June 20, 2014

The Problem Is Central Bankers Are Happy To Oblige

It’s Friday desk clearing time for this blogger. “A year ago, the housing market looked like it was finally recovering. But then home sales fizzled. A big part of why housing remains so stunted is that there are more than 2 million ‘missing households’ in the U.S. ‘We would love to buy a house right now, but we just don’t have anything saved currently,’ says 26-year-old Marissa Szabo. Szabo is ready to settle down and move in with her boyfriend. ‘Some places were asking for first [and] last [month's rent], security [deposit], a broker’s fee for our Realtor and a broker’s fee for the landlord who hired one too. So that’s five months’ rent right upfront,’ Szabo says. ‘That was the straw that broke the camel’s back. And we both just sat down and said, ‘All right, are we willing to take all our money and light it on fire?’”

“So, like other millennials, they turned to their friends and family. Szabo and her boyfriend have decided to move in with her mother. ‘She doesn’t want rent or anything like that. We’ll help with utilities and we’ll do some repairs around the house for her,’ Szabo says.”

“Last year was a good year for industries that depend on the building and selling of houses in the Treasure Valley. But with sales flattening in the first four months of 2014, Valley housing experts wonder what will happen next. Ada County has a 20-month supply of newly built homes between $120,000 and $159,000 at the current sales pace, says Jere Webb, associate broker at Downs Realty in Eagle. Canyon County has a nine-month supply. Inventories of seven months or more can’t sustain current construction, Webb says.”

“‘Those builders should really look at these numbers carefully and realize they are heading into dangerous waters,’ he says. ‘Right now, there’s a realization on the part of many agents that there are storm clouds looming.’”

“Springtime, usually the housing market’s busiest time of year, came and went in lackluster fashion in metro Phoenix. For homebuilders, however, it was essentially non-existent, and probably won’t get much better this year. ‘Sales were horrible, they are still horrible, and with summer here and traffic counts already falling, the 2014 outlook is not appealing to those that make their living selling new homes,’ Jim Belfiore said in his monthly report.”

“New-home sales Valleywide dropped by more than 12 percent year-over-year in April, pushing prices down slightly, a direct result of home builders increasing incentives out of desperation to get buyers to pull the trigger, Belfiore said. Late last month, Moody’s Analytics said it had overstated its 2013 population growth estimate for the Valley by a whopping 37 percent. Moody’s also slashed its 2014 estimate by 40 percent, or 45,800 people. ‘If correct, sales may be down because nearly 88,000 fewer people migrated to Phoenix in a two-year period than were believed to be in the process of moving here,’ Belfiore said.”

“House prices have surged 15.2 per cent since the interest rate cut in November 2011, on Australian Bureau of Statistics data, and now sit at record highs. Morgan Stanley property analyst Lou Pirenc argues the oversupply of new apartments in 2014 will also have an effect on house prices in inner city areas. During the past year, 81,000 apartments have been approved nationwide. This is almost twice the long-term average of 44,600.”

“Buyers are also in a stronger position that last month, said RP Rismark analyst Tim Lawless. ‘The level of discounting has risen slightly indicating that buyers have a slightly better position when negotiating on the contact price,’ he said. First home buyers will be hoping that these predictions bring a change of fortune, with many now exiting the market altogether as the properties they want move beyond reach. ‘There is an extremely low number of first home buyers active in the housing market currently.’”

“A giant poster on a 40-storey building overlooking a Dubai highway, proclaimed ‘Keep calm. There’s no bubble.’ That may have been true at the time, but the risks are rising. A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months. ‘Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place,’ said Simon Williams, HSBC’s chief economist for the region.”

“A Dubai banker, declining to be named under briefing rules, noted increased risk-taking in funding to developers by local banks: ‘Some banks are offering 100 per cent financing deals to firms on a selective basis. That’s not very sustainable.’”

“The housing market is not showing any signs of shaking off its current slump. Between March and April, the prices of flats and terraced houses in Finland went down by 0.9 per cent, reveal the latest statistics compiled by Statistics Finland. In sparsely populated areas and industrial towns with ailing economies, job losses are reflected in the property market as weak demand and dropping house prices. Buyers also expect more for their money. Heikki Loikkanen, an emeritus professor of urban economics at the University of Helsinki, fears that the housing market may soon become unstable unless the economy takes a turn for the better.”

“‘I’m surpried prices haven’t gone down more. If the financial situation does not improve, housing production does not pick up and the unemployment rate goes up, house prices will come under pressure,’ explains Loikkanen.”

“‘The risk of a further build-up of imbalances on the Swiss mortgage and real estate markets persists,’ the Zurich-based Swiss National Bank said in its annual financial stability report. ‘Given the persistence of the low interest rate environment, banks and authorities should remain alert and take the necessary steps to keep risks for financial stability in check. Efforts should now be directed towards preparing regulatory measures that could be implemented swiftly should momentum pick up again on the mortgage and residential real estate markets,’ the SNB said. These could include steps ‘that give banks stronger incentives to pursue a more cautious mortgage lending policy,’ it said.”

“Li Yaozhi, general manager for one of the biggest brokerages in China, told reporters in Shenzhen that developers owe Centaline more than HK$3 billion ($387million) in commissions. Shi Hongrui, managing director of Shanghai-based Hanyu Property, told the Oriental Morning post that developers owe the brokerage 120 million yuan ($19.5 million) in commissions, accounting for 30 percent of its revenue last year. ‘Some big developers don’t pay us cash at all and give us apartments as commission.’ Shi told the Shanghai-based newspaper.”

“REO sale eclipsed new home sales during the first quarter of 2014 in the Coachella Valley,reports show. Only two cities showed more new home sales than REO, or real estate owned, closings from January through March. Indio had the largest margin: 61 new home sales against 16 REO sales. Palm Desert came in second, with 20 new home sales, only three more than REO sales. The year-over-year increase has become a three-month pattern across California, said Daren Blomquist, VP of RealtyTrac.”

“‘It’s an increase after two years of decreasing activity, and that’s what we’ve been expecting, Blomquist said. ‘We do believe that there’s shadow inventory in California, that the banks have been holding back from foreclosing on.’”

“Concern about inequality and egregious greed is shared by the high priests of the financial system, it seems. The governor of the Bank of England, Mark Carney, warned in a recent speech that for markets to sustain their legitimacy they need to be not only effective but fair. ‘Within societies, virtually without exception, inequality of outcomes both within and across generations has demonstrably increased,’ he said. ‘Bankers made enormous sums in the run-up to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures. That unjust sharing of risk and reward contributed directly to inequality but - more importantly - has had a corrosive effect on the broader social fabric of which finance is part and on which it relies.’”

“The Federal Reserve and others have worked hard for reputations as independent, professional and trustworthy. The problem is that central bankers are happy to oblige. Instead of pressing governments to fix the issues themselves, the Draghi’s, Carney’s and Bernanke’s of the world have been printing and launching experimental programs. They’re being asked to monitor banks, housing, markets and the entire financial system. They being asked to look for bubbles. Some are being asked to manage reserves with central banks now investing in risky assets like stocks. This is a grave error.”

“Sure, they might have a bit more success than politicians but very few central bankers and zero central banking institutions saw the crisis coming. Most of them still didn’t anticipate a recession in the days before Lehman collapsed. This bubble is in central bank power. One day there will be another crisis that central banks didn’t see and can’t control. When it goes bad they’ll be blamed and chastised by the same politicians who empowered them.”

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Comment by Housing Analyst
2014-06-20 04:06:23

And we both just sat down and said, ‘All right, are we willing to take all our money and light it on fire?’”

And that is precisely what you do when you buy a house at current massively inflated prices.

Why buy when you can rent the same square footage for half the monthly cost?

Comment by mikeinbend
2014-06-20 13:23:37

Hey Henny Penny, have prices exploded here in Bend!

I mean I got $90/sq ft for my depreciating crapshack, same what I paid. And felt lucky, but that was 2013. I may have lost a lot but I could have lost a lot less!

2014 the same model(1305 sq ft) is currently, same subdivision, one year later, offered for sale, at $157/sq ft. In the Beverly Hills of Prineville of all places.

But you had convinced me an echo bubble was not in the cards…
no hard feelings on my part. Every house in Bend seems for sale due to this lunacy.

Mike the veggie man
At least I got a veggie stand

Comment by cactus
2014-06-20 16:50:30

I didn’t tell u to sell remember that it was that other guy

Comment by cactus
2014-06-20 16:55:33

Hey Mike hows the back ?

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Comment by mikeinbend
2014-06-20 19:37:54

Hey yourself.
Back is never gonna be the same; after 15 years I’m used to it. But it hasn’t got any worse; sold the house and then bought a farm store; and I go set up veggies every day at 5 AM, run a farmers market booth to boot in one of our local destination resorts, and haven’t gone surfing in 6 months. So I’m functioning and my wife works for us at the store and I actually employ a few people rather than counting on rent or appreciation for $$.

Had a close family friend I remember fondly from kissin in the old orange groves on Balcom Canyon Rd pass away in a scuba accident two weeks ago; I am not complaining about my back. Her folks in Camarillo are bereft.

My own daughter is away on an overnight with her own boyfriend now(sleeping in a teepee at a hot springs with his whole family thank you). How time flies. Blink and you lose a friend or your daughter goes and gets some.
Thanks for the interest.

Comment by Prime_Is_Contained
2014-06-21 03:47:52

2014 the same model(1305 sq ft) is currently, same subdivision, one year later, offered for sale, at $157/sq ft.

Note that it is LISTED, not sold, at that price, mike… BIG difference!

Comment by Housing Analyst
2014-06-21 04:24:23

Awww poor thing. Your little ruse ignores the the fact that none of those dumps you’re cheerleading aren’t selling at any price.

Go victim go!

Comment by Mr. Banker
2014-06-20 05:16:12

“So, like other millennials, they turned to their friends and family. Szabo and her boyfriend have decided to move in with her mother. ‘She doesn’t want rent or anything like that. We’ll help with utilities and we’ll do some repairs around the house for her,’ Szabo says.”

Well this really sucks! If they don’t commit to buying a house then how is it that they are going to be able to spend money that they do not have? How am I supposed to get my cut?

I suppose there are credit cards; I still get a cut when they use credit cards, but the biggest and most enduring cuts I get to enjoy are the cuts I get from floating mortgages.

And what about the economy? Where is all the money going to come from that needs to go into the economy to keep it running if it is not borrowed from the future via equity cash-outs? What happens to the economy if people are somehow forced to live within their means?

Most importantly, what happens to the bankers?

Comment by Ben Jones
2014-06-20 06:51:46

‘There’s one room in his Bridgeport apartment that Tim Johnson likes to make special note of when giving a grand tour. The bright, sunny space used to be the landlord’s bedroom, but now it functions as a living room for him and his wife Michelle Skinner. But that’s not what makes it special.’

“I’m really proud of this room because we didn’t pay for anything in it,” Johnson announces. “Everything came from family members or we found it somewhere. Except for the credenza, we had to buy that because nothing else fit.”

‘It’s easy to see that Johnson prides himself in his penny-pinching skills. He says he even tracks his credit score like some others might track their favorite sports team. But even with his meticulous financial planning, the newlyweds say that buying a home is out of the question - thanks to their student loan debt.’

‘Johnson, 27, has about $27,000 in student loans from the University of Illinois at Chicago. He says his payments are manageable for now, but as Skinner, 23, continues through her PhD program at the University of Chicago, her $70,000 in undergraduate loans will slowly come out of deferment — making it almost impossible for them to save enough for things like a downpayment or closing costs, no matter how badly they want more room for a baby one day.’

“We try to save Tim’s bonuses for it,” Skinner said. “But the market prices have been increasing - or at least what we need has been increasing at a proportion to which we can’t save.”

“We’ve given up on it for like five years,” Johnson said. “Once Michelle gets out of school and gets a full-time position then we can start to look. And what has me worried is, (whether) we’ll have a down payment by that point.”

‘You don’t have to look far to find another example of hopeful home-buyers struggling to get out from under their student debt. Just a few blocks away, Martin Gleason and Shannon Glass are also doing the math to see whether they can buy a home with all their student loan debt.’

‘For those who just squeak in under the debt-to-income-ratio, Zwarycz says their debt still matters, as the more they carry, the weaker their buying power. And he says that’s been causing a slowdown in Chicago’s entry level market.’

“There’s this large amount of inventory particularly in the city’s smaller condominiums that are typically first-time homebuyer properties. If an individual can’t sell their first-time home property that they bought five years ago, they can’t move up to the upgrade property. And that has sort of a ripple effect through the entire market,” Zwarycz said.’

Comment by Ben Jones
2014-06-20 06:56:54

‘There’s this large amount of inventory…If an individual can’t sell their first-time home property that they bought five years ago, they can’t move up’

Golly, the little hamsters aren’t running on the wheel, my commissions are suffering! Somebody do something!

To these people we’re just money cogs to be worked in a machine. Never mind that these people are overloaded with debt already. It’s sinking in out there that debt doesn’t make you rich. So Yellen, have you ever seen somebody flogging a worn out donkey? It’s sad, isn’t it?

Comment by Ben Jones
2014-06-20 07:00:42

‘The two-year-old U.S. housing recovery is faltering. “The big housing rally wiped itself out because prices increased too quickly for buyers to keep up,” said Richard Hastings, a consumer strategist at Global Hunter Securities LLC in Charlotte, North Carolina, who predicted the slowdown eight months ago. “The pool of eligible new buyers is collapsing” because of stagnant incomes and lack of credit, he said.’

Wiped itself out, huh? It recovered too much?

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Comment by Housing Analyst
2014-06-20 08:17:50

Collapsing housing demand….. And its going to continue collapsing until prices roll back to pre bubble levels(1996) and not a second sooner.

Eventually housing will hit bottom.

Comment by Gabor
2014-06-20 10:53:33

Do you mean pre 96 inflation adjusted or just pre 96? Because most things, including my salary are about 2.5x more now than they were in 1996. So if a house was 100k in 96, then that house should be about 250k today.

Comment by Housing Analyst
2014-06-20 12:19:31

Current salaries aren’t 2.5x 1996 salaries but that’s besides the point. To answer your question, nominal prices.

As far as a house being $100k in 1996, that’s laughable.

Comment by Guillotine Renovator
2014-06-20 12:28:57

Your salary means nothing, Zsa Zsa, because median income is not up 2.5x since 1996. Real wages are FALLING. Nice try, though.

Comment by Pete
2014-06-20 18:54:05

“As far as a house being $100k in 1996, that’s laughable.”

Maybe laughable, but true. The house in this link, and every house in this neighborhood was built in ‘95 and ‘96. Based on the price history the one-story, 1300 sf homes went for 110-130K back then, the two-story 1600 sf ones went for around 140K. And this is Woodland, Ca, mind you, a meth-infested suburb of Sacramento.

Check the price history.


Comment by Ben Jones
2014-06-20 19:12:18

‘built in 1996′

Why would someone build a house in a ‘meth-infested suburb’?

Comment by Pete
2014-06-20 19:31:18

Good question. I wasn’t here then, maybe the meth thing is a recent development. There’s a facebook page named “people in Woodland that aren’t on meth”. But they are still building here. Just not in or near downtown. Except for the new courthouse, which might just sum it all up.

Comment by Housing Analyst
2014-06-21 08:03:08

Sounds like more fraud but you wouldn’t know anything about that now would you?

Comment by goon squad
2014-06-20 15:56:39

This is beautiful, two debt donkeys in love, who crave more debt.

Good luck with that kidz…

Comment by AZtoORtoCOtoOR
2014-06-20 15:01:35

Szabo and her boyfriend have decided to move in with her mother. ‘She doesn’t want rent or anything like that. We’ll help with utilities and we’ll do some repairs around the house for her,’ Szabo says.”

The boyfriend has it figured out. Free housing while sleeping with the owner’s daughter that he doesn’t have to commit to. I wonder how much time he has for repairs between the video games??

Comment by Combotechie
2014-06-20 05:32:56

An interesting comment to the last article posted above:

“Could the CBs do anything differently? I don’t think so. Rates have been going down for the last 30+ years, this is like continuous refinancing of the system at lower and lower rates. Now that we have come to the zero bound there’s nothing left but to print. This is how the current financial system is designed. Printing doesn’t solve the problem but it helps to maintain the system for a few more years.”

“… this is like continuous refinancing of the system at lower and lower rates.”

I think this guy nailed it. And now that rates are so low this “continuous refinancing” is reaching its end, which means we may be approaching the “Now what?” stage.

Comment by Ben Jones
2014-06-20 06:47:46

‘Home sales in the Portland (OR) area took a tumble in May compared with a year ago, though a thin supply of homes for sale means the market is still very competitive. The Regional Multiple Listing Service reports 2,483 homes sold in May, a decline of 7.4 percent from a year earlier.’

‘More houses are coming on the market, which may begin to ease the inventory crunch and further cool prices. Homeowners newly listed more than 4,000 homes in May, 9 percent more than the same month a year ago.’

Comment by mikeinbend
2014-06-20 13:33:45

Same thing happened last time; prices went up even though sales slowed, like about 2006. In another year its going to be tough to sell I think.
Prices in Prineville have gone from $90/sq ft. last year to $150 this year. Don’t know about sales volume but I suspect it will be declining even as prices continue to rise for awhile.
Then, hopefully, crater! Just like in 2007.

Last year Hayden Homes was advertising starter homes from $99,900.
This year same billboard, but from $180,000.
And he’s done built out this particular subdivision and on the prowl for more pre-prepped lots.
I know the guy who landscapes the lots and he says this year will largely put his kids through college.

Comment by Housing Analyst
2014-06-21 08:05:01

And not a buyer in sight……. Except for one foolish individual.

Comment by Ben Jones
2014-06-20 07:16:55

‘Two vacant Portland homes have caught fire in two days and investigators suspect squatters may be behind both incidents. Firefighters worry they’ll continue seeing more fires caused by squatters living in vacant or abandoned homes. There are about 7,526 vacant residential units in the city, according to the Portland Housing Bureau.’

‘Richard Leverenze lives across from the Malden Street home that caught fire Tuesday. He said he’s lost track of how many times he has called to report squatters.’

“We’ve called them so much that we’re a nuisance now,” he said. “So you don’t want to call anymore because now you’re a nuisance. I mean it’s terrible. You’re in a Catch-22 here.”

Comment by Ben Jones
2014-06-20 07:18:55

‘It was a slow month for housing sales in Northern Virginia last month, and prices for the most part were lower than a year ago. The median sales price in Alexandria last month was down 9 percent from a year ago. Loudoun County saw median prices that were down 1 percent from a year earlier.’

‘Fairfax County saw no change in median prices, but Fairfax also saw the biggest drop in sales, down 22 percent from a year earlier. All five Northern Virginia counties saw a double-digit decline in year-over-year sales.’

‘There is also a whole lot more for potential buyers to look at. Inventory is up by double-digits throughout Northern Virginia with the biggest increase in Loudoun County. There are more than 2,000 residential listings in Loudoun right now, up 31 percent from a year ago.’

Comment by Ben Jones
2014-06-20 07:23:28

‘German Finance Minister Wolfgang Schaeuble warned in the clearest terms yet about the risks of loose monetary policy for Europe’s largest economy, saying low interest rates were already spawning “dangerous” rises in domestic property prices.’

‘Schaeuble has long warned about the threat of speculative bubbles forming as a result of excess liquidity, but his comments went beyond his usual line that low rates must correct higher over time. They come two weeks after the European Central Bank (ECB) cut interest rates to record lows to ward off deflation and kick-start growth in sluggish southern euro states.’

‘The move sparked criticism from conservative German economists, the media and even some allies of Chancellor Angela Merkel, who worry that the bank’s one-size-fits-all policy carries risks for the steadily growing German economy, even if it hasn’t sparked inflation here.’

“In the long run, the amount of liquidity is too great and the level of interest rates too low,” said Schaeuble.’

‘Asked about warnings from the Bundesbank that the low rate environment risked creating asset price bubbles, Schaeuble said there were signs a rise in German property prices was reaching “dangerous” levels and this needed to be taken “very seriously”.

Comment by Ben Jones
2014-06-20 07:25:58

‘The U.S. Senate finally confirmed former Bank of Israel governor Stanley Fischer as vice chairman of the Federal Reserve on Thursday. As the second-most influential Fed board member, Fischer will play a key role in advising and assisting Fed chairwoman Janet Yellen. While many in the international economics community cheer Stanley Fischer’s appointment to the Fed, I view it as a disaster waiting to happen because of his role as the main architect of Israel’s little-known and still-unpopped bubble economy.’

‘Contrary to popular belief, Israel’s so-called economic strength is the byproduct of a temporary economic bubble that Fischer helped to inflate rather than the result of sound and sustainable monetary policies. Stanley Fischer is a member of the New Keynesian school of economics – a group that is notorious for using incredibly stimulative monetary policies (also known as “money printing”) to create artificial economic growth, while virtually ignoring the existence of obvious economic bubbles and the risks of monetary policy-induced inflation.’

‘During his tenure as governor of the Bank of Israel from 2005 to 2013, Stanley Fischer’s New Keynesian policies caused the country’s M1 money supply to surge by an astounding 250 percent.’

Comment by Guillotine Renovator
2014-06-20 12:32:54

Bankers love bubbles.

Comment by snake charmer
2014-06-20 07:30:57

From a realtor in Colombia. The Poblado neighborhood is an upper-class enclave in Medellin. According to the writer, it’s different here!

“Also as much as people like to hate on Poblado, it has a very durable, long-term competitive advantage for investors in Medellin. One hundred years ago, Poblado is where wealthy farmers and their families lived in Medellin. Poblado is where Nel Rodriguez chose to build El Castillo, perhaps the finest and most famous home (now museum) ever built in Medellin. Poblado is where the first residential high-rise apartments were built in the 70s, first 5-star hotels in the 90s/2000s, where the best restaurants of yesterday and today are located, etc., etc,. And now that Poblado is basically “done” in terms of new development/supply able to hit the market, there is a solid floor under prices by definition of supply and demand. Investors, I predict should continue to see consistent 4-6+% CAGR in top line prices, and 8-10+% yields/cap rates continue for the foreseeable future like we’ve seen for the last 15+ years and will be insulated from any global economic shock, recession or depression that might affect Colombia like the rest of the planet.”


Comment by Ben Jones
2014-06-20 07:31:00

‘Queen’s University professor John Andrew is as puzzled as any observer trying to interpret the dynamics in Toronto’s real estate market. Runaway house prices, he notes, are simply incongruent with stagnating sales. “I’ve been perplexed about that for a couple of years.”

‘Prof. Andrew is director of the Executive Seminars on Corporate and Investment Real Estate at Queen’s. Among his teaching duties, he lectures in Queen’s School of Business. A sudden burst of activity last month led to the strongest May on record, he notes, but the broader trend in Canada has been a gentle downturn.’

‘Prof. Andrew believes that if the federal government were to force banks to take on more responsibility, “it would immediately be passed on to consumers.” Such a change would discourage many potential buyers, he says. “That could have a hugely chilling effect on the market.”

‘Prof. Andrew says the federal government is in a tight spot. Increasing the minimum down payment required for mortage insurance would also serve to take some steam out of the market, but home builders are lobbying tremendously hard against such a move. “I think they’re terrified to increase the minimum down payment.”

‘His “biggest fear,” he adds, is that rates eventually rise – prompting a lot of homeowners to try to sell at the same time as they watch the value of their asset decline.’

‘If you’re in your house for the long haul, it doesn’t matter if rates rise or values fall, the professor points out – unless the mortgage comes up for renewal at a rate the owner can’t afford or doesn’t want to pay. “They’ll scale back in 100 ways to not lose their home.”

‘That risk is highest in the condo market, he adds, because those owners tend to be investors. “If it’s an investment, then it’s easy to cut and run.”

‘As the average selling price approaches the $1-million mark for a detached house in Toronto’s 416 area code, Prof. Andrew says the milestone – if it is reached – won’t have a big impact on the market. If there is a flurry of attention, that may draw some foreign investment, he says, but over all he expects the impact would be small. “Vancouver passed that a while ago. We don’t want to overstate the psychology because it had little impact in Vancouver.”

Comment by snake charmer
2014-06-20 07:51:04

We are totally in the grip of a failed ideology, and know it. Where do people like this guy come from? More importantly, why do they remain as political, economic, or thought leaders?

I read something from Taleb the other day, and he made an interesting point: we talk a lot about allowing for upward mobility based on demonstrated merit, but we also need a reciprocal degree of downward mobility based on proven lack of merit. Both dynamics are becoming relics.

Comment by Whac-A-Bubble™
2014-06-20 07:33:44

Kenneth Rapoza
I cover Brazil, Russia, India & China.
Investing 6/19/2014 @ 10:01AM
No Violent Pop As China Housing Bubble Continues Deflating

You have to hand it to the Chinese government. They are quite good at managing controlled demolitions. The housing market, roaring for at least five years as both a result of rising wages, and speculation by Chinese investors, is cooling.

On Thursday, that 35 out of the 70 cities it tracks reported monthly price declines for new homes. That’s up from 8 declines in April. According to NBS, prices in 15 cities were flat but new home prices in 20 cities did see price growth from April. The figures exclude government-subsidized homes.

The average price of new houses in the 70 cities, including government-funded affordable housing, meanwhile, dipped 0.2 percent in May, the first month-on-month decrease since June 2012.

Shanghai remains the most expensive city on the mainland. Home prices there increased 11.3% from a year earlier, the most in the country. It was the seventh straight month the city led the nation.

In the existing home market, NBS said prices in 35 of the 70 cities it tracks fell last month, while 19 registered gains. On an annual basis, gains were recorded in 64 cities.

Comment by Ben Jones
2014-06-20 07:45:23

‘Property developers have begun to reduce prices in the hope of reviving sluggish sales to prevent potential breaks in their capital chain. New homes built on land near Asian Games Town in south China’s Guangzhou City, the country’s most expensive land in 2010, were sold with up to 30 percent discount last week as the developer hurried to recoup cash to keep the company afloat.’

‘The grim climate has even influenced the country’s first-tier cities, which were believed as exceptions of the overall downturn and would continue the rising momentum this year driven by housing demand from new urbanites.’

‘New home prices in four megacities performed unexpectedly weak in May. Prices in Shanghai and south China’s Shenzhen cities fell 0.3 percent and 0.2 percent month on month respectively. The price change bucked the situation in April when all four cities maintained price growth and broke the usual belief that housing prices in megacities were unlikely to fall as there were always migrants seeking for places to settle down.’

‘Ma Guangyuan, director of the Private Economy Research Center under Renmin University, said the volatile price change indicated a turning point in the country’s real estate industry. His words were shared with Zhang Dawei, chief analyst at real estate agent Centaline Property, who said the faster-than-expected change in the property market suggests an incoming adjustment that will occur not only in small- and medium-sized cities but first-tier ones as well.’

‘Zhang predicts the adjustment will exert profound and lasting influence on the sector amid the dented market confidence. Chang Jian, chief China economist at Barclays, expects the cyclical adjustment to continue into 2015 as the sector has already been sizzled by overbuilding and increased developer leverage.’

Comment by Ben Jones
2014-06-20 07:50:55

‘The shadow banking has definitely increased financing costs of developers but what is more worrisome is that it is unknown how large the shadow banking is.’

‘Qin Hong, director of the Policy Study Center of the Ministry of Housing and Urban-Rural Development, said that as long as China does not use zero or low down payment policies and not enlarge leverage and deter speculation needs, property finance will not trigger systematic risks.’

‘However, Shanghai-listed Shoukai Property Development Company Limited has rolled out a “zero down payment, zero monthly payment, zero interest rate” policy to promote its new apartments priced at 20,000 yuan per square meter in Tongzhou district of Beijing.’

‘Souofun.com, a major property information provider posted this information on Monday. The “zero down payment” is only for one person, the subscriber of any apartment who wins the drawing when the company kicks off its sales opening ceremony. In fact, Shoukai will pay the down payment for the winner. The “zero monthly payment” is for three people who submit their intention for home-purchasing and also win a lot and Shoukai will pay for them. The “zero interest rate” is for all first-time home buyers, who buy from Shoukai, who will also pay this sum of money.’

‘The “zero down payment, zero monthly payment, zero interest rate” type of promotion may well tell the story of Chinese developers and People’s Daily also asked whether there are still opportunities in this industry.’

‘There are still opportunities in the real estate sector, Yu Liang, president of Vanke Group, one of China’s major developers. Although the real estate industry is past its golden era where everybody could pick gold and has now entered the silver era, but silver is still precious metal, Yu said.’

‘However, according to the Sina.com survey, 11,347 respondents voted no when answering the question “do you think properties are still good investment targets”, accounting for 77 percent of all the respondents.’

The REIC could learn a thing or two from these guys:

‘zero down payment, zero monthly payment, zero interest rate” type of promotion may well tell the story of Chinese developers’

On this:

‘the real estate industry is past its golden era where everybody could pick gold and has now entered the silver era, but silver is still precious metal’

Got copper? Oh yeah, they’ve got lots of copper!

Comment by Dguy
2014-06-20 10:08:10

‘Qin Hong, director of the Policy Study Center of the Ministry of Housing and Urban-Rural Development, said that as long as China does not use zero or low down payment policies and not enlarge leverage and deter speculation needs, property finance will not trigger systematic risks.’

Unlike here, the systemic risks won’t come from the individual buyers not paying back bank loans; most of them paid with hard earned savings, most of which will soon be lost. The systemic risk will come from the symbiotic relationship between developers and local governments, and the whole shadow banking sector based on lies and wishful thinking. The real estate bubble popping will be just a precursor of the gigantic credit bubble explosion that will follow.

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Comment by Dguy
2014-06-20 10:00:17

“You have to hand it to the Chinese government. They are quite good at managing controlled demolitions. The housing market, roaring for at least five years as both a result of rising wages, and speculation by Chinese investors, is cooling.”

Is this guy praising the Chinese government because the pin hasn’t quite popped the bubble yet? Let’s see how the Chinese government does when tens of millions of people see their life savings flushed down the real estate toilet.

Comment by Ben Jones
2014-06-20 07:34:09

‘It was just last year that Abdul was about to lose his one-family Ozone Park property to the bank. A 60-year-old bus driver, Abdul bought the house back in 1998 and had been paying his monthly mortgage regularly until 2010. That year, his wife had a terrible traffic accident and the family fell behind on the bank payments.’

‘Two incomes became one, and the family had trouble paying its bills. Fortunately, Abdul, with the help of Queens Legal Services, was able to save his house under a 2009 law that requires banks to have mandatory conferences with homeowners to work out settlements in a courtroom.’

“The bank gave me a really hard time,” said the homeowner, who asked that his last name not be published. “I though I was going to lose my house.”

‘According to the New York Unified Court System, 91,522 of these settlement conferences took place in New York City between October 2012 and October 2013. Of those, just 10,346 ended in foreclosure.’

‘On June 11, the state Assembly voted 56-1 to renew the law, which has saved the homes of thousands of New Yorkers.’

A comment:

‘I can understand Abdul’s case. It sucks that someone is thrown out of their homes due to accidents. However, many people in this city is living way above their means. If you just bought a house that you could afford, then this would not happen. Unfortunately, there will always be people coming into.NYC buying houses that they can not afford and Then they scramble to change their one family home into a two family home - legally and illegally. These two family homes are putting a strain on city services like garbage collection and schools. Even when these homes get foreclosed, sure enough a developer will be right behind them bidding on those homes just to sell it off to the next sucker who wants to live above their means.’

Comment by aNYCdj
2014-06-20 22:07:36

Or a 2 fam into a 3 making an illegal basement apartment…then jacking up the price to unsuspecting buyers…so they need 3 rents to pay the mortgage…

There is a house like that up the street so I bad mouth the house outside during their open houses…its $150K over priced but if it was a Legal 3 family it would still be priced high….funny almost all the potential buyers are asian……and their culture is to toss out the deadbeat tenants, ooh i can smell a big lawsuit waiting to happen.

Then they scramble to change their one family home into a two family home - legally and illegally.

PS strange quirk in NYC housing law the owner or his family can live in the illegal 3 rd apartment but it cant be rented to the public.

Comment by Ben Jones
2014-06-20 07:40:05

‘Airbnb calls its hosts “home sharers” and spins folksy tales of regular people who make ends meet by occasionally “sharing” (for money) their home.’

‘In a deep dive into Airbnb data in San Francisco, The Chronicle found several contradictions to this just-plain-folks narrative. Almost two-thirds of local listings are entire homes or apartments, while about a third are offered by people who control multiple listings, for instance.’

‘Anecdotal reports in San Francisco say that some hosts are removing their listings, fearful of retribution from landlords for violating their leases, or from the city for flouting a local ban on short-term rentals. Slee found that 2,701 San Francisco Airbnb listings from November had vanished. While 1,945 new listings popped up, that resulted in a net loss of 756 places for rent.’

‘The churn brings Airbnb’s massive $10 billion valuation into question. Could the company hit a wall for growth?’

‘In another post, Slee looked at listings in 18 cities worldwide to see if Airbnb’s business is based on “regular people” who occasionally share a spare room, as the company frequently asserts. His findings were quite similar to The Chronicle’s report on San Francisco. “It turns out there is an element of wishful thinking in the (self) portraits of Airbnb,” he wrote.’

Comment by snake charmer
2014-06-20 07:57:42

I’m still of the belief that Airbnb will be the Pets.com or Webvan of this decade. Plus, I’m not happy about the commercial appropriation of the word “sharing.” We’ve really seen the deformation of language in our era, much like Orwell predicted.

Comment by iftheshoefits
2014-06-20 08:05:38

I looked at it briefly once, thinking maybe something might work out for an extended stay unit in an area we’re considering relocating to. Everything I saw was listed at wishing prices.

There have been adequate internet sources for renting individual vacation-type units for a good while now. I don’t see what all the fuss is about in this particular case.

Comment by Ben Jones
2014-06-20 09:10:17

‘I don’t see what all the fuss is about’

Wall Street and the venture guys can’t make any money on Craigslist. They have to find a “new thing” to hype and sell.

I worked for a dotcom back during the original tech mania. I eventually saw the model. The founders only want to sell to “angel” investors. This second group just wants to take it public, selling to the public. Nobody had much interest in generating a profit of building a self-sustaining company. Then every one wonders why so many lose their a** in the end.

That was an era of artificially low interest rates and mad money creation too.

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Comment by Ben Jones
2014-06-20 08:08:42

Boatloads of printed money have made people greedy and foolish, again. And as usual, much of it gravitated to the bay arean’s.


Market Cap: 22.16B

EPS (ttm): -2.50

Div & Yield: N/A (N/A)

You know there was a day when you had to actually make something at a profit to be on a stock exchange.

Comment by azdude
2014-06-20 11:35:15

lmao These stocks will crash to the earth soon. garbage

I heard go daddy was going to have an IPO.

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Comment by Ben Jones
2014-06-20 07:57:49

‘Economist Richard Koo diagnosed Japan’s crash in the early 1990s and subsequent two decades of economic malaise as a “balance-sheet recession.” That conclusion wasn’t lost on the Federal Reserve during the financial crisis of 2008-09. The Fed engineered an emergency response to craft what can best be described as a balance-sheet recovery.’

‘At its policy meeting earlier this week, the Fed made clear that it’s scarred, if no longer scared, by the crisis. Extraordinarily loose monetary policy will continue in force. While the Fed’s monthly asset purchases will decline, short-term interest rates will remain pinned near zero. And long-term rates need not move higher—the Fed assures us—even with improving inflation dynamics, credit markets priced-for-perfection, and stock prices at record levels.’

‘The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That’s more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed’s unrelenting balance-sheet recovery strategy.’

‘Yet it provides little solace for families and small businesses that must rely on their income statements to pay the bills. About half of American households do not own any stocks and more than one-third don’t own a residence. Never mind the retirees who are straining to make the most of their golden years on bond returns.’

‘The share of the working-age population out of work is now at a 36-year low. There are now more Americans on disability insurance than are working in construction and education, combined.’

Comment by Prime_Is_Contained
2014-06-21 04:42:11

‘The share of the working-age population out of work is now at a 36-year low.

Huh? My understanding is that the participation rate is still very low—e.g. the share of the population out of work is still very high, not at a 36-year low.

Comment by Ben Jones
2014-06-20 08:00:46

‘Kathleen Tarr says AT&T Inc. employees looked to her as “their de facto 401(k) expert.” Visiting their homes and offices, she advised them on their retirement plans as they called up balances on computer screens.’

‘Actually, Tarr worked for Royal Alliance Associates, a brokerage firm owned by insurer American International Group Inc. She encouraged hundreds of departing AT&T employees to roll over their retirement money into the kind of risky high-commission investments that Wall Street’s self-regulatory agency warns against on its website.’

‘Tarr and her business partner reaped hundreds of thousands of dollars a year in commissions and trips to the Bahamas and Florida resorts. Not all of her clients fared as well, and 37 of them have filed complaints against her, according to Financial Industry Regulatory Authority records.’

“It’s scary,” said Maria Lew, a former AT&T administrative assistant and Tarr client whose account balance has fallen to $100,000 from $390,000. She fears she will lose her home, and her kitchen ceiling has a gaping hole because of a leak that will strain her budget to fix. “There are days when I go to sleep and I can’t stop thinking about it.”

Comment by Housing Analyst
2014-06-20 08:26:27

IF you can find a buyer, dump your depreciating house now because you won’t be able to sell it at any price later.

Comment by mikeinbend
2014-06-20 14:55:24

Same thing you said last year.

Prices have skyrocketed since. House I found a buyer for last year @125k is on market for 204k this year. Maybe no one will buy it but it sure got more expensive in the face of your stopped clock predictions.

Sure they will fall again; but you have no idea when!

Comment by Housing Analyst
2014-06-20 15:27:57

Another old housing trollname shows up, same daily HBB troller. What a coincidence.

Just a reminder trollholio; I can ask $50k prices for my 15 year old Chevy truck but nobody is dumb enough to go for it. You might be a good candidate though. And prices are falling again.

Deal with it.

Comment by doom
2014-06-20 18:11:06

People are dumb enough at the Barrett Jackson Auction every

year. Maybe you should try your luck at selling the old Lady

truck this Jan. who knows, maybe you get 50k and you can

put it down on a place to live?

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Comment by Housing Analyst
2014-06-20 18:17:54

This has nothing to do with me kiddo.

Comment by mikeinbend
2014-06-20 19:55:06

You are paranoid. I am amused to still get a rise out of ya. Yes they are transacting homes at obscene prices here in Bend but I am posting here first time in months
No coincidence; I’ve been reading but not posting.

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Comment by Housing Analyst
2014-06-21 10:05:26

And you’re a liar.

Nothing is selling in Oregon. You know it and so do we so why lie?

Comment by Prime_Is_Contained
2014-06-21 04:47:01

Another old housing trollname shows up, same daily HBB troller. What a coincidence.

HA, you really need to go back on your meds; mikeinbend is clearly not the same person as the trolls that you joust with on a daily basis. Or at least, that is clear to the rest of us long-term readers. He has been around a long time, has offered up lots of unique personal info, and even has a unique writing style.

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Comment by Housing Analyst
2014-06-21 08:06:28

And a yakking fool appears pretending to know what’s going on.

Comment by Prime_Is_Contained
2014-06-21 09:50:44

And you probably think I’m the same poster as well—you did accuse me of that at some point in the past. LOL… :-)

Comment by Housing Analyst
2014-06-21 10:03:27

And you continue to yak away.

Comment by Prime_Is_Contained
2014-06-21 11:29:25

And you continue to yak away.

Quoth he with the most yak to offer… And likely the least original content per post, given your propensity to cut-and-paste your own posts.

I think I’ll start calling you Ditto, or just ‘D’ for short.

Comment by Housing Analyst
2014-06-21 12:16:53

And you’re still pretending.

Comment by doom
2014-06-20 18:05:56

Gosh you are always full of hope and cheer(?). Do you anticipate

anything getting better in this country, or were you born negative?

Comment by Housing Analyst
2014-06-20 18:16:46

Pick yourself up off the floor and cheer up.

And remember….. Falling housing prices to dramatically lower and more affordable levels is positively bullish and good for the economy.

Comment by mikeinbend
2014-06-20 19:50:57

Housing ANAListholio
just pointing out that when you said “Sell now before you cant find any buyers at any price” LAST YEAR, I bit and sold my home. Now they are going for more even though I believed you. I don’t hate you for that; I have moved on and am into something else now.
BUT….in your timing you were wrong! HA HA

People are buying at the wishing prices; I and you wish they would stop but not just yet.
We are at the point that volume is decreasing but prices are still increasing IMO. Crater around the corner, but not last year.

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Comment by Housing Analyst
2014-06-21 04:26:48

Wrong again victim. Housing demand is collapsing and has been.

Comment by Doom
2014-06-21 06:46:37

Buyers are on the sidelines waiting for 2008-2009 to happen again? Big difference this time around, sellers are making their payments and are willing to wait it out, even if they break even they will be satisfied. But the days of 20 to 60% drop is over.

Buyers have to make a decision wait and pay 5 to 6% for a mortage or buy now at low 4% and jump in, the answer is clear, buyers who wait are going to get hosed early to mid 2015.

Buyers ask yourself this, a home is 400k at 4.25%, you offer let’s say 375k, what is better for you, wishing the 400k house goes down to 275k ( not going to happen) at 5.5% next year or buy this home at a guaranteed rate now?

Comment by Housing Analyst
2014-06-21 08:08:35

There are no buyers. That’s why housing demand has collapsed to 19 lows….. And falling.

Why buy when prices are falling again? Buy later after prices bottom for 70% less.

Comment by Prime_Is_Contained
2014-06-21 11:27:17

Buyers ask yourself this, a home is 400k at 4.25%, you offer let’s say 375k, what is better for you, wishing the 400k house goes down to 275k ( not going to happen) at 5.5% next year or buy this home at a guaranteed rate now?

Think I would prefer to pay the $275K with all of the cash that I have saved up by renting for only HALF the price of buying for the past decade.

Comment by Ben Jones
2014-06-20 08:46:54

‘There was a boom in luxury condo construction in Canada’s most populous city roughly five years ago, with buildings such as The Ritz-Carlton, The Shangri-La, and Trump International Hotel and Tower bringing a new style of accommodation to the city, one that enabled residents to live much like hotel guests. Real estate observers were watching to see whether Toronto had enough of an appetite for high-end-life-in-the-sky to absorb the plethora of units that were built within the span of just a few years.’

‘Condos.ca Inc. president Carl Langschmidt and his team recently decided to visit the land registry office to see just how well these condos have done from a price perspective. And he says that prices have risen faster in the neighbourhoods around these buildings than they have in the buildings themselves. In many cases, units are selling for less now than they were sold for before the buildings were built. Blame the sudden abundance of supply.’

“When I first got into the business about 10 years ago, you could count the condos in Toronto that sold over $2-million on your fingers and toes,” he says.’

‘The fees for a 3,273 square foot condo in the Trump Tower are $3,040 per month, and that building charges an additional $450 per month for parking, Langschmidt’s team says. ‘

Comment by Housing Analyst
2014-06-20 08:54:45

Fairfax, VA (DC Metro) Housing Demand Evaporates As Inventory Explodes 89%- Prices Slide 14% YoY


Comment by Ben Jones
2014-06-20 09:28:57

‘For years, close observers of the financial crisis wondered why mortgage bond investors never stood up for themselves and demanded sufficient restitution from the banks who swindled them. Investors purchased trillions in mortgage-backed securities that the sellers knew were fraudulent, yet they never made a full-throttle effort to get their money back.’

‘While homeowners were difficult to organize and had limited resources, the biggest institutional investors had deep pockets, and binding contracts that allowed them to recoup most of their losses if the mortgages they purchased did not meet prescribed underwriting standards. A mountain of evidence shows that, in fact, they didn’t: A recent Federal Housing Finance Agency Inspector General’s probe found errors in “almost every” mortgage bond deal examined.’

‘Now, at long last, the other shoe has begun to drop. An investor group led by Pimco and BlackRock, two of the largest bondholders in the world, sued six trustee banks in New York Supreme Court on Wednesday, opening up a new front in the war over who will bear the losses from the housing bubble’s collapse.’

‘While the trustee banks had obligations to defend investors, they also had large conflicts of interest that prevented them from fulfilling their role. These large global mega-banks did business with all the bond issuers, and did not want to jeopardize that by forcing repurchases on them. Moreover, some trustees, like Citi and Wells Fargo, were divisions of banks that also issued bonds, and they wouldn’t want to set any precedents on absorbing losses that would affect their bank’s bottom line. The trustees aligned with the “sell-side,” the bond issuers, over the “buy side,” the investors.’

Comment by Ben Jones
2014-06-20 09:32:22

‘This week, 11 Silicon Valley mayors including Millbrae Vice Mayor Robert Gottschalk will be traveling to China as part of the organized China Opportunities Silicon Valley trip. This will be the second trip to China a Millbrae representative will be taking since the past November 2014 sister city trip. The purpose of this trip is primarily to establish contacts in China for potential investment opportunities.’

‘There are many domestic problems in Millbrae that warrant full attention such as projected $13 million budget gap across funds. The budget was a major issue in several of the prior elections, and still the City Council has not found an effective solution; this is the greater problem our city should be focusing on. The City Council is doing us a disservice by pandering overseas instead of serving the residents who voted for them.’

‘The National Association of Realtors reports that cash buyers of property made up a record 42.7 percent of all sales in the first quarter of 2014. It is reported in Irvine, California, that 80 percent of all sales are cash purchases by foreign buyers from China. This is not a small amount of the buying pool or even close to an example of a traditional housing market.’

‘What most Millbrae residents do not know is the significant amount of real estate and condominium complexes are being purchased primarily for investment purposes by foreign buyers from China.’

‘This phenomenon has created an enormous housing bubble in San Mateo County and contributes to speculative housing prices and the rental crisis affecting the entire Bay Area. Our local government officials appear to be more interesting in flirting with rich investors overseas and creating a plutocracy in San Mateo County rather than provide opportunities for the existing residents to thrive.’

‘The Examiner reported that in June 2013 alone that the county shed more than 7,000 middle- and low-income households during the five years prior, while the affluent ones grew by more than 10,000.’

Comment by Ben Jones
2014-06-20 09:49:13

‘The stringent housing loan policy by Bank Negara Malaysia (BNM) is among the factors that make it difficult for developers to sell the Bumiputera housing quota units, leading to a glut in such units especially in this state.’

‘The Real Estate and Housing Developers’ Association (Rehda) Melaka chairman Datuk Anthony Adam Cho Tian Han said the policy also indirectly restricted the Bumiputera buyers in the middle-income group earning between RM2,000 and RM5,000 a month from owning the unsold Bumiputera housing units which are priced at RM250,000 and above.’

‘The three-day expo beginning today is participated by 27 property developers promoting 4,223 properties in Malacca, Negeri Sembilan and Penang worth over RM1.7 billion. Cho said the unsold Bumiputera quota units had caused developers to incur losses and they were not able to continue undertaking new projects in the state over the next few years.’

‘According to him, a total of 2,820 Bumiputera housing units worth close to RM1 billion were unsold in Malacca up to March 31, 2014.’

OK, so it ‘restricted the buyers in the middle-income group earning between RM2,000 and RM5,000 a month from owning the unsold Bumiputera housing units which are priced at RM250,000 and above’. Sounds like they are keeping people necks out of a noose.

Comment by Prime_Is_Contained
2014-06-21 05:39:12

RM2,000 and RM5,000 a month

If I’m doing the math right, that’s roughly 4x-10x annual income…

Comment by Albuquerquedan
2014-06-20 11:03:30

Unlike America where excess debt is encouraged, China is actually trying to discourage it:

Updated: 2014-06-20 10:26
Chinese iron ore traders are being starved of credit by banks reining in loan approvals and curbing letters of credit, industry sources and bankers say, as a clampdown on financing deals in the world’s top consumer of commodities gathers force.

The moves come after China’s banking regulator has urged more checks on iron ore financing deals to cut default risks and amid an official probe into a suspected metal financing fraud in Qingdao port. They also come as the steelmaking raw material’s prices have tumbled and port inventories are near record levels.

The funding squeeze may force small traders to sell their stocks and pressure already weak prices. Iron ore .IO62-CNI=SI has tumbled nearly 33 percent this year, hitting a 21-month low below $90 a tonne on June 16, stoking banks’ concern that smaller traders may fail to repay trade loans.

“Tighter credit will exacerbate the oversupply situation in the market and will send iron ore prices even lower. The next level I’m looking at is $80,” said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.

The Qingdao port investigation further underscores lenders’ jitters over commodities financing. While the probe is centered on deals involving copper and aluminium, it could spread to iron ore, industry sources say.

Chinese banks, the major lenders to the iron ore trade, have over the past two months raised their scrutiny of iron ore financing across the country, including in Shandong - one of China’s top trading hubs for the raw material - financial centre Shanghai and top steel-producing Hebei province, traders said.

Local branches of Bank of China (BOC) in Shandong province, for instance, have been required to submit all requests for issuing L/Cs to the provincial-level office for approval, while the provincial office has almost stopped lending to small firms, four traders in the region said.

“It is very troublesome and time-consuming getting L/Cs from Bank of China now and we basically have stopped trying,” said an iron ore trader based in Shandong, adding traders who had failed to get credit had sold off iron ore stocks.

“Many iron ore traders will be wiped out this year and next due to the cut-off in credit.”

Another trader said his company had failed to obtain an L/C from BOC’s Shandong branch to book one cargo in May. The bank had “actually halted issuing L/Cs to small traders”, he said.

A Bank of China spokeswoman did not reply to emails requesting comments. The Shandong provincial branch of the bank could not be reached for comment.


Commodities such as copper, rubber and soybeans have been commonly used in China for financing, where traders or investors borrow against the commodity with the aim of investing the money in high-return areas in real estate or shadow banking.

Banks have been gradually cutting back loans to the steel sector since late last year, encouraging firms to increase iron ore imports as a way of getting financing.

Some banks are now requiring traders to secure buyers before they are granted L/Cs, and many have also increased the margins that importers must deposit at banks to 40-50 percent from 10-20 percent previously.

“We have currently stopped issuing new loans (for commodity financing) and are trying to get existing loans back. We’ve also stepped up internal supervision,” said an official at China Construction Bank, who declined to be identified because he is not allowed to speak to media.

It was not immediately clear whether other state-owned banks in China had tightened approvals or had stopped issuing L/Cs.

Calls to a media representative of China Construction Bank were not answered, while a representative of Industrial and Commercial Bank of China did not respond to queries on the loan tightening measures.

Iron ore inventories at main ports were at a record 113.1 million tonnes at end-May, with about 34 percent owned by traders, according to data from industry consultancy Umetal. Inventories stood slightly lower at 112.5 million on June 13.

There is no official data on how much iron ore has been tied up in financing deals, but industry sources are concerned that any delays or defaults could prompt even more banks to scale back on trade loans, dealing a further blow to traders who are already cash strapped.

“We believe the next step of iron ore’s transition will be a clearing out of excess inventory - a process that means purchasing activity needs to drop below real demand and is likely to result in near-term downside risk to prices,” Graeme Train, an analyst with Macquarie, said in a research note.

Others were optimistic. Citi said in a note iron ore at $90 a tonne will lead to significant production cutbacks in China and elsewhere, which should help “prevent any sustained declines below $90 per tonne for the remainder of 2014″

Comment by pazuzu
2014-06-20 16:49:22

“China is actually trying to discourage it:”

Too late.

Much. Too. Late.

Comment by Housing Analyst
Comment by Bluto
2014-06-20 22:32:07

Inexplicably the article on the humungous “keep Calm NO Bubble” sign did not have a picture…but it is worth seeing and there is a photo at
great wallpaper ;-)

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