While China’s characteristics are unique, there is a distinct pattern of policy activism that can be seen globally that has been of limited effectiveness in curbing house price appreciation. The housing market crash that occurred a decade ago was global in nature... IMF, April 2018 CLICK CHART TO ENLARGE

CLICK CHART TO ENLARGE Apparently it's still global and a lot of us are in the deep end of the debt pool now. Makeway for China as the water level rises.

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Between January and October last year (2017), according to recent data from Southwestern University of Finance and Economics, Chinese household leverage rose more than eight percentage points, from 44.8 percent to 53.2 percent of GDP -- a record increase.

By contrast, between 2009 and 2015, households had added an average of just three percentage points to their debt-to-GDP ratio each year, and that includes a large jump of 5.5 percentage points in 2009 as banks ramped up lending in response to the global financial crisis. Before 2009, household debt levels had hovered around 18 percent of GDP for five years. In other words, the debt burden for Chinese consumers has nearly tripled in the past decade. 

Part of that rapid debt expansion has been deliberate. China’s government has encouraged increased borrowing and spending on items like cars and houses, to boost both consumption and investment. At the G-20 summit in February 2016, China’s sober central bank chief Zhou Xiaochuan remarked that rising household leverage had “a certain logic to it.”

At the same time, a generational shift is unfolding. Younger, urban Chinese are proving more willing to bring their consumption forward to today rather than pushing it off to the future as their parents did. 

Most worryingly, though, skyrocketing home prices seem to be driving much of the increase in household debt. Andrew Polk, Bloomberg, February 2018

China's economy is headed for a difficult decade.
Michael Pettis, March 2018

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​In December 2017, the 10yr less 2yr Canada Government bond spread narrowed to just 32 beeps away from inversion.

Market history is littered with downturns that followed new Republican presidents: Hoover (1929), Eisenhower (1953), Nixon (1969), Reagan (1981), and Bush (2001). The Trump bubble will likely prove to be the mother of all Republican presidential ebullience bubbles. Trade wars are not positive at all for the markets. They are what exacerbated the Great Depression and they should be one of the key triggers of the bursting of the China bubble.

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Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017

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"OSFI tells some banks to test for sharp drops in Vancouver, Toronto housing markets" July 26, 2016 CBC News

“B.C.’s 15% tax on foreign homebuyers could drive money to other parts of Canada” July 26, 2016 Financial Post 

"Tory won't rule out a tax on foreign real estate buyers in Toronto" July 28, 2016 Toronto Sun

​"Chinese-language media up in arms over B.C. foreign buyer tax"  July 28, 2016 Globe & Mail

“Does this set a dangerous precedent in the minds of foreign investors across Canada?" July 29, 2016 Mortgage Broker News

The Automated Payment Transaction Tax

In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/payments system.

The APT tax introduces progressivity through the tax base since the volume of final payments includes exchanges of titles to property and is therefore more highly skewed than the conventional income or consumption tax base.

The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure.

The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost.

Think about the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax.

The APT tax rate from the original study publication in 2000 achieved the goals of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax of only 0.15% on each side of the transaction for a total of 0.3% on any financial transaction.

The APT tax proposed is designed as a revenue neutral replacement for the present tax system. It is emphatically not intended as an additional source of revenue. It proposes to broaden the tax base by eliminating all implicit tax expenditures, all exemptions, deductions and credits while adding to the tax base the enormous volume of transactions representing exchanges of property rights to real and financial assets and liabilities. The flat rate tax required to maintain revenue neutrality is estimated to be in the neighborhood of 0.6 percent if total transactions volumes fall to half of their current levels.

With the next renewal (of the “Inflation Control Target”) approaching in 2016, the Bank is focusing its review and research in the following three areas:

1) The Level of the Inflation Target​
2) Financial Stability Considerations in the Formulation of Monetary Policy​
​​3) Measuring Core Inflation

“The social state is advantageous only when all have something and none too much.” A paraphrase of Jean-Jacques Rousseau from his Du Contrat Social ou Principes du Droit Politique of 1762.

How economic inequality harms societies - Richard Wilkinson
"If you want to live the American dream, go to Denmark.”

“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."

Real Time with Bill Maher
Michael Moore – Where to Invade Next ​

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Chronically low interest rates since the Pit of Gloom in March 2009 have fueled a huge credit bubble in Canada. StatsCan as far as I can tell does not highlight luxury sales, but the Bank of America credit card division does as the chart shows. I have added to the mashup a sales chart of detached housing in West Vancouver, one of Canada's most expensive postal codes for real estate. Is the FEAR OF MISSING OUT shifting to the FEAR OF GETTING IN for hopeful West Van buyers? ​

Asian buyers won 28% of Christie’s offerings world-wide. but a big reason for the drop in the list of sales below was the disappearance of the heretofore relentless Chinese bid. (Year/Year Data)
​
Art Sales down 33%
Auction Sales down 37.5%
Private Broker Art sales down 10%
Contemporary Art sales down 45%
U.S. Art Sales down 50%
Europe Art Sales down 12%
Hong Kong Art Sales down 11%
Rival Sotheby's Art Sales down 22.6%
Tefaf Art Market Report: Global Art Sales down 7%
Asian Art Sales down 33%

Christie’s said only 29 artworks it sold during the first half achieved prices exceeding $6.5 million—compared with 47 the year before—with nothing selling for anywhere close to the $180 million that Pablo Picasso’s “Women of Algiers (Version O)” brought in 2015."

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While we wait for the Brexit vote, here is Patrick Ceresna's hour long video explaining in detail his argument for what will trigger the Canadian real estate market selloff. My bullet points from the video are below and the chart (left) shows credit is tightening.

Are You Ready For a Canadian Real Estate Crash?
Patrick Ceresna Chief Derivative Market Strategist
​LearnToTradeGlobal.com (1 hr. 4:35 min)

Bullet Points from the Video Above

June 9, 2016: Bank of Canada Governor Stephen Poloz cautioned that climbing real estate prices have outpaced local economic fundamentals like job creation, immigration and income growth.

June 13, 2016: Financial markets are worried about China because its debt has surged to a record 237% of gross domestic product.

Here's Why China's Economy Will Be So Hard to Fix

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Technical Recession? It depends on where you are in this country and in your life. In Canada there are only 4 provinces where average earnings are greater than the average and the 4th, Ontario, barely makes the cut (chart of June 2015 data - 2 months lag). BC didn't make the cut and BC and Ontario are home to the bubbliest cost of accommodation in the country. So I think we can say that earnings have not been the driver of housing costs. The Bloomberg piece below does suggest that current economic policy in the last decade has been, if anything, ideological.

Canada's Economic Slide in Five Charts
Bloomberg, September 2, 2015
By Christopher Flavelle

Tuesday's announcement that Canada's economy shrank for the first two quarters of 2015, putting the country into a technical recession, puts a little more strain on the ruling Conservative Party's claim of sound economic management, the core of its campaign for next month's federal election. What's more interesting is how long the party has been able to hang on to that mantle.

The charts below show Canada's ranking on the most basic economic indicators relative to other developed countries, first for 2006, when Prime Minister Stephen Harper's Conservatives took office, and then for the latest period for which data is available. For each indicator, the country has slipped.

Individually, any of these economic indicators could perhaps be explained away as the result of adverse circumstances, or just plain bad luck. Taken together, they force the question of how exactly the Conservative government has strengthened Canada's economy after almost a decade in power.

The answer is probably in the final chart, which shows that Canada now spends less of its gross domestic product on social programs than any member of the Organization for Economic Cooperation and Development save for three (Iceland, Estonia and South Korea). Shrinking government has been the overriding goal, and chief accomplishment, of the Conservatives' tenure. Whether you agree or not with the wisdom of that shift, the other charts suggest it hasn't done much for Canada's economic performance.

This doesn't necessarily mean the Conservatives will lose; voters may not trust the other parties to do a better job. But the government's claim to have run the economy well doesn't stand up to a comparison against other OECD countries, and that was true before this week. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Original Post Here

If China is the Commodity Engine
Canadian resource exporters will have to add more value.

"Working Class Hero" John Lennon

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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

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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