Wed Post #1: China's Property Values continue to decline

Perhaps one of the most important stories for our little hamlet on the wet coast is the fact that China's property values continue to decline.

The chart above from ISI Research shows that the rate of decline is now similar to the lows in early 2009. And, as Pragmatic Capitalism notes, data from ISI tends to be more accurate than the official numbers coming out of China’s housing ministry.

As we have noted in earlier posts, much of this decline has been engineered by Beijing as China attempts to arrest their housing bubble.

And as Reuters notes, this policy will not be letting up soon. As an unnamed spokesman from the housing ministry was quoted as saying that “all localities must firmly implement various property tightening measures as required by the central government.”

Beijing is sending a stern message to local authorities to keep the measures place.

But, as China undergoes an economic slowdown, which may end up being more severe than the authorities had anticipated, will the tightening measures in the housing market be relaxed (particularly at the local level)?

Reuters notes that even if measures are relaxed, any rebound may be a ways off.

Vanke, China’s largest developer by sales, said earlier this month it would take about 11 months to sell down unsold stocks in key cities such as Beijing, Shanghai and Shenzhen should the market rebound.

Hui Jianqiang, head of research at the China Real Estate Association, told Reuters that he doesn't see a rebounding market.

“I’m not worried about a home price rebound as long as the government keeps its tightening stance.”

Presumably we shouldn't look to see a HAM rebound here in the foreseeable future either.

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Mon Post #1: China's bubble is starting to break

Patrick Wolff, founder and chief executive officer of Grandmaster Capital Management LLC, was on Bloomberg Television's "Money Moves" talking about China.

In his words, China's bubble is starting to break.

The thing that is really striking about China is that there is an extraordinary double standard in the world today. You know, what you have in China is a state dominated, really state controlled, economy. It's, you know, it's not really capitalism by any stretch; it's something different. And it's very striking to me that the same people who would probably be apoplectic at the idea of the US government tightening regulations even a little bit in some area--that I know you were talking about the Volker Rule earlier where obviously there is a lot of debate on that as their should be--but the same people who would be really really upset about that, somehow come to believe that the fact that China's government controls everything in China is a good thing. I don't think it's a good thing; I think it's a bad thing.

I think there have been years and years of debt-fueled mal-investment. And it's come to a head. And when it breaks, as it seems to be breaking now, it's a long way down.

Another reason we shouldn't expect HAM (Hot Asian Money) to flood in and support the Vancouver Housing Market.

(hat tip World Housing Bubble)

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HAM exit stage left?

Faithful readers know we have pondered about what might happened when the Hot Asian Money (HAM) that has flowed into Vancouver suddenly needs to depart.

A lot of money has been parked here are as China experiences it's own real estate bubble, a bubble driven by more stimulus money, per capita, being injected into their economy that has been injected in the USA.

But as we discussed on Thursday, a real estate crash is underway in China. 

As margin calls come due for many mainland Chinese who have invested here, the impact of the need for liquidity cannot be underestimated.

The very first signs of this starting to happen are evident in the absence of HAM in the Vancouver spring real estate market. It is, basically, non-existent.

And as the year moves from early Spring to the end of Spring... is the HAM trend ready to move to the next phase?

At the top of this post is the video promo from a realtor for 3243 W. 33rd Avenue. The asking price is $2,480,000 and here is how it is being promoted (click on image to enlarge):

Mackenzie Heights House for Sale! BRAND NEW high-end custom-built house selling now at the well sough after Mackenzie Height area. This is a dream house that comes with high-end Kitchen Aid stainless steel appliances, HRV, air-conditioning, two gas fireplaces, centralvacuum cleaner, crystal chandeliers, electronic door lock, security system with intercom speakers and monitor, jacuzzi tub in master bedroom, granite counter-tops throughout house and granite tiles at the entry foyer. This house comes with just almost everything you need. Possession is AVAILABLE NOW. Open house Saturdays. Will you be this brand new house's FIRST homeowner?

A professional video and coherent write up.

But is there desperation behind the signs by the seller?

A curious craigslist ad has appeared regarding this house - you can click on the image below to enlarge it. (hat tip to Patiently Waiting on Vancouver Condo Info):

It says, in broken english:

"Note: the owner because of a urgent to return China, so the asking price there are a lot of room for negotiation, coupled with the distribution of the total value of 80000 full set of aristocratic furniture, piano, plus on the government’s home purchase cash back, buyers will get a total of nearly 200 000 discounts, which in the vancouver west very expensive premium real estate is very difficult to find such a cheap price, welcome to the OPEN HOUSE to look at the new luxury house just completed! NEAR TO U.B.C!”

Seems odd to have a craigslist posting written like this by a realtor. Is the owner desperate to explore additional advertising options because he is desperate to sell the property?

Let's face it, how many realtors would openly advertise a seller's weak hand and tell you he 'urgently returned to China' and that there is 'lots of room for negotiation?'

Interesting.

It's a good thing a lack of sales and burgeoning inventory doesn't mean housing prices will be coming down, eh?

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Are the swirling winds of change blowing towards a Nexus point?

HAM... or Hot Asian Money... has been a prominent feature of our real estate bubble.

As China pumped more stimulus money, per capita, than the Americans into their economy a huge bubble has been blowing.

One of the benefits has been China's real estate.

Buoyed by inflated real estate values, wealthy Chinese have extracted equity and utilized equity to leverage real estate purchases overseas. And Vancouver has been a primary beneficiary.

But what happens when the bubble begins to burst?

One of the first consequences is the access to easy money disappears... and with it the free flow of money to locales such as the Village on the Edge of the Rainforest.

HAM is basically AWOL in the Vancouver Spring Real Estate market and all indications are the situation in China is worsening.

Mish Shedlock noted on his blog yesterday that the Real Estate Crash in China is Underway.

Citing an excellent report (China Real Estate Unravels) by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, Mish notes that Chinese developers, burdened by 70% leverage ratios and loans threatening to come due, rushed to complete projects already in their pipeline, to put those units onto the market and raise cash.

That rush to complete inflated real estate investments, investments that were allegedly up 23.5% in the first quarter.

But other statistics from the report tell the real story.

• Year-on-year sales in Q1, for all real estate, was down 14.6%.
• Residential property sales were down 17.5%
• Office sales were down -10.2%
• Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
• Total amount of floor space “for sale” was up 35.5%, compared to the same date last year
• Floor space of residential units “for sale” grew 47.4%.
• At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold
• A year and a half worth of excess inventory is hidden somewhere in the pipeline
• New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
• Housing starts fell -14.4% year-on-year and -23.4% month-on-month
• Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
• Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
• Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
• Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year.

Chovanec notes:

"Clearly a crash is underway and the Chinese soft-landing thesis is collapsing.

The “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all. It’s more like the last gasp of a market that’s running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.

Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%.

At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out. But the April numbers suggest it is already happening.

Chovanec notes if real estate investment drops by 10%, GDP will come in at 5.3%. But what if real estate investment falls by 20% or 25%?

Moreover, why shouldn't it?

The real estate crash in China has arrived and is underway.  The GDP crash will follow shortly.

What comes after that?

After that comes the second consequence for the Village on the Edge of the Rainforest... the panic sale of overseas assets to meet financial demands at home.

All of which is shaping up to hit us just as the OFSI rule changes come into effect.

The swirling winds of change are blowing towards a convergence point that can only be described as the perfect storm combining the Boomer Trigger, the China Trigger and the Speculator Trigger with upcoming mortgage rule changes.

People email me and say my prediction of a collapse in real estate values here of 70-85% is completely unrealistic and they just can't see how it could possibly come to pass.

Not only do I think it is very easy to see... I sometimes think my estimate may be underestimating the full extent of what may play out.

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The media says... HAM is "fizzling out"

So I was sitting in a cafe near Canada Place this morning with a group of 'friends of friends' who had just finished running the Vancouver Marathon (or in their case... the half marathon) and the topic turned to real estate.

One astute member for the 'friends of friends' clan was explaining to a colleague about why downtown condo prices, which have been falling recently, will continue to fall.

Our table was long, but my ears had not deceived me. The bear case was being eloquently laid out!

Listening in, my heart shone as this learned individual explained the current market dynamics.

It wasn't long before your faithful scribe chimed in about the impending OSFI changes to LTV mortgage renewals to complete the discussion when he turned and said, "ah... so you know all to well what's going on!"

Indeed... and clearly I'm not alone as one glance at the weekend papers indicate enlightenment isn't just occurring in local cafe's.

For several years now this, and other blogs, have ruminated that the phenomena of HAM (Hot Asian Money) was not a panacea to the everlasting inflation of our housing bubble.

And as the Spring market fails to materialize, it becoming very evident to all that Chinese buyers are not going to save the market.

It's so evident that even the local newspaper columnist Frances Bula is now writing about it.

Bula writes that the:

"boom of sky-high prices for Vancouver west-side houses – one that provoked media around the world to claim with scant proof that mainland Chinese investors were buying up the city – is fizzling out."

Bula notes that a house in the 3000 block of West 24th Anenue, first listed at near $4.5-million six months ago, sold on April 15 for $3.35-million, over $1 million chopped off the asking price.

Fresh statistics from the Greater Vancouver Real Estate Board show the number of sales on the west side is down by nearly 40% for the first four months of the year. Only a third of the nearly 400 homes listed in April have sold – one of the lowest rates in the region.

And Bula quotes west-side realtor Marty Pospischil, who specializes in selling single-family homes owned by long-term residents, who says that last year, 90% of his 100 house sales were to “offshore buyers”. This year, it’s less than a tenth of that.

Pospischil also noted:

“We’re now seeing a 50% collapse rate in deals, when it’s usually more like 5%.”

The reason?

In addition to the lack of money flowing from China, there is another factor hitting sales hard.

“Banks are now requiring borrowers to disclose incomes and assets before mortgages are approved, as of the last six weeks.”

Meanwhile Bula quotes another west side realtor, who specializes in single family homes. He notes:

“I always thought that market was not sustainable. Every local person was juiced out of the market. The average household income on the west side doesn’t support those prices.”

Wow!

Not that we haven't been saying the exact same thing.

But to see these types of headlines coming from mainstream media in the Vancouver real estate scene, it tells you this is a market in trouble.

For if HAM is evaporating, mortgage rules are tightening and local incomes can't support the current bubble prices; it means there is only one way the market can go.

As long time residents painlessly slash $1 million dollars off those sky high prices for homes they only paid $60,000 to $80,000 for back in the mid-1970s, you have to wonder how long before the free-fall in prices starts?

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Globe and Mail: What will make the housing boom go bust? 'Greed'

Today's edition of the Globe and Mail newspaper contains an article which asks: What will make the housing boom bust? 'Greed'.

The article notes that speculation in Canadian cities such as Vancouver and Toronto is wildly out of control, and states that the real-estate bubble in this country is overdue for a correction painfully similar to the one south of the border... a theme all too common for blogs like this one.

The Globe speaks to Ben Jones, the Arizona-based accountant who launched the  Housing Bubble Blog in December, 2004. At the time he was one of only a handful who was raising concerns about the vulnerability of the U.S. housing market.

Now, almost eight years later, Jones still sees signs that the real-estate mania is far from over in America. As part of his blogging experience, he keeps tabs on Canada and sees a lot of pain in our future.

Says Jones:

From what I can tell, the condo markets in Toronto and Vancouver are even crazier (than the US was). Prices are still going up and the participation of so many foreign investors is indicative of a more vulnerable market than in, for example, Miami in 2004. And that was a complete disaster.

China probably has the largest bubble in the world and when it blows, it’s going to shake the globe. There have been housing bubbles before, but never all over the world. Every time I hear people talk about the housing bubble in the past tense, I cringe.

Jones casts his eye at the Canadian market, sees all the speculation, sees the huge debt ratio Canadians have amassed and has this to say about our current real estate prices:

Artificially low interest rates and lower mortgage standards have enabled your bubble to do a head fake and push even higher. The same thing happened in Australia and China. You guys should be further along the road to recovery than us and you’re not. I would chalk that up to your government policy. Any objective economist should be able to see what’s going on in Toronto and see that it’s a disaster in the making. In the United States, everybody knew that it couldn’t go on forever, but at the root of a mania is the belief that the trees will grow to the sky.

And what of all the stories about the Chinese speculating with their money by buying Canadian real estate?

I posted the recent story about that Toronto house that sold for $400,000 over asking price. And it was just a bungalow. It really reminds me of 2004 when Californians were spreading across the whole country, buying property left and right, using their equity from the California bubble to create bubbles in other areas, like Las Vegas. We called them “equity nomads.”

China probably has the largest bubble in the world and the fact that they’re using their bubble wealth to drive up prices in Canada is the rolling-bubble phenomenon playing out on a massive scale. If the real-estate market collapses in China, are they going to close on all these condos they’re buying in Toronto? I kind of doubt it.

It’s even more complicated, because the Australians have a pretty big bubble and their resource-based economy is largely dependent upon China. It’s a house of cards: China goes down, Australia goes down and they drag down the market in Vancouver and Toronto, which trickles down to the U.S. That’s the danger people are willing to ignore when things are going up.

But everyone says it’s different here.

Ask yourself, why are the Chinese buying all these properties in Toronto and Vancouver? To make money. Yes, they say they are really nice places, but they say that about every bubble market.

Florida is a really nice place. California has great weather. I don’t think that justifies paying $400,000 over asking. Toronto was a really nice place 20 years ago, but nobody was paying half-a-million dollars for a condo.

It forms what I like to call The China Trigger and tomorrow or the next day I will discuss this is greater detail.

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