It's been 10 years since the 2008-09 crash which is difficult to even remember now after 10 years of watching our housing prices more than double. But as Hilliard Macbeth points out in the chart above, when residential mortgage lending momentum approaches and dips into a negative metric, housing prices tumble and recession metrics begin to appear. In the two biggest FOMO markets, Vancouver and Toronto, prices indeed have been dropping in the 7-9% per year range after peaking 18-20 months ago respectively (Plunge-O-Meter).
As Hilliard further points out:
"There hasn’t been a serious economic downturn in Canada since the 1990s; the last time that mortgage credit grew as slowly as now. Unfortunately bank lending is pro-cyclical, so lenders will tighten credit conditions just as real estate borrowing stops growing, which will make the downturn worse. This boom/bust cycle is inevitable as long as lenders focus on lending for real estate investment and speculation rather than more productive investments. To change that focus, a new set of rules and regulations that govern lending is needed.” Quote included in Jason Kirby and MACLEAN's Most Important Charts to Watch in 2019
Well it could easily be one o'clock in the morning as weak hands cut their losses. Hat Tip to @Hutchyman
It's important to remember that our housing and credit boom is part of the global credit boom and it's fading. Hat Tip to @TaviCosta
Hilliard MacBeth posted an interesting chart comparing the BIS housing price index data of Australia, Canada, U.S. Germany and Japan. I have mashed it up here adding inset charts of the BIS (Bank of International Settlements) debt service ratios and debt to GDP. Here is Hilliard's original post from December 9, 2016.
And the charts left are from the OECD via the IMF showing the recent ranking of cities with respect to house price to rent and house price to income ratios.
Canadians in Vancouver and Toronto are up against extreme increases in housing costs and no doubt conversations around the kitchen table probably include migration to more affordable housing jurisdictions and employment opportunities.
Hilliard MacBeth makes the point that in Germany there is a much higher population density than in Canada "Munich is more than 4 times as dense as Toronto and 5 times more packed than Vancouver." and that "In Canada, home ownership is at record high levels of about 70 percent, similar to the U.S. in 2005, while in Germany comparable numbers are 45 percent."
The idea of development land scarcity and the current regime of letting the market place dictate land values in Canada is of course absurd. We need reform, not a wild west of house flippers, money laundering and consumption at any cost.
I covered this observation in early 2014 with my post of "German Housing", and I regularily publish the census density of Canada as well. The point is really about the Social Contract we should be developing. We have an under supply of affordable housing in Canada because we the electorate do not have representation.
The housing and bond bubbles are reflections of the ignorance bubble that we the electorate are in and it's not likely to change.
The last two properties of Umberto Eco's list of 14 that define fascist ideology are cogent to our predicament:
"Selective Populism" – The People, conceived monolithically, have a Common Will, distinct from and superior to the viewpoint of any individual. As no mass of people can ever be truly unanimous, the Leader holds himself out as the interpreter of the popular will (though truly he dictates it). Fascists use this concept to delegitimize democratic institutions they accuse of "no longer represent[ing] the Voice of the People."
"Newspeak" – Fascism employs and promotes an impoverished vocabulary in order to limit critical reasoning.
Critical thinking might as well be outlawed in the new world order of truthiness.
Word of the Year: "Post Truth"
Walter White: The New DEA Nominee
Bob Dylan: Only a Pawn in Their Game
The top panel shows Canadian Government Spending vs Labour Force Participation and the lower panel shows Canadian Jobs Added on an Annual Basis all since 2008.
The two biggest line items of Federal Government Expenditures as of 3Q 2014 are:
- Gross current expenditure on goods and services (63% of Total Expenditures, up 0.9% since 4Q 2011) and
- Current transfers to households (23% of Total Expenditures, up 0.7% since 4Q 2011)
- All other Federal Government Expenditures (14% of Total Expenditures since 4Q 2011) have dropped 1.5%
Government spending on itself and the household sector combined with ultra low borrowing rates have not yielded growth in Canadian Labour Force Participation.
Deutsche Bank reveals 7 reasons why ‘Canada is in serious trouble,’ starting with a 63% overvalued housing market. Financial Post, Business Insider, Andy Kiersz, January 8, 2015
If Treasury Yields are a measure of price and wage inflation, it's just not happening.
Jerry Maguire - Show me the Money
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
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
A ranking like this is important, said WealthInsight Analyst Oliver Williams, "...because wealthy individuals, more than any other group, will change their home and even their domicile based on factors of ready access to wealth managers and private banks as well as political stability and heritage. Owning a piece of history in a city such as London is an aspiration for many, particularly wealthy individuals from overseas..."
- Monaco (29.21%)
- Zurich (27.34%)
- Geneva (17.92%)
- New York (4.63%)
- Frankfurt (3.88%)
- London (3.39%)
- Oslo (2.90%)
- Singapore (2.80%)
- Amsterdam (2.63%)
- Florence (2.59%)
- Hong Kong (2.58%)
- Rome (2.54%)
- Dublin (2.40%)
- Doha (2.31%)
- Toronto (2.29%)
- Venice (2.25%)
- Brussels (2.11%)
- Houston (2.09%)
- San Francisco (2.07%)
- Paris (2.04%)
Grace Kelly & Prince Rainier Attend A Gala Show 1955?
"The high end has been bought by Europeans and Chinese trying to get off the grid."
Edited & bulleted from July 12, 2014 armstrongeconomics.com
- U.S. real estate market remains very diverse.
- U.S. high end bought by Europeans and Chinese trying to get off the grid.
- Chinese biggest buyers on price of U.S. real estate.
- Canadian biggest buyers on quantity of U.S. real estate.
- Prospects of bail-ins coming in Canada.
- Texas & Florida property cannot be seized even in a court judgment.
- Hawaii topping the list of U.S. price advances.
- Europe's real boom was clearly in London real estate.
- Germany’s house price rises slowing, yet are still positive.
- South German house prices are extremely cheap.
- Germany’s overall house price index slowed for 7th consecutive month at April 2014 after the September 2013 high.
- Lithuania’s demand for, and new construction of, property is recovering gradually as its economy has produced growth.
- Copenhagen and Denmark experiencing a real estate boom as prices rise and may soon surpass pre-financial crisis levels.
- Armenia’s property market recovering gradually following several years of falling house prices and now being driven by the inflow of wealthy Armenians from Russia and ethnic Armenians from Syria trying to escape political turmoil.
- Chinese average prices of new homes in 100 major cities fell 0.3% M/M (April-May 2014); the first decline since June 2012.
- China’s share markets peaked in 2007 and the bulk of domestic capital moved into real estate causing a great worry that banks would soon be overstretched with bad loans to developers as many projects were left vacant.
- Shanghai has a (low) supply problem. Demand keeps rising sustaining prices at high levels.
- China-style housing bubble is concerning.
- China's weaker real estate market means less cement being poured and less copper being purchased and that impacts the commodity prices in the West, which have declined.
- China's real estate market is similar to the land boom in the 1830's USA more than the 2007 bubble created entirely by bankers.
- Macau’s property prices continued to dramatically surge even after double-digit annual prices rises in recent years.
- Macau residential property prices skyrocketed about 50% Y/Y in 2013.
- Myanmar’s property prices and rents have surged with new government allowances since 2011 and from a sharp increase in overseas investors and persistent land and building shortages.
- South Korea’s house prices are rising after more than a year of falling house prices and a 2014 recovery of robust economic growth.
- Singapore’s house prices now starting to fall from the problem of hunting expats by Europe and American governments despite a reasonable rate of economic growth.
- Malaysian house prices continue to rise even following anti-speculation measures.
In preparing for my recent BNN Interview (July 9th) the producers sent some queries in advance of the spot; one was "Is it time to rent or buy?". We never covered it on air but my response would have been:
It’s always a time to rent or buy unless you're Hikikomori.
One should look at the fundamentals of one’s present balance sheet and not rely on past performance or future speculation. If you are risk averse then buy or rent what you can pay for if the scenario of your household income were to suddenly drop. Contingencies are for the unexpected. Two income households may have a cushion, one income households have a greater risk.
I mashed up the chart above from Mercer via ZeroHedge which shows the high rent cities (petro-finance-centric) and I included Manhattan averages with or without doormen as well as the 3 hot Canadian markets of Vancouver, Calgary and Toronto.
The fundamentals don't support buying in Vancouver, Calgary and Toronto especially since interest rates are at a low (will they drop?) and rents and resale prices are at the highs (will they rise?).
There is little room for improvement on cash flow unless buying hot market real estate to rent out has some potential for improving the ability to increase the revenue. As I demonstrated in my case study last year of buying a Vancouver condo for investment, the risk of a negative return is only going to be alleviated by a 25% reduction in purchase price if comparison to a 10 year bond is rational. Also last year at the time of the study, inflation (CPI) was running at half of what it is today; a rising CPI erodes the bottom line.
Canadians who import a lot of their news from U.S. wires and depend a lot on trade with the U.S. have a similar negative view about their children's future; nearly two thirds of respondents in a 2012 Pew Research poll in both countries believe the next generation will be financially worse off than themselves. Germans believe the same.
Three quarters of the British and Japanese and 90% of French respondents are bearish. On the flip side the bulls live in China, Brazil and Russia.
Hat Tip to Barry Ritholtz
A 16,000 sf unfinished penthouse shell gets "snapped up" by an "eastern" European at One Hyde Park in London for £140 million with finishing costs expected in the range of £175 million and a "stamp duty" possibly as high as £21 million. All four penthouses in the development are now spoken for.
Source: The Daily Mail. More Whale Watching Here.
"Mystico & Janet - Flats Built by Hypnosis"
Monty Python 1972
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
Balance Of Trade
Rent Or Buy