While we wait for the July Canadian housing data to trickle out, let's return to Japan and their housing price experience after nearly 20 years of ZIRP and NIRP.
I have posted charts about Japan since 2012 to illustrate the folly of global central banks and their monetary policies of instituting ZIRP & NIRP to stimulate inflation > consumption > production, the by-product of which, has been the manic search for yields as the underlying asset class values became stretched to perfection under pressure from the FOMO crowd.
Instead of using fiscal policy which requires long term planning and socially cohesive agreements directed towards production and well being, the quarterly knob twiddling monetary policy has in part, along with the rise of a digitized global financial network, unleashed "megabyte" money laundering which the UNODC estimates at 2-5% of global GDP per year.
It has also crushed the incentive to save for a future funding of investment into productive assets.
The Household Saving Rate in Canada has decreased to 1.1% in the first quarter of 2019.
Commodity Super Cycle - 10 Years into the Bear
Here is a chart I published in a 2012 post "What Do You Do During a Housing Bust".
The answer is "save".
If the CRB chart above has correctly identified a cyclical swing between bull and bear commodity production, then we should expect another "lost decade" of balance sheet repair especially in the over-speculated and now depreciating housing asset markets of Canada.
A Housing Bubble "doesn't just warp the real estate market, the knock-on effects can throw a region's entire economy into disarray."
Bloomberg via Visual Capitalist
House Price to Rent Ratio ... Canada Ranks 2nd
House Price to Income Ratio ... Canada Ranks 2nd
Real House Prices ... Canada Ranks 3rd
Household Debt to GDP ... Canada Ranks 5th
Bill Gross of Janus Capital commented on... his recent investors’ letter (emphasis added is ours Macro-Ops.com):
There is a phase in the debt cycle when revulsion sets in.
At the end of the business cycle there are three forces at work:
1) Rising interest rates sap demand and raise the cost of capital.
2) At the same time, according to capital theory, future returns decline due to over capacity.
3) While demand is decreasing and there’s a glut of supply, the herding nature of market participants create euphoric sentiment that drives expectations (and market prices) well past likely outcomes.
This process is what forms a market top. Alex Barrow Co-Founder of Macro Ops
Looking at Federal Direct Investment in Canada, future returns are moot if there is a continuation of the last 20 years of foreign direct investment in Canada that has remained negative relative to Canadians making direct investment offshore to get a better return on capital and labour. Global over capacity means that our export markets for goods and services are price marked to global markets.
With respect to the third point above and concentrating on the wrecked affordability of housing in Canada, the FOMO herd is facing waning sales and waxing inventory and the current low cost of borrowing is no longer a stimulus to enter into risk positions. And this is playing out now in Canada's poster province ground zero metro and Demographia's international runner up: Vancouver.
The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, edged up to 14.9% in the first quarter (2019), as total obligated debt payments grew at a faster pace than disposable income.
Ray Dalio's Economic Machine
Credit booms are followed by credit busts and as the chart shows, Canadian Residential Mortgage Credit (%Y/Y lending) has been shrinking dramatically since the July 2008 Crude Oil Peak and the Crash into the March 2009 Pit of Gloom (6 Metros Chart).
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
Canadian Banks on "Credit Doomsday Watch" CIBC
The CIBC analysts said that Canadian banks appear to be headed for their weakest credit cycle since the oil price collapse, which caused related loan losses to jump in 2016. While their prediction is “not a coming apocalypse,” the report said the banks’ loan losses last quarter had a “one-off feel to them” that could become more frequent. “For reference, the actual doomsday clock sits at two minutes to midnight,” the analysts said.
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
While we wait for the February real estate data to come in, here is the latest UBS update to their real estate bubble index.
Not many surprises; we have been seeing these cities appear on the most expensive lists for sometime now.
My Demographia file has been tracking these cities since 2005.
Vancouver, whose house prices accelerated to a double-digit rate relative to last year, has a ballooning index score. Higher stamp duties for foreign investors proved futile in braking its boom. By contrast, Toronto’s price dynamics have slowed considerably and its index score declined somewhat from last year’s. In both cities, valuations have trended upward since the late 1990s. Neither the financial crisis nor weakening commodity prices has dragged them down. But rising rates, stricter market regulations or an economic downturn could turn the lights out on the party given the high valuations and strained affordability.
2018 UBS Global Real Estate Bubble Index PDF
As the U.S. Energy Information Admin EIA.gov noted in their December 12, 2018 report:
"...concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth."
The economic slowdown in China is on, being driven by "risky lending and a rapid rise in debt levels". That sounds familiar to me and I have plotted it out on my Canadian Household Debt, GDP, Balance of Trade and FDI chart.
After decades of sharp expansion, the Chinese economy is slowing down. Growth in 2018 is set to be the weakest since 1990. And 2019 looks even worse. The world's second largest economy is feeling the effects of a darkening trade outlook and government attempts to rein in risky lending after a rapid rise in debt levels. "The drivers of China's slowdown have yet to have their full impact on the economy, and the combination of both is unprecedented," analysts at Moody's wrote in a research note this month. "This creates a high degree of uncertainty and risk. CNN Business December 30. 2018
The USD which is the "senior currency" continues to go up in value when measured against other currencies. That is having a profound effect on global foreign debt holders that have to raise US dollars to repay their loans with their "depreciating" local currencies.
A further, significant strengthening in the dollar will tell us when the Deflationary endgame for the global economy is gathering force. It will crush debtors, bankrupt creditors and lop at least four or five zeroes worth of funny money from the banking system’s quadrillion-dollar shell-game. I have written extensively on why hyperinflation is extremely unlikely to settle debts that have become vastly too large to repay. If you cannot understand why, let me pose this question: Do you actually believe the banksters will let you pay off your mortgage with a few hundred-thousand-dollar bills that you’ve peeled from your wallet? If you answered in the negative, you are implicitly a deflationist.
The C.D. Howe Institute study estimates of money laundering in Canada range from $5 billion to $100 billion. C.D. Howe Report, September 2018
A return to savings will eventually allow the pendulum of capital investment to return to productive use. But asset deflation is in view now and we don't yet know it's future length of trend.
One asset class that retains value and even grows during a broad deflationary event is precious metals; and that canary in the coal mine is happening now. See my ongoing chart study of "real" gold and real estate.
December 31, 2018 note to clients:
Why The Stock Market Is Heading For Disaster
In this presentation, Clarity Financial's economic analyst Jesse Colombo explains why the U.S. stock market is experiencing a dangerous bubble that is going to burst violently and cause serious damage to the underlying economy. Published on Oct 11, 2018
- S&P 500 since 1997
- Percent equity gains since 2009
- Interest rates since 1997
- Real Fed Funds rate since 1990
- U.S. corp debt since 1980
- U.S. corp debt as a percent of GDP since 1980
- Buybacks and dividends paid vs S&P 500 value since 2000
- S&P 500 vs NYSE margin debt as percent of GDP since 1997
- Retail investor allocation to stocks vs cash since 1997
- CBOE volatility index (VIX) since 1997
- St Louis financial stress index since 1997
- BAML U.S. high yield spread since 1997
- Cyclically adjusted P/E ratio since 1980
- U.S. stock market capitalization to GDP ratio since 1971
- Tobins Q ratio since 1902
- U.S. net corp profits as a percent of GNP since 1947
- FAANG stocks vs S&P 500 since 2009
- Fed Funds rate and recessions since 1997
- Financial banking crises and recessions since 1977
- 10-2 year treasuries spread since 1976
Trump Is Completely Misguided On Interest Rates
If the Fed or other central bank voluntarily abandons further credit expansion (most commonly by raising interest rates), the credit and asset bubble will experience a deflationary bust. Deflationary episodes entail credit busts, falling consumer prices, bear markets in stocks and housing prices, and falling wages. If the central bank decides to never put an end to the credit expansion (for example, if the Fed never raised rates), however, the result would be a runaway credit and asset bubble that leads to a severe decrease in the value of the currency and high rates of inflation. The latter scenario is what would occur if President Trump got his way – hardly a desirable outcome for the economy. To summarize, the Fed is crazy – they’re crazy for creating such a large bubble in the first place via loose monetary policy, but not for raising interest rates and normalizing their monetary policy. Jesse Colombo, Oct 17, 2018
Market Bear Hussman Says Stocks Could Lose $20 Trillion
To state the obvious, bull markets do not last forever, and inevitably are followed by bear markets. Likewise, economic expansions also must end at some point, followed by recessions, and recessions typically are accompanied by bear markets. John Hussman, Oct 15, 2018
There's trouble ahead in the global housing market
Source: Business Insider July 2018
Toronto: Prices clearly peaked in early 2017. Prices are now down 3% vs last year. (Toronto SF Detached are down 17% from the peak. See the Sept 30, 2018 Plunge-O-Meter)
Syndey: Compared to last year, prices are now down 5% and supply has ballooned 22%.
Stockholm & Vancouver: Over a recent 6-month period, prices in the luxury property market fell 9% and 7.6%, respectively.
New York City: In Q1 2018, prices were down 8% YoY and sales were down 25%. NYC's luxury properties fared even worse.
San Francisco: After hitting a record price high in January, the city has seen a rare spring decline in prices, while rents across the SF Bay Area are starting to "cool off"
Bond King Gundlach predicts yields
much higher before this move ends
"If you look at the charts and you look at the way the market's behaving and you think about the trends that are underneath the bond market, it wouldn't be surprising at all to see the 30-year [yield] go to 4 percent before this move of the breakout above 3.25 percent is over," he said on "Halftime Report" Thursday. CNBC, Oct 11, 2018
I have added in comparison on the chart, the rise in single family detached housing prices for Vancouver and Toronto as well as the increase in annual employment earnings all since 1999, the eve of the dot com tech crash.
The result is a six and a half fold increase in housing cost relative to employment earnings.
Some rental housing cost relief will occur with increases in minimum wages, but minimum wagers are not a source of buyers for detached houses in Canada's crazy towns.
If the real estate bulls are correct in their projection that house prices are not going to drop in any meaningful way because of dearth of land, string pulling by government or money laundering then society is going to have to deal with the prospect of guaranteed incomes to offset housing unaffordability and we will have to provide better access to services and housing closer to employment.
Lance argues in the chart above that the...
Intermediate-Term Picture Remains Bearish
On a intermediate-term basis, both of our weekly “sell signals” remain, and as shown below, the market once again failed at its overhead trend line last week as well as the downtrend resistance from the previous peaks. These failures keep downward pressure on the market as prices continue to follow the “path of least resistance.”
The weekly chart also shows the rare “buy” and “sell” signals issued on a longer-term basis. Currently, as the market struggles with its current correction process, it is also very close to triggering a more important “sell signal” which could indicate a further correctionary process over the next several months.
Over the last 25-years, these sell signals have only been triggered 5-other times.
1. At the peak of the market prior to the “Asian Contagion”
2. Just prior to the peak of the market in 2000
3. At the peak of the market in 2007
4. At the peak of the market 2011 as QE-2 ended and the U.S.was facing the “debt ceiling debate.”
5. Near the peak of the market from the collision of the end QE-3, the “taper tantrum” and “Brexit.”
But I did find this chart here of the S&P 500 vs the Case Shiller U.S. Housing Index:
It is clear that some sort of correlation exists between stock values and real estate values. Stocks started their recent bull run in 2009. As you can see from the chart above, real estate values didn’t start moving up steadily until 2012. So there is a lag here. But what is interesting is the correction in stock values in 2008 matched up with real estate values. In fact, real estate values started trending lower before the market crash. DoctorHousingBubble.com
In January 2018 the S&P 500, DOW and TSX peaked.
U.S. vs Canada Private Debt to GDP
Steve Keen "Can we avoid another financial crisis?"
History, Charts & Curated Readings
Balance Of Trade
Rent Or Buy