Residential Mortgage Debt as a % of GDP (Sep 2014 Source)
The inflationists have bet the farm on housing in all the global markets that attract non-resident buyers. When I look at my long term (since 1956) Canadian Housing Starts with Census overlaid chart, it strikes me that we actually need a lot more housing if we want to see affordability again. But the price to rent ratio does not incent the construction industry. If offshore money is willing to buy physically depreciating negative yields, then let's help them along. Perhaps a public-private (us-them) partnership is in order. We build them, they finance them.
On the for sale graphic (source: www.realtor.ca) there are +/- 1500 houses for sale starting at $2,000,000 up to $37,000,000. On the for rent graphic (source: vancouver.craigslist.ca) there are +/- 100 houses for rent starting at $6,000/mo up to $30,000/mo.
On my Affordability Page, notice that Demographia who looks at hundred's of cities housing and economic metrics globally defines affordable as "...the ability for any urban household to be able to rent a dwelling for less than a 25% of its monthly income, or to buy one for less than about three time its yearly income!"
On that scale, one would need an income of $24,000 per month to rent a $6000/mo house; that's easily accomplished by only 12 of those imported foreign workers (2 or 3 to a room) that we subsidize corporations with to flesh out their labour pool. Why export a low wage job when high wage jobs are easier to export and that's the Canadian will.
And on the same Demographia scale one only needs $666,666 in annual income to buy a $2,000,000 house - that's only 28 of those imported foreign workers banding together in joint ownership. That's only a half dozen or so workers per bedroom. I bet the refugee swarm scaling the new walls of Europe would easily do that if given the chance.
Oh ya, I forgot we are afraid of terrorists, but not so much of the peer pressure and institutional mountebankers that have exposed so many Canadians to so much risk in only a decade.
Portlandia: Escrow Scene
Canada's Economic Slide in Five Charts
If China is the Commodity Engine
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)
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
Are you worried about being PRICED OUT of real estate because interest rates are going to zoom?
Or are you anxious about being PRICED IN because the commodity bust is widening?
A solution to these stressful thoughts is to move more to cash.
If rates do zoom you will be able to move cash into higher rates of return or if the asset value bust continues, you will be able to buy more value.
The charts above show the ongoing DEFLATION in consumption prices and wage earnings. The top panel is the MIT Billion Prices Project which tracks online in real time the high-frequency price data, as well as the US inflation index (CPI). The lower panel is the U.S. FRED chart of Y/Y total private average hourly earnings of all employees with the data plotted year over year to gauge the momentum. Both series are clearly down since the 2009 Pit of Gloom.
Without wage inflation, price inflation evaporates with every actor's change in sentiment from bull to bear.
45% (U.S.) say it's a good time to find a quality job (the highest since 2007 prior to the bust and the Pit of Gloom)
The Low point on this measure was 8% in 2009 (after the pit of Gloom) and in 2011 (after the top in Commodities)
Ukulele Orchestra - Should I Stay Or Should I Go
During the mortgage boom, credit is easy, prices are rising, people are working in and around the housing sector and governments are collecting taxes and expanding services.
After a mortgage boom, the bust shows up and if there was a rapid ramp-up in mortgage creation, a deep and prolonged recession subsequently unfolds.
Notice in the chart (left) that mortgage creation in bank portfolios increased:
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
"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