January 11, 2016

Australia’s Long-Term Bet On China

The Sunshine Coast Daily reports from Australia. “Opening up more land for urban development can only be justified if the State Government identifies a reversal in the declining interstate migration rate, an increase in wages and the return of a strong stock market. That’s the view of Local Government of Queensland chief executive Greg Hallam. He said, if anything, the current oversupply of land was suppressing prices. The Sunshine Coast, which has the most concentrated broad acre ownership in South-East Queensland, provides an example of how developers restrain the release of new lots until they see the rise.”

“‘The rate of release is determined by price,’ Mr Hallam said. ‘What we hear often is that there is a land shortage. That may be true for small to medium developers, but that’s not to say there is not enough land. There is enough but 70% is held by two or three major national companies.”’

From ABC News. “In great news for renters, but a bind for property investors, a new report shows Australia’s capital cities have posted the lowest rate of annual rental growth in records going back two decades. According to CoreLogic RP Data’s Rent Review report, weekly rents were unchanged in December, while rental growth nationally was a feeble 0.3 per cent over 2015. ‘You only have to drive around the inner-city areas of Sydney, Melbourne or Brisbane to know that there’s a huge amount of unit construction activity going on,’ CoreLogic RP Data research analyst Cameron Kusher told ABC News. ‘Now units are twice as likely to be rented as houses, so much of that stock does end up back in the rental pool.’”

“Renters in Darwin and Perth have reaped the biggest benefits, with rents there falling by 13.3 per cent and 8 per cent respectively over the past year. ‘Perth is still approving a lot of new housing for construction as well, so that’s going to continue to weaken the market,’ Mr Kusher said. In further bad news for many heavily indebted landlords, CoreLogic said it expected rental growth to slow further before it starts to improve. ‘Obviously that’s not great news for people who own investment properties but, for renters, it means they’ve got a lot of choice out there in the market,’ Mr Kusher said.”

From The Advisor. “Almost all major markets are likely to become oversupplied during 2016, a leading forecaster has claimed. BIS Shrapnel managing director Robert Mellor told Mortgage Business, The Adviser’s sister title, that Sydney is likely to be the only capital city that remains undersupplied at the end of 2016. Mr Mellor also highlighted Western Australia, which he said is ‘moving into substantial oversupply’ because of reduced net overseas migration and slower population growth. Local investor demand is expected to “fall off significantly” in markets that are facing an oversupply, particularly inner-city apartments in Brisbane and Melbourne.”

“‘If you want to isolate the inner-Melbourne and inner-Brisbane markets and look at the high-density component of those markets, at some point construction has to fall by 50 per cent and maybe as much as 60 per cent, because we are at incredibly high levels – unsustainable levels – and ultimately it must lead to significant excess supply,’ he said.”

From Domain News. “People wanting to buy a home have reason to celebrate at last with 2016 declared the first buyers’ market of the past four years. As property prices soften and auction clearance rates are tipped to remain close to a modest 55 per cent, eager sellers are racing to cash in before prices slide further, triggering a buying bonanza. ‘The market has finally reached a point where it’s no longer a sellers’ market where buyers were forced to meet their ridiculously inflated prices,’ Jalil Wakim, managing director of finance broker Lendfin, says.”

“Home owner Peter Svoboda,​ for instance, put his three-bedroom plus studio house in Mascot on the market just before Christmas, hoping to pick up a buyer over the quiet period. Having lived in the home for 24 years, retired potter and occasional Elvis impersonator Svoboda, 69, feels it’s now or never to sell for a good price before downsizing elsewhere. ‘We feel it’s a good time to sell now to take advantage of the market that’s been so strong recently,’ says Svoboda. ‘We don’t know what will be happening with prices in the future.’”

“His agent, Veronica Perez of PRDnationwide, says the home is for sale at about $1.4 million but will be put up for auction if it doesn’t sell beforehand. ‘It’s in a great location, so should attract lots of interest,’ she says.”

The Daily Telegraph. “Sydney has become Australia’s weakest major real estate market after starting 2015 as the strongest. Core Logic RP Data’s latest figures show property prices in the Harbour City fell further than in any other capital over the three months to December, with the average home losing 2.3 per cent of its value. The median price of a Sydney home is now $800,000, down from just over $820,000 in September.”

“‘[Regulatory changes] have made it more expensive and difficult for investors to access housing finance. Added to this are higher mortgage rates and more restrictive credit policies and loan servicing requirements,’ said Core Logic head of research Tim Lawless.”

The Guardian. “Over the last couple of decades, China has undergone profound change and is often cited as an economic growth miracle. Day by day, however, the evidence becomes increasingly clear the probability of a severe economic and financial downturn in China is on the cards. This is not good news at all for Australia. The country is heavily exposed, as China comprises Australia’s top export market, at 33%, more than double the second (Japan at 15%).”

“As of the second quarter of 2015, China’s household sector debt was a moderate 38% of GDP but its booming private non-financial business sector debt was 163%. Added together, it gives a total of 201% and its climbing rapidly. This may well be a conservative figure, given it is widely acknowledged the central government has overstated GDP growth.”

“Australia’s long-term bet on China was and still is conceptually simple – an incredibly flawed assumption that the country would never cease to consume increasingly more iron ore. For a time, the Australian bet looked good. The banking and financial system collected all the debt they could source from overseas wholesale lenders, underpinning increasingly greater expansion into Australia’s already grossly overvalued residential housing market.”

“The current downturn in China is smashing the Australian mining industry via lower demand for commodities amid increased global supply, especially in iron ore. As well as hitting Australia hard, the mining export-driven states and territories (Western Australia, Queensland and the Northern Territory) will suffer the most.”

“Population growth rates are falling in these regions, growth is softening and underutilization (unemployment and underemployment) is steadily rising. Spillover effects into the other states are likely, which could impact the country’s largest and most leveraged asset class: the housing market. Government and industry have managed over the last decade and a half to instill severe complacency in Australia, hoping policymakers’ two big bets on the finance, property and mining sectors would continue to pay dividends far into the future.”

“With the Chinese economy beginning to falter, the fear is Australians must now figure out where their economic future lies for the next generation who have been brainwashed into believing that digging up rocks and flipping houses by accumulating a gargantuan mountain of private debt is how a modern western country builds its future.”

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Comment by Mugsy
2016-01-11 05:36:16

“The median price of a Sydney home is now $800,000, down from just over $820,000 in September.”

Excellent news as I’m sure this has put the median Sydney home well within the reach of the median Sydney working class buyer.

Comment by bink
2016-01-11 08:49:10

Why they’ve never been more affordable!

Comment by Jingle Male
2016-01-12 01:12:34

The Australian dollar is now $.69 US (down from $1.10 a few years ago) so you are ironically correct. Never cheaper……well, never worth less. 69% of A$800k is U$560k!!

Comment by Michael in Brisbane
2016-01-12 06:05:04

AUD was .59 back in early ‘09 and even lower many years ago. The Aussie dollar has potential to fall much, much further.

Comment by Combotechie
2016-01-11 06:09:03

“With the Chinese economy beginning to falter, the fear is Australians must now figure out where their economic future lies for the next generation who have been brainwashed into believing that digging up rocks and flipping houses by accumulating a gargantuan mountain of private debt is how a modern western country builds its future.”

What a bunch of dummys.

Comment by rentor
2016-01-11 12:52:57

That could be said of all English speaking western countries. Leave the boring work to foreigners and concentrate on marketing products, including housing.

Comment by Mafia Blocks
2016-01-11 13:25:45

They better get some better marketing skills given the fact that housing demand is at 20 year lows and a massive excess empty and defaulted housing inventory of 25 million.

Comment by taxpayers
2016-01-11 06:38:03

All the gov regulators get to keep their jobs
Oz of us
Who has more gov housing agencies

Comment by Blue Skye
2016-01-11 06:48:14

“With the Chinese economy beginning to falter, the fear is Australians must now figure out where their economic future lies for the next generation…digging up rocks and flipping houses ”

China was in trouble in 2008 due to having overbuilt capacity. Their response was more massive capacity building. Some reports say capacity utilization in China is less than 50%. There’s the miracle in a nutshell. It will take many years to deconstruct 100s of thousands maybe of useless factories and recycle the scrap metal. The mountains of debt and all the bubble jobs will just vanish.

What will the next generation do indeed.

Comment by aNYCdj
2016-01-11 07:36:51

the fed will sell china 10,000,000 homes in exchange for hundreds of billions in treasury debt they own……..

Comment by Jingle Male
2016-01-11 08:21:26

They would sell them for $110 each in order to clear the whole $1.1 trillion of Chinese Treasury holdings. How about selling them 10,000 houses for $110,000 each?

Comment by Blue Skye
2016-01-11 07:00:52

“BIS Shrapnel”

Is this a bank? What an unfortunate name.

Comment by Michael in Brisbane
2016-01-12 06:10:26

They are a research and analyst firm, based here in Australia.

Comment by Professor Bear
2016-01-11 07:11:24

Global economy
The Observer
Is 2016 the year when the world tumbles back into economic crisis?
Some see China’s share collapse as merely a symptom of middle-class prosperity. Others take a darker view – and if they are right, the global threat is real
Which way now? An investor in Beijing watches the Chinese stock market move last week.
Photograph: Wang Zhao/AFP/Getty Images
Larry Elliott
Saturday 9 January 2016 11.00 EST
Last modified on Saturday 9 January 2016 17.00 EST

Rarely have financial markets had a more traumatic start to the year. Shares plunged, the price of oil clattered to its lowest level in 11 years, trading on the Chinese stock market was halted twice, and the World Bank warned that a “perfect storm” might be brewing.

George Osborne chose his moment well to go public with his concern that the UK faces a “cocktail of threats”. In addition to the $2tn wiped off global stock markets, the North Koreans claimed they had exploded a hydrogen bomb and relations between Saudi Arabia and Iran worsened markedly.

On the face of it, there seems no reason why the global markets should remain depressed. Rising oil prices have traditionally been associated with recessions, so a drop of more than two-thirds in the cost of a barrel of crude should, logically, be good for growth. Cheaper energy means lower costs for businesses and additional spending power for consumers. There are winners and losers from a falling oil price but on balance the impact should be positive.

Comment by Professor Bear
2016-01-11 07:31:19

Since when is a stock market crash a sign of “middle-class prosperity?”


Comment by Blue Skye
2016-01-11 07:47:36

“so a drop of more than two-thirds in the cost of a barrel of crude should, logically, be good for growth”

In your dreams! Oil is crashing because debt driven demand has crashed. Collapsing demand does not lead directly to growth. In between all the excess and the debt it rode in on must be extinguished.

Comment by Ben Jones
2016-01-11 07:41:12

‘The moderation in China’s economic expansion entails a decrease in the rate of—and sheer size of—demand growth this year, according to Barclays. “In 2016, we expect Chinese oil demand to grow at a slower pace, of 300,000 barrels per day (3 percent) versus the estimated 510,000 barrels per day in 2015, reflecting the country’s economic slowdown,” he concludes.’

‘From 2011 through 2014, implied year-over-year oil demand growth averaged 361,000 barrels per day, according to Mahesh.’

‘As Morgan Stanley sees crude falling to $20 per barrel on U.S. dollar appreciation, it’s troubling to imagine how bad things could get in the event that the magnitude of the slowdown in Chinese demand growth is larger than Barclays anticipates.’

Comment by scdave
2016-01-11 09:09:41

China’s massive accumulation of Debt..Starting to see warning bells and flashing amber….Continued capital flight would be the death blow…You were so wrong Adan….


Comment by Ben Jones
2016-01-11 08:01:54

‘Having lived in the home for 24 years, retired potter and occasional Elvis impersonator Svoboda, 69, feels it’s now or never to sell for a good price before downsizing elsewhere.’

Whenever I look at these house photos in Australia, they almost always look like a 1960 little hut. Sure Elvis, $1.4 million, where do I sign?

Comment by Ben Jones
2016-01-11 08:06:58

Yesterday I was driving and I listened to the Sunday REIC devils on 720 AM out of Las Vegas. There was an hour segment (infomercial) from a lending company. They had to be jumping around in the studio when they recorded it, practically screaming about all the things you could do with the “easy money”. They were really worked up about cash-out refinancing. Most of their competitors would only do 90% of LTV cash outs, but they were proudly doing 100%. And get this; no appraisal.

Comment by Jingle Male
2016-01-11 08:38:55

It would be interesting to know the back story on these guys. Where is this money originated? What kind of rates are they asking? Is it simply all based on credit, or do they run a computerized Zestimate type valuation? It is hard to believe we are moving back toward 2002-3 type underwriting & credit expansion, but it has almost been 15-years……which seems like the magic number for destroying memory brain cells in the financial markets. 1990-2005. 2005 to 2020?

Comment by Young Deezy
2016-01-11 08:51:44

I’ve been noticing these sorts of ads on both TV and the radio near me as well. I can’t help but wonder if it portends the beginning of the end for the echo bubble. It’s almost like it’s 2005 again, with all the financial shenanigans to go with it.

Comment by Mafia Blocks
2016-01-11 09:27:35

This is nothing new. It’s been going on all along not to mention the fact that 3% down payment mortgages are the bulk of new mortgages since 2008. As we all know, 3% DP is the definition of subprime.

Comment by CalifoH20
2016-01-11 15:04:52

As someone who got a loan in: 2003, 2005 and then tried and failed in 2013, i can tell you there is a uhhuuuuge difference.

Comment by Mafia Blocks
2016-01-11 16:06:22

0% down to 3% down is a distinction without a difference Lola.

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Comment by Jingle Male
2016-01-12 01:25:44

I don’t think lending standards are that loose either. I just refinanced some houses at sub 60% LTV and an 800 FICO. It was painful and time consuming. The 3.5% rate made it worth it.

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Comment by Mafia Blocks
2016-01-12 07:54:58

LTV doesn’t mean much when there was no appraisal.

Comment by watching
2016-01-11 08:46:52

Not strictly related to today’s topic, but on housing …

A couple of months ago you reported on Olmsted Place in Boston, a swank new luxury condo complex aimed, supposedly, at all the medical professionals in the nearby Longwood medical area.

Yesterday I was driving near the area and had to take a detour in through the city (the main Jamaica Way thoroughfare is a narrow, fast, hilly, curving road, and the cops had it blocked off due to an accident. The nightmare of getting in and out is reason number one to not even think of living there). I ended up on a street I didn’t know; at one point I looked left, and there was Olmsted Place, which I’d seen in photos from the article linked here.

It was about 4:30pm and pouring rain, so almost dark already, and nobody was out. I looked only for a second, but if there were half a dozen lights on in the place (196 units, of which I could see maybe half), that was more than I counted.

We kept going down the street; there were more ‘for lease’ and ‘for rent’ signs all along the way. Saw just one guy out on the sidewalk, shambling along with a garbage bag over his shoulder. Turning back north into the city, I kept looking and counted a number of ‘office space for lease’ signs.

We drove by blocks and blocks of the crappy tenements the students live in for god knows how much future debt burden, and then the glowing, beautiful facades of the Mass College of Art. Part of it was the rain drowning everything, but the juxtaposition of all these things seemed like graphic proof of a completely broken system. The end can’t come soon enough but the unwind is going to be awful.

Comment by taxpayers
2016-01-11 09:06:48

driving in BAHHstin
yikes !
tx for the report
Everyone claims Bostin is bullet proof

Comment by Ben Jones
2016-01-11 10:03:49

They said the same thing about Sydney until a few months ago. And China before that.

Comment by Jingle Male
2016-01-12 01:29:14

…and still saying it about Vancouver!

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Comment by Ed
2016-01-11 18:59:46

As a fellow Bostonian, the amount of luxury housing going up right now is batshit insane. The Seaport is “build it and they will come” although I have no idea who can afford $3500 for a studio in a neighborhood with no schools, bad transit options (SL is a joke) and nothing to do.

Everything inside the 128 belt is filled with million dollar houses sitting on the market for hundreds of days. Anything comes on the market under $750K its instantly swarmed. I’ve seen open houses with hundreds of people attending, trying to get anything because inventory is so low, especially at the low end.

Boston is a great city, with lots of economic opportunity and lots of great neighborhoods. But I mean we haven’t built an affordable place for people to live in the last 15 years. Everything is luxury. At some point they have to run out of millionaires, right?

Comment by Jingle Male
2016-01-12 01:31:54

Therein lies the problem. If they (Fed) keep printing Million$, no one ever runs out…..

Comment by Ben Jones
2016-01-11 08:57:28

Philippine Stocks Head for Bear Market Amid Foreign Selloff

‘Philippine shares posted the biggest foreign outflow in six weeks last Friday as concern about China’s economic slowdown and slumping oil prices sap demand for developing-nation assets.’

As China Dumps Treasuries, World Sees No Better Place for Refuge

‘As the biggest overseas creditor to the U.S., China has bankrolled hundreds of billions of dollars in deficit spending, particularly since the financial crisis. And that voracious appetite for Treasuries in recent years has been key in keeping America’s funding costs in check, even as the market for U.S. government debt ballooned to a record $13.2 trillion.’

“You have China running down reserves and Treasuries are a big portion of reserves, but even with that we still think the weight of support” will boost demand for U.S. debt, said Lee Ferridge, the head of macro strategy for North America at State Street, which oversees $2.4 trillion. The question is “if China slows, where does growth come from. That’s what’s been worrying a lot of people coming into 2016.”

If China slows? And they put you in charge of 2 trillion Lee?

Comment by Karen
2016-01-11 11:40:57

Dear god, these are the ’smart’ people

Comment by Senior Housing Analyst
2016-01-11 09:32:05

Yorba Linda, CA Housing Prices Crater 8% YoY; Mortgage Defaults And Housing Inventory Balloons


Comment by Mafia Blocks
2016-01-11 09:36:37

“Oil Tumbles To 11 Year Lows After Another Bank Joins “$20 Crude” Bandwagon”


We cautioned weeks ago that the oil price bottom is a very long way down from current levels. The reality is oil will flounder at $15/bbl for decades.

Comment by Senior Housing Analyst
2016-01-11 09:45:41

Plano, TX Housing Market Craters; Prices Plunge 14% YoY As Housing Correction Gears Up Nationwide


Comment by snake charmer
2016-01-11 10:11:49

I visited the Australian Gold Coast/Surfers’ Paradise area, fifteen years ago, and it already was incredibly dense with tall apartment buildings and condos. The construction was so poorly thought through that the beach — which is, after all, the reason why people go there in the first place — was thrown into shade for much of the day.

Comment by Michael in Brisbane
2016-01-12 06:20:44

The Gold Coast is a dump.

Comment by Senior Housing Analyst
2016-01-11 10:21:20

Vienna, VA Housing Market Craters; Prices Plummet 26% YoY


Comment by Larry Littlefield
2016-01-11 11:10:24

Worst case analogy:

U.S. 2016 = Great Britain 1929

China 2016 = U.S. 1929

Comment by Ben Jones
2016-01-11 11:48:06

I checked commodities a minute ago. All red, even coffee. I don’t think I’ve ever seen it all red.

I find it curious how easily the soft landing for China was cooked up. Why should they have a soft landing? Is it the invincible iron state? The totalitarian nature? Or is a hard landing unthinkable?

Comment by Larry Littlefield
2016-01-11 11:55:46

I think I need another cup.

Comment by Ben Jones
2016-01-11 11:57:43

US crude dips below $31, hits fresh 12-year low

‘Oil prices fell for a sixth session to a new 12-year low on Monday as slowing growth in China rattled investors’ hopes for demand this year and traders increased bets against any near-term recovery.’

“If the first week is anything to go by we are in for a long, volatile and very exhausting year. The week started on a bad note and ended on a good one but the market response, worryingly, was the same to both — sell, sell, sell,” David Hufton, of oil brokers PVM Oil Associates, wrote in a note.’

“China has torpedoed the hopes of the optimists. The third leg of the financial crises involving emerging markets that the IMF, World Bank, BIS and various messengers of doom had warned of has come into play,” he said.’

‘Morgan Stanley said on Monday that oil prices in the $20s were possible, especially if the dollar surges more against other currencies. “A 15 percent CNY (Chinese yuan) depreciation alone could send oil into the $20s,” the bank said.’


A long way from $70 Dan.

This currency thing could be a game changer.

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Comment by Ben Jones
2016-01-11 12:09:07

‘China’s markets continued their decline Monday, this time spooked by data indicating that Chinese companies would continue to see profit margins thin and that there would be continued downward pressure on the yuan.’

‘In other words, we’re talking about deflation here, people.’

‘The number to watch is China’s producer-price index, or PPI, which monitors wholesale prices for companies. It came at -5.9%, holding stable from November but still looking grim and missing expectations of -5.8%. This is also the 48th consecutive negative PPI read.’

‘PPI matters to the currency because as long as China’s companies are suffering from overcapacity, the government has the impetus to allow the yuan to weaken. Chinese companies that are having trouble selling products can use a weaker yuan to sell goods overseas.’

‘The government set the yuan higher on Monday, but the PPI read showed market participants that companies were still weak and that the problems that would force the country to devalue the yuan were still very real.’

‘Bloomberg economist Tom Orlik said the data indicated that overcapacity may be a bigger problem than we thought. The government has indicated it is looking into tackling this issue — which is specifically hitting old economic-growth drivers like manufacturing and construction — but we haven’t seen concrete plans yet.’

‘Meanwhile, those old growth drivers — which make up 43% of China’s economy — are growing at a mere 1.2%.’

‘Another factor driving lower PPI is China’s corporate debt. Struggling companies are using revenue to pay down interest rather than grow and invest.’

‘PPI deflation isn’t just bad for Chinese companies; it also means there will be continued downward pressure on the yuan. If there’s continued downward pressure on the yuan, there’s a higher risk for volatility not just in China’s markets, but in markets all over the world.’


Comment by snake charmer
2016-01-11 12:13:58

Speaking of messengers of doom, I’ve seen several reviews of “The Big Short,” although I haven’t yet watched the film. Where’s the movie about us? We were just as right as those guys, although we didn’t get stupid rich off our conclusion.

I’ve been thinking about who would play me in a “Housing Bubble Blog” movie. My wife would vote for Javier Bardem, but I have to concede that he’s, uh, slightly better-looking than me. Yes, it’s true.

Comment by Blue Skye
2016-01-11 12:27:09

“I checked commodities a minute ago. All red, even coffee.”

OMG, even chocolate is in the red! We are doomed.

Comment by Combotechie
2016-01-11 16:02:25

If the lure that sucks in buyers is rising prices (which is ECON 101 turned on its head) then it’s not possible to have a soft landing because as soon as the price rise softens:

1. The lure that sucked in buyers vanishes and

2. The incentive that potential sellers had for holding out for higher prices also vanishes.

1 + 2 = a massive reduction in demand plus a massive increase in supply.

Comment by Mafia Blocks
2016-01-11 12:41:10

Update: Crude Oil Craters To New 52 Week Low; $20 Range Oil In Sight


Comment by Xenos
2016-01-11 13:24:24

Yikes. Maybe I should not get the lexus hybrid with my cash-out refi money.

Do they still make Hummers?

Comment by Mafia Blocks
2016-01-11 13:34:06

With an economy in shambles and prices falling, are you sure?

Comment by CalifoH20
2016-01-11 15:06:07

mafia - not everyone is depressed

Comment by Mafia Blocks
2016-01-11 16:04:23

Pull yourself up out of that sewer, clean yourself up and cheer up and remember Lola……. Nothing accelerates the economy and cures poverty like falling prices to dramatically lower and more affordable levels. Nothing.

Sacramento, CA Housing Prices Dive 5% YoY On Ballooning Mortgage Defaults


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