"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'
Readers here know that I have been tracking "Real" Canadian interest rates and most of the time since the Pit of Gloom in March 2009, the real bank rate of Canada has been negative and yet total CPI since 2011 has been in a down trend except for the 2013-2014 spike with the oil rally which has rolled over.
The Eurozone central bank nominal negative rate experiment started in June 2014 but is getting panned by the private sector. Supply side lending is not producing private sector demand for borrowing. Borrowers get quickly fatigued when prices are not rising, and without price inflation, aggregate demand drops and economic growth stalls.
Banks are not sitting on piles of unloaned money, they are unable to find credit worthy borrowers that have desire.
It's a myth that banks lend their reserves in some money multiplier style fashion and that the Central Bank can control the rate of inflation directly by steering the banks to act in precise ways. Hat Tip to Cullen Roche
THE EUROZONE CONTINUES TO DEFLATE
AS CHINESE HOUSING GRINDS LOWER
When it comes to net worth, what the stock market is to the US, housing is to China. Hat Tip to Zero Hedge
When the world is suffering from insufficient demand, however, clearly the problem we face today, income inequality and excess savings are the problem, not the solution. There may be plenty of good investments that are not being funded in the US, but the reason they suffer from lack of funding, unlike in the 19th Century, is not because capital is to scarce or too expensive. Capital is actually too plentiful, and this shows up in the speculative flows that have driven global stock and bond markets to unreasonable levels. It is weak demand or political gridlock that prevents productive investments from being made. Hat Tip to Michael Pettis
When Real Estate Deflates, Owners Become Renters
This chart shows the major shift in sentiment and ability when the booming U.S. housing market busted in 2008.
The weak hands folded and the rates of home ownership plummeted. The year over year change in ownership in 2013 was negative 27,800 while domicile rentals increased 525,500 Y/Y.
In Canada home ownership is high.
According StatsCan (National Household Survey) via the
Canadian Home Ownership was:
During the mortgage boom, credit is easy, prices are rising, people are working in and around the housing sector and governments are collecting taxes and expanding services.
After a mortgage boom, the bust shows up and if there was a rapid ramp-up in mortgage creation, a deep and prolonged recession subsequently unfolds.
Notice in the chart (left) that mortgage creation in bank portfolios increased:
Post WW2 and 1970's inflation, Canada has been late to the party and the ongoing Canadian mortgage creation boom relative to total bank lending which includes business and structural expansion financing, is 2x that of the U.K. and 3x that of the U.S.
We are building a leaky condo economy.
SUMMARY of Jordà, Schularick, and Taylor's 2014 long-run dataset covering disaggregated bank credit (examining mortgage loan leverls) for 17 advanced economies from 1870 to 2014
When prices stop rising, the boom collapses and because there has been no increase in business investment other than supplying the housing trade, unemployment goes up and spending and tax collection goes down. Then the boring business of converting debt into equity unfolds by the long process of debt repayment amortized over decades or the short process of liquidation.
The first important insight from our data collection effort is that the sharp increase of credit-to-GDP ratios in advanced economies in the 20th century has been first and foremost a result of the rapid growth of loans secured against real estate – i.e. mortgage and hypothecary lending. (A hypothec is a right linked to property.) The share of mortgage loans in banks’ total lending portfolios has roughly doubled over the course of the past century –from about 30% in 1900 to about 60% today, (U.S.).
In other words, banking today consists primarily of the intermediation of savings to the household sector for the purchase of real estate. The core business model of banks in advanced economies today resembles that of real estate funds: banks are borrowing (short) from the public and capital markets to invest (long) in assets linked to real estate.
By contrast, nonmortgage bank lending to companies for investment purposes and nonsecured lending to households have remained stable over the 20th century in relation to GDP. Nearly all of the increase in the size of the financial sectors in Western economies since 1913 stems from a boom in mortgage lending to households and has little to do with the financing of the business sector.
Household mortgage debt has typically risen faster than asset values, resulting in record-high leverage ratios that potentially increase the fragility of household balance sheets and the financial system itself.
Mortgage lending booms were only loosely associated with financial crisis risks before WW2, but since then real estate credit has become a significant predictor of impeding financial fragility in the postwar era.
Since WW2, it is only the aftermaths of mortgage booms that are marked by deeper recessions and slower recoveries. Both in normal recessions and in financial crisis recessions, the slump is deeper and the recovery slower if mortgage growth was rapid in the preceding boom.
In the second half of the 20th century, banks and households have been heavily leveraging up through mortgages. Mortgage credit on the balance sheets of banks has been the driving force behind the increasing financialisation of advanced economies. Our research shows that this great mortgaging has been a major influence on financial fragility in advanced economies, and has also increasingly left its mark on business cycle dynamics.
Source & HatTip to: http://pragcap.com/the-great-mortgaging
The Wealth-X and UBS Billionaire Census 2014
Record number of billionaires (now): 2325
Billionaires combined net worth: 7.3 trillion
New billionaires since 2013: 155
New billionaire growth since 2013: 7.1%
Billionaires in Europe: 775
Billionaires in U.S.: 609
Billionaires in Asia: 560
Billionaires in Middle East: 154
Billionaires in Latin American: 153
Billionaires in Africa: 40
Billionaires in Pacific: 34
Average time to become a billionaire: 45 years
Self-made billionaires: 55%
Inherited/Self-made billionaires: 26%
Inherited billionaires: 19%
Billionaires with university degree: 65%
Billionaires in private companies: 63%
Billionaires in public companies: 31%
Billionaires with over $50b: 4
Billionaires with $25-50b: 16
Billionaires with $10-25b: 88
Billionaires with $5-10b: 169
Billionaires with $2-5b: 732
Billionaires with $1-2b: 1316
Average billionaire cash holding: $600m
Philanthropic donations by a billionaire: more than $100m
Real estate held by a billionaire: less than $100m
Number of billionaires that are networked by a billionaire: 3
Number of billionaires by 2020: 3800+ "this might change eh?"
Data Source & Full Report
The rush to do deals in Vancouver prior to hosting the 2010 Winter Olympics led to "an assessor being overly aggressive in pricing" said Paul Sullivan, Burgess Cawley Sullivan & Associates Appraisers as quoted in the BIV.com report "Anatomy of a deal: the sale of Vancouver's Olympic Village"
The remaining units for sale in total have dropped in assessed value by 20% between 2011 and 2014 and some units have plunged over 30% easily and we haven't even started the real correction yet. We're not even at the EXTREME FEAR or GET ME OUT levels.
It's no wonder that my Vancouver Housing Chart has been underlining the reality that strata units in this town are trading in some cases at 2007 prices.
As Hillard Macbeth says, it's the First Time Buyers and Investors who wake up from the real estate trance first.
Hillard makes the point that interest rates are so low that a soft landing in Canadian real estate is not probable. What is more likely is a hard landing and a real estate correction of 40-50%, perhaps over a decade.
Perhaps my Case Study from last year woke a few people up.
CBC's Amanda Lang interviews investment manager Hillard MacBeth, author of the book "When the Bubble Bursts: Surviving the Canadian Real Estate Crash."
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