Mar252015
China’s real estate plunge accelerates
Chinese house prices fell considerably in February. Is this the first leg down in what will become an epic financial catastrophe?
The Chinese government and central bankers ran a Ponzi scheme to accelerate real estate development to help China catch up to the rest of the world. Unfortunately, since it was a Ponzi scheme, they couldn’t figure out a way to unwind it without devastating their economy, so they kept putting more and more money into it, hoping desperately that it would work itself out.
At some point long ago, China developed enough housing stock and commercial properties to meet the needs of its citizens, but since they depended so heavily on continued development to sustain their economy, they kept building, and building, and building, and building. The overbuilding is so extreme that 20% or more of their housing stock sits empty, and entire cities are devoid of people.
All Ponzi schemes are unsustainable. China’s Ponzi scheme is starting to unravel, and it could have devastating effects on the world economy.
China’s Housing Crash Continues
Prices and sales volumes fall off a cliff, large developer needs bailout
By Valentin Schmid, Epoch Times | March 18, 2015
House prices in China can fall fast, especially around the Chinese New Year, just to quickly recover soon after. We saw this in 2011 and 2012. This year seems to be different though, and not in a good way.
On March 17, the National Bureau of Statistics announced prices in 70 of China’s major cities dropped 5.7 percent on average in February 2015 compared to a year earlier. This is the sixth consecutive decline on record and January was also bad with minus 5.1 percent.
According to private surveys, units sold in 48 cities declined by 10.9 percent over the year as government revenue from land sales cratered 36.2 percent in the first two months of the year, according to Shanghai Daily.
In a nutshell, people aren’t buying from developers and developers aren’t buying more land from the government. This is a big deal in a country where real estate contributes 20 percent to GDP and houses make up the bulk of the people’s savings.
The deflation of the Chinese real estate bubble will be particularly painful for the growing middle class in China, just as it was here in the US. It will also devastate the economy because 20% of their GDP will crumble to dust. This problem will not be contained to China.
… economist Gan Li … told Bloomberg in the beginning of 2014, “Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.”
It seems, now we know.
Developers the Biggest Debtors
Despite the similarity of the price declines between the early subprime crisis days and the Chinese housing bust, there are stark differences. Most Chinese pay for their homes in cash and don’t borrow heavily. So they are under far less pressure to sell than their U.S. subprime counterparts who are pressured by interest and principal payments.
On the other hand, the Chinese housing bubble seems to be of a greater magnitude and not all depends on the consumer, whose debt load at the end of 2013 was only 23 percent of GDP, a big part of it mortgages. …
This is an important point. The Chinese housing bubble burst won’t be driven by distressed supply; instead, the bubble will burst due to an enormous oversupply.
Numbers by the Survey and Research Center for China Household Finance stretch the imagination: More than one in five homes in China’s urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold.The other problem is that most of the debt incurred building this huge bubble is on the books of property developers.
“Quite simply, China has produced and built far too much capacity, through overinvestment in steel and cement firms and in accelerated housing development. In the process, it has amassed the largest buildup of bad debt in history,” writes economist Richard Vague.
Most developed economies around the world endured deflationary forces over the last 8 years due to collapsing housing bubbles and the non-payment of debt associated with bad real estate loans. Much of this deflation was printed over by various central banks, but some argue the printing was insufficient to overcome deflation. Good evidence of this can be found in negative bond yields on European bonds and very low bond yields in the US, Japan, and other countries.
For as bad as our deflation has been, when the Chinese real estate bubble bursts and the overleveraged real estate developers and associated industries collapse, the deflation will be far worse.
Private debt now stands at 211 percent of GDP, according to Vague, similar to levels seen in Japan before the crash and a big part of that is debt backed by real estate.
“China today is likely to have an estimated $1.75 trillion to $3.5 trillion in problem loans—a figure well in excess of the $1.5 trillion of total capital in China’s banking system,” wrote Vague. …
As with Countrywide and Bank of America, Chinese banks did well to plug the hole in the sinking ship because Chinese developers and construction companies are interwoven in an obscure chain of Ponzi credit. If one doesn’t pay, the other will almost certainly default.At the end of this chain stands the Chinese banking system and by extension the Chinese regime. Both are too big to fail and too big to bail out at the same time.
So what will Chinese government officials do about the problem with all this bad debt?
I believe the Chinese will print money, buy it up, and make the central bank the repository for all the toxic waste, similar to how we ultimately resolved the problem here in the US.
China’s house price crisis is creating a perverse bailout bubble for property companies
Mike Bird, Mar. 18, 2015, 4:11 AM
China’s house prices are sinking at the fastest pace on record, but you wouldn’t know it by looking at the country’s massive property companies.
Prices tumbled 5.7% in the year to February, falling across 66 of China’s 70 biggest cities.
China’s booming economy has driven a colossal supply of houses, including the ghost cities for which the country is now infamous.
… Rabobank’s analysts suggest the crash “likely still has years to play out given the level of oversupply.”
Is China’s housing bubble and it’s associated industries too big to fail? We’re about to find out.
And you would think that would be bad for China’s big property and real-estate companies. After all, residential and commercial buildings are what they sell to make their living, so falling prices certainly seem like a bad thing.
But shares of China Vanke, the country’s largest property developer, rose by 4.04% on Wednesday.
It’s a similar story for Poly Real Estate Group, another massive developer. Shares rose 5.05% overnight and are up by more than half in the past year. In fact, both companies easily outstripped the 2.13% rise in Shanghai stocks overall on Wednesday. But why?
The answer lies in the perverse incentives on offer — and the fact China’s Evergrande Real Estate Group just got a $16 billion (£10.85 billion) lifeline from China’s state-run banks. …
Property prices falling in China means more bailout money.
Investors in China certainly believe these entities are too big to fail.
It isn’t just private industry in China that needs a bailout.
Swapping spree
The finance ministry moves to ease local governments’ money troubles
Mar 14th 2015 | SHANGHAI | From the print edition
EVER since China’s gargantuan stimulus of 2009, which was unleashed to repel the global financial crisis, people have worried about how the debts incurred would be repaid. This week the finance ministry provided a partial answer, in the form of a scheme to restructure the liabilities of local governments, the most indebted of China’s public institutions.
Local governments will be allowed to swap 1 trillion yuan ($160 billion) of their existing high-interest debts for lower-cost bonds. Such swaps could become a feature of China’s fiscal landscape over the next few years…
It will start with restructuring, but when that fails — and it will fail — then the central bank will begin buying up this debt and printing it over.
The restructuring does not reduce these vast debts, but it does make them much easier to bear. Local governments can only borrow with the explicit permission of the finance ministry, which is usually miserly. They have responded by setting up companies, which they keep off the books, to raise money (hence the uncertainty about the scale of the borrowing). Such opaque entities, naturally, borrow at higher rates.
I am astonished that the government allows this given the inherent instability it creates.
China’s other debts, alas, remain a big concern. The cabinet has ruled that only a portion of local governments’ concealed liabilities would be treated as full-fledged government debt. Swaps like this one will help show what the government stands behind and what it does not, which may lead to defaults on excluded debt.
It most certainly will lead to defaults on the excluded debt, which will contribute to the coming deflation.
The Great Reset
Many people envision the Great Reset, the ultimate culmination of Hyman Minsky’s vision. So far central banks around the world have lowered rates and printed more money to prevent this reset from happening, particularly in China. Right now, the moral hazard in China is so extreme that nobody believes the central bank will allow the Great Reset to occur — even the central bankers believe it; however, when you consider the size of the enormous bubble in real estate in China, it’s hard to believe the central bank can print enough money to save it.
If China prints enough money to paper over its bubble, it will flood the world with its currency, and its value will crash. Ultimately, the value of any currency cannot exceed the value of a countries assets and the value of goods and services produced. If China’s real estate is 90% to 95% overvalued, the actual value of property based on the income of Chinese workers will force the Great Reset to occur — and it’s not like China can raise everyone’s income by 2000% to support real estate because such high wages would ruin its export base and further destabilize the economy.
The Chinese economy is a bomb, and falling house prices light the fuse.
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Problem is, China’s manufacturing/exports/growth is dependent on a cheap currency, but the Yuan is linked(within a narrow band)to USD.
Dollar up = yuan follows = China manf is priced-out of other key global markets. Hello deflation!
China doesn’t hard peg the yuan to the dollar. The problem was the rapid appreciation of the dollar which is very uncommon. Chances are china will just do what they did in 2005 and do a one off revaluation.
China’s exporters should greatly benefit from a high dollar relative to the yuan, but I rather doubt the benefit will outweigh the tremendous losses coming in their real estate market.
Please point out where I said the yuan was hard pegged to the dollar.
Thx in advance.
You didn’t I was merely pointing out your contention of China being prices out is false. They can just revalue it like they did in 2005.
+1 Nice post.
LOL!
http://www.tradingeconomics.com/charts/china-manufacturing-pmi.png?s=chinamanpmi&lbl=0
Oops!
Mortgage Purchase Index Rises 5%
Is the market finally showing signs of life?
The seasonally adjusted Purchase Index increased 5% from one week earlier to its highest level since January 2015. The unadjusted Purchase Index increased 5% compared with the previous week and was 3% higher than the same week one year ago.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.90%.
California Pending Homes Sales Rise
Exhibits typical seasonal pattern
As a whole, California pending home sales increased in February, with the Pending Home Sales Index growing 24.8% from a revised 89.9 in January to 112.2, based on signed contracts.
The month-to-month increase easily topped the long-run average increase of 17.9% observed in the last seven years.
Statewide pending home sales were up 15.6 percent on an annual basis from the 97.1 index recorded in February 2014. The yearly increase was the largest since April 2009 and was the first double-digit gain since April 2012.
This comes as good news for the state since it infamous for having a tough housing market to enter.
Dwight Johnston, chief economist for the California Credit Union League, explained that California is not changing anytime soon. There is no movement to loosen the problem in the states, and if anything, there are people who are restricting changes.
His tip for how to afford living in California: save.
In the old days, people didn’t need to put as great of an emphasis on saving, Johnston explained. However, now it really requires incomes to rise and people to save more.
Economists Cling to Hope in Face of Bad Housing Data
The Federal Housing Finance Agency House Price Index reported a 0.3% increase in U.S. house prices in January from the previous month. From January 2014 to January 2015, house prices were up 5.1%.
Sales of new single-family houses in February 2015 picked back up to a seasonally adjusted annual rate of 539,000, 24.8% above last year’s estimate of 432,000. This is 7.8% above the revised January rate of 500,000. It was originally posted at a seasonally adjusted annual rate of 481,000, only 5.3% January 2014’s estimate of 457,000, which was considered a weak level.
Looking back at the start of the year, January was a bad month for housing starts, completions and permits, with privately-owned housing units authorized by building permits in January coming in at a seasonally adjusted annual rate of 1,053,000.
But industry watchers said this haphazard start could be short-lived.
“February’s bump in new home sales is definitely encouraging when compared to the lackluster numbers we’ve seen recently in existing home sales,” said Quicken Loans Vice President Bill Banfield. “We’re a bit low on the supply-side which could force prices up for buyers, further hammering home that we’re in a seller’s market.”
Paul Stansfield, chief property economist for Capital Economics, said that housing should pick up as spring takes off.
“Together with the rise in existing home sales reported yesterday, the surge in new home sales, to a seven-year high in February, appears to confirm that the weakness in housing activity at the start of this year was just a blip,” Stansfield said. “An eventual loosening in supply conditions should in turn stimulate sales, as more potential buyers are attracted by a wider choice of homes for sale. Along with our bullish forecasts for the labor market, this supports our view that new home sales in particular have significant scope to rise further over the next two years.” ?
Report: Weak Inventory, Lower Affordability, Tight Credit Hindering Housing Bubble Reflation
The recovery of the housing market continues at a slower-than-expected pace due to weak inventory, slowing demand, and rising prices, according to Auction.com’s Real Estate Nowcast for March 2015 released on Tuesday.
“The housing market is continuing to recover, but at a slower, more incremental pace than what most people had hoped for in 2015,” Auction.com EVP Rick Sharga said. “Three main problems continue to prevent more robust growth: extraordinarily limited inventory, especially at the entry level of the market; lower affordability, as home price increases have significantly outpaced wage growth; and tight credit for all but the most highly-qualified borrowers. This adds up to an especially difficult ecosystem for first-time homebuyers to navigate, and we continue to see less home sales to that segment of the market than what we’ve seen historically.”
According to Auction.com’s chief economist, Peter Muoio, the deceleration of price growth could slow affordability deterioration, thus boosting home sales – especially if the predicted wage growth comes to pass.
“Despite some recent softness in several economic indicators, the US economy – especially the labor market – appears to be on solid footing,” Muoio said. “Unemployment is descending, voluntary quits are increasing, and consumer confidence has breached the 100 index level mark, bringing it firmly back into ‘normal’ territory. These are all positives for future housing demand and we continue to expect the housing recovery, now in a winter-like dormancy, to show signs of growth as the year progresses.”
“…and tight credit for all but the most highly-qualified borrowers.”
Why not write, “…and loose credit for the least qualified borrowers continues to be unavailable”?
A more truthful and accurate statement as you describe would not serve their hidden agenda; in fact, it would underscore the absurdity of what they really propose and make the direct and obvious connection between the policy they advocate and the housing bubble everyone wants to avoid.
I’ve made the case that interest rates would not rise in 2015. Most “experts” believe rates will start to rise in September, perhaps even June. This trial balloon foreshadows the likelihood of federal reserve inaction for the rest of 2015.
Fed’s Evans: Central Bank Shouldn’t Raise Rates This Year
Overly weak inflation and a lack of evidence suggesting price pressures are about to heat up means the Fed shouldn’t raise interest rates this year, Federal Reserve Bank of Chicago President Charles Evans said in a speech Wednesday.
“I think economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016,” Mr. Evans said. While the economy is growing and adding jobs at a very healthy clip, inflation remains well under the 2% level targeted by the Fed, and that argues for caution, he said.
While a number of Fed officials share Mr. Evans’s worry about inflation, most officials appear to agree the door to rate rises comes with the Fed’s mid-June policy meeting. In a speech Monday evening, San Francisco Fed President John Williams, also an FOMC voter, said, “I think that by midyear it will be the time to have a discussion about starting to raise rates.”
In his speech, Mr. Evans shared the optimism his colleagues have about the economy. But he again cautioned the Fed faces serious problems if it raises rates too soon.
“Given uncomfortably low inflation and an uncertain global environment, there are significant risks, but few benefits, to increasing interest rates prematurely,” Mr. Evans said. “A prudent risk-management and goal-oriented approach to U.S. monetary policy dictates that we continue to assess inflation developments for some time before generating more restrictive financial conditions,” he said.
Mr. Evans believes the Fed will see inflation back at 2% in 2018. He said to be confident inflation is moving in the right direction, he needs to see some pick up in core price measures that strip out food and energy prices, accelerating wage gains, as well as firmer public and market expectations that prices are going to rise from current levels.
“It would be very surprising if inflation did not pick up to 2%,” Mr. Evans told reporters after his speech. “I don’t have the same confidence in the time frame. It would pay off to look at a little more data.”
He said the fact that inflation remains low raises questions about whether the Fed’s monetary policy is “as accommodative as we think.”
“I think that by midyear it will be the time to have a discussion about starting to raise rates.”
Not a very hawkish statement… Not only is it not time to start raising rates, it isn’t even time to start talking about raising rates. In Mid-2015 the discussion may or may not start, depending on the data. Right.
“Mr. Evans believes the Fed will see inflation back at 2% in 2018.”
Then why raise rates until then? Seems like the FED would want inflation closer to 3% than 2% before they start tapping the brakes. Unless, of course, long-term economic stagnation is the goal.
We are only at the beginning of the beginning of the recovery. Sure the unemployment numbers look great, and that is indeed reason to hope that the worst is behind us. But, a tighter labor market needs to translate into higher wages. These higher wages then need to translate into debt reduction, increased savings, or increased discretionary spending.
As you pointed out last week, increased economic activity from rising discretionary spending will show up in monetary velocity. But what comes first? Debt reduction, saving, or discretionary spending? At most there might be a 1/3 allocation to each.
But I think that first: debt gets paid down to a manageable level, and savings rates are increased until a reasonable cushion is reached. Only then will discretionary spending get the lion’s share of the wage hikes. All this takes time. Don’t put the cart in front of the horse. It’s much easier to steer and control that way.
For those who already have manageable debts and a sizable cash safety net, discretionary spending can rise sooner. This is beneficial since goods and services can be had before prices rise. I think we are in what is known as the incubation period. The economic egg has been laid so to speak, but we may have a couple of years before it hatches.
Very well stated.
Can you imagine the federal reserve raising interest rates while inflation is below 1%? Right now, it’s almost zero, so even worst case, it will still be below 1% in June. What possible reason would the federal reserve have for raising rates at that point? Certainly not for fear of inflation.
As you noted, real inflation is well off in the future because it will take time to pay down debts and rebuild savings, and that’s after everyone goes back to work, which still isn’t the case given the low labor participation rates.
House Banking Panel to Take Up Slate of Dodd-Frank Changes
National Mortgage News, Mar. 24, 2015–Heltman, John
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, announced a vote for Thursday of 11 bills aimed at lessening regulatory burden on banks by changing aspects of the Dodd-Frank Act and associated regulations.
If nothing else, this puts political pressure on the Bureau to be less aggressive in its efforts. The Bureau is planning to kill the payday lenders (a necessary objective). We’ll see if they retreat…
The heated and completely irrational rhetoric of the Republicans on this issue signals to me they are advocating for a hidden donor base, probably financial interests. Since the CPFB is completely independent, Republicans can bluster all they want, and they have little actual power to influence the bureau’s activities, which is probably why their rhetoric is so extreme and ridiculous.
Gold in Feces?
All this time I’ve been saying Goldbugs are full of shit when in fact it was the other way around. — Barry Ritholtz
Feces contains gold worth millions
Washington (AFP) – Human feces contains gold and other precious metals that could be worth hundreds of millions of dollars, experts say.
Now the trick is how to retrieve them — a potential windfall that could also help save the planet.
“The gold we found was at the level of a minimal mineral deposit,” said Kathleen Smith, of the US Geological Survey, after her team discovered metals such as platinum, silver and gold in treated waste.
A recent study by another group of experts in the field found that waste from one million Americans could contain as much as $13 million worth of metals.
Finding a way to extract the metals could help the environment by cutting down on the need for mining and reducing unwanted release of metals into the environment.
“If you can get rid of some of the nuisance metals that currently limit how much of these biosolids we can use on fields and forests, and at the same time recover valuable metals and other elements, that’s a win-win,” said Smith.
Based on these findings, experts believe the so-called “Gold Bugs” will begin saving their feces and panning for the gold within. “It’s not glamorous work, but it’s very rewarding, said one Gold Bug.
A consortium of Gold Bugs is exploring purchasing private wastewater treatment plants to mine gold on a commercial scale. “Over the last four years as gold prices collapsed, people believed gold was worthless as crap,” says one influential Gold Bug, “The irony is that crap was more valuable than anyone realized.”
I think we’ve reached a new phase of the bubble cycle, when those that were smart enough to avoid the bubble begin humiliating those that thought it was based on fundamentals and not a mania. Kind of the way Pets.com became the whipping boy of the tech bubble and Truthi became the whipping girl of the OC property bubble.
Barry Ritholtz is hilarious.
I wonder what happened to Truthi (I know her true identity, BTW). I suppose business must have picked up enough that she didn’t have all day to spam the OC Register with comments.
Was she an agent that specialized in REO? She always implied that she had inside connections and info on distressed properties, but I couldn’t get her to elaborate. To be fair, she also wanted to know what my role was and I wouldn’t elaborate either.
She was a mortgage broker. I just checked for her on Google, and apparently now she is working as a real estate agent for Coldwell Banker out of their Quail Hill office. She’s also running an independent business consulting company, but she doesn’t have a website.
Hinterlands duplex #2 closed yesterday.
Purchase price: $70,000
Monthly rents: $1,300-1,400
Expected cash on cash return: 20%
Are your units section 8 rentals?
No, but that’s a good idea. The government guarantees part of the monthly rent and if the tenant trashes your place, they get booted from the program, so there’s a strong incentive to be good citizens.
Several of my properties in Las Vegas are section 8. Those have been among the most reliable and best cared for of the bunch.
Since I’m not an expert, do you simultaneously market to Section 8 and non-Section 8 tenants and just go with whoever applies first?
Yes. Basically, when I have a vacancy, the property management company markets it. They ask me if I am open to Section 8 tenants, and they tell Section 8 that we are open to applicants on the property. Whoever steps up first with an application I like gets the property.
I like section 8 tenants because I have no worries about them paying the rent because the government does it. I do worry about them trashing the place, but they generally don’t because if they do, they lose the Section 8 benefit, so most people will take care of the property because they know it means they get to live there for free (usually free, but some contribute a little).
Good to know. I’ll talk to my property manager about it.
Congratulations on your purchase. You’re making me wonder if I’m not missing a good opportunity.
If you ever want to write a guest post about your experience, I’d be happy to run it.