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'
One57 sells for $100,000,000
and... how to adorn a Unicorn
But as the Georgia Straight pointed out on May 6, 2015 on the subject of the most expensive housing in Canada:
Schmeiß die Mama aus dem Zug!
Rick Ackerman looks at shorting U.S. home builders, his notes and a chart are below. I added more real estate sector stocks, ETFs and related index thumbnails. In the bottom left of the chart, I have put a blue dashed oval around XRE.TO which consists of securities of Canadian real estate investment trusts (REITs) listed on the Toronto Stock Exchange.
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:
Rick's Pick for Friday April 24, 2015 - $ DHI (D.R. Horton)
Throw Momma from the Train (1987)
from 1928 to 1970:
from 1970 to 2007:
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.
- OCT 2014 HuffingtonPost Canada Mortgage and Housing Corporation’s insurance portfolio is currently worth $551 billion, equivalent to 30 per cent of Canada’s gross domestic product.
- APR 2014 SpartanFunds Given its scale, a deceleration in the growth of CMHC’s balance sheet could seize up much of the credit creation in Canada. This is not merely a hypothetical issue: CMHC is rapidly approaching a parliamentary-imposed mortgage insurance cap of $600bil
- U.S. mortgage loans in banks’ total lending portfolios have doubled from about 30% in 1900 to about 60% today.
- The core business model of banks in advanced economies today resembles that of real estate funds.
- Mortgage lending to households and has little to do with the financing of the business sector.
- Record-high leverage ratios potentially increase the fragility of household balance sheets and the financial system itself.
- Since WW2 real estate credit has become a significant predictor of impeding financial fragility.
- The aftermaths of mortgage booms are marked by deeper recessions and slower recoveries.
- The slump is deeper and the recovery slower if mortgage growth was rapid in the preceding boom.
- Mortgaging has been a major influence on financial fragility in advanced economies, and has also increasingly left its mark on business cycle dynamics.
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.
- Òscar Jordà is a Research Advisor, Federal Reserve Bank of San Francisco; Professor of Economics, UC Davis
- Moritz Schularick is a Professor of Economics at the University of Bonn
- Alan Taylor is a Professor of Economics and Finance, University of California, Davis
Source & HatTip to: http://pragcap.com/the-great-mortgaging
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.
The main driver of the 2005-09 surge in the BDI was linked to commodity prices, particularly oil. The index then plummeted back to historical levels and has remained weak. Many ships that were ordered during the "bubble years" have entered the market, providing capacity growth above demand growth. Bunker fuel accounts for about 40% of vessel operating costs with limited opportunities to mitigate them. Thus, a surge in oil prices is directly reflected in shipping rates, and if energy prices drop, the BDI can also drop. Source
Always provocative is Stephen Colbert and his guest last night was Elon Musk (Youtube not available in Canada, but here is Elon unveiling the New Version of the All-Wheel-Drive Tesla Model S with dual drive and auto pilot: Video From Bloomberg TV Oct 10, 2014).
The disrupters are innovation (Musk etal), a rising supply of energy (U.S. fracking & China's solar panel ramp up) and the strengthening U.S. Dollar. If you are making a leveraged bet on continuing price rises in Calgary housing, it would be prudent to match your amortization to your wage earning contract. A sudden shift down in tar sand grade demand would force the weak hands to sell their real estate. The collapse in the BDI is due to the real price of oil dropping, an over supply in vessels, a strengthening of the U.S. Dollar, a global trade slowdown and disruption via innovation as an old generation gets replaced with the new.
1980 Oil peaked at US$35 per barrel ($100 per barrel today) Source
1986 Oil dropped from US$27 to below $10 ($58 to $22 today)
1986 Average U.S. Inflation was 1.9% Source
2014 Average U.S. Inflation is 1.7% Source
1.00 2014 US Dollar = 0.54 1986 US Dollars (using GDP Defaltor)
1.00 2014 US Dollar = 0.47 1986 US Dollars (using CPI Defaltor)
US$ Index peaked at 164.72 in February of 1985 Source
I continue to make the point that the bet on capital gains from real estate is not through inflation but through speculation. The speculation might be about inflation, but if inflation was the case, we would see employment earnings keeping pace, and they're not. From CBC News July 15, 2014 comes this "Microsoft expected to cut jobs in wake of Nokia deal." and quote:
“We will increase the fluidity of information and ideas by taking actions to flatten the organization and develop leaner business processes,” Satya wrote. “Culture change means we will do things differently.” said Satya Nadella, CEO of Microsoft.
The management will employ fewer people to give us feedback about our ideas by reducing the number of different levels of employment pay so that our cost of doing business is reduced on our balance sheet. We are forced to reduce our inhouse activities.
I have a job contract to fulfill and you don't. You no longer have employable skills here.
Software is eating the world.
"This is the basic insight: Software is eating the world. The Internet has now spread to the size and scope where it has become economically viable to build huge companies in single domains, where their basic, world-changing innovation is entirely in the code. We’ve especially seen it in retail — with companies like Groupon, Zappos, Fab." Marc Andreessen Wired interview April 24, 2013
How Technology Is Destroying Jobs
By David Rotman on June 12, 2013, MIT Technology Review
A less dramatic change, but one with a potentially far larger impact on employment, is taking place in clerical work and professional services. Technologies like the Web, artificial intelligence, big data, and improved analytics—all made possible by the ever increasing availability of cheap computing power and storage capacity—are automating many routine tasks.
Countless traditional white-collar jobs, such as many in the post office and in customer service, have disappeared. W. Brian Arthur, a visiting researcher at the Xerox Palo Alto Research Center’s intelligence systems lab and a former economics professor at Stanford University, calls it the “autonomous economy.” It’s far more subtle than the idea of robots and automation doing human jobs, he says: it involves “digital processes talking to other digital processes and creating new processes,” enabling us to do many things with fewer people and making yet other human jobs obsolete. Full Article Here
"Job Switching" from I Love Lucy
Aired September 15, 1952 on CBS TV
"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