HISTORY & READINGS at Brian Ripley's Canadian Housing Price Charts & Plunge-O-Meter

Spanish Inquisition

10/31/2013

CLICK Francisco Goya 1799 from Los Caprichos

Trick or Treat

I have reported in the past (July 24, 2013) on big money buying up swaths of bank owned U.S. residential properties in the last 2 years for buy, hold and flip when capital gains return despite current negative yields. Today Bloomberg is reporting that:

"Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S. is using its experience to replicate the model in Spain where property prices have dropped 40 percent."

A few quotes from the Bloomberg article follow:

The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private.

While Spain traditionally has a lower percentage of renters than the U.S., the (Spanish) government last year introduced measures to increase demand in the rental market by abolishing tax breaks for individual home buyers, passing legislation to protect landlords by speeding up evictions of tenants who don’t pay, allowing owners to raise rents above the annual inflation rate and reducing the duration of leases.

Three years of austerity, unemployment at 26 percent and a drought in mortgage lending are forcing more Spaniards to rent (rather than own) and (banks) to attract foreign funds to invest in the country’s unsold homes, which may total 1.5 million units according to some estimates.

Blackstone (in the U.S.) is now attempting to sell debt backed by the rental payments, the first securitization of its type, with Deutsche Bank AG (DBK) holding a meeting today in New York to market $479.1 million of the securities backed by mortgages on 3,207 properties. Blackstone’s long-term wager is that the homes’ values will rise, positioning the firm to exit at a profit.

Oh, did I mention that the wire services have reported that Spain is officially "out of recession" according to the Madrid-based Bank of Spain: "Gross domestic product expanded 0.1 percent in the third quarter, growing for the first time in more than two years."

Happy Halloween, here's some Wikipedia reading:

The Spanish Inquisition (1478-1834)
Goya's image above is from Los Caprichos (1799)

...and here is Richard Wilkinson's Ted Talk (2011): How economic inequality harms societies. The hard data on economic inequality shows what gets worse when rich and poor are too far apart; real effects on health, lifespan, even such basic values as trust. "If Americans want to live the American dream, they should go to Denmark".

People are a little Screwy

10/25/2013

“We really can't forecast all that well. We pretend that we can but we can't.

And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.”

Alan Greenspan, speaking to Jon Stewart (at 6.20min) on The Daily Show. More quotes from this interview (paraphrased):

The banks did not fully understand the risks out there.
We analysts thought the actors would be rational.
We couldnt believe their (bank's) leverage.
You cannot tell which are the toxic assets.
Let banks suffer the consequences, don't let them default.

Alan Greenspan was Chairman of the U.S. Federal Reserve from August 1987 to January 2006. Vancouver has been screwy since the spring of 2005 when commodity markets launched bringing other physical and paper assets along for the ride as private sector investors and government managers abandoned fundamentals.

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Share of Wealth

10/21/2013

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50/10 10/50
"We're in California, isn't there a better way of doing that?" Elon Musk

The bottom 50% of most national populations is participating in less than 10% of its wealth, and the top 10% of populations is wheeling and dealing with over 50% of its national wealth. If you are in the bottom 50%, you are working at the wrong trade if your desire is to enjoy just some of the benefits of those above you; for instance more free time.

It's doubtful that in this period of history there is any point in waiting or voting for your governors to move you up the ladder because the 10% make up the rules of the game. The only remedy I can see is to retrain so that you have a skill that the top 10% needs and that the bottom 50% doesn't have.

Here are some high quality and free educational providers, Khan Academy and EdX to get you started and an interview with Elon Musk "A lot of education is vaudevillian" from April 17, 2013 at the Khan Academy office in Mountain View (48min).

Here is another interview with Elon talking about Tesla and SpaceX at the D11 Conference on May 29th 2013 (69min) "Change the rules of the game."

US Flipping Update

10/18/2013

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The Rich Get Richer

When it comes to flipping houses in the U.S. it is the very wealthy who excel at the gross margin.

Total flipping activity (bought and sold in 6 months) is down by about 13% Y/Y but in the 2 to 5 million dollar price range, the flip count is up 350% Y/Y.

The mid and low end price flippers are being forced into holding, folding or chasing prices down the slope.

What's that old saying... "The rich get richer and the poor get children"? Well fortunately the poor are getting smarter and the birth rate is falling due to "demographic transition" according to Warren Sanderson, a professor of economics at Stony Brook University.

"Don't talk so much, old sport... Play!" The Great Gatsby F. Scott Fitzgerald

US 30yrs Later

10/17/2013

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Capital vs Labour

Thanks to Ted Kavadas rounding up these 3 charts (and 7 others shown here). In the past 30+ years since the peak in the cost to borrow, Capital has chased financial asset prices (housing, stocks and bonds etal) in bidding wars to record highs against yields plunging to negative return lows.

During this time frame, Labour has formed longer lineups as more and more jobs become a negative return on work/time. Why invest one's time in working for someone else if "unemployment" and grubbing about for oneself produces a similar quality of existence?

The past class struggles against the owners of the means of production ended either with revolution that restructured society or the common ruin of the contending classes. (paraphrased from the 1847 Communist Manifesto Wikipedia)

Well the North American "Spring" seems nowhere in sight, so forget the revolution. Perhaps the reset will be a "restructuring of the contending classes"; although that idea currently seems remote; a minimum wage increase or an asset mark to market is well lobbied against. Also the U.S. (and Canadian) federal governments are on a declared path of austerity as is Europe and other developed countries. As governments reduce spending the only alternative sources for investment in the economy are the private sector and trade. The trade balance is stubbornly negative.

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Wealth Changes

10/16/2013

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Lecturing birds how to fly

The October 2013 Credit Suisse Global Wealth Databook contains lots of comparitive charts on recent national and global changes in wealth. This one shows the change in household wealth between 2012 and 2013. The authors point out that since 2000, Canadian per capita wealth has been rising at about 3.7% Y/Y after discounting for exchange rates.

Relative to the U.S. Canada has a more equal wealth distribution with both a smaller percentage of people with less than US$10,000 and a larger percentage with wealth above US$100,000 and the Canadian wealthy account for 3% of the top 1% of global wealth holders, despite having only 0.5% of the world’s population. So far so good.

But look at the inset chart of the Canadian Trade Balance; since the pit of gloom in March 2009 the advances in wealth measures are at the expense of Canadian export production. We are not producing and selling stuff to other nations as our main activity.

As Credit Suisse points out; financial assets account for more than half of household wealth and so with fire sale credit available, Canadians have been deriving their wealth by consuming on margin fueled by their cohort bidding up financial asset prices. Indeed this wealth created by consumption is subject to all the agents continuing to agree on rising valuations. There is no room for depreciation in the model.

The plan might have looked good on a policy paper, but capital flight is not anchored to a national border and as it becomes more concentrated in fewer hands, it can very quickly flow towards markets that are deemed more exploitable. As Nassim Taleb conjects:

We have the illusion that the world functions thanks to programmed design, university research, and bureaucratic funding, but there is compelling—very compelling—evidence to show that this is an illusion, the illusion I call lecturing birds how to fly. Nassim Taleb "Antifragile: Things That Gain from Disorder"

Stocks vs Housing

10/11/2013

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Asset Bubbles Correct

We have lot's of "Eiffel Tower" price patterns to refer to that have a fully formed right side to the tower; Japan is a classic with a multiple decade reversion.

I have lined up the peaks of the Japanese, U.S. and Canadian stock markets with housing index overlays.

The Canadian pair looks to be at a crossroad and according to a Statistics Canada medium growth projection, net immigration along with net birth-death may also have a right side reversion.

Debt to Income

10/9/2013

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Mirage Market

Canadians did not see that the housing bubble was over in 2Q 2010. The last 3+ years have been a gift to real estate sellers at the expense of retail sellers of stuff. As aggregate demand for stuff declines, so will labour force participation as jobs evaporate.

Here's a wild hypothesis: with the announcement today of closing Pixar Canada after 3+ years in Vancouver, some +/- 100 employees are probably thinking of selling just as many condos that were bought during this same mirage market time period. If incomes fall there is an upper limit to the Household Percent Debt to Income ratio. The dynamics are to get another job to continue making payments; sell or default.

Not Required in Canada

10/8/2013

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It's different in Canada

The Economist has a useful user input tool for comparing different real estate markets. This 4 pack looks at the difference between the U.S. and Canadian real estate markets from 1Q 2009 (the pit of gloom) to 2Q 2013 with respect to real values (nominal less CPI) and relative to incomes and rents.

The Canadian real estate market diverged from the U.S. market path after the 2009 interim bottom (chart below) and for the last 4+ years thanks to 1) the government price fixing of interest rates and 2) tax payer funded insurance of high ratio debt to equity financing and 3) credulous buyers willing to bid up prices on the promise of price inflation without the experience of wage inflation; Canada has extended its bull market in housing. If you are looking for negative yield, Canadian real estate fits the criteria.

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Sub-Waterfront

10/2/2013

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Vancouver at High Tide

This map of Vancouver is from Robert A. Rohde's Global Warming Art and it shows regions that are most vulnerable to sea level rise. Leaky condos result from bad construction; flooding basements from bad site selection.

Snippets from Global Warming Art:

During the twentieth century, sea level rose 20 cm.
Many model predictions still foresee a sea level rise of less than 1 additional meter by 2100.
The likely scenarios for twenty-first century sea level rise due to unrestrained global warming remain less than 2 m.
Regardless of the time scale involved, an analogy to the previous interglacial suggests that a few degrees Celsius of sustained warming can cause enough melting to raise sea level 4-6 m before the ice sheets reach equilibrium. This level of warming is likely to be achieved or even exceeded by 2100 in the absence of intervention to combat climate change, though as above, it would take far longer to realize the full sea level change.
Since coastal regions tend to flat and the ocean's surface provides a calibration target for the radar system, one can usually expect that near shore elevations will be somewhat more accurate than the average.
These maps don't include any information regarding tides, storm surges, or other coastal effects, they provide only a partial picture of how vulnerable a given terrain may be to sea level rise.
One should view these maps as rough estimations of how sea level rise may affect coastal areas and not rely on them too heavily.
The ultimate amount of flooding is highly uncertain.

Check out your own locale at Global Warming Art. See also the Google Sea Level Rise map produced by Alex Tingle that features a sea level rise input field.

My previous post on storm surges and tidal flat risk was "Attention Snow Birds".