The Housing Bubble

‘Without explanation, authorities in two Chinese cities have refused to issue approvals for transfers of apartments built by selected developers, including troubled Kaisa Group.’

‘Most analysts believe the extraordinary moves are related to Xi Jinping’s so-called anti-corruption campaign, but that explanation fails to explain certain crucial facts. There is reason to think there could be bankruptcy law factors behind the withholding of the approvals, which have unsettled markets in recent weeks.’

‘Late last year, Shenzhen began to withhold ordinary approvals and permits to Kaisa. Later, Kaisa in a December 21 filing with the Hong Kong Stock Exchange, disclosed that Shenzhen had blocked pre-sales at four of its projects.’

‘Then last week the Wall Street Journal reported that Hangzhou, in coastal Zhejiang province, blocked the sale of almost all the apartments in Kaisa’s 749-unit Xixi Puyuan project. The Journal, in a cryptic passage, raised the possibility that the projects of other developers in Hangzhou had also been affected.’

‘Moreover, Shenzhen has begun blocking the sales of at least five other builders. In the middle of last week, the city’s Urban Planning Land and Resources Commission stated that sales of 2,800 units constructed by China Overseas Land & Investment were blocked.’

‘Shenzhen has also stopped sales in projects of Rongchao Real Estate, Dong Dao Real Estate, and China Merchants Land. And Fantasia Holdings Group may now be under a partial sales ban with four units at Hua Xiang Garden listed as “restricted.”

‘Yet the corruption narrative, which is accepted by most observers, fails in one critical respect. It does not explain why the two cities are taking actions that punish innocent parties, the purchasers of units.’

‘Anne Stevenson-Yang of Beijing’s J Capital Research calls the anti-corruption narrative “all but irrelevant.” In an e-mail message last week, she suggests that Shenzhen stopped apartment sales to ensure that its own banks “are first in line when the cash is distributed.” Kaisa is already holding purchaser deposits, but until purchasers take title, their rights can be easily superseded by the developer’s bank creditors.’

‘Stevenson-Yang’s theory is consistent with reports that Shenzhen banks have asked courts to freeze Kaisa’s assets. It appears that, in response to the banks’ move, more than $100 million of the developer’s assets have been judicially locked down.’

‘This bankruptcy law theory, unlike the one about Xi’s corruption campaign, takes into account why that city has been willing to risk social unrest by prejudicing the rights of thousands of prospective homeowners. Hundreds of purchasers flooded a Kaisa office on Tuesday to demand that the Shenzhen government allow the sales to go through.’

‘For China’s shipyards, the oil rig market that was supposed to be a blessing is in danger of becoming a curse. As crude prices slide, oil producers are slashing new project spending. With a near 40 percent slice of a global market worth tens of billions of dollars, Chinese rig builders that offered juicy financing terms and discounts to leapfrog Asian rivals in recent years are now the most exposed to a slowdown.’

‘Chinese yards are scheduled to supply 37 new ‘jackup’ rigs - used in shallow-water exploration - this year, according to Nomura research, none of which has contracted customers to date. The most widely used drilling platforms, a jackup rig typically carries a price tag of around $200 million.’

“We’re having a big headache because there are no orders,” said an official at a large state-backed Chinese shipyard, speaking condition of anonymity. He cited a lack of rig order enquiries for the year 2016 and beyond.’

‘Earlier this month, COSCO Corp, one of China’s biggest shipyards, said it has decided to terminate building an offshore platform known as Octabuoy after failing to find buyers.’

‘China became the world’s biggest offshore drilling rig builder after rapid expansion led by the likes of state-backed yards China Merchants Heavy Industry, Dalian Shipbuilding, a unit of China Shipbuilding Industry Corp , and Shanghai Waigaoqiao, a subsidiary of China CSSC Holdings Ltd’

‘But their jackup rig market share gains from traditional powerhouses in Singapore came at a financial cost. “The Chinese yards are the main culprit (of speculative rig buildup)…Even if crude oil prices are to recover as expected, we expect new-build jackup rig orders to be subdued in 2015″ with considerable inventory of already made rigs available, Nomura analyst Wee Lee Chong said in a report earlier this month.’

‘So what’s the story with copper now? Like many commodities, it has taken a severe beating. The current spot price, $2.57 per pound is nearly 45% below the 2011 high of about $4.50. In just the early days of 2015, the red metal has fallen more than 10%. That’s a big move in commodities markets.’

‘Probably the biggest drag on copper right now is slowing demand from China, the world’s top user of the red metal with 40%-to-45% of total global consumption. Although still expanding at faster rate than other economies, China’s economy is beginning to cool, prompting analysts to estimate that China’s copper requirements will only rise by about 5% this year, down from 7% in 2014.’

‘Such estimates incorporate factors like a downshift in manufacturing activity, as measured by China’s Purchasing Managers Index. A PMI greater than 50 indicates general expansion of manufacturing activity, while a below-50 reading suggests a general decline. The current reading, 50.1, is a one-year low and well under the decade peak of 63 achieved in 2005.’

‘China’s real estate market, in a major slump since May 2014, is weighing on copper, too. Simply put, lower property demand reduces the need for copper, which is used to make pipes, wiring, roofing materials and other building construction elements.’

“The cyclical collapse of oil prices is as predictable as death. We all know we are going to die. The only surprise is when.” — Former Alberta finance minister Ted Morton in the Globe and Mail.

‘Through Edmonton, a cold wind is blowing. Oil prices have plummeted to $48 a barrel. The provincial government has changed its budget projections from a $1.5-billion surplus to a $500-million deficit. Oil producers are starting to talk about layoffs.’

‘Alberta has seen the price of oil dive plenty of times before: in 1986, in 1998, in 2001, in 2008. Each time we wail and gnash our teeth and promise that next time, next time, we won’t piss away the boom. Yet each time we’re amazed when the good times screech to a halt.’

‘Yet for Alberta, there’s an additional wrinkle this time. Natural gas prices collapsed back in 2009 and have never recovered.’

Are house prices much different from these previous commodity busts?

‘From talk of a return to dorm-style housing camps to reduce labour costs, to pestering oilfield services to slash drilling rates, exploration and production companies are taking a very sharp knife to cut out excess in virtually every oilpatch operation.’

‘It all made for a sombre mood at an oilfield services investor conference this week in Toronto as companies adjust to the harsh realities of a sub-US$50 oil-price environment. “It is a very sobering and sombre time,” says Dana Benner, managing director, head of research, oilfield services, at AltaCorp. Capital Inc. on the sideline of his company’s conference.’

‘Speakers at the conference, held in conjunction with ATB Corporate Financial Service, talked extensively about the possibility of “deferred projects” and “lack of visibility” on outlook.’

“We will probably get into an environment where overall activity is going to be lower for several years,” says Trevor Haynes, president and chief executive officer of Black Diamond Ltd., which provides lodging facilities in the oil and gas sector’

‘Analysts believe the market is yet to absorb the full impact of sub-US$50 oil, especially as producers have been a bit slow to react to the prices, given the holiday season. “A lot of companies that were in growth mode only six months ago have had to quickly readjust their outlook for 2015. The E&Ps have been a bit behind the oilfield services in cutting,” AltaCorp.’s Mr. Benner said.’

‘Oilfield services will bear the brunt of that squeeze, as producers lean on providers to cut rates by as much as 20% in some cases. “There has been a number of cancellations. … Today you can’t get a two-day job,” Karl Rudd, CEO of Akita Drilling Ltd. said at the conference. “It obviously depends on what market you are in, but the independent market of people drilling resource-based plays and or marginal plays have literally shut the door. Q1 is going to be slower for everybody in Western Canada. Beyond that it is going to be bad.”

The Texas economy appears headed for a slowdown, state and economic experts say. Everything from job growth to tax collection to real estate sales are under downward economic pressure as lower oil prices spread across the United States and the world.’

‘No one is panicking, however, because the economy is helped by Texas’ steady population growth — about 1,000 people a day are moving to the state — and its stronger than expected real estate market. Texas was not as hard hit as other states by the housing crash during the recession.’

‘Still, energy-producing Texas could see job growth drop, cutting about 125,000 jobs across a variety of sectors this year.’

‘The housing sector also may lose speed. “It may start to slow down because of the price of oil,” said Jim Gaines, a research economist with the Real Estate Center at Texas A&M University. “It just depends how the market reacts to the decline of the oil prices. There is a psychological impact because people are thinking bad thoughts.”

‘Chinese shares chalked up their biggest one-day slide in nearly seven years on Monday after regulators there took steps to rein in speculative lending, while investors everywhere braced for what is shaping up to be a critical week in the euro zone.’

‘The Shanghai market and the CSI300 index of the largest listed companies in Shanghai and Shenzhen both plunged 7.7 percent, their biggest falls since June 2008. Adding to the air of caution was Sunday data showing Chinese new home prices in December fell an average 4.3 percent year-on-year in 68 of the 70 major cities monitored.’

‘While Canberrans are taking advantage of the flat property market to snap up existing homes faster than anywhere else in the nation, the demand is not yet generating new construction.’

‘Mr James said the Australian economy was still “in very good shape” when compared to other parts of the globe and had not slipped back since the end of the Global Financial Crisis.’

“You are talking about an economy that hasn’t contracted in 23 years,” he said. “At the moment we are transitioning from an economy that is driven by the mining sector to one that is driven by the housing sector.”

‘Fake windows are painted on the north side wall of a Economical Housing by developer in Qingdao, Shandong province of China.’

What a dump.

‘The $400 million of cumulative losses that Citigroup Inc., Deutsche Bank AG and Barclays Plc are said to have suffered from the Swiss central bank’s decision to end the cap on the franc may be followed by others in coming days.’

“The losses will be in the billions — they are still being tallied,” said Mark T. Williams, an executive-in-residence at Boston University specializing in risk management. “They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system.”

‘Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about $830 million in assets at the end of the year, after losing virtually all its money on the SNB’s decision, a person familiar with the firm said last week.’

‘FXCM Inc., the largest U.S. retail foreign-exchange broker, got a $300 million cash infusion from Leucadia National Corp. after warning that client losses threatened its compliance with capital rules. FXCM, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by customers.’

‘Shorting the franc was a popular trade and most firms would leverage their positions some 20 times or more, said Williams, who consults for hedge funds. With such leverage a 5 percent move against the position wipes out all the value, yet the trades were seen as relatively low-risk by models used by financial institutions because volatility of the franc was reduced by the SNB’s cap, he said.’

‘J.P. Morgan is the latest among Wall Street banks to downgrade oil & gas companies in Asia. The bank now sees that Brent crude can fall below $40 per barrel in the near-term, “should the oil market not be able to accommodate a 1.6mb/d surplus,” that Brent crude will average at only $49 per barrel this year and $56.8 next, and that the recovery will be a slow U-shape.’

‘Given these assumptions by J.P. Morgan’s commodities analysts, it is not surprising oil & gas equity analyst Scott L Darling and team downgraded PetroChina from Buy to Hold, CNOOC from Hold to Sell, and kept Sinopec at Hold.’

‘In China, we not only see weak demand, falling production due to global oil rout – which are well understood – but also falling refining margins and potential inventory write-downs, because the government is not helping’

‘Local governments are in unprecedentedly poor financial shape. They have already spent all of their money in their reckless housing investment cycle a few years ago. Many of them are deep in debt, so much so that a casual survey of the large empty towns they built can speak to their virtual recession. Some analysts have warned that some second- and third-tier cities may suffer double-digit negative growth this year.’

‘The financial state of perhaps half of Chinese cities is, interestingly enough, similar to the lives of the corrupt officials who cannot continue to use public funds but cannot even offer to resign from their posts, either. They have to remain where they are and wait for the central discipline officers to take them away for investigation.’

‘Those “problem cities” cannot continue to borrow - because banks don’t want to lend to them for their local government financial vehicles.’

‘They cannot issue local development bonds - firstly because none of China’s provincial-level governments has ever tried to do so, and secondly those cities’ credit rating levels would be risky because of their existing debt levels. They can’t find an easy solution to their debt problem.’

‘The value of housing transactions fell 31% year-on-year in Taiwan’s six municipalities in the first 11 months of last year, a real estate agent said Sunday, attributing the drop to tightened measures by the government to suppress rising property prices’

‘The transactions (excluding new houses) in Taipei, New Taipei, Taoyuan, Taichung, Tainan and Kaohsiung fell to NT$701.34 billion (US$22.29 billion) in the 11-month period in 2014, from the NT$1.165 trillion (US$37 billion) in the previous year, said Huang Shu-wei, a market researcher at Yung Ching Realty Group, one of the largest real estate agencies in Taiwan.’

‘In Taipei and New Taipei alone, housing transactions slumped by 34% to NT$422.13 billion (US$13.39 billion) in the first 11 months of 2014 from the NT$214.93 billion (US$6.82 billion) in the same period of the previous year, registering the largest drop among the six major cities, Huang said.’

‘The measures include conducting tax inspections on high-priced properties and imposing a so-called mansion tax and tax on people possessing more than three housing units. Furthermore, government-funded banks have taken strict measures to review housing loan applications in areas where housing transactions are overheated, he said.’

‘As a result, housing sales have cooled, leading the real estate transactions in Taipei and neighboring New Taipei in 2014 to fall to their lowest in 23 years, the manager of Yung Ching’s market research center said.’

‘The nosedive in international oil and gas prices has dealt a heavy blow to shale-oil/gas operations in North America, including many with Chinese capital, which are now attempting to keep their heads above water.’

‘The price plunge has taken some toll. For example, WBH Energy in the US recently announced bankruptcy in early 2015. Local analysts have also expressed concern over the fate of Chinese investors, including state and private enterprises, which had sunk capital topping US$30 billion in North American shale-oil/gas operations as of 2013, during the heyday of such operations, according to a study of Chen Dongwei, chief researcher at China National Offshore Oil Corp.’

YoY resale housing transaction data should be out this week. Expect many more areas to show negative prices YoY.

Sit tight.

williston,nd
midland ,tx

wow, it will make 10/1929 look tame

“Growing Threat Hangs Over Legacy Mortgage Bonds”

http://www.reuters.com/article/2015/01/16/fanniemae-rmbs-idUSL6N0UL2Q420150116

Given the growing delinquencies and defaults on 2010-2014 mortgages, imploding publicly traded builders, tsunami of excess empty housing inventory and falling prices, the legacy mortgage problems will seem like a walk in the park.

‘Even before noon Monday, trading in China’s biggest stockbrokers was halted in Shanghai because their own stocks had crashed by the daily limit of 10%. That’s the kind of day it was in China’s stock markets—or casinos, depending on your persuasion.’

‘The regulator also punished nine different brokerages for allowing unqualified traders to open leveraged accounts, Xinhua reported, which allow investors to borrow funds from their brokers to increase the size of their equity bets—sometimes by ratios of five-to-one.’

‘Loans for margin buying have almost tripled since the summer, reaching $170 billion by last week. Reports have said brokerages were lending to investors with just 50,000 yuan ($8,040) in their accounts, instead of the mandated 500,000.’

‘That the government plays a large role in China’s stock markets is a given. Shanghai’s 60% market rally since last summer could be timed, almost to the day, to when the state-run press began touting undervalued stocks to individual Chinese investors.’

This comes to mind:

“My dear friends,” said Oz, “I pray you not to speak of these little things. Think of me, and the terrible trouble I’m in at being found out.”

“Doesn’t anyone else know you’re a humbug?” asked Dorothy.’

“No one knows it but you four–and myself,” replied Oz. “I have fooled everyone so long that I thought I should never be found out. It was a great mistake my ever letting you into the Throne Room. Usually I will not see even my subjects, and so they believe I am something terrible.”

“But, I don’t understand,” said Dorothy, in bewilderment. “How was it that you appeared to me as a great Head?” “That was one of my tricks,” answered Oz.’

“I think you are a very bad man,” said Dorothy.’

“Oh, no, my dear; I’m really a very good man, but I’m a very bad Wizard, I must admit.”

‘A Shenzhen government website posted an announcement on Jan. 15 that four apartments owned by Fantasia in the city had been given “restricted” status. The website didn’t indicate when the status on the properties changed. That same day, Fantasia issued an exchange filing saying it no longer owned the apartments and that its business operations were normal. Dollar bonds of Fantasia fell to record lows.’

‘Housing’s influence on China’s economy is pervasive, driving sales of everything from cement and steel to electrical appliances, furniture and cars. It’s contribution at home, and to global expansion, make it “the most important sector in the universe,” Jonathan Anderson, the former chief economist for emerging markets at UBS Group AG who now runs Beijing-based Emerging Advisors Group, wrote in a 2011 research note. Property is the main risk for China’s economy, Ma Jun, the chief economist at the People’s Bank of China, said in October.’

‘Borrowing costs for many developers in the world’s second-largest economy have surged since Kaisa’s travails began. Yields on Chinese dollar-denominated speculative grade debt climbed to 12.38 percent on Jan. 16, a Bank of America Merrill Lynch index shows, the highest since June 2012. The junk debt has lost 5.7 percent in 2015, the worst start to a year on record.’

‘Chinese companies comprised 62 percent of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion of the $392.5 billion total, according to data compiled by Bloomberg. BlackRock Inc., the world’s biggest asset manager, owned Kaisa’s 8.875 percent securities due 2018 and the ones the subject of the missed coupon payment, the 10.25 percent 2020s, its latest filing on Jan. 14 shows. Funds managed by JPMorgan Chase & Co., Fidelity Investment and ING Investment Management also held some of Kaisa’s debt at the end of October, according to filings.’

is there a price positive re market in the USA ?
Austin, Boston ?

Market cools for million-dollar homes

Balance seems to be the new favorite word.

Garry Watts from Orange County CA

The drop in oil prices have a very short term gain for people…..yes you pay less to fill up but provinces such as Alberta whose main industry stems from the energy sector is now looking to implement sales taxes, something that hasn’t even been looked at by their provincial government in 40 years. yet they still continue to pump out the gas like there is no tomorrow. Now you would think that this would affect the development of housing industry in places like this. But consumers would still prefer to buy a brand new house than a older house that could have been sitting on the market and at a fraction of the cost of the newer houses. Houses are sitting empty and the appeal of new housing developments are continuously growing in places like this all over Canada

Look folks, at least try cleaning up your home before listing or open house, those touch up photos of how nice your house looks, it isn’t going to fool a buyer when they arrive?

Bad enough you probably are asking 06′ prices without the burden of embarrassing yourself, try a little elbow grease at least and make it look like maybe you have something worthwhile?

“Supply Is Abundant But Demand Is Not As High As Before”

We’ve recently seen where this leads in the oil market.

Could housing possibly work the same way?