Real estate

The fact of the matter is that there is a very fundamental, and sparsely recognized reason for overbuilt retail commercial real estate to take a tumble - in addition to the more recognized massive headwinds.

Many don't understand how connected the financial fates of the US and the EU actually are. Those that don't have another think coming.

As I listen to all types of perma-bull talk about how the S&P would be at 1400 if it wasn't for Europe (which is the equivalent of: if my wife was 100 pounds lighter... she'd be a supermodel), I can't help but pulling my hair out.  The situation in Europe is clearly bad, and after reading Michael Lewis' new book... appears almost impossible to be resolved without massive defaults.  However, the other domino in the equation is the Chinese real estate market. The 'global growth engine', China, is running out of steam.  Their policy of placing market orders on anything and everything to inflate stimulate the economy - surprise, surprise - is proving to be unsustainable.

Everyone hoping that the last quarter of the year would start on an optimistic note was disappointed following not just the continuation of last week's manipulations now that hedge funds have their marching orders from their LPs, who are certainly seeking to redeem tens if not hundreds of billions in capital, but also from Bill Gross' monthly letter who in "Six Pac(k)in'" writes that "there are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years." And pontificating on a theme started many months ago by Zero Hedge with observations on the relative contribution to income from labor and capital (a modern day warning to Marxists), Gross warns that "both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize" His conclusion: "A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs." More or less reminds us of the warning above the gates of hell in Dante's Inferno...

Perhaps the most defining features of an asset bubble is a marked and persistent deviation from the underlying metrics that once determined fundamental value.  We know how real estate in Canada stacks up when compared to GDP, personal disposable income (cities and provinces), rents (cities and provinces), and inflation.  It's not pretty.  As with any real estate bubble, the overvaluation is most extreme in a handful of cities.  The regional data can be seen in the highlighted links.  Certainly not all areas of the country have experienced a massive divergence from underlying fundamentals, but it is extensive enough to concern us.

Trading the CAC40 vs witnessing The Inevitable Pan-European Real Estate Collapse

"By suggesting, without adequate support, that the registries are full of fraudulent and defective documents, clouding thousands of titles, YOU are adding to the public's confusion and hesitancy to re-enter the real estate market."

Had a great lunch with two real estate pros who don't see any recovery in US housing and the risk that the Canada bubble is about to burst...

That the Spanish savings banks, or cajas, have long been a source of instability is well-known to everyone with more than a passing knowledge of the pitfalls of the Spanish economy. Last year, in "The Ticking Time Bomb That Are The Spanish Cajas", we said "Cajas are likely hiding losses on home loans by taking non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations." We also noted that at 264 bps, Spain CDS "is cheaper than a deserted Salamanca hotel." (it is 320 bps today and soon going much wider). So now that Ireland (of all bankrupt countries) is slinging feces in a desperate attempt at distraction and pointing fingers at Spain, it is logical that the mainstream media would once again remind the world that Spain's financial system is effectively hollow, and that the greatest mystery in the financial world continues to be that Spanish CDS is not trading 2 or 3 times wider than where it is now. As Bloomberg says "Spanish banks have 50 billion euros ($70.7 billion) in unrecognised problematic real estate assets, El Confidencial reported, citing a report by the Boston Consulting Group. The consulting group estimates that Spanish banks need between 20 billion euros and 30 billion euros in additional capital and that Spain’s bank rescue fund, known as the FROB, could end up taking over 20 percent of the banking industry, El Confidencial added." But not before the second European Stress Test finds that all Cajas, just like last year, are perfectly capitalized, in what will be the latest daily lie out of Europe.

It is one thing to watch squiggly lines, or pretty, but largely meaningless bubble charts explaining a snapshot phenomenon or one transpiring over time. It is something else to actually be in a rollercoaster which recreates the experience of the Vancouver real estate market. Which is why the following animation from Vancouver Condo Info is rather cool. "This is a roller coaster simulation of the last 35 years of the
Vancouver Real Estate market. The actual graph you're riding is the
inflation adjusted value of a house in Vancouver BC based on data
collected by Royal LePage and calculated by the UBC Centre for Urban
Economics and Real Estate. Some of the peaks and troughs have been
rounded to keep the train from flying off the tracks, but other than
that slight modification it is a precise scale model of the red line on
this graph: cuer.sauder.ubc.ca/?cma/?data/?ResidentialRealEstate/?HousingPrices/?housing-pri-vancouver.pdf. When the housing bubble of the early eighties popped in this city some house prices dropped by 50% over the next couple of years and didn't reach their inflation adjusted real price again for 25 years. What would a real estate market bust look like these days?"

The banks can be trusted... Truly! All of them, but particularly the BIG ones! JP Morgan slashes loss provisions on RE loan assets by more than Dexia actually provisions for said losses in anticipation of sale. This is bullish, of course, so Goldman puts JPM on their "CONVICT"ion buy list in order to create the buying pressure necessary to dump prop inventory. Of course, this is just speculation on my part. After all, they would never do such a thing with Apple, would they?

I called it the coming RE Depression in 2007! I put MY money where my mouth was and sold off all of my investment real estate. I put YOUR money where my mouth was and shorted all that had to do with real estate (REITs, banks, builders, insurers). I called almost every major bank collapse months in advance. I warned the .gov bubble blowing does not = organic economic recovery. Now I'm saying we need to, and will, continue what's left of the crash of 2009, with ample global company. There will be no RE recovery this year, and there will be a crash. OK, you heard it here!

Anybody who has been following me since 2006 knows me to be a real estate bear. I was massively bullish from 2000 to 2005, after which I started selling off my investment assets. No, it wasn’t perfect timing, intellect, luck or a gift from God. It’s called a spreadsheet. Simply do the math and the truth will be self-evident!

"America Realist!" I really like the ring of that:-) Yesterday, I bluntly called out the European state of economic affairs as I saw them in “Liar, Liar, European Pants on Fire!” Today, I present the article published by Property EU, one of the leading real estate publications in Europe which illustrates much of my thoughts on the topic of how and why Europe is nowhere near out of its economic malaise, and more importantly how this may pull the value of real estate down. Well, you can use your imagination for the Lehman like results…

A month ago, Zero Hedge observed the collapse in March real estate prices and number of transactions in Beijing (here and here), speculating that this could be the beginning of the end of the Chinese real estate bubble. Today, courtesy of the Hong Kong land registry service, we find that the drubbing has shifted from mainland China to Hong Kong. "The number of sale and purchase agreements for all building units received for registration in April was 10,386 (-23.1% compared with March and -27.4% compared with April 2010). Among the sale and purchase agreements, 7,635 were for residential units (-27% compared with March and -37.6% compared with April 2010)." This number of transaction is the lowest since March 2009. As for the actual money changing hands: "the total consideration for sale and purchase agreements in respect of residential units was $39 billion (-24.8% compared with March and -26.8% compared with April 2010)" - another low, as this is the biggest Y/Y drop since June 2010. Yet, not too surprisingly, the actual prices of real estate remain sticky. As Bloomberg reports: "Housing prices in the city, ranked the world’s most expensive place to buy a home by Savills Plc (SVS), have gained more than 55 percent in the past two years on record-low mortgage rates and an influx of buyers from China. The government in November increased property transaction taxes and pledged to boost land supply amid public protests that housing prices are becoming unaffordable and as the central bank warned about the risk of a “credit-fueled property bubble.”" The reason for this is that despite the cash-n-carry scheme described by Sean Corrigan recently, credit was suddenly become so scarce that it is only available to the wealthiest, who in turn are not, for now, in urgent need of hitting bids, thus preventing prices from attaining market clearing levels.