Tag Archives: Anecdotes

In Case You Thought Our Bubble Was Due To Special Local Factors…

“Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years.”

– from ‘Swedish household debt soars as poll nears’, CNBC, 24 Aug 2014

“In the capital the latest full-year figures show that the average wage is £39,920, while the average house price is about £400,000.
Prices are therefore 10 times greater than wages.
But in South Buckinghamshire, in towns like Amersham and Beaconsfield, the average home is worth 20 times as much as the annual local salary.
Outside the South East, the place where houses are least affordable is the Cotswolds, where they cost 19 times wages.
The countryside may be scenic, but that is little compensation when the average worker, putting a third of his or her salary into a mortgage, would need over 60 years to pay it off.” …
“”I shall be disappointed if I only get £550,000 for it,” says Mike Golding, as he shows me into a two-bedroom, first-floor flat he is selling. It has no garden, few proper windows, and no view to speak of.
But such prices are not excessive in Stow on the Wold, a pretty market town in the Cotswolds, where the undersupply of affordable housing is matched only by the oversupply of Barbour jackets, local organic brie and bow-windowed tea shops.
One such tea shop is run by Anna Wright and her mother.
She and her boyfriend have been looking for a house to buy, but, faced with prices like the above, they have given up looking in Stow.
“We have been priced out of the market,” she says.
“You are privileged to grow up in the Cotswolds, but there’s never an expectation of buying a house here,” she tells me.
A few doors down, 21-year-old shop worker Nicola O’Driscoll is in the same position.
She has been forced to look for a flat in Cheltenham, no less than 18 miles away.
“It’s really unfair. I feel like they don’t want youngsters to live around here. Because there’s no way they can,” she says.

– from ‘The 62 areas where houses are less affordable than London’, BBC, 18 Aug 2014

Too-cheap money has caused many speculative bubbles in housing, and perverted the relationship between income and housing prices. – vreaa

Interest Rates Held Far Lower Than Necessary Cause Speculative Bubbles

fig

“The Fed’s mode of operation has drastically changed over the past 12 years. Prior to 2002 the Fed would tighten monetary policy in reaction to outward signs of rising “price inflation” and loosen monetary policy in reaction to outward signs of falling “price inflation”, but beginning in 2002 the Fed became far more biased towards loose monetary policy. This bias is now so great that we are starting to wonder whether the Fed has become permanently loose.”

“The chart above comparing the Fed Funds Rate (FFR) target set by the Fed with the Future Inflation Gauge (FIG) clearly illustrates how the Fed has changed over the past two decades. Note that the Future Inflation Gauge is calculated monthly by the Economic Cycle Research Institute (ECRI) and should really be called the Future CPI Gauge, because it is designed to lead the CPI by about 11 months.”

“The chart shows that prior to 2002 the FFR tended to follow the FIG. After the FIG warned of rising “price pressures” the Fed would start hiking the FFR, and after the FIG started signaling reduced upward pressure on the CPI the Fed would start cutting the FFR. During 2002-2004, however, the Fed not only didn’t hike its targeted interest rate in response to a sharp increase in the FIG, it continued to cut the FFR. The Fed’s decision to maintain an ultra-loose stance during 2002-2004 was the fuel for the real estate investment bubble and set the stage for the collapse of 2007-2009 [in the US].” [editor's note: The Canadian RE market was bailed out by parallel rate cuts here -- before it had even crashed!]

“There was a lesson to be learned from what happened during 2002-2007, but the Fed apparently learned the wrong lesson. The lesson that should have been learned was: Don’t provide monetary fuel for bubble activities, because the eventual economic fallout will be devastating. Unfortunately, the lesson that was actually learned by the Fed was: An economic bust can be avoided forever by keeping monetary policy loose forever. The result is that the divergence between the FFR and the FIG that arose during the first half of the last decade is nothing compared to the divergence that is now in progress. Moreover, the near-zero FFR doesn’t do justice to the ‘looseness’ of the Fed’s current stance, in that 4+ years after the end of the last official recession the Fed is still pumping money as if the US were in the midst of a financial crisis.” …

“By ignoring investment bubbles and erring far more in favour of “inflation” than it has ever done in the past, the Fed is currently setting the stage for the mother-of-all economic busts.”

- from ‘Future ‘Inflation’ and Monetary Madness’, Steve Saville, 14 Oct 2013

Canadian markets are completely subservient to action in the US. (If you don’t believe this, watch any aspect of a Canadian market of any sort on a US market holiday. Flatline!)
Canadian interest rates were cut in lockstep with the US in late 2008, even though the RE market here sorely didn’t need the juicing. The BOC and the Min of Finance were, and are, at fault for dropping interest rates too far, and then holding them too low for too long.
If you want to see a graphic representation of the reason for our national RE bubble, look at the orange areas in chart below (a version of the one above). [BTW, the charts here are almost a year old.. the FIG is now back around 4, and the Fed Fund rate remains zero].
The policy is perverse, and the piper is yet to be paid.
– vreaa

fig c g

‘A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.’

Josh sells real estate in urban Toronto. “Fourteen years now,” he says, “since I was 21. And in all that time, there’s been only one really crappy time – six years ago now.” …
Josh’s clients are mostly people his age – the sub-40 set. The average deal is around $800,000, he says, “but one in four, I’d say, range from one-two to one-four.” Of those spending more than a million, Josh figures the average mortgage is about 80% – taking into consideration CMHC insurance is no longer available for seven-figure deals.
“Used to be that a million-dollar mortgage was a big deal,” he adds. “Now I see them all the time.”
By the way, to carry $1,000,000 today with a variable-rate mortgage at just under prime is about $4,500 a month. With insurance and property tax, it’s a little over $5,000. The land transfer tax in Toronto on a $1.2 million so-so house needing serious renos in the north end is $40,200. So to close on that with 20% down would require cash of about $290,000, and then a million in financing. …
No wonder RBC came out with that report last week. The bank found people between 35 and 44 have far more debt than their parents did at the same age – and more leverage than any other group in society. Mortgage rates today may be 3% instead of the 14% they were in 1993, but the amount of debt has ballooned so dramatically that monthly payments eat up far more of disposable income.
As a result, people in this age group are more dependent on real estate than any in the past. Almost 100% of the increase in net worth for Josh’s cohort has come from housing appreciation, since they’re saving and investing virtually nothing outside of their walls.
While real estate augments, they win. When it declines, they’re screwed. …
[And] it’s worth understanding what happens to people like Josh’s clients once they have seen a disaster. In the US these days the appetite for house-buying is sinking with regularity among the young. A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.
So either the American kids are wusses and might suffer, or the kids here are naïve and could implode.

– from Generations, by Garth Turner, greaterfool.ca, 10 Aug 2014

Our bubble is national, and will end as all bubbles do, with implosion.
Vancouver has the biggest bubble and the least non-RE support; it will suffer the most.
As one recent online article succinctly stated: “You can’t taper a Ponzi scheme”.
– vreaa

‘Canada’s moment as an economic standout is over.’

“Canadian employers created barely any jobs in July, surprising forecasters and reinforcing the Bank of Canada’s decision to keep interest rates low.
Statistics Canada’s monthly tally of hiring and firing produced a net gain of 200 positions last month, as a 60,000 increase in part-time jobs marginally outweighed a 59,700 plunge in full-time positions. …
“There is little job growth in Canada and the degree of slack in the labour market remains elevated,” David Watt, chief economist at HSBC’s Canadian unit, advised clients in a note.
Canada’s moment as a standout among the world’s richer economies is over. The country weathered the financial crisis relatively well and gross domestic product and employment rebounded to pre-recession levels faster than most of its peers. Economic growth now is coming much harder. For the better part of the year, Canada has tended to follow monthly gains in hiring with offsetting declines in the weeks that follow. …
The labour participation rate, which measures the percentage of the population either working or seeking work, dropped to 65.9 per cent, the lowest since October 2001. Employment in goods-producing industries has shrunk by 56,000 positions this year, reducing the headcount to its lowest since January 2012, according National Bank Financial. …
Canada’s economy is need of a jolt that just isn’t coming.
The Bank of Canada has signaled its readiness to leave its benchmark lending rate unchanged at 1 per cent for a considerable period, yet it is wary of cutting borrowing costs because that could prompt highly indebted households to take on more credit.”

– from ‘Surprisingly negative jobs report supports low-rate stance’, G&M, 8 Aug 2014

Canada’s housing price bubble has been the result of 12+ years of too-cheap money rather than growth in real economic fundamentals. At some point prices will reconcile with fundamentals. – vreaa

‘The Extra Breadwinner In The Family’ – ‘Does your house make more than you?’

Another nation, but just as relevant (and equally unsustainable) here in Vancouver. – vreaa
[Remember the Vancouver dentist who reportedly said that he "made more on the sale of that house than he made in his entire career"? (VREAA, 21 Aug 2011)]

“With house prices growing faster than incomes in many parts of the UK, is your house making more money than you do?
Thanks to an extra breadwinner in the family, Rebecca Fletcher, her husband and two daughters are living the good life in a rural cottage deep in the Hampshire countryside.
The extra breadwinner is their old family home – a three-bedroom, terraced house in south-west London which Mrs Fletcher, a primary school teacher, and her husband, a London solicitor, bought in 2007.
They paid £450,000 – right at the top of the house price boom of the last decade.
When house prices fell after the 2008 banking bust, they feared financial disaster.
“We thought, ‘Are we ever going to be able to move out of this house – are we ever going to recoup the money we’ve spent on it?'” says Mrs Fletcher.
Their fears proved unfounded.
In 2009, prices in south-west London started rising, and went on rising. By the time they sold their former home last August, the price was £655,000.
According to calculations done for the BBC by Lloyds Bank, in the 12 months before the sale, Mrs Fletcher’s London home had increased in price by about £100,000 – more than she and her husband’s earnings put together.”
– from ‘Does your house make more than you?’, Michael Robinson, BBC, 1 Aug 2014

“It won’t last. It just prepares the way for the bust. It forces out real businesses. And it drives out people who find themselves financially unable to live here any longer.”

When reading this article, Vancouverites may want to play spot-the-differences/spot-the-similarities. – ed.

How the Surge of Hot Money Pushes San Francisco to the Brink
Wolf Richter, wolfstreet.com, 22 July 2014 [also reprinted at zerohedge]

The median home price in my beloved and crazy San Francisco – that’s for a no-view two-bedroom apartment in an older building in a so-so area – after rising 13.3% from a year ago, hit an ultra-cool, slick $1,000,000.

It made a splash in our conversations. People figured that nothing could to take down the housing market. Yet, as before, there will be a devastating event: the moment when the billions from all over the world suddenly stop raining down on San Francisco.

Every real-estate data provider has its own numbers. The Case-Shiller placed the peak of the prior bubble in “San Francisco” in June 2006 with an index value of 218, well above the current index value of 191. Though named “San Francisco,” the index covers five Bay Area counties that include cities like Oakland and Richmond where home prices, though soaring, haven’t gone back to previous bubble peaks.

The $1,000,000 that DataQuick, now part of CoreLogic, came up with is for the actual city of San Francisco. In the data series, San Francisco’s prior housing bubble peaked in November 2007 when the median home price hit $814,750. People thought this would go on forever, that San Francisco was special, that the national housing bust would pass it by. A month later, the median home price plunged 10%.

It was the beginning of a terrible bust – the moment when money from all over the world stopped raining down on San Francisco. Real estate here lives and dies with the periodic storm surges of moolah from venture capital investors, IPOs, and corporate buyouts.

Now we’re in another storm surge. The Twitter IPO transferred billions from around the world to Twitter investors and employees in the city and the Bay Area. When Facebook acquired Whatsapp for $19 billion, its 55 employees and some investors started plowing some of this money into the local economy, money that didn’t come from heaven but indirectly from Facebook shareholders. In the current climate, hundreds of transactions, large and small, take place every month, including a slew of IPOs. That’s the great hot-money-transfer machine. And San Francisco sits at the receiving end.

There are some drawbacks, however. Number one, it won’t last. It just prepares the way for the next bust. Number two (and in the interim), it forces out real businesses with real revenues and profits. And it drives out people who find themselves – though well-employed – financially unable to live here any longer.

Take the story of Bloodhound that was catapulted into the limelight by ValleyWag. In January 2013, a Series A round brought its total funding to $4.8 million, based on its conference app, an “ambitious vision to fundamentally change how buyers meet sellers,” as TechCrunch put it. “Its hardcore dedication to product and the fact that it can reuse everything it builds puts it leagues ahead of….” Etc. etc. The article was dripping with startup hype.

Companies like Bloodhound are flush with money from investors and have no need to make revenues or profits, and they have no clue how to manage expenses, or that expenses even need to be managed, and there’s nothing to constrain them in any way and force them to be prudent with investors’ money. Armed to the teeth this way, they dive into the local real estate market.

As the startup bubble in San Francisco was coming to a boil, and billions started showing up in bits and pieces, landlords began lusting after this money. And so in October 2012, the Million Fishes Art Collective – “an incubation program” for artists – was not able to renew its lease on a 10,000 square-foot space on Bryant Street at 23rd Street, in the Mission, which had been an iffy area and therefore affordable. After ten years, Million Fishes was gone, and so were the artists and the shows that had been open to the public. It reportedly had been paying over $13,000 per month.

The space was prepared for a startup armed with hype, hoopla, and Series-A money piped in from VC-fund investors around the world. Along come Bloodhound with whatever remained of its $4.8 million in funding. It signed a 5-year lease for $31,667 a month in rent and $564 in fees, or nearly 150% more than Million Fishes had paid. The neighborhood wasn’t amused, but hey, big money rules, and it was a done deal.

So Bloodhound was blowing $387,000 a year on rent, and it didn’t care because expenses were no objective because profits weren’t even on the horizon. It was just building a thingy that would forever change the world. But now Bloodhound is gone as well. Stopped paying rent, ran out of money, just packed up and disappeared. ValleyWag reported:

When emailed for comment, Bloodhound co-founder Anthony Krumeich simply stated “We moved out of the office. No longer fit our needs.” However court documents indicate Bloodhound has gone AWOL and abandoned their office. The landlord’s attorney has not been able to issue the company or its founders a summons….

Bloodhound didn’t change the world. But its hot money changed San Francisco. It helped drive up rents. Each transaction impacts a number of future transactions via the multiplier effect. This scenario is repeated over and over. Enterprises with real cash flows are pushed out because they can’t compete with the hot money that briefly comes into town looking to multiply itself.

But occasionally, it goes too far, even for San Francisco. A little while ago, Pinterest jumped into the fray. It has raised $800 million so far, and sports a valuation of $5 billion, but has no noticeable revenues, doesn’t even dream of profits, and has no idea how to control expenses – and no need to. Armed with this distorted attitude and hundreds of millions of dollars in global hot money, it set its sights on the beautiful, historic 600,000 square-foot San Francisco Design Center at 2 Henry Adams St., where 77 design businesses were plying their trade the hard way by generating the cash flow necessary to sustain themselves.

The Design Center’s owner, according to the SFGate, “had sought to take advantage of a city zoning ordinance that allows owners of designated historic landmarks to change zoning from so-called PDR – production, distribution and repair – to traditional office space. That would have allowed Pinterest to locate its offices there.” The tenants would have been booted out in favor of a company that had no reason to care about how much money it blew on office space. Alas, after an uproar, the Board of Supervisors Land Use & Economic Development Committee voted to table the matter indefinitely.

The ratchet effect continues as each transaction impacts future transactions, pumped up by hot money that doesn’t care about actual expenses and profits. And the space Million Fishes had leased for $13,000 a month, and that Bloodhound had leased for $31,667 a month, went back on the market, ValleyWag reported, at $37,500 a month.

This too is happening to homes where one sale price of one home impacts the price on average of 60 others via the multiplier effect [How Wall Street Manipulates The Buy-to-Rent Housing Racket]. That’s how the median home price of $1,000,000 came about: powered by hot money that follows hope and hype about the next big thingy that will change the world. As before, someday the hot money will suddenly evaporate, with devastating effect. To pinpoint that moment, we just have to watch the IPO market. When it blows off its top, so will San Francisco.

UBS is already preparing for that moment. The world’s largest wealth manager is “very worried” about “the lack of liquidity” that could wreak havoc during the expected sell-off. So UBS reduces risk “over the full spectrum of assets.”

Wage To House Price Ratio Is A Changin’

inside-llewyn-davis-trailer

Readers may have seen the 2013 Coen brothers movie ‘Inside Llewyn Davis’, about a folk singer in NYC in 1961.
In a relatively early scene we hear from Llewyn’s sister that their parents’ house has been sold for “Eleven-Five” ($11,500).
Immediately thereafter Llewyn sits in on a recording session for another folk singer, playing second guitar and doing fill-in vocals on one song. For this he is paid $200 (a little under 2% of the value of a house!).
Gee, how times have a-changed.
The equivalent in our town today would be for a musician to be paid $15K-$20K for session work on one song.
– vreaa