World"s Longest Bull Market (55 Years) In Australian House Prices Is Over, According To UBS

This morning, CoreLogic released its monthly report on Australian house prices – the world’s longest running bull market. Finally, measures to tighten credit standards and dissuade overseas buyers (especially Chinese in Sydney and Melbourne) are beginning to bite and price rises ground to a halt last month. From the report...

Since moving through a peak rate of growth in November 2016, capital gains across Australia’s housing market have been losing momentum, with national dwelling values unchanged over the month of October. For October, conditions were flat across both the combined capital cities and the combined regional areas of Australia, however over the past twelve months growth in the capital cities (+7.0%) has outperformed the regional areas (+4.9%).

 

CoreLogic head of research Tim Lawless said, “The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers.” 

 

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples.  Additionally, interest only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties. 

 

“In fact, the peak rate of growth in dwelling values lines up closely with the peak growth rate for investment lending in late 2016.   We saw the housing market respond in a similar fashion through 2015, and the first half of 2016 as investors faced tighter credit conditions following the announcement from APRA that lenders couldn’t surpass a 10% speed limit on investment lending.”

The top line in CoreLogic’s summary table below shows that Sydney prices seem to be leading national prices lower.

Following the release of the data, Bloomberg reports that UBS is calling an end to the boom in Australian housing...

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS Group AG said.

 

National house prices were unchanged in October from September, while annual growth has slowed to 7 percent from more than 10 percent as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report.

 

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

 

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates.

 

The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

The regulatory crackdown on the insanely loose practice of lending on high loan to valuation ratios is well overdue. This was permitting speculators to use unrealized gains on one property as a down payment on another property, then another property as prices roses, and so on. See our post from last month “Australia Mortgage Market Is Now A $1.7 Trillion ‘House Of Cards.’”

As we noted at the times, over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt. But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

 

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

 

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

 

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

 

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

Earlier this month, the Bank for International Settlements (BIS) released a new working paper,  “Interest rates and house prices in the United States and around the world”.

This identified Australia’s 55-year housing bull market – 50 years from 1961-2010 then 2013-2017 without a downswing in between – as the longest in world. The US housing bull market from 1992-2006 was a mere 15 years. This was the BIS methodology.

Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The up swings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century.

Here are the results in tabular form – Australia is third from bottom...

Since 2000, the BIS found that Australia has seen the second largest increase in real house prices, only exceeded by New Zealand – where the new government has just banned foreign buyers from the market.

 

Our gut feeling is that today’s data signals the beginning of a “Minsky Moment” for the Australian housing market.

The Toronto Housing Market Is About To Collapse By This Measure

With the collapse of Home Capital Group focusing the world"s attention on the Canadian real estate market, nowhere is the subprime debt time bomb more likely to go off than Toronto, which as we recently noted "has gone nuts."

Even Bank of Canada Governor Stephen Poloz (who declined to comment on questions about Home Capital Group and whether he’s worried about contagion), noted that Toronto is out control tonight while answering questions following a speech in Mexico City...

"pretty sure recent gains in Toronto home prices were not sustainable and that the city’s housing market had elements of speculation"

"Financial stability is part of the Bank of Canada’s monetary policy decision making, but the central bank’s primary mission is inflation targeting,... it would be odd to use interest rates to target home prices in just one city."

Perhaps Mr. Poloz... But, as we noted previously, it doesn’t take a genius to figure out that this will end in tears.  Even the big Canadian banks are fretting. “Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal Chief Economist Doug Porter warned clients. But the bubble’s deflation would push the city into a fiscal and financial sinkhole

Jason Mercer, TREB’s Director of Market Analysis, explained the basic supply and demand problem:

“Annual rates of price growth continued to accelerate in March as growth in sales outstripped growth in listings,” he said.

“A substantial period of months in which listings growth is greater than sales growth will be required to bring the GTA housing market back into balance.”

And that is exactly what Capital Economics is pointing out is occurring - in a very accelerated manner... as listings flood the market and an extreme lack of affordability means homes remains unattainable to all but the oligarchs seeking safe-haven for their "hard"-hidden gains, prices will have to adjust rather rapidly.

Additionall, Mercer told policy makers to tread carefully: “As policy makers seek to achieve this balance, it is important that an evidence-based approach is followed,” he said. This is a gravy train, and it must be allowed to speed on until the last cent has been extracted.

What we don’t know yet is when it will end in tears, and whose tears it will end with. But we already know: When it does end in tears, real estate organizations will first be denying it, and then they’ll be clamoring for a bailout of their stakeholders – so it will end in the tears of others.

Toronto House Price Bubble Goes Nuts

Submitted by Wolf Richter of Wolf Street

Based on fundamentals? You gotta be kidding.

Residential property sales in Greater Toronto soared 17.7% year-over-year to 12,077 homes, according to the Toronto Real Estate Board (TREB). New listings jumped 15.2% to 17,052. Prices for all types of homes, based on the MLS Home Price Index Composite “Benchmark,” soared 28.6%. The “average” selling price soared 33.2%!

That average selling price of C$916,567 is up from C$688,011 a year ago. Over the past five years, it has doubled!

The heavenly manna was spread across the spectrum. For condos, the average price in Greater Toronto soared 33.1% to C$518,879; for townhouses it soared 32.9% to C$705,078; for semi-detached houses, 34.4% to C$858,202; and for detached houses, 33.4% to C$1,214,422.

Even the house price bubble in Beijing cannot compete with this sort of miracle; new house prices there increased only 22% year-over-year in February. And Sydney’s fabulous house price bubble just flat out pales compared to the spectacle transpiring in Toronto, with prices up only 19% in March.

Vancouver has its own housing bubble to deal with. But there, the government of British Columbia has tried to tamp down on wild speculation with various measures, including a transfer tax aimed squarely at foreign non-resident investors, with “mixed” success.

Now the great fear in Toronto’s real estate circles is that the government of Ontario might impose similarly cruel and unusual punishment on the participants in this spectacle. Some measures are on the table, with folks wondering how to stop the bubble from inflating further and causing even greater harm to the real economy when it deflates, as all bubbles eventually do.

They’re reluctant. It seems they want to see how BC’s measures are washing out in Vancouver. The central government too is trying to fine-tune some macroprudential measures, but they’ve had absolutely no effect on Toronto’s housing bubble. And the Bank of Canada, which has been fretting about the housing bubble for a while – always couched in its very careful terms – refuses to raise rates. Everyone is talking. No one dares to do anything real about Toronto’s house price bubble.

In Toronto, according the real estate folks, it’s all based on fundamentals. It’s based on supply and demand and very rational calculated thinking, and there is no bubble in sight, lenders are just fine, and if Canadians are locked out of the housing market, so be it, it’s just a shortage of housing, really. So TREB President Larry Cerqua is glad the efforts to tamp down on it all have not come to fruition, in part due to TREB’s vigorous lobbying:

“It has been encouraging to see that policymakers have not implemented any knee-jerk policies regarding the GTA housing market,” he said in a statement.

“Different levels of government are holding consultations with market stakeholders and TREB has participated and will continue to participate in these discussions,” he said. “Policy makers must remember that it is the interplay between the demand for and supply of listings that influences price growth.”

Singing a similar tune, Jason Mercer, TREB’s Director of Market Analysis, explained the basic supply and demand problem:

“Annual rates of price growth continued to accelerate in March as growth in sales outstripped growth in listings,” he said. “A substantial period of months in which listings growth is greater than sales growth will be required to bring the GTA housing market back into balance.”

And he told policy makers to tread carefully: “As policy makers seek to achieve this balance, it is important that an evidence-based approach is followed,” he said. This is a gravy train, and it must be allowed to speed on until the last cent has been extracted.

It doesn’t take a genius to figure out that this will end in tears. What we don’t know yet is when it will end in tears, and whose tears it will end with. But we already know: When it does end in tears, real estate organizations will first be denying it, and then they’ll be clamoring for a bailout of their stakeholders – so it will end in the tears of others.

Even the big Canadian banks are fretting. “Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal Chief Economist Doug Porter warned clients. But the bubble’s deflation would push the city into a fiscal and financial sinkhole

"This Is Going To Blow Sky High" - Observations On Canada's Housing Market

For months we"ve been warning about real estate bubbles re-emerging in various markets around the world from Canada to Australia (see "There Are 66,719 Empty Mansions In Vancouver" and "Vancouver Home Sales Crash 40%, As Toronto Home Prices Soar 22%").  And while facts and figures clearly indicate that certain markets are bubbling over courtesy of all the same mistakes that caused the "great recession" in 2008, nothing helps to confirm the truly obscene nature of a real estate bubble quite like attending a good ole-fashioned, get-rich-quick real estate expo. As such, below are the musings of one financial market observer who recently attended the Canadian Real Estate Wealth Expo as a joke but walked away convinced the system is about "to blow sky high."

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Originally Authored By Tim Bergin of On Beyond Investing

Originally, I thought this would be a bit of a joke.  There were billboards in all the Toronto subway cars advertising the Canadian Real Estate Wealth Expo - learn how to become a millionaire.  I thought this was so ridiculous, it may be fun.  What better way to experience the top of the housing market than watching Tony Robbins and Pitbull along with a bunch of US real estate professionals explain how Toronto real estate is the path to riches.

Prices were originally $150 per ticket, but I was able to buy for $50.  While it deeply bothers me that I paid $50 to these shameless (amoral) self-promoters, I thought it would be worth it to witness, in person, the top of the housing market.

I had thought, there can’t be that many people stupid enough to attend this, but I was very wrong - 15,000 people were there!  I was blown away.  Bubbles are largely psychological.  This crowd was tangible proof of that.  15k people in one spot listening to Americans explain why real estate in Toronto is an exceptional investment.  The whole experience was horrifying.  The crowd was very well-dressed, middle- to upper-middle class (from appearances), and super excited to hear how much money could be made if you just buy real estate (most of them clearly already owned).

The first real segment of the expo was a panel of Canadian developers and real estate agents giving their views on the market.  It actually started off a touch bearish, which surprised me.  Two of the panelists were saying that prices are exceptionally high and no market goes up forever.  With that slight bit of caution thrown out there, it became a real estate FOMO-building talk.

There are, apparently, two very important things to know when dealing with real estate.  First, you have to face your fear; this fear is to be ignored and then you should ‘just do it’ and "buy now".  The next step is find what you can afford and then buy it.  Ignore all ‘non-doers’, don’t overanalyze or focus on the numbers, just fucking buy.  To allay fears the speakers are actually quite clever as they shift between a long to short term focus when it suits.  For example, now is a great time to buy because short-term the market is on fire. If, however, markets cool then you just hold because it always goes up long-term - and you are a savvy long-term buyer, aren’t you?  By showing no scenario where you can lose I can see how this pitch works on the susceptible.

The second important factor in real estate is financing.  Not everyone has money, so what can they do?  The answers were shocking.  Be ‘creative’ was the first response.  Pool your money, borrow from friends and family, own just 5% of a house, get the money however you can and just do it - remember, it only goes up.  Other financing suggestions were get cozy with a lender and they will ‘bend the rules’ for you!  The fact that the biggest condo developer in Canada (Brad Lamb) said lenders will bend (but not break, apparently) rules to get you financing in front of 15k people with most people smiling and nodding was shocking.

So there you go - when it comes to Toronto real estate, just do it (using borrowed money any way you can get it).

The booths outside of the presentation hall were just as troublesome.  Plenty of “high double-digit monthly yields”, retire early with real estate, “everyone needs a place to live - buy apartments” type messages.  Almost all of these pitches were second lien lending.  Most offered yields in the 8 to 10% range.  The presentations all suggested that you can borrow money, if you don’t have it, at 4% and then buy these investments at 10% - easy money.

The apartment pitch booth was like most other pitches - it revolved around stable cash flows + mortgage paydown by renter + equity appreciation = profit.  (Now that all sounds great but owning a condo at current prices in Toronto is a negatively carrying asset, so where does this cash flow come from?)  Further, investing in apartment funds is even better if you borrow the money to do so.  The pitch goes on to explain that levering a 30% return makes you more money than not levering...

The Paramount Equity pitch was also interesting and stated in all caps “HIGH DOUBLE-DIGIT RETURNS ON YOUR CASH, RRSP”.  This product pays monthly, is a second lien mortgage, with a one year term and LTV <85%.  Paramount uses clever language that states they cover the cost of defaults.  By that they mean they pay some of the fees, not the default risk itself.

There was a space to pick up business cards.  I got quite a few from real estate investors.  I plan on emailing them all to learn just how bad their pitch/product is.  I want to learn more about how these second lien investor pools are sourced and just how bad this is going to be.

Also, perhaps there will be an opportunity to meet a bunch of distressed sellers, before they even know it themselves…

Nowhere in any of this was there ever a mention of risk, the dangers of leverage, how terrible negative equity can be, how that can trap you, etc.

The amount of shadow leverage in this system is crazy.  The terms on these second lien loans is 1yr.  What happens when all of these loans are called?  Even lenders with first positions will see clients sell when these loans become due and there is no money to pay them.

This is going to blow sky high.