Fundamentals today are getting repriced in Real Estate and the Yield Curve (and other asset classes). Appraisers will have to dust off their calculators if today's market action is a harbinger.
The Stream - Vancouver's Housing Crisis
On the 20 plus year commodity boom, we produced a huge positive balance of trade. But now after the crash into the March 2009 pit of gloom and for the last 7+ years, the Canadian export economy is hung at record negative net lows. Monetary policy is busted.
What is working is exporting our cheap capital into offshore markets as evidenced by my new chart of Canadian Household Debt plotted over Foreign Direct Investment, GDP and Canada's Balance of Trade data.
Canadian companies and international affiliates in Canada are using that cheap credit to invest in offshore markets where labour is more productive (they do more for less reward) and those products and services come back into Canada where the same cheap credit fuels our ability to maintain our lifestyles. We are not trading production skills, we are trading future earnings for depreciating assets at record prices.
If you own a single family detached house that was purchased prior to the early 2000's in Toronto or Vancouver or any other isolated but hot Canadian market, you are sitting on a once in a lifetime winning lottery ticket if you can collect.
"The condo you bought is getting 'crusty: Kevin O'Leary'
In a June 9, 2015 note, David Rosenberg chief economist at Gluskin-Sheff, currently thinks "...the Canadian dollar could head as low as the mid-70s coming under pressure as oil prices fall further in the global glut and if the Fed hikes interest rates in September. Since there's "zero chance" the Bank of Canada will follow suit, foreign investors will have even less incentive to be in the Canadian bond or money market." Financial Post, June 9, 2015
Well a mid-70 cent is what it was in the pit of gloom in March 2009 and in terms of FX, we are almost there without any major correction in North American equity, bond or real estate markets... yet.
Commodities on the other hand are depressed (peaked more or less in 2011) and getting more so as the USD climbs the worry wall.
The other target low that might need a retest of course is the January 2002 post-dotcom crash low when the Loon looked like a 60 cent dollar. Market makers don't like the long side of the Loonie trade anymore as the Net Speculative Positions Chart below suggests.
A revaluation of the Canadian Dollar down is not good news for foreign owners of Canadian assets or consumers of imported stuff (that's everybody in Canada). The black swan for real estate in Canada could be more of a loon; a crazy loon if market rates in the bond market continue their uptrend.
The average price comparison of Vancouver, Toronto & Calgary Single Family Dwellings denominated in CAD and USD along with notations of significant changes in the spot price of WTI crude oil and the currency spread is on my monthly UPDATED CHART HERE.
"A state of war only serves as an excuse for domestic tyranny." Aleksandr Solzhenitsyn
Here we are again at month's end waiting for Canadian real estate data from May to come out.
The chart above shows Canada's current account (the sum of the net balance of trade - exports less imports - and the net income from abroad and net current transfers) from 1946 through 2015. A global commodity inflation erupted after the dot.com turn of the millennium crash which fed financial assets and real estate as well. The crash of 2008 put Canada's current account back into deep red where it still languishes unmoved by ZIRP, NIRP and Rate Normalization chatter.
I wonder if we should invest in socially sustainable production rather than use up our credit on consumption. Just sayin'...
The stimulus for this post was the Globe & Mail May 27th online report that "Ottawa aims to keep lid on details of Saudi arms deal"
I began to inquire into Canada's military industrial complex in 2013 to look for some correlation to the speculative craze that Canadians have relentlessly pursued in real estate. Vice also poked the arms trade story in 2014 "Canada Is Ramping Up its Arms Exporting Trade"
The only correlation I can offer is the insanity of our broken system that refuses to criticize religious beliefs held without evidence of their veracity (both theirs and ours) and the invented primacy of private property rights that allow transnational corporations the legitimacy to wage war via government proxy.
In my March 2013 "Guns or Butter" post, I included charts of then current PMI and GDP along with various quotes from newswires like the Huffington Post that underscored the obvious "...the production and trade of military goods is powerfully influenced by governments".
The point is, a modern Political class is deeply wedded to corporate mercantilism and opportunism and since no one wants the political chore of discussing the question of who benefits from murdering foreigners in their own land, the protocol from the top down, becomes silence (keep a lid on it) or worse moral confusion (it's ok to supply arms to a country that "has a persistent record of serious violation of the human rights of their citizens" even though it also violates Canada's export regulations).
Let voters instead churn about in the blogosphere over the "foreign invasion" into Canadian real estate as diversion to the horror of war with the side benefit of maintaining the fear of the other.
1984 - The Purpose of War
Addendum - June 2, 2015
We're doing beyond well
said CEO of Vornado Realty Trust.
How to catch a whale; put a unicorn in front of them. Global money has not yet exhausted itself on trophy properties. The bets on asset price appreciation keep rolling in. Here are some snippets from the WSJ May 12, 2015
- 220 Central Park South secured $1.1 billion in sales ... in just six weeks on the market.
- At One57... sales have picked up substantially ... hope to sell out the tower by the end of the year.
- The well of buyers is deep ... at least for the best towers.
- Investors look for higher returns than they can get from bonds.
- Many apartments go unoccupied, used only as investments.
- Details on buyers are scant, since wealthy purchasers typically shield their names.
- Real-estate markets that lack transparency are prone to overbuilding.
- Very little information is actually getting into the market ... everyone’s just copying each other.
One57 sells for $100,000,000
and... how to adorn a Unicorn
- Only 16 percent of the 53,710 Vancouver homes sold in 2014 were priced over $1 million.
- The average sale price of all residential properties in 2014 for the bottom 80 percent of the Lower Mainland Vancouver market of 42,968 units, was $462,792.
- The average sale price of the bottom 80 percent of just the condo market was $327,486.
Schmeiß die Mama aus dem Zug!
Apparently Canadians like their real estate dividends; the XRE.TO is still well above its 50 day moving average.
But as Jin Won Choi noted on March 23, 2015:
In 2012, the average Canadian had a net worth of roughly $243,800. Of that, roughly $155,000 was attributed to real estate, which in most cases represents a person owning his or her own home. The average Canadian is therefore already heavily invested in real estate, so it doesn’t make sense to increase the real estate component of the investment portfolio further by adding REITs.
The other reason is that a REIT’s long term returns are tied to the price of properties. If they overpay for a property, they will collect less rent in proportion to the purchase price, and they will also have a hard time selling the property at a profit in the future. Both of these factors will serve to decrease the future dividend yield of a REIT that overpays for properties.
Currently, many reputable publications such as the Economist and the OECD consistently rank the Canadian housing market as one of the most overvalued in the world.
The Organisation for Economic Cooperation and Development (OECD) has said Canada’s market is overvalued by as much as 30 per cent when measured by the price-to-income ratio and by 60 per cent based on the price-to-rent ratio.
If they are correct, it doesn’t bode well for the long term returns of Canadian REITs.
Rick's Pick for Friday April 24, 2015 - $ DHI (D.R. Horton)
Could this be the first crack in the dam? Homebuilder D.R. Horton’s shares have gotten schmeissed in the last two days (along with Lennar and Pulte Group), as the accompanying chart attests. Recall that the implosion of homebuilder stocks that began in the summer of 2005 led the stock market’s collapse by more than two years. We ought to pay close attention in any case, since shorting the shares of Beazer, Horton, Lennar and other homebuilders back in 2005 was the best and easiest way to have profited from the Great Financial Crash. If this selloff is similar to the earlier one, it will give way to a secondary top achieved via a steep rally. For now, however, look for a short-term bottom at exactly 25.11. If this Hidden Pivot is easily exceeded, or if the stock closes below it for two consecutive days, it will be time to unfurl the yellow flag.
Throw Momma from the Train (1987)
Joe Oliver presented the delayed Government's budget yesterday and touted it as "balanced". All the fuss was done to lead off the Government's campaign into the upcoming October Federal Election by assuring voters of the incumbent's prowess as responsible managers.
Journalists coming out of the lockup were quick to make the point that the "balance" ie: slightly more revenue than expenditure, is a product of selling assets, reducing federal expenditures and delaying "promises" into the future.
To assuage our fears, the government will spend $7.5 million (The Tyee) of our tax-payer money beginning next month to encourage us to continue voting for the present management.
One problem that is never discussed in the mass media is the lack of understanding about how a modern national economy like Canada, which has the authority to issue and enforce the use of its own currency, actually works.
There are 3 sectors to the national economy in terms of income and expense:
- Public (Fed Gov't)
- Private Sector
- Foreign Trade
And the simple balance sheet equation is that the net sum of the 3 sectors have to balance to zero, ie:
Net Public Sector+Net Private Sector+Net Foreign Trade Sector = 0
The result of this accounting reality is that:
- If society wants more private sector savings, then either the Federal government must run a bigger deficit or exports must increase.
- When the government runs a surplus, then the private sector must run a deficit unless exports are booming and make up the difference.
Most people on the political right or left are programmed by their ideological beliefs and have never been presented with the above accounting reality.
Yesterday's heralding of the budget does nothing but further limit the Private Sector.
Because the current federal government has been methodically cutting its own spending since taking over in 2006, today, Canadians have fewer choices to maintain their lifestyle. They either have to continue to drain their savings or take on more debt, or find new earning sources (the search for yield).
Since the Pit of Gloom in 2009, the Feds have been on an ideological mission to "balance" the federal budget by ignoring the Negative Trade Balance and by adding to the Negative Private Sector Balance.
The following is an abstract of some of Cullen Roche's observations about how a modern national economy works with links to further reading. I originally posted this in June of 2012.
Why is the chart above a big idea?
Because it helps to to objectively describe the operational realities of economies that operate on a fiat monetary system. A modern fiat monetary system is one where the nation is an autonomous issuer of their own non convertible currency which exists within a freely floating exchange rate system (the U.S is the example here, but Canada and Japan are appropriate examples as well). It also proves that:
(S-I) + (T-G) + (M-X) = 0
In other words the Private Sector balance (Savings less Investment) plus the Public Sector Balance (Taxes less Government Spending) plus the Foreign Sector Balance (Imports less Exports) always results in a balance sheet bottom line of zero! It can be no other way; it's an accounting fact.
This rearranges to: (S–I) = (G–T) + (X–M)
ie: The private sector balance is equal to the addition of the government and trade balances; or "... that private sector saving is the source of net finance for the government deficit and the international capital account deficit."
Source Material (monetaryrealism.com)
The algebra can also be shorthanded to: S = I + (S-I)
- If society wants more private sector savings, then either the Federal government must run a bigger deficit or exports must increase.
- When the government runs a surplus, then the private sector must run a deficit unless exports are booming and make up the difference.
(S – I) = (G – T) + (X – M)
S = I + (G – T) + (X – M)
S = I + (S – I)
Private sector saving = investment, plus the change in private sector net financial assets, or
Private sector saving = investment plus private sector net financial asset accumulation.
Investment is funded by three sources of saving: private sector saving, government saving, and foreign saving. Among other things, given the presence of government and foreign sector saving contributions, the term S must cover the saving contributed by the remaining sector, which is the private sector.
In particularly, S does NOT stand for household saving alone.
"Saving is a flow. I think it’s sometimes easier to understand our thinking on S=I+(S-I) as a stock of assets and liabilities. For instance, in the USA, the total net worth of the private sector is $63T. Of this, about $15T is government net financial assets. The rest is private sector assets like common stocks, real estate, etc. The flows of spending in the economy help the private sector to generate these stocks (govt deficit spending results in a stock of net financial assets). But the private sector is not built on a stock of government net financial assets. It is built on a stock of private sector assets.
- Household and business sectors are consolidated into a single private sector that includes both household and business saving.
- The equation itself has no inherent model or ideological content.
- An explanation (Nov 19/12) from Cullen Roche:
The primary purpose of S=I+(S-I) is about understanding that the private sector generates most of its net worth via the "I" component. That is, it is via investment that we build the majority of our financial assets. MMT ('Modern Monetary Theory' as opposed to MR 'Monetary Realism' which is the view presented here) argues that the economy is built around the government stock of financial assets through govt spending.
Like all things in MMT, the argument is government centric. This is a misrepresentation of the way our balance sheets are built. They are not built around govt NFA (net Financial Assets), but around private sector financial assets that derive from Investment.
So, when MMT defines net saving as S-I they are essentially marginalizing the most important part of the entire Saving equation by subtracting I from S. This is not an accurate portrayal of the way our monetary system exists. The economy is built on a base of primarily private sector assets that develop via Investment. Hence, the clarification of S=I+(S-I)."
This operational reality is widely unrecognized or worse unvoiced among academic, political, business, media and commentators at all levels of discourse.
One of the main educational proponents describing how this modern monetary system works and what social benefits can flow from this knowledge is Cullen Roche who says:
"One of the great problems with the economics profession is that there is no firm foundation of understanding from which analysts can build their policy prescriptions. Further, one tends to find schools of thought based on normative rather than positive thinking; prescriptive rather than descriptive.
The MR (Monetary Reality) approach is similar to that utilized by Leonardo Da Vinci regarding medicine and human anatomy. Da Vinci viewed the human body as a machine and as one of the first anatomists provided the world with a better understanding of how that machine functioned (e.g. how its pieces worked together, how it was built, how it changed, etc). To Da Vinci, it was all about finding out what IS, not what CAN be. It was only through rigorous analysis of how the machine worked that he and others were able to be in a position to offer advice on medicine and surgery.
The “dismal science” need not be so unscientific. Unfortunately, most of its practitioners are trying to be Hippocrates and not Da Vinci. And like the surgeons of the days of Hippocrates, they do not know how the system works and while they might believe they will “do no harm” too many are too often working from a false premise or a false understanding of the system due to a preconceived ideology. It is my hope, through MMR and a true focus on understanding how the system actually works, that we can provide as close as possible to a purely positive approach to economics. I know this is a bold task, but through focusing on the understanding of the monetary system we can then provide others with a foundation from which our problems can be solved."
Read the full article here:
And also read Joe Weisenthal's "How the Clinton's Budget Surplus Destroyed The American Economy" for an insight into the U.S. experience after the incorrectly lauded Clinton Surplus and the aftermath that is still with us...
"The bottom line is that the signature achievement of the Clinton years (the surplus) turns out to have been a deep negative. For this drag on GDP was being counterbalanced by low household savings, high household debt, and the real revving up of the Fannie and Freddie debt boom (Mortgage Backed Securities) that had a major hand in fueling the boom that ultimately led to the downfall of the economy."
Japan's Financial Sector Balances
Above is another view of Japan's Financial Sector Balances with the "Private" Sectoral Balance broken into its two components of Corporate and Household Net Savings.
The following is from PragCap.com edited by Cullen Roche, December 18, 2012 taken from research by Tanweer Akram of ING discussing the economics of Japan over the course of their continuing balance sheet recession.
“The Bank of Japan’s balance sheet had been bloated even before the 2008 global recession forced central banks the world over to expand theirs. However, despite years of an expanding monetary base — and contrary to monetarist mantras — Japan remains mired in deflation (see Chart Figure 29 above). Japan’s experience since the turn of the century validates the contemporary understanding of monetary policy and central banking, which holds that the expansion of central bank’s balance sheet does not necessarily lead to higher inflation. Increases in reserves are merely outcomes of the expansion of the central bank’s balance sheet; they do not directly affect bank lending or credit growth, and inflationary pressures may not arise unless credit growth fuels economic activity. This is particularly true when an economy is characterized by excess slack and spare capacity, as Japan’s is.”
“Understanding sector balances in Japan can provide useful insights about the evolution of the Japanese economy. Japan’s domestic sector balance had been weakening in the late 1980s, preceding the bursting of its real estate and equity asset bubbles. Japan has been fairly consistently running current account surpluses over the past three decades, contributing to the surplus of its domestic private balance. However, its general government deficits declined from 1988 to 1991, going from nearly 5% of nominal GDP to a surplus. The decline in the government deficit resulted in the weakening of the surplus in the country’s domestic private balance. In response to slower growth and fiscal stimulus, the surplus in domestic private balances rose in the mid-1990s as the government deficit rose, helping to partly — but slowly — repair the balance sheets of the private sector. Since the mid-1990s, current account balances stayed in the range of around 1.5% to 5.0% of nominal GDP while general government deficits have varied from 2.0% to 10.0% of nominal GDP. Clearly the change in general government deficits has been the main driver in the variation of domestic private balances. As the domestic private sector deleveraged and spurned debt to repair their balance sheets after the bursting of asset bubbles, the government had to run deficits in order to prevent the economy from failing into a tailspin.
Japan’s current account surplus could decline in the coming years, particularly as the country’s export growth slows due to stiff competition from various Asian countries and the strength of the Japanese yen, and as Japan’s energy import bill rises going forward. Remarkably, the Japanese yen had appreciated through the lost decades, thereby limiting the international competitiveness of Japanese exports, while creating deflationary pressures domestically. If in the coming years Japan’s current account surplus diminishes, its government deficits must get larger to retain the domestic private sector’s surplus at its current ratio.”
Worried About a Canadian Housing Bust?
Financial Post April 7, 2015 via Canadian Press
A new survey of Canadians found almost 20% of respondents didn’t put aside a dime in 2014 and a further 40% felt they were not saving enough.
This year’s household savings report from BMO Financial Group says 31% of respondents had a fixed savings plan in place that included monthly contributions.
That was a significant increase from the previous year when only 26% reported implementing such a plan.
The BMO study also revealed that a third had less than $10,000 in savings.
Money for vacations was the most common goal among savers, while 43% were saving for retirement and 40% for emergencies.
Still with me? Here's your treat: "POLITICIAN"
Jack Bruce, Robin Trower & Gary Husband
Seven Moons Tour 2008
Why Vikram Mansharamani is shorting Canada
"BUBBLES ARE NOT RANDOM"
- Canadians have extremely higher debt to income ratios than Greeks do.
- Canadian housing prices have diverged extremely upward from the U.S. experience without a corresponding correction.
- The Canadian economy is at risk from the oil sell off.
- Canadian sub-prime loans could be as high as 25% of new loan creation.
- Canadian hubris, over confidence and fear: 1) Canada is different, 2) foreign buyers want Canadian real estate, 3) real estate prices will continue to rise (the inflation argument), 4) have to buy now before being priced out.
Wed, April 1, 2015, Frances Horodelski interviews Vikram Mansharamani, author of "BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst", and Senior Fellow, Harvard Kennedy School.
WATCH THE 9min VIDEO INTERVIEW WITH VIKRAM
This Bird Has Flown
Alberta's so called "progressive" conservative governments; 7 consecutive iterations since 1971, have squandered their provincial energy resources leaving their treasury with a CAD 12 billion dollar debt and a 500 million dollar deficit. (The Tyee)
Data for the chart above came from Greg Poelzer's Macdonald-Laurier Institute's February 2015 Publication Paper "What Crisis? - Global lessons from Norway for managing energy-based economies."
According to estimates by the International Monetary Fund and Fitch Ratings, Norway needs an oil price of $40 to BALANCE THEIR BUDGET. (Institutional Investor, Feb 24, 2015)
|Strong societal consensus from the outset embodied in its “ten oil commandments.”||No consensus and much conflict between the federal and Alberta governments about how to manage petroleum resources.|
|National public ownership and control of all aspects of oil production and distribution.||“Open door” to multinational oil companies. Let the private sector take the lead, with government providing subsidies and tax breaks to encourage resource exploitation. Foreign ownership very high. Federal and provincial ownership and control initiatives only in the Lougheed and Trudeau era–1974 to 1984.|
|Maintained key policy tools to manage its resources.||Surrendered key policy tools under the Canada U.S. free trade agreement and NAFTA.|
|Active industrial policies to encourage linkages to upstream and downstream petroleum related activities.||Active industrial policy measures, both federally and provincially, until the mid-1980s; since then they have been passive (subsidies, tax breaks, R&D assistance, etc.)|
|State-owned oil company, Statoil, dominant player in the development of the oil industry.||Provincial and federal initiatives to develop state ownership did not last. Eventually private interests and their political allies defeated these initiatives. Petro Canada was fully privatised.|
|National oil self-sufficiency was quickly achieved.||Eastern provinces forced to import oil even as exports to the U.S. expanded rapidly. Today they import more than 80% of their oil consumption.|
|Has maintained full employment even during the global recession.||Canada’s unemployment rate has remained high since 2008. Alberta’s unemployment rate has been much lower on average, bumping up only during the recession.|
|Has maintained low and stable inflation.||Canada has maintained low and stable inflation. Alberta’s inflation has been significantly higher than the Canadian average.|
|Has maintained a stable exchange rate due largely to its centralized wage settlement policies and to its petroleum fund.||Has experienced a huge increase in its exchange rate, with major adverse impacts on non-petroleum regions. Neither level of government has a petroleum savings fund to offset the inflow of oil revenue and bitumen investment. The federal government has chosen not to take measures to offset the upward pressures on the exchange rate.|
|The huge oil revenue inflow has been offset by the outflow to the petroleum fund. Has a huge trade and current account surplus.||Canada’s traditional merchandise trade surplus turned into a deficit after 2008. Its non-resource deficit is huge. It also has a very large current account deficit. Alberta maintains a large trade surplus due to its oil and gas exports to the United States.|
|Economic and employment benefits have been widely distributed. Any regional disparities have been offset by a very effective income transfer system.||GDP and employment benefits are concentrated in Alberta. Petroleum related employment gains are outweighed by employment losses in non-petroleum related industries concentrated in the rest of Canada. Relatively small benefit going to the rest of Canada due to weak linkage effects and weak federal government income transfer mechanisms.|
|The state captures the vast majority of net revenues, or economic rent, from petroleum.||Rent captured by the Alberta government is among the lowest of all petro states. The federal government captures a very small portion of oil rent through the general corporate tax rate.|
|Maintained its level of non-petroleum taxes despite rising oil revenues. Its overall tax-to-GDP ratio is among the highest in the OECD.||Alberta lowered its non-petroleum taxes as petroleum revenue rose and now has by far the lowest taxes in Canada. Both governments lowered corporate income taxes including on petroleum companies by half over the last decade.|
|Its diversified revenue base is not dependent on fluctuating petroleum revenues but rather on the more stable international financial returns to government coffers from its petroleum fund.||Alberta’s fiscal capacity is highly dependent on petroleum revenues, which go up and down as prices fluctuate, and often finds itself in deficit. Its savings funds to stabilize revenues are small and ineffective.|
|Strong unions are in a balanced power relationship with business. High union density, centralized collective bargaining and wage settlements, consensus building approaches.||Declining unionization especially in the private sector. Only the public sector has high unionization rates. Collective bargaining systems are fragmented and adversarial. Alberta has the lowest unionization rate in Canada. Both governments have beenworking aggressively to undermine unions.|
|Petroleum wealth, due to equitable labour relations, progressive taxes, and a generous social welfare system, is equitably distributed amongst the population and regions of the country. Has among the lowest income inequality in the world.||Since the mid-1990s there has been a rapid growth of income inequality driven by the 1% in Canada—now amongst the highest in the OECD. This has been accompanied by the reduction in social program spending. There has been growing interprovincial disparity in income and fiscal capacity with Alberta pulling away from the rest. Government redistribution mechanisms have been greatly weakened, exacerbating these trends. Inequality in Alberta has grown during the boom, and it is home to a rapidly growing share of Canada’s super-rich.|
|Norway’s carbon emissions per capita are half of what they are in Canada.||If Alberta were a country it would have the highest per capita emissions in the world along with Qatar.|
|A leader on climate change issues.||A climate laggard.|
|Met its Kyoto commitments. Its Copenhagen carbon reduction commitments are the most ambitious in the industrial world. Plans to be carbon neutral by 2050 or sooner.||Compared to commitments of 6% below 1990 levels, was 24% above 1990 carbon levels in 2008. Withdrew from Kyoto and its Copenhagen commitments are much weaker and almost certainly will not be met. Rapid development of the oil sands takes precedence over climate concerns. Alberta’s plan aims to reduce emissions by just 14% below 2005 levels by 2050.|
|Recently doubled its carbon tax to $66 per ton, and participates in the European carbon trading emissions regime.||Federal government refuses to implement a carbon tax or a cap and trade system for carbon emissions. Alberta’s $15 partial carbon tax is extremely low and ineffective.|
|Tough environmental regulations govern the exploitation and transportation of oil and gas.||Alberta’s environmental regulations don’t meaningfully restrain the environmental impacts of rapid oil sands development. The environment department lack sufficient resources to effectively enforce regulations. The federal environment department has been gutted as has the federal environment regulation and review system.|
The Beatles - Norwegian Wood (This Bird Has Flown)
"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