November 18, 2017

A Buying Frenzy Has Been Encouraged

A weekend topic starting with a piece by Matt Barrie with Craig Tindale. “I recently watched the federal Treasurer Scott Morrison proudly proclaim that Australia was in ’surprisingly good shape.’ Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970. I was pretty shocked at the complacency, because after 26 years of economic expansion, the country has very little to show for it.”

“For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour — China. As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

“Unfortunately for Australia, that ‘lucky’ free ride is just about to end. Societe Generale’s China economist Wei Yao recently said: ‘Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses.’ Hyaman Capital’s Kyle Bass calls China a ‘$34 trillion experiment’ which is ‘exploding.’ where Chinese bank losses ‘could exceed 400 per cent of the US banking losses incurred during the subprime crisis.’”

“The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full-blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets. This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg.”

“Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016 — exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.”

“While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.”

“In April 2016, the average holding period for steel rebar and iron ore contracts was less than three hours. The Chief Executive of the London Metal Exchange, said ‘Why should steel rebar be one of the world’s most actively-traded futures contracts? I don’t think most people who trade it know what it is.’”

“Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50 per cent of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens. In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Over the last six years, the price of iron ore has fallen 60 per cent.”

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee. Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other. A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, ‘upswings’ last 13 years).”

“In 2016, 67 per cent of Australia’s GDP growth came from the cities of Sydney and Melbourne where both state and federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24 per cent of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.”

“This can only be described as completely ‘insane.’That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe ‘one of the biggest housing bubbles in history.’ ‘Australia,’ he added, ‘is the only country we know of where middle-class houses are auctioned like paintings.’ Our Federal Government has worked really hard to get us to this point.”

“The government decided to further fuel the fire by ’streamlining’ the administrative requirements so that temporary residents could purchase real estate in Australia without having to report or gain approval. It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”

“I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation — Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.”

“UBS estimates that $500 billion worth of ‘not completely factually accurate’ mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.”

“At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of ’severely unaffordable.’ Melbourne is 9.6x.”

“This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years — but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.”

The Globe and Mail. “In Vancouver, the detached house owner is often vilified. So too, is the resident who protests density. They are vilified by what one academic is calling ‘the housing supply myth,’ which is the belief that we need more housing in order to lower costs. It’s an argument commonly used by politicians, industry, and some academics and citizen activists. ‘There is an intuitive appeal to that argument,’ says Dr. John Rose, who spent the last year on education leave, researching the popular belief that Vancouver has a lack of housing supply. ‘We understand this idea of supply and demand, intuitively, even if you haven’t taken an economics course.’”

“However, he has concluded that Vancouver does not have a shortage of housing units. In fact, we have a surplus. And, as anybody in Metro Vancouver knows, prices have not plummeted as a result. ‘If we are looking back at the last 15 to 20 years, we have been providing more than enough units of housing – and it’s still unaffordable. And yet, you see this argument being thrown out there by various quarters, that we have this housing shortage.”‘

“He also looked at supply in housing markets elsewhere in Canada, the United States and Australia. ‘As a resident of Metro Vancouver and observing all this construction around me, I thought: ‘How do we have a housing shortage?’”

“And despite a surplus of housing stock, affordability has significantly worsened – a contradiction to the supply mantra. ‘We would think that if a market got less affordable, maybe that meant supply was getting tighter and tighter. But that’s baloney. That’s garbage,’ he says. ‘So my answer to the supply argument is that it’s tenuous for all the markets, because you can basically see no relationship – and this is over a 15-year period. Here we’ve had more than enough supply and yet the housing costs have gone crazy.’”

“Josh Gordon, assistant professor at Simon Fraser University’s School of Public Policy, has regularly spoken out against the more-supply argument. ‘There’s simply no evidence of a slowdown in construction or supply,’ says Dr. Gordon. ‘The construction industry in Vancouver is operating at full throttle. There are around 40,000 units under construction, which is twice the historical average for the post-2000 period. The idea that we should get more supply into the pipeline is a bit silly. The role of the supply argument is, to a large extent, to distract the public and policy makers from action on the demand side, specifically in terms of foreign capital.’”

“There are supplyists who are notoriously confrontational, particularly on social media, and Dr. Rose knows that his findings will be challenged. ‘Bring it,’ he says. ‘Here’s the data. If you want to argue against it, go ahead. It’s publicly available. And when I did this research, I had my independence. Nobody owns this. I get no sponsorship from any industry, any sector. I’m a free agent.’”

“‘I think that’s a benefit of this research. It’s not coming from a school of business that is being funded by the real estate industry, or somebody who’s passionate about densification and smart growth. I think there’s some romanticizing going on, about what the ideal city should look like, and unfortunately it gets sucked into this debate about affordability. I’m just saying look at the numbers, and we see Vancouver has plenty of supply. And can we build ourselves out of this? Not in this current model.’”

A letter to the editor in the Islington Tribune. “In the 1970s I had to travel to Portugal before I saw people begging on the streets. Now, I only have to walk down Stroud Green Road to see evidence of real housing need. But we are assured that an increase in housing supply will enable everyone to afford a home. This theory might apply to some commodities, under certain conditions, but not housing in 2017.”

“Our neoliberal governments have infected our basic need for homes with, first, their desire for a ‘property-owning democracy’ and then for us to acquire property assets to use as collateral for further debt with which to fuel the economy and keep them in power. Since the ’70s those same governments have allowed banksters to create the majority of new money, not to risk on manufacturing, agriculture or even house-building, but primarily for the purchase of existing housing.”

“In consequence, house prices have risen without the accompanying increase in productivity and the distributed incomes that would have generated genuine affordability. A buying frenzy has been encouraged, a race to get on the property-asset ladder while the bubble is still inflating. Dropping interest rates, in a misguided attempt to encourage the sort of investment that would actually increase wealth, has only served to divert the savings of ‘the haves’ into property.”

“The primary purpose of London’s housing is now to act as a treasure chest. Rather than blame the free market, government has put up a smokescreen of ‘initiatives,’ including the concept of so-called ‘affordable housing,’ that do nothing to address the underlying problem, which is their failure to manage the money supply.”