"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
 CLICK CHART TO ENLARGE Divergence Update 2014 U.K. Edition New Opportunities Just kidding; not you dear reader unless you work in app building, robotics or machine language; or as Tom Friedman says, "as long as you are not average". Oh and he also said "Think Like an Immigrant: "We are all new immigrants to the hyper connected world, and new immigrants are paranoid optimists. I better understand what world I’m living in, what the biggest trends are and pursue them with more energy, vigor and persistence than anybody else.” It should be obvious to everyone that the trend is a new machine software revolution that is capable of replacing not only the middle but the top as well; and Mark Carney, new immigrant that he is, knows the trend. The Bank of England will cut up to 100 jobs following a 'Value for Money' review, as part of £18m of savings to be made by 2016. The jobs will be cut from the bank's support division, known as Central Services, and equates to roughly 10pc of the workforce in that area. In total the Bank has roughly 3,600 staff. The review, launched last autumn shortly after the arrival of Mark Carney, the Bank Governor, looked at staff deployment and spending and identified savings of £18m to be made by 2016, roughly 10pc of the spending that was under review. Central Services will now be reorganised following the review, providing "new opportunities" for some staff, while other jobs "will not be filled as staff retire or move on". "It is envisaged that there will be between 80 100 redundancies, subject to staff consultation," the Bank said. "The Bank is working closely with the Bank’s union to ensure that affected staff will receive support to find alternative employment." The Telegraph Jan 31, 2014 How long do you think the divergent spread between earnings and housing unaffordability will last? (see Demographia update for a 3rd party view of value)
The 3 charts above are EOY 2013. Current Charts are here.
 CLICK CHART TO ENLARGE Bull turns into a Mule "The Chinese housing market is clearly oversupplied, existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year." said Gan Li, economist and professor at Southwestern University of Finance and Economics in Chengdu, Sichuan and at Texas A&M University in College Station, Texas. Mr Li interviewed 28,000 households (100,000 individuals) and found that a third of households are involved in peer-to-peer lending with zero-interest loans among friends, or very high interest averaging 34%, viewed as the cost of credit for businesses and households excluded from the formal banking sector, creating the social class known as Fang Nu (Housing Slave). Hat tip to Zero Hedge. The idea of buying a property with borrowed money didn’t become popular until 2004 when home prices in major cities started rising fast enough to compensate for interest payments, enticing buyers to borrow to buy property, said Liu Yuan, a Shanghai-based researcher at Centaline Property Agency Ltd., China’s biggest real estate brokerage. (ZH Source) Fang Nu bulls are willing, as long as prices continue to rise. But when prices reverse, so does sentiment. A sentiment shift can be seen in North America's biggest "Asian" city, Richmond BC, a neighbouring municipality on the southern border of Vancouver. Richmond has an immigrant population of 60%, the highest in Canada. Richmond has 50% of residents identifying as Chinese, the city in North America with the largest proportion of Asians. More than half of its population is of Asian descent, many of whom immigrated in the early 1990s, mostly from Hong Kong, Taiwan, and Mainland China. (Wikipedia) Not to be deterred: "B.C. real estate firm looks for luxury buyers in China" Most high-end transactions occur on Vancouver’s West Side and the Municipality of West Vancouver. In the luxury market, there were 644 properties that sold for $3-million or higher in the Vancouver area last year, up 47 per cent from 439 homes that traded hands in 2012, according to data compiled by Macdonald Realty. Of homes that sold last year, there were 148 that fetched at least $5-million, compared with 107 sales in that category in 2012. Dan Scarrow, vice-president of corporate strategy at Macdonald Realty Ltd., said he has heard enough anecdotal evidence of well-heeled home buyers with roots in China to make it worthwhile to invest in a Shanghai office.  CLICK IMAGE TO ENLARGE Meanwhile back in reality; credulous buyers will only appear when prices are rising; when prices reverse, it's painful for the Fang Nu.
From the Vancouver Price Drop blog we have a typical example of a vendor chasing buyers down the slippery slope of price reductions unable to get in front of the slide. In the Year of the Horse, the advice is to tighten your saddle. The bull has turned into a mule.  CLICK CHART TO ENLARGE Oil and Money Flow Canadians like to assume that Canada is a large exporting resource laden land mass; yes and no. The Wall Street Journal observes a different market; "Canada an Emerging Market? Yes, for U.S. Oil Exports". Light crude imported into Canada from the U.S. increased 520% from 2008 to 2013 and is expected to rise another 61% by 2015 (top panel of chart mashup). As the U.S. becomes more energy self sufficient, Canada becomes more reliant on imported fuels. For more background information see the blog discussion between Andrew Leach and Robert McClelland etal. Canadians don't build energy infrastructure because of a) expense; it's short term "cheaper" to import other nation's value added products, b) trade agreements; our small relative market size keeps us compliant and acquiescent at the bargaining table and c) policy void; it's easier politically and corporately to let a+b=c Now look at the bottom panel of the chart mashup above. When the price of imported fuel spikes so does the volume of Canadian imports AT THE HIGHER PRICE! Meanwhile in Canada:
 CLICK CHART TO ENLARGE Flying Dutchmen cRAZY cANUCKS When prices get bid up way ahead of fundamentals then corrections occur as we have seen in California, Florida, Japan, Dubai, Greece, Ireland, Spain, etal. The problem is not that prices drop but that the debt used to chase the prices up does not decline with the price. The extreme example is the Netherlands where the percent household debt to income remains at +/- 250% (2012) and yet their housing index has plummeted +/-20% in the last 5 years. The debt remains to be transformed into equity by the long process of amortization while the debtor continues to face depreciation, repair, and income risk. The alternative is the shorter trip to the foreclosure courts. But in Canada: Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. As in Canada, mortgages in the Netherlands are also full recourse and as can been seen below, Dutch housing prices have plunged since 2008 and have left average mortgagors with very high debt to household income. In the U.S. mostly non recourse loans occur, and after prices blew out, borrowers who could not pay, quit their positions and negative equity was written off at the expense of the lender. Canadians continue to borrow.
 CLICK CHART TO ENLARGE Buy Rent or Live at Home Lance Roberts makes the cogent observation that what really drives long term economic growth is not residential investment as much as "household formation". I have mashed up only 2 of his 6 chart argument to show that total U.S. housing activity in the U.S. has rallied out of the 2009 pit of gloom, but the action appears to have faded in 4Q 2013 and is stalled at 2008 levels. On the lower panel we can see that household formation in the U.S. has plummeted off the 2005 peak and the percentage of owner occupiers is back to 1980 levels. Owner occupier levels in Canada, according to the StatsCan 2011 Census via The Financial Post, is at a level that corresponds with the peak in U.S. levels of 2005. Canadian national home ownership was 68.4% in 2006 and 69% in 2011 spurred on by a high-rise condominium boom; 30.9% of owner households in Canada live in condos and in Toronto it's a very high 67.4% of homeowners that do. But household formation it is not. Single non-family households make up 45.5% of condo owning dwellers in the top 10 Canadian metros. This, along with the underemployed is perhaps Canada's Freeter class. FREETER: Japanese expression for people who lack full-time employment who are underemployed, who do not start a career after high school or university, but instead earn money from low skilled and low paid jobs. (Wikipedia) Here is the distribution of owner-households by household type, for owner-occupied condominiums and other owner-occupied dwellings in 10 CMAs (Canadian Metros) with the highest number of occupied condominiums. StatsCan 2011 Catalogue 99-014-X2011003  CLICK CHART TO ENLARGE  CLICK CHART TO ENLARGE Average is Officially Over “If you cannot justify your singular ability to add value every day, you will be in trouble; that’s the big difference between us and our kids. We got to find jobs, they will have to invent them.” Tom Friedman "Countries that Enable will Thrive" (3.04min) Or watch the Keynote by New York Times columnist Thomas Friedman at the 2013 Maryland Competitiveness Coalition’s Economic Summit "How the merger of globalization and the IT revolution is impacting the economy and the future of work." (47.43min) QUOTES:
 CLICK CHART TO ENLARGE What, me worry? Messieurs Poloz, Flaherty, Carney, Bernanke and Madame Yellen et al are all on the record warning about leverage and the cost of it as a major risk going forward. Chris Kimble makes an interesting observation that the St Louis Fed Stress Chart is at the lowest historical levels just as it was in 2007 and 2000 when the S&P 500 was at its highest. The North American story is that the U.S. economy is growing, recession has been averted, the business cycle is risk-back-on and Canada as a satellite exporter to the U.S. will participate in the new joyful inflation as central banks raise rates to make sure we all stay within the 2% CPI target and not get too hot nor stay too cold. Mr Harper continues to assure that the government will evaporate the deficit by 2015 (government workers are advised to start looking for private sector employment). Aw shucks, all is calm, all is bright in the kingdom of managed inflation so keep buying more stuff because prices are going up; but just a little bit, 2% per year, no big deal. Rates might go up 25 beeps or so, but no big deal. Your employer can hardly wait to get pricing power advantage and more productivity out of you so he can raise your pay packet and not lose you to the head hunters in Alberta. Wait a minute; the "risk" of rising interest rates is not really the BIG risk that central banks of countries, who are autonomous issuers of their own non convertible currency, lose a lot of sleep over lately. It's the "D" word that provokes insomnia in government and the private sector. As Chris Kimble points out in the chart above, the stress at the Fed could not be much lower than it is today and sleep should be effortless. But what if asset valuations decline? Is that not the greater risk over time? Japan: Here is what 30 years of low interest rates looks like; and here is the effect on assets and behaviour.  CLICK CHART TO ENLARGE  CLICK CHART TO ENLARGE Rate Suppression Risk A 3% handle on a no risk treasury looks pretty good. Imagine what a 4% handle is going to look like and what it will do to Canadian real estate.  CLICK TO ENLARGE |
History, Charts & Curated Readings"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense Archives
November 2019
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