July 12, 2015

Surgery To Avoid Death

A weekend topic on lending and the housing bubble. The Visalia Times Delta”A new working paper by Wharton economists Fernando Ferreira and Joseph Gyourko, the authors argue that the idea that subprime lending triggered the crisis is misguided. That paper looks at foreclosure data from 1997 through 2012 and finds that while foreclosure activity started first in the subprime market, the foreclosure activity in the prime market quickly outnumbered the number of subprime foreclosures.”

“While subprime borrowers default at a higher rate than prime borrowers, Ferreira said in an interview with Fortune that the data shows that the foreclosures crisis would have happened even in the absence of such risky lending. ‘People have this idea that subprime took over, but that’s far from the truth,’ Ferreira said.”

“The vast majority of mortgages in the U.S. were still given to prime borrowers, which means that the real estate bubble was a phenomenon fueled mostly by creditworthy borrowers buying and selling homes they simply thought would not ever decrease in value.”

The Olympian. “June was a good month for the Thurston County housing market. It was so good, in fact, that the 455 single-family residences that sold last month were the most in June in nine years, according to Northwest Multiple Listing Service data. The county housing market has improved, largely spurred by historically low mortgage interest rates — a 30-year mortgage is around 4 percent — and lower inventory levels, which have helped drive prices higher.”

“The lack of inventory also has led to instances where buyers compete for the same house with multiple offers, and some have taken more drastic steps, such as waiving the need for an inspection to get that house, said Windermere Olympia owner Steve Garrett. ‘That harkens back to the days when we had a real estate bubble,’ Garrett said.”

“The big difference is that lending remains cautious, though it has eased a bit since the recession, he said.”

From Bloomberg. “Canada’s fastest pace of multiple-unit projects in almost three years led a surprise gain in housing starts for June, another sign of what the central bank dubs a side effect of cutting interest rates in a time of record consumer debt. The beginning of work on projects such as condominiums and apartments rose 3.7 per cent to 130,933 units, Ottawa-based Canada Mortgage & Housing Corp. said Thursday. That type of work has surged 53 per cent since February, the month after Bank of Canada Governor Stephen Poloz made a surprise rate cut.”

“Poloz may lower his benchmark rate again next week to 0.5 per cent after recent indicators showed unexpected declines in economic output and non-energy exports. The governor last week likened his January cut to ’surgery to avoid death’ and said the controversial move that risked stoking household debt ‘must be subordinate’ to the bigger economic dangers.”

“Poloz and Finance Minister Joe Oliver have said there is no housing bubble in Canada, even as condominium prices and construction in Toronto and Vancouver have swelled. The Bank of Canada said June 11 a crash in housing prices that are overvalued by as much as 30 per cent remains the biggest risk to the country’s financial system. Two days ago the Toronto Real Estate Board said home sales rallied to a record for the third-straight month and the average price of a detached house in the core surged 14 per cent to $1.05 million.”

“‘The momentum in the housing market through the spring and into the summer is undeniable,’ said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit. ‘While the issue of household leverage remains a concern, it is secondary to growth fears and the very real risk of a technical recession in the first half of 2015.’”

Crain’s Cleveland Business. “As the economy expands, unemployment continues to fall and inflation improves to projected stable levels, Janet Yellen, chair of the Federal Reserve Bank, reinforced the Fed’s message that a federal rate hike could come later this year. Regarding factors that could stymie economic growth, Yellen said business owners and managers ‘remain cautious’ and haven’t significantly increased capital expenditures despite ‘brighter prospects for consumer spending.’”

“A second factor could be housing, she said, pointing out that residential construction has remained ‘quite soft’ despite growth in national home prices and home sales. ‘Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing,’ Yellen said, citing the increasing numbers of young adults living with their parents.”

“‘The biggest challenge I think the Federal Reserve faces is making sure that we have a strong enough and resilient enough financial system that is well enough regulated and supervised, that we do not have another financial crisis in the lifetimes of anyone in this room — and hopefully not the lifetimes of our children either,’ she said.”

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Comment by Ben Jones
2015-07-11 08:39:26

‘the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing,’ Yellen said, citing the increasing numbers of young adults living with their parents.’

Skyrocketing house prices had nothing to do with this, huh?

Comment by GuillotineRenovator
2015-07-11 16:48:26

Listening to this woman gurgle and spit as she speaks is like nails on a chalkboard. I cannot even do it.

Comment by Professor Bear
2015-07-11 23:28:04

It’s all subprime when buyers borrow ginormous amounts to overpay for housing. This bidness about “credit worthy” borrowers is a red herring.

Comment by Mafia Blocks
2015-07-12 04:52:15


If you have to borrow for 15 or 30 years, it’s not affordable nor can you afford it.

Comment by oxide
2015-07-12 05:07:09

“It’s all subprime when”

It is subprime only when the FICO score is below a certain number. That was the original definition.

These donkeys at Wharton only prove what I’ve been saying for years and years. FICO DOESN’T MATTER. FICO is a red herring. And if credit-worthy means high FICO, then that’s a red herring too.

What really matters is debt-to-income ratio.

Comment by Mafia Blocks
2015-07-12 05:35:32


Paying a grossly inflated price for a depreciating asset, then double down on it by financing, is subprime by definition.

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Comment by Professor Bear
2015-07-12 06:54:22

Screw the static box definitions of “subprime”. What matters is that many have borrowed to buy homes at historically high multiples of income bases on a presumption that the anomalously high rates of housing price appreciation during a mania will continue indefinitely. Time will tell.

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Comment by Oxide
2015-07-12 07:52:49

I’m sorry but you can’t screw the definitions, bear. Screwing the definitions — especially on the Prime end — is precisely what caused this mess. Thousands of originators said, “well you want a $750k house. Your income is only $120K but your FICO is 724 Prime. Here’s your money.” You said it yourself — high multiples of income. Imagine if instead of screwing the defition of subprime, these donks instead ignored FICO and actually looked at income.

Comment by Mafia Blocks
2015-07-12 09:03:21

If you need a definition just look in the mirror.

Comment by Blue Skye
2015-07-12 12:31:08

Insisting on a strict definition (especially of a made up word) betrays lack of understanding. Sub-prime by definition means high risk of default. There can be any number of reasons for high risk of default, like overpaying.

Comment by Professor Bear
2015-07-12 13:59:28

“Sub-prime by definition means high risk of default.”

Agreed. And anyone who borrowed a high multiple of their permanent income to buy a home on the expectation that ever-rising home prices would make them rich meets the definition.

Comment by Albuquerquedan
2015-07-12 07:44:30

I would say FICO shows willingness to pay while debt to income shows ability to pay. Many people when faced with paying their bills or going clubbing will favor having fun. That is measured in FICO. However, after people are eating mac and cheese to stay in a house, they have very little left to cut so that is debt to income. BTW, (just for HA) my total debt including housing is about 110% of my income so I still have the fun in my life.

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Comment by Mafia Blocks
2015-07-12 07:52:23

I couldn’t care less about your income. What are your losses on the depreciating asset.

Comment by Prime_Is_Contained
2015-07-12 11:27:35

BTW, (just for HA) my total debt including housing is about 110% of my income so I still have the fun in my life.

My DTI about 0% of my income, so I have a lot of freedom.

Comment by Professor Bear
2015-07-12 12:10:15

“I would say FICO shows willingness to pay while debt to income shows ability to pay.”


Comment by Blue Skye
2015-07-12 16:59:37

Debt to income is like a stock’s P/E. It’s based on what you hope you will earn.

Comment by Prime_Is_Contained
2015-07-12 21:50:17

Debt to income is like a stock’s P/E. It’s based on what you hope you will earn.

Great point! But at zero, the ratio is not sensitive to changes in income.

Comment by Ben Jones
2015-07-11 08:41:13

“The road to hell is paved with good intentions.” That proverb is quoted by Jeffrey Brown, professor of finance at the University of Illinois, in his acclamation for Thomas E. Hall’s book “Aftermath: The Unintended Consequences of Public Policies” (Cato Institute, 2014). It’s an insightful and fact-filled treatise on how well-intentioned laws and government regulations can generate destructive economic outcomes, adverse political consequences and widespread and long-term societal damage.’

“There is much more to generating good social outcomes than having an interesting policy idea,” cautions Brown.’

‘On the macro level, for instance, the Great Depression of the 1930s, the recurring U.S. recessions and overall instability in the America economy have “resulted from poorly designed government policies,” asserts Hall, a professor of economics at Miami University in Oxford, Ohio.’

‘Most recently, the 2007-09 financial crisis clearly was linked to the federal government’s “fair” housing policies, which produced an artificial housing boom, a subsequent decline in home prices, extensive personal bankruptcies and falling stock prices that coalesced to generate the loss of 8 million jobs and a drop of $13 trillion in U.S. household wealth.’

Comment by MarkinSF
2015-07-11 10:35:58

“the 2007-09 financial crises clearly was linked to the federal government’s “fair” housing policies”? Seriously? That is so absurd on the face of it that I can’t believe anyone would have the audacity to post it. Reality - we no longer manufacture in this country, our natural resources have already been exploited, the income gap between the haves and have nots is growing exponentially (not quite but it’s pretty dramatic). Translation - our national psyche is to become a nation of speculators and financiers. The fruits of labor accrue to the top in an ever increasing fashion; wage growth has been on the decline for at least 40 years. What drove the financial crises? Fear, insecurity, relentless greed, the herd smelling the blood of the slaughterhouse. Would love to hear the logic that led to the CATO institute’s conclusion.

Comment by Ben Jones
2015-07-11 10:57:38

‘That is so absurd on the face of it that I can’t believe anyone would have the audacity to post it.’

It’s just a viewpoint related to the subject.

‘our national psyche is to become a nation of speculators and financiers’

Yeah, there’s always this chicken and the egg thing. Is there a bubble and why? Is the why the root problem? Probably, and we’ve discussed it many times here. The moves to keep up the borrowing, telling us of dire consequences if we don’t, suggests the real economy is actually very weak. You pointed out some of the reasons why that is.

Comment by MarkinSF
2015-07-11 13:31:02

Maybe I went a bit overboard, apologies. Just don’t see how the “government” created the 2007-2009 crash due to some “housing policy”. Conversely, I do believe that government is assisting the TBTF banks and that is allowing them to hold housing assets off the market until their value comes back to the loan value. But that is another chicken and egg scenario. Are the banks running the fed or the other way around? The reality is probably that they are 2 sides of the same coin.

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Comment by Professor Bear
2015-07-12 06:57:21

What is the difference between actions our regulators have taken to manipulate housing prices and what is currently happening in China to shore up investor confidence?

Comment by Professor Bear
2015-07-12 12:11:25

“What is the difference between actions our regulators have taken to manipulate housing prices and what is currently happening in China to shore up investor confidence?”

I thought our Republican Party boosters would be all over that one. Not a taker!

Comment by Mafia Blocks
2015-07-11 12:24:08

How was it absurd? Government involvement in housing is what created the mess we’re in right now and it’s been a mess for 15 years at a very minimum.

Get government out of housing and watch the economy accelerate like you’ve never seen.

Comment by Selfish Hoarder
2015-07-11 17:39:24


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Comment by MarkinSF
2015-07-12 12:03:07

The opinion piece itself is what was absurd. The housing boom of 2002-2007 wasn’t fueled by “minorities” buying up real estate they couldn’t afford. Maybe they pushed up house prices in certain neighborhoods(low end housing primarily)but the role they played in the runup was marginal at best. What caused the housing boom? You can argue many points but it’s pretty clear there was massive collusion (even if it was unspoken) between big banks, mortgage brokers, real estate agents, appraisers & finally the quasi government agencies that guaranteed the loans (and do you really believe that these quasi government agencies acted independently of NAR & TBTF lobbyists)? The author of this editorial is basically blaming the lower rungs of society (enabled by some phantom “liberal” government) for creating the boom & bust. In reality it was wealth (as it always is because honestly, who has the power in this world?) that conspired to create this run up. Why? Because were else can they expand their wealth outside of creating asset inflation? The age of creating wealth through actually making things from the exploitation of natural resources has come and gone in the United States.

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Comment by Blue Skye
2015-07-12 12:34:49

Willingness to pay too much in the belief that magical profits would be the reward. Willingness to borrow to accomplish this and willingness to lend into stupidity.

Comment by Professor Bear
2015-07-11 23:31:03

He totally missed the role of the huge pre-2007 runup in prices.

Comment by Mafia Blocks
2015-07-12 04:55:21

And the collapse in demand as a result of still massively inflated housing prices.

Housing Demand Plunges To 20 Year Low


Comment by Ben Jones
2015-07-11 08:56:45

‘Everyone knows the Chinese government is desperate to keep stocks from crashing. But this desperate?’

‘The regulatory tweaks aimed at supporting equities included this shocker: Homes are now acceptable collateral for borrowing to buy more stocks. Perhaps the least of the too-many-to-list problems with this idea is that property is difficult to liquidate when assets crash. The biggest is that China is sowing the seeds of a third financial time bomb to match its debt and stock bubbles.’

‘The wording of China’s new rules - and its list of “other assets” that can be used as collateral - will force brokers to become experts in valuing everything from property, to antiques, to art.’

‘Ginning up shares with central bank liquidity and regulatory inducements, as China has already done, is a slippery slope. Tying the future of the nation’s housing sector to today’s stock mania is lunacy. Why bother letting banks churn out subprime debt instruments, as Wall Street did in the 2000s, when you can turn your whole economy into one?’

Comment by Blue Skye
2015-07-11 16:10:50

It’s a giant wealth transfer hoover.

Comment by Ben Jones
2015-07-11 18:45:01

‘The Chinese Passenger Car Association, for example, said the weeks-long market retreat was a factor behind a 3.2 percent year-on-year sales decline in June. “The stock market turmoil has led more people to put off their plan to buy new cars,” it said, adding that according to dealers some customers who had put down deposits had become “unwilling” or “did not have the cash” to pay the balance.’

‘Capital Economics estimates that “overheated trading activity” was responsible for adding more than 0.5 percentage points to GDP growth in the first quarter of 2015, and even more in the subsequent three-month period. “The immediate economic downsides from a cooling off of activity in the financial sector are substantial,” its chief Asia economist Mark Williams said in a note.’


“A large number of companies - facing weak demand, squeezed margins and falling profits - speculated in the stock market too,” Standard Bank’s Stevens said in a note, adding many offered shares as collateral when borrowing from banks. “Losses may reverberate through the banks,” he added.’

‘Bank of America Merrill Lynch equity strategists also expect significant damage, saying that investors have lost faith in the government’s capacity to control asset values and stress there may be a time lag before the worst aspects of the decline show up.’

“The ripple effect from the market correction has yet to show up,” they wrote. “We expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis.”


Comment by Ben Jones
2015-07-11 18:50:54

Here you go Dan:


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Comment by Ben Jones
2015-07-11 19:03:09

‘I find it both disturbing to read reports that prominent investors and investment firms encouraging people to apply the mindless “buy on the dips” mentality to the current sell-off in the Chinese stock market. Why do I say that? Because the Chinese stock market is, as far as I can see, officially dead.’

‘It is no longer functioning as a market after Chinese authorities panicked this week and closed much of the market to trading while threatening short sellers with criminal prosecution. They have also placed a moratorium on new IPOs and prohibited selling by shareholders owning more than 5% of the shares in any company while also prohibiting large pension funds from selling shares. For all intents and purposes, China no longer has a functioning stock market although for some reason few commentators or media observers have stated this obvious fact.’

‘Investors are encouraged by the sharp recovery in shares on Thursday, but calling it a “dead cat bounce” is overstating the case since at least half of the cat remained in suspended animation.’

‘And while its economy is slowing to low single digit growth (expectations of continued 7-8% growth are a pipe dream), debt continues to grow at much higher rates.’

‘The last thing China needs is for its experiment in shifting speculation from housing to stocks to implode in its face. Collapsing stocks can’t possibly help domestic consumer demand or economic growth. And a slowing China, which has already decimated global commodity prices since last summer, can only place further downward pressure on heavily indebted Western economies.’

‘China can pretend that its stock markets are still operating normally, but investors need to acknowledge that they have been largely closed down. When short sellers are facing the equivalent of the tank staring down the lone protester in Tiananmen Square, and large stockholders are prohibited from selling while negative comments about the market are outlawed, even capitalism with a Chinese character needs to find a different name.’

Comment by Ben Jones
2015-07-11 19:05:59

“I doubt the market will enjoy a sustained rally,” said Mr. Cui. The damage from the recent selloff “will extend far beyond the stock market,” with banks and brokerages’ balance sheets weakened and consumer spending likely to deteriorate.’

‘Confidence is wearing thin among global investors, with state intervention only adding to the volatility of the Chinese stock market. “With more than half of listed companies having suspended trading in their shares, it’s hard to be confident that any moves are other than transitory,” Tim Condon, an analyst at ING, wrote in a research report.’

Comment by Ben Jones
2015-07-11 19:08:11

‘Eva Lee is a Hong Kong-based real estate analyst for UBS and commented in a note that various press reports are stating that several buyers of real estate projects in Shenzhen have forfeited their deposits and cancelled their planned real estate purchases.’

‘Lee noted that the cancellations are likely a direct result of the “significant” stock market correction seen in China. In addition, other press reports are suggesting sellers in the secondary market are lowering their asking prices.’

Comment by Albuquerquedan
2015-07-12 07:13:21

Ben, a one month decline in car sales when they are up for the year does not call for a caw, neither the IMF nor the World Bank see anything but around 7% growth for China this year and they have confirmed that growth just in the last two weeks.

Comment by Albuquerquedan
2015-07-12 07:19:41
Comment by Mafia Blocks
2015-07-12 07:22:47
Comment by Professor Bear
2015-07-12 07:23:03

Slip-sliding away

Comment by Albuquerquedan
2015-07-12 07:23:40
Comment by Albuquerquedan
2015-07-12 07:30:20

The slowing of the increase in car sales is primarily driven by restrictions in car sales for pollution reasons in tier one cities. Of course that is starting to drive the sales of electric cars:

Comment by Mafia Blocks
2015-07-12 07:34:07


China GDP Growth Falls To 2002 Levels


Comment by Albuquerquedan
2015-07-12 07:37:08

What happens when a country with an average IQ of around 100 deals with a country with an average IQ of about 75? This:

Comment by Mafia Blocks
2015-07-12 07:39:52

Pedal Mr. Crowman pedal!

Comment by Albuquerquedan
2015-07-12 07:47:18

Actually just checked, average IQ in Angola is 69.

Comment by Mafia Blocks
2015-07-12 08:09:34

Good boy.

Comment by Professor Bear
2015-07-12 12:13:31

“Because the Chinese stock market is, as far as I can see, officially dead.”

It’s a Terri Schiavo stock market…

Comment by Albuquerquedan
2015-07-12 12:46:37

Just read a poll of non-Chinese source economist 6.9% growth this quarter with a raise in estimates for the year to 7%. I find that curry makes everything taste better, so maybe you and Rio should eat curry crow.

Comment by Ben Jones
2015-07-12 12:49:27

How much of that is empty cities?

Comment by Professor Bear
2015-07-12 14:00:59

I guess if China counts construction of empty cities in the positive column, then GDP can grow at 7% forever?

Comment by taxpers
2015-07-11 09:27:14

Buyers that put 10 % or more down pay their tab
And 3x income

Comment by alphonso bedoya
2015-07-11 09:30:54

“…the real estate bubble was a phenomenon fueled mostly by creditworthy borrowers ….”

I would have liked to know what parameters defined CREDITWORTHY by these two distinguished Wharton economists. I did have a close friend buy no less than two houses on a $50,000/year income with $3000 down…$1500 each. They promised him a “flip” before the “closings.” That never materialized.
Perhaps people forget that the agenda was to get everyone into a house. Affordability never became part of the discussion.
My son’s closest friend called me one morning and wanted to know why there were black cars surrounding his building. He arrived at work and kept his engine running across the street. I told him to go home and visit his parents. Later I found out he was being paid $135K to create documents. The owner quietly went to the airport and flew out to Puerto Rico.
Let no one say that some millennials are not a creative force.

The largest “religion” in the world today is real estate.

Comment by Ben Jones
2015-07-11 10:13:25

‘The governor last week likened his January cut to ’surgery to avoid death’ and said the controversial move that risked stoking household debt ‘must be subordinate’ to the bigger economic dangers’

Do these central bankers ever wonder how an economy that results in million dollar houses can simultaneously be close to death?

Comment by Ben Jones
2015-07-11 09:44:36

‘This could be the story of an American dream. An immigrant family builds a successful business and buys a four-bedroom house in a quiet neighborhood with good schools for their young son. But not all is as it seems on the steep, curving streets of San Diego’s Rancho Penasquitos.’

‘A 45-year-old Chinese woman, Xu Ting, lives in a brown shingle house with a weedy driveway. She has been sued for counterfeiting by eight luxury brands, including Gucci and Louis Vuitton, and owes Chanel Inc. $6.9 million in damages. None of this has stopped her from becoming a legal permanent resident of the United States and achieving a comfortable suburban life.’

‘China is not the only country with a counterfeiting problem. Most fakes are made in China, but they are sold in America. Counterfeiting is not a priority on par with drug smuggling or money laundering, and is rarely prosecuted as a crime. The lack of legal cooperation with China makes it easy for counterfeiters to move their money beyond the reach of Western law enforcement - and hard to root out counterfeiting kingpins. As long as counterfeiters can stay out of jail and hold on to their profits - and consumers continue to buy - the trade in fakes will likely thrive.’

‘Despite spending millions on brand protection, companies often end up playing whack-a-mole, shutting down producers and distributors of fakes, only to see them pop up again. Xu Ting simply refused to show up in court over the years. Instead, doing graduate studies in statistics at San Diego State University, helped her family amass at least $890,000 in bank accounts back in China, and bought the $585,000 Rancho Penasquitos house with her husband, who has also been involved in selling counterfeit luxury goods, public records and court cases in China and the U.S. show.’

“There’s a million ways to game the system,” said Dan Plane, an intellectual property lawyer at Simone IP Services in Hong Kong, who is not involved in litigation against Xu Ting. “Probably the only thing that’s going to stop her is when she passes away - probably on an island resort somewhere - or if she gets arrested.”


Comment by Selfish Hoarder
2015-07-11 17:45:00

Somehow I am beginning to think the number of scammers from China dwarfs the number of non-Chinese scammers in America.

Comment by Professor Bear
2015-07-12 12:16:12

The Xu’s live only a couple of miles south of our Chinese neighbors. They have likely been visitors at the house next door.

Comment by Ben Jones
2015-07-11 11:13:54

Sometimes I read here that 2007 was the peak in housing prices, but that’s not the way I remember it. I came across this:

‘November 2, 2006′

‘Last Years Buyers “Completely Upside Down”: Arizona’

“A housing report from the Arizona Republic. ‘Pinal County’s nascent resale housing market continues to reflect the Valley’s as it backslid in third-quarter 2006. Sales volume was off by nearly half from the same period last year and the median price dipped under $200,000, according to a report by Arizona State University.”

“The median price on a year-to-year basis dropped 6.4 percent to $199,900 from $213,500, and fell 5.3 percent from second-quarter 2006’s median of $211,000, the report said. Pinal County’s median resale price peaked at $220,000 in fourth-quarter 2005 and has dropped for three straight quarters.”

“Sales fell 45.2 percent to 850 homes, from 1,550 homes sold in third-quarter 2005, and by 28 percent from last quarter’s 1,180 transactions.”

“Bill Murdoch, an associate broker-manager at ReMax’s Queen Creek office, said the market is cooling from ‘last year’s insanity.’ He predicted that first-time buyers and investors would return to Pinal County’s resale market once the median price dips under $190,000.”

“Buyers and refinancers who did deals last year from July to November, at about the market’s peak, and want to sell now will find themselves ‘completely upside down,’ Murdoch said.”

“Probably the biggest loss is Pinal County’s image as a quick-turn cash cow, ASU’s Jay Butler said. ‘(Buyers) figured they could turn around and sell and make a lot of money,’ he said. ‘That market is gone now. There is a loss of expectation.’”

“Sweet deals from new home builders, infrastructure and traffic problems, and higher prices than first-time buyers and investors can afford continued to push Pinal County’s resale housing market downward in third-quarter 2006.”

The East Valley Tribune. “The resale prices of single- family homes in Pinal County, including Apache Junction and portions of Queen Creek, are declining partly because of buying incentives being offered by builders for new homes.”

“‘New homebuilders have been aggressively pursuing buyers through incentives such as specially priced upgrades, free pools and gift cards,’ said Jay Butler.”

“Butler said new homes have become a ’strong competitive and attractive alternative’ to resale homes in Pinal County. As a result, the market for the resale of homes is also slowing.”

Arizona State University. “Although the average 30-year mortgage for third quarter 2006 was 6.2 percent (5.5 percent for a year ago), the declining home prices allowed the monthly mortgage payment for the median price, based on an 85 percent loan-to-value, to be very comparable at $1,040 versus $1,350 for a year ago.”

“‘Because investors were drawn to the inexpensive housing in Pinal County, higher prices have limited the investor’s role in the local housing market,’ said Butler. ‘There are many reasons for the slowing market and issues that will have to be overcome for any future recovery.’”

The Tucson Citizen. “The Tucson market has seen cutbacks in new homes, aggressive incentives by home sellers, the exit of many speculative investors, said Mike Inselmann, president of Metrostudy.”

“About 10,062 new homes were built in the 12 months ending in September 2006. That’s a 9 percent decline from the market peak six months before.”

“The median resale price in September was $210,000, a decline of 6.7 percent from June, when the median price peaked. During the 12 months ending August 2006, the median price hovered near $220,000, so the September price decline is noteworthy, said Ben Sage, director of Metrostudy’s Arizona division.”

The Business Journal of Phoenix. “The Phoenix area posted an annual rate of 54,747 home starts at the end of the third quarter, a decline of 12 percent from the record 62,000 starts recorded at the end of the first quarter of 2006, according to the Metrostudy.”

“‘Builders’ efforts to liquidate inventory have been successful, but starts are likely to continue dropping until inventory declines further,’ said Sage.”

From AZ Family. “If you’re looking to buy real estate in the Valley, you may want to wait a year. Last year, as many as a third of new homes sales went to speculators and investors. Now, many of them are competing with builders to dump their holdings. As a result, some developments have dropped by more than $100,000.”


Comment by taxpers
2015-07-11 12:39:40

July 5 2005 here
Reporting slows as the market tanks

Comment by Prime_Is_Contained
2015-07-12 11:19:51

Sometimes I read here that 2007 was the peak in housing prices, but that’s not the way I remember it.

My recollections differs as well, Ben. IIRC, it was San Diego to peak first, late in 2005; most of the rest of the country peaked at various times throughout 2006; there were a few stragglers that peaked in 2007, I think.

Easy to verify using the Case-Shiller spreadsheet, though!

Comment by Senior Housing Analyst
2015-07-11 11:22:03

Alameda, CA Housing Prices Fall 8%


Comment by Blue Skye
2015-07-11 14:48:38

“Chinese companies that borrowed money using shares as collateral may have to put up more assets or repay their debts, carrying the ripples from the stock market plunge into the wider economy.

“Bank and other loans backed by listed shares officially increased around 260 percent in May to 58.4 billion yuan ($9.4 billion) from a year earlier…”



Comment by Ben Jones
2015-07-11 17:17:07

Speculative investors head for the exit in Nine Elms development

Financial Times-Jul 10, 2015

‘Britain’s biggest housing development area, Nine Elms in London, is seeing a … to sell unbuilt properties amid fears the capital faces a glut of expensive homes.’

‘Charlie Ellingworth, a partner at buying agents Property Vision who has dubbed Nine Elms “Singapore-on-Thames”, said that buying off-plan was “the ultimate option play” for “a lot of the buyers [who are] Asian”.

“You only need to put down 10 per cent and then see how the market goes,” he said.’

Comment by Ben Jones
2015-07-11 17:24:52

The New Zealand Herald has this Q&A:

Mark Li of Liaoning Province, China owns a Mt Albert house and advises New Zealanders to save harder. He spoke from China via a translator to Anne Gibson.

Why did you invest in Auckland?
I have a sister living in Auckland and my parents come to visit her sometimes. All my family members think it’s a good idea to invest in a property in Auckland for future visits/stay.

What did you pay, what type of house did you buy and when? I paid $750,000.00 (loaned $250,000.00 from bank), freehold, 65sqm in Mt Albert, bought it in February 2014.

Is it rented?
It’s rented out now.

Do you know that New Zealanders are worried about Chinese buying our houses? I heard about it, but why?

Did you know Kiwis can’t afford to buy a first home? I don’t understand. When I was here, I heard that they spent hundreds of dollars on food and drinks every week. I was so surprised. Things are cheaper here than in China. Why do you spend $100 on beer when you can save it and spend it on your house one day?

Many say Chinese - particularly those who are not NZ citizens - are out-pricing our housing?
I don’t know. I’ve been to a number of auctions before I bought the house, and I saw many Kiwis win the auctions too. I work hard, I work long hours to achieve what I have achieved now. Stop blaming other people, work harder!

Did you know we as New Zealanders can’t buy your houses? What do you mean? I might sell my house in Auckland one day then they can buy it.

Do you therefore think this is fair?
My house is rented out now to New Zealanders, it’s not vacant. So you mean that because I bought it, then you couldn’t buy it? I don’t understand, why don’t you buy other houses if you can afford? There are so many other Kiwis who can afford to buy their houses. Why don’t those people work harder to earn more, save more and then they can buy? To me, it’s very fair. Excuse my language, but only losers think it’s not fair. My money didn’t fall on me from the sky. I am not ashamed of being richer than those people who don’t work hard and blame others for their own failures.

Did you know 39.5% of Auckland house sales in three months were to Chinese? I didn’t.

Yet only 9% of Auckland’s population is made up of Chinese? Are you sure? I think the percentage in Auckland is much higher than that…If you think the high house price is caused by us Chinese people, maybe [that] makes Auckland less attractive to us.


Comment by Selfish Hoarder
2015-07-11 17:50:19

Kruschev was partly right about “we will bury you.” He was wrong that Russia will bury the west. Mainland China is buryi western civilization by pricing us out of where we were born. We will be their slaves unless their stock market really crashes…

Comment by alphonso bedoya
2015-07-12 10:43:03

Sunday in the Go Park

Work harder. We work harder. You need work harder. Everyone work hard here. No one afford dead cities but work harder and afford. We now visit everywhere. Everywhere cheap. Hong Kong not so cheap.
We have money.
You have beer and football. You work hard drinking beer and work hard watching football.
War not needed. You not understand our game of Go. Very different from chess. Learn Go and succeed. Surround enemy. Not kill like chess.

One day all work for Go masters.

Comment by Ben Jones
2015-07-12 11:40:02

This guy should change his name to Mee No Tact.

A while back there were protests in Hong Kong and one of the things they were mad about was main-landers pouring in buying up housing (and shopping). It seems they didn’t appreciate the A-hole behavior of the visitors that included, according to some, urinating in the streets.

Comment by Ben Jones
2015-07-11 18:07:22

‘REIT investors acted on their jitters about the possibility of an interest rate increase, and the sector’s returns for the first half of 2015 suffered accordingly. NAREIT says that although listed REITs have raised more equity and debt year to date than they did in the first half of 2014, the S&P 500 and S&P 1500 had outperformed the primary US REIT indices as of June 30.’

‘Total returns for the FTSE NAREIT All REITs Index, All Equity REITs Index and All Mortgage REITS Index fell 5.24%, 5.44% and 5.09%, respectively, for the first half of the year. In comparison, the S&P 500 delivered a 1.23% percent total return in the first six months, while the S&P Composite 1500 returned 1.56%.’

‘Some REIT sectors did better than others when it came to returns. Manufactured home REITs posted a 3.75% return, with self-storage trusts close behind at 3.72%. Apartment REITs posted a 0.82% return, the only one of the major property types to post a positive return YTD. Healthcare and industrial fared worst at -11.74% and -11.33%, respectively, followed by hotels at 10.35%.’

“REITs continued to have strong underlying operating fundamentals in the first half of the year, with rising rents and occupancy rates supported by limited supply and development of real estate,” says Steven A. Wechsler, NAREIT’s president and CEO. “REIT returns, however, were negatively impacted by investor expectations about the effect of rising interest rates on real estate and REIT share prices.”


Comment by Selfish Hoarder
2015-07-11 20:55:19

David Stockman talks about Ho Li Sheet


…got bitcoin and cash?

Comment by Senior Housing Analyst
2015-07-12 04:43:08

“As the economy expands, unemployment continues to fall”

Are you sure? Did you mean employment continues to fall?

Labor Force Participation Rate Falls To 37 Year Low


Deliberately incentivizing millions to load up on a lifetime of debt for a depreciating asset at a grossly inflated price isn’t an encouraging sign.

Comment by Senior Housing Analyst
2015-07-12 04:48:52

“June was a good month for the Thurston County housing market.”

The reality?

Thurston County, WA Housing Prices Turn Negative On Year


A strange coincidence? Doubtful.

Comment by Mafia Blocks
2015-07-12 05:52:16

At least the Thurston County tax man understands how houses depreciate.


What are your losses to depreciation?

Comment by Prime_Is_Contained
2015-07-12 11:37:03

It looks like the assessor considers it to accrue at only approximately 0.5% per year! Can it really be so low?

Comment by Mafia Blocks
2015-07-12 11:41:36

$2.50/sq ft per year are typical losses to depreciation.

(Comments wont nest below this level)
Comment by Prime_Is_Contained
2015-07-12 11:59:04

Then you and the tax-man do not agree on depreciation, unless housing is priced at $500/sq-ft.

Comment by Mafia Blocks
2015-07-12 13:53:41

I can’t help you or the taxman but that is the typical rate of depreciation of a SFR.

Comment by Blue Skye
2015-07-12 13:59:32

Prime, are you thinking depreciation rate allowance by the IRS? I don’t think they let you take depreciation on your own house, but if it was a rental I think the allowance would be 27.5 years (not sure). In that case a $500 price would allow $18/yr depreciation allowance.

Comment by Prime_Is_Contained
2015-07-12 21:56:41

Prime, are you thinking depreciation rate allowance by the IRS?

Nope… Blue, check out the link that HA posted above; the Thurston County tax assessor link shows a graph and a table. The entries in the table vary a bit, but were approximately 0.5%/yr (e.g. the 8yrs row shows 4% depreciation).

Comment by Mafia Blocks
2015-07-12 05:06:16

“Home Buyers Sue Realtors, Inspector”


Classic… Typical. The Housing Crime Syndicate in action. Inspectors, realtors, appraisers.

Comment by Mafia Blocks
2015-07-12 05:09:11

“Soaring home prices not a ‘bubble’: Realtors”


So much for NAR taking an ethical inventory of themselves.

Comment by Mafia Blocks
2015-07-12 05:11:22

“Call It a Comeback for Risky Home Buyers”


I*If you signed up for 15 or 30 years of debt on a depreciating asset like a house, you’e a risky buyer borrower.

Comment by Mafia Blocks
2015-07-12 05:15:29

“WI Realtors Buy Ads Claiming Bucks Arena Job Creation, Win Free Space In Milwaukee Business Journal”


“Other things I don’t honestly get: Why the Business Journal’s Rich Kirchen wrote an entire article repeating the realtor ads’ claims”

Comment by Mafia Blocks
2015-07-12 05:57:40

I don’t ever recall this one getting discusseddisgust.

“Brothers claim they were ripped off by Realtors”


Comment by Professor Bear
2015-07-12 07:21:25

Isn’t a “technical recession” pretty much just a recession?

Why bother sugar coating the situation with weasel words?

Comment by taxpers
2015-07-12 07:47:45

Does Oxide look like a younger Tina Fey ?

Comment by Professor Bear
2015-07-12 14:02:58

Does anyone besides me find it extremely peculiar how one minute AlbuquerqueDan is talking up Donald Trump’s candidacy, then the next he is defending Chinese communist central planner economic governance?

It’s pretty amazing to me that the same person could be making these posts.

Comment by Professor Bear
2015-07-12 14:15:28

George Samman
The Xi Jinping Put: From Free Market to Free-Fall (Op-Ed)
2015-07-12 05:03 PM

The Chinese government along with its Central Bank have taken extraordinary measures to halt the free-fall of its stock markets. But while these measures appear to have stopped the bleeding for now, is government intervention the right solution for the world’s second largest economy?

Or will it ultimately hurt the overall confidence of investors and the public towards Chinese markets and force money to flee to other asset classes such as gold or virtual currency?

The ‘Greenspan Put’

Former Fed Chairman Alan Greenspan was perceived to be so market friendly and communicated such to the markets that most investors in the market believed the Federal Reserve would stand by and provide ample liquidity and use whatever easing tools it needed to support the markets. This came to be known as the “Greenspan Put.”

Bernanke and Yellen have followed suit in these policies even more so than their predecessor. President of China, Xi Jinping, has taken this to a whole new level by taking the free out of free markets. What China has done over the last week demonstrates the government and the PBOC will use any means necessary to prop up the Chinese markets.

Can Confidence Be Restored?

Joyce Poon of EvergreenGaveKal, dubbed the term “Xi Jinping Put” showing that Beijing and the PBOC will protect the capital markets. Last week after cutting interest rates for a fourth time and lowering the reserve ratio requirements for a third time, counterintuitively the market continued to sink even further.

Chinese officials don’t see this as just a falling stock market, but a loss in confidence and political credibility, that needed to halt. More moves were made to shore up confidence and stop the freefall.

* The State Council ordered an indefinite suspension of new share issues, which should halt further dilution and free investor funds that would otherwise have been locked up ahead of initial public offerings;

* The China Securities Regulatory Commission said that the capital of the China Securities Finance Company, a state body which extends margin financing to brokers, would be increased fourfold to RMB100bn, and pledged that the People’s Bank of China would inject liquidity into the lender in order to support the market;

* Central Huijin, a powerful state investment fund, said it was buying index-tracking ETFs;

* A score of China’s leading brokerage companies said they will set up a RMB120bn fund to buy stocks, also pledging they will not sell stocks on their own account while the Shanghai Composite index remains below the 4,500 level. At Monday’s close it was at 3,776;

* Nearly 100 fund management companies promised to buy stocks to support the market;

* In addition, last week the authorities announced a crack-down on short sales and said the national pension fund would be permitted to buy equities.

The reason why is because the people that got hurt the most in this were retail investors. Low to middle class investors who got caught in the hype while the government talked up buying stocks right up until they plummeted.

A middle class that believed deeply that the motherland would become strong has been eviscerated,” read an essay circulating on Chinese websites this week that was credited to an investor who had lost most of his savings. “This was a stock wipeout that thoroughly damaged middle-class assets from a decade of striving. For us, the China Dream really is just a dream.”

Comment by Professor Bear
2015-07-12 14:28:34

BUSINESS DAY TV: Chinese stock market ‘has been divorced from economic reality’
by Transcript Services, July 11 2015, 13:32

WORTH Wray is a global macro strategist and co-author of A Great Leap Forward.

BUSINESS DAY TV: Even with markets globally seeing some respite today offered by the Chinese government’s instructions to major shareholders to hold off on share sales, the risk of a slowdown in Chinese growth has certainly not evaporated. So, what are the implications for emerging markets? Worth Wray, chief investment strategist at Mauldin Economics and co-author of best seller A Great Leap Forward, joins us now on the line with his perspective.

Worth…so right at the top, is China sitting on the edge of a great transformation, or an epic disaster as you see it?

WORTH WRAY: We still don’t know. China is trying to transition its economy from an industrial investment driven economy to something driven by consumption, services, technology and the high value exports. That’s not an easy transition after one of the largest credit booms in modern history.

In a market-oriented economy I’d say it would be impossible, but in China … they play by very different rules. And Beijing has explicitly made its equity market policy over the last year. It’s part of that plan to restructure that debt in the system, and if the equity market crashes here, there’s a worry that China should go dramatically up which is frankly why the state is going to intervene. We still don’t know how this plays out in the long run.

BDTV: I asked the question because last year this time, you were quoted saying that China will need a series of miracles to actually sustain any growth. So do you see the central bank managing to offer these miracles right now…you’ve alluded to the kind of intervention we’re seeing and they’re using all the firepower they have in an attempt to try and put an end to the rout in the markets right now.

WW: Yes, I think that China certainly needs a series of miracles to pull off this grand transition of its great leap forward that Beijing is attempting. That will be a 10-year process and China certainly has been sustained by a whole series of miracles since the late 1970s. Its rise has defied everything that western economists knew about development. On the stock market terms I don’t think that miracles are needed yet because I don’t think that Beijing is out of policy tools. There are still things that Beijing can do to support the market…it disappoints me to see them restrict short selling, to restrict forced buying in the system, to do things that would discourage foreign investors from wanting to come in, that’s a breakdown of the market liberalisation we’ve seen and hoped for, but Beijing still has the options to make some tough policy sacrifices…one of things that people talk about…

Comment by Professor Bear
2015-07-12 14:30:29

World / Asia-Pacific
Investors weigh what China’s rout means for global growth
by Adam Haigh, Kana Nishizawa and Yuji Nakamura, July 09 2015, 06:50

SYDNEY/HONG KONG/TOKYO — China’s stock rout has reached a tipping point.

Losses in Shanghai and Shenzhen spilled across Asia on Wednesday, sending the region’s benchmark gauge towards its steepest drop in two years. The eight biggest Asian markets fell at least 1%, with Hong Kong shares heading for the biggest decline since the financial crisis. Gauges of equity volatility in the city and Tokyo surged.

Even as the first three weeks of China’s stock slump wiped out $3.2-trillion in value, developments in the Greece crisis and the Federal Reserve’s latest prognostications took centre stage for many asset managers. That is changing as the deepening rout forces investors to weigh what the losses mean for the global growth outlook.

“Chinese equities are transitioning from a period where we’ve had weak economic growth and a very strong equity market, to an equity market which is looking for confirmation of economic strength,” said Stephen Corry, Hong Kong-based chief investment strategist at the private bank unit of LGT. “It has failed to materialise so far. The sell-off is therefore an indication that investors have lost confidence in policy makers’ ability to reflate the economy.”

Comment by Professor Bear
2015-07-12 17:13:03

Business & Economy
China’s stock market meltdown
Andrew Kenningham, a senior global economist at Capital Economics, discusses China’s stock market crash.
12 Jul 2015 18:41 GMT | Business & Economy, Asia, China

Every individual investor has to take responsibility for their own actions and a lot of people perhaps got their fingers burnt who would have otherwise been wiser to not get involved.

–Andrew Kenningham, Senior global economist

China could be heading towards the biggest financial disaster since the 1929 Wall Street crash after shares on its stock markets nosedived, dropping by around 30 percent in less than a month.

More than $3.2 trillion has been wiped out in three weeks - an amount more than 10 times the size of the entire Greek economy.

The Chinese government has been scrambling to avert a crisis and has issued an emergency response to keep the flagging economy going.

Andrew Kenningham, a senior global economist at Capital Economics, told Counting the Cost that unlike Greece, which has dominated headlines this week, China was not facing a debt crisis but was dealing with a major stock market bubble and correction.

Source: Al Jazeera

Comment by Professor Bear
2015-07-12 19:42:41

The Wall Street Journal
Heard on the Street
China’s Stock-Market Fear Is Everyone’s Worry
Government measures to stop a stock rout speak volumes about the country’s growth potential
Chinese President Xi Jinping. Beijing has been aggressive in propping up the stock market.
By Alex Frangos
July 12, 2015 12:04 p.m. ET

China’s leaders are clearly freaked out about the stock market. Global investors need to wonder how nervous they should be, too.

A 30% fall in the stock market, after a 150% rise, shouldn’t necessarily spark such concern. So why is Beijing in panic mode? Most analysts figure the real economy, while slowing, isn’t collapsing. And the stock market plays a limited role in financing in China, while the percentage of households exposed to the market is less than 10%.

Then again, many had the same feeling of relative confidence at the end of 2007 in the U.S., just after the stock market peaked. It turned out, in retrospect, the recession had already begun.

If Chinese policy makers were at all confident about the economy, they probably would have preferred to let the market teach investors a valuable lesson. Investors should take that as a cue about the negative direction of growth.

Indeed, there are decidedly dour signals. Car sales fell 3% in June. Property transactions have picked up, but most of the strength is confined to China’s biggest cities. Producer prices have been falling for three years, something many have dismissed as the fault of global commodity prices, but could also reflect deep structural overcapacity and weakness in the industrial sector.

Manufacturing surveys are in contraction territory, with employment subcomponents weak. Consumer sentiment is much weaker than would be indicated by an economy supposedly expanding at a 7% clip, as it did in the first quarter.

And many analysts already think China is expanding slower than that. Actual first quarter year-over-year growth was 4.6%, according to Citigroup, or 4%, according to Conference Board economists. So China’s economic handlers may worry stocks are infecting an already weak patient.

Comment by Professor Bear
2015-07-12 21:53:08

CNN Money
China expected to post worst growth since financial crisis
By Sophia Yan
china economy
China is poised to post its worst quarterly growth since the financial crisis, according to a CNNMoney survey of economists.

Gross domestic product is forecast to have expanded by 6.9% in the second quarter, compared to the same period last year, according to the survey’s median estimate.

The estimate is a bit lower than the 7% GDP growth rate from the first quarter. Looking ahead, economists expect to see 6.95% annual GDP growth for this year, and even slower expansion at 6.5% in 2016.

There’s no question about it: After years of breakneck growth, China’s economy, the world’s second-largest, is now slumping. Economists say the government has no choice but to continue working to stimulate the economy, especially as data points continue to disappoint and risks keep piling up.

The numbers are expected “to show another tepid growth in real activity,” said UBS economists Harrison Hu and Wang Tao. The “sluggish economy … is prompting the authorities to escalate policy supports.”

Comment by taxpers
2015-07-12 14:58:12

Anyone get 60 Greek bonds yet?
No worries as imf will buy some for us taxpayers

Comment by Mafia Blocks
2015-07-12 17:22:14

Hacks….. Get you shit together. You’re looking like the 3 stooges.

Comment by Professor Bear
2015-07-12 18:56:31

Apparently they get paid no matter how lame the posts…and then deny they are paid.

Comment by Professor Bear
2015-07-12 21:10:18

Will government bailouts be enough to reverse the collapse of China’s Potemkin stock market?

Comment by Professor Bear
2015-07-12 21:14:54

Experts split on Beijing’s next move
45 mins ago

Security guards scuffle with protestors angry about failed investments with Hunan Bofeng Asset Management Ltd. outside of a branch of the Industrial and Commercial Bank of China in Changsha in southern China’s Hunan province. Source: AP


A WEEK after news broke of China’s monumental stock market crash, stories of suicides and the role the country’s shady underground banking system may have played in the catastrophe have begun to emerge.

At the urging of the Chinese government, ordinary citizens pumped their life savings into dodgy investments in this “shadow” banking system, and as the losses mount, a violent backlash has begun.

Fan Xiaolin, an engineer in Changsha in central China, thought he was safe when he deposited his family’s savings of 800,000 yuan ($A173,000) in a private finance company he said was recommended by employees of state-owned Bank of China.

The company, part of an informal industry of lenders and investment managers that operates outside China’s state-run banking system, collapsed six months later as economic growth slowed and businesses struggled. Today, Fan said he and about 100 other depositors in Hunan Bofeng Asset Management Ltd. protest several times each week outside state banks and government offices, demanding their money back.

“The security people at the bank hit us,” said Fan, 50. “The police ask us to go home and wait.”

Thousands of Chinese savers like Fan who entrusted money to an informal finance industry that operates with little government oversight are suffering painful losses as borrowers default and real estate and other ventures fail.

Beijing allowed underground finance to flourish over the past decade to support entrepreneurs who generate jobs and wealth but get little credit from state banks. Communist leaders reaped the benefits of a thriving private sector without tackling the political challenge of giving entrepreneurs more access to an official financial system supports government companies.

Now, as losses rise, Beijing faces political tension and pressure to help investors recover their money.

“Many investors don’t realise the risk until something goes wrong,” said Guo Tianyong, director of the Banking Research Center at Central University of Finance and Economics in Beijing.

The industry’s popularity reflects the Chinese public’s urgent search for an alternative to low interest paid by banks, which has driven repeated bouts of boom-and-bust speculation in real estate and other assets. It propelled the flood of money from novice investors that fuelled this year’s explosive rise of Chinese stock prices, which peaked in June and have plunged since then. Last week it was revealed $3.2 trillion had been wiped off the Chinese stockmarket in just three weeks, prompting the Chinese government to begin lending money to investors to prop up the flailing market.

One portion of informal finance is allowed by Chinese law: small loans from individuals to entrepreneurs. For a fee, brokers put borrowers in touch with small savers. They provided trillions of yuan (hundreds of billions of dollars) that supported the growth of Chinese private business.

The status of other activities is murkier. Some entities operating under names such as “investment guarantee fund” act like banks, raising money from depositors to lend, invest or speculate in stocks or gold. They promise two times or more the interest paid by banks.

Regulators have tried to keep official banks separate from the underground industry, but complaints in Changsha that Bofeng was recommended by employees of Bank of China and another state-owned lender, Industrial & Commercial Bank of China Ltd, or ICBC, highlight the tangled connections between the two sides.

“I went to deposit money in the bank and the bank manager recommended this to me,” said an ICBC customer, Sheng Weimin, a 48-year-old engineer for an aviation company. He put 100,000 yuan ($A21,600) into Bofeng in January 2014.

Fan, the engineer, said he got similar advice at Bank of China to put money into one-year Bofeng contracts that promised 7 per cent annual interest — double the rate at state banks.

“There was no talk about risk,” said Fan, who earns 4,000 yuan ($A860) per month. “The counter staff at Bank of China said anybody who still uses certificates of deposit is a fool.”

Bofeng raised 400 to 500 million yuan ($A86 million to $A108 million) by selling “trust products” to several hundred investors, according to the official Xinhua News Agency. It cited local authorities as saying the company was not authorised to do so.

Bank employees were paid a 2 per cent bonus for selling the investments, Xinhua said.

Where that money went is unclear. Bofeng’s website says the company is an investor and asset manager. But the Web portal Sina.com reported it also traded stocks and made high-interest loans to real estate and other businesses.
Thousands of Chinese savers who entrusted money to an informal finance industry that operates with little government oversight are suffering painful losses as borrowers default and other ventures fail. Source: AP

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