in New Zealand

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.

The Only Bubble Is Small and It Is Over There

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!"
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.)
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?
"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 . . .
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.
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.

Thursday, February 16, 2012

The Five Stages of Grief as Applied to a Housing Crash

Kübler-Ross' model of grieving:


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

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%

Wednesday, February 15, 2012

The Myth of Fixed Affordability Tracking Interest Rates

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

Monday, February 13, 2012

China Daily on the State of Private Lending

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

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

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.

Sunday, February 12, 2012

ANZ Raises Rates Despite Central Bank Staying Put

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?

Friday, February 10, 2012

Real Estate Bull Insists Rents Should Not be Adjusted for Quality

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

Thursday, February 9, 2012

Sentiment on Housing in Australia Seems to be Shifting

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
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......
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

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.

Wednesday, February 8, 2012

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

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)

Tuesday, February 7, 2012

Wenzhou Company Boss Arrested with Billions in Debt

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

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


If you feel pressure. Walk away.

Real estate penalty a joke, say thwarted pair
The advertisement said relocatable houses were permitted on the sections.



. . .


Monday, February 6, 2012

Checking in on France's Housing Bubble

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

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

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

Well, a few days ago someone posted to 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.

(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

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?

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

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?

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"

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.

Sunday, February 5, 2012

Toronto, Especially Condos, Show Signs of a Price Slide

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. 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.

Friday, February 3, 2012

Rush to the Exits?

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

“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.

Wednesday, February 1, 2012

Just noting something for later

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

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
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.
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.
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.)