More red lights in China; House prices at a stalemate?

Tomorrow we’ll do another monthly round-up of the big real estate board stats.  Victoria and Calgary are out already.  Toronto and Vancouver come out tomorrow.  Should be fun!

Red lights in China…What’s next for commodities?

Hat tip to Donald for emailing me this story.

China leading indicators flashing red lights

It appears that the leading indicator indexes calculated by both the OECD and the Chinese National Bureau of Stats are both signaling strong coming weakness in China’s economy.

“Once again, investors see China plays as the only investment game in town. (We) remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s”

“Once again, China’s leading indicator is pointing towards a very significant slowdown in economic growth ahead.”

The last time we’ve seen Chinese leading indicators plunge at this rate, the commodity bubble was about to burst.  The graph below shows the OECD leading indicator for China in red, with commodity prices in black.

China’s own stats agency confirms this slowdown.

I’m bullish on commodities over the longer term, without a doubt.  But it’s also my conviction that the sharp rise in commodity prices of late are largely based on demand out of emerging markets and continued speculation in futures markets (see CFTC’s commitment of traders reports).  This surge in prices has been bullish for the Canadian stock market and to an extent it has helped pad Canada’s export totals.

I’m not convinced that the current rise in prices has been driven by underlying fundamentals.  If I were a betting man, I’d be inclined to say that the odds of a commodity repricing is above 50-50, meaning more volatility for the commodity-heavy TSX.

Keep in mind that the current moves in gold and silver strongly suggest that it is being priced as a currency rather than a commodity.  Though we may see some strong pullbacks in both gold and silver, these are only buying opportunities.

House prices at a stalemate?

It won’t be until mid December that CREA releases their final November numbers.  It’s going to be close as to whether or not the aggregate home price will be up or down.  The reporting boards so far are showing either flat or falling prices.  Vancouver and Toronto will be the big news.  I expect both to be relatively flat year-over-year, though Toronto had some mind-boggling mid-month stats.

I’m sure sales will continue to be near decade lows in all the bog boards, with listings also cratering. It’s at times like this, where buyers and sellers seem to be in a stalemate, that looking back at how housing booms and busts have played out in other countries may offer insights for both camps.

Robert Shiller may well be the world’s leading expert in bubbles and bubble psychology.  It’s worth reading anything of his that you can your hands on, particularly his books.  Back in August of 2005, at a time when the US national real estate market was experiencing just a minor 3 percent fall in sales with prices still rising, Shiller gave this interesting interview for Fox news:

Is the housing market about to bubble over?

“(A bubble is) a social contagion,” he says, “An epidemic whose mode of transmission is word of mouth. It’s emotional. People keep hearing about price increases. There’s a tinge of envy about other people who have done well, which brings more and more people into the market. This, in turn, pushes prices up.” In other words, it’s a self-fulfilling prophecy.”


“It’s naturally self-limiting.  Prices can’t continue to go up forever.”

As Shiller notes, a bubble is a social contagion.  For a bubble to grow, it requires a widespread belief in an asset class and widespread participation in it.  Now how might one know whether or not we’ve experienced this here in Canada?  Let me suggest that there are two gauges to measure this: ownership rates and consumer sentiment/expectations.

With regards to ownership rates, we know that it has risen across all demographics since 2000.  It has now surpassed the US high water mark, currently sitting above 70% here in Canada.

This participation lasts only as long as people are convinced that real estate prices will increase substantially.  So it is worth keeping an eye on bullish sentiment within the broader population.  This is also at extreme levels.  RBC periodically runs consumer sentiment polls related to housing.  Back in March they reported that 92% of Ontarians consider real estate an excellent investment.  With perhaps the exception of Alberta, which is well below its peak, I don’t see any reason why people in other provinces would feel differently.

Shiller adds these thoughts:

“(Owning a home) has become a self-respect issue. You have to own your house now. It’s humiliating not to own a home. It’s a frightening thought.”

Indeed.  As a lowly renter, I can personally attest to this social stigma.  I’ve been asked numerous times why I don’t buy.  By the time I get into total cost differential, investment returns, and opportunity costs, eyes typically glaze over.  People seem to give more thought to the colour of a vehicle than they do to the actual merits of buying a home.

“In fact, except for two periods — the early 1940s and the late 1990s — when adjusted for inflation, home prices in this country “have been mostly flat or declining.”

“This trend holds true even in what Shiller calls the “glamour cities” such as Los Angeles — where you hear of recent double-digit price increases. That’s because while these areas get a lot of publicity when real estate prices skyrocket, they also tend to experience periods of significant price declines (which get less media coverage). As a result, the average inflation-adjusted price increase in Los Angeles real estate since 1980 isn’t much higher than that seen in Milwaukee.”

Yup….it’s true.  Despite the influence of immigration, demand, unique features, etc, real estate returns are overwhelmingly dictated by inflation.  It makes sense when you consider that inflation is what puts upwards pressure on wages over time and what causes raw materials to increase in value.  This finding is consistent with EVERY academic study that has looked at long-term price appreciation, regardless of the country.

So what does that suggest when we see graphs depicting real home prices (real = adjusted for inflation)?


“Though he admits there are so many variables it’s impossible to forecast it precisely, Shiller says he senses that the housing bubble is “more likely to turn out badly.”

He was bang on on that prediction.  Will his predictions for our markets bear similar results?

“The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary…Canada has been caught up with home buying fever just as the United States and other countries around the world.

We won’t know until there is a decisive break in the current stalemate.  Tomorrow’s board data may give us insight.





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25 Responses to More red lights in China; House prices at a stalemate?

  1. "Dad" says:

    Buy a house, you wimp!!!

    My grandson will be living in the back of your Toyota when your landlord finally turfs you out!!

    Your Loving Father!

  2. Thanks for the ‘advice’ dad. As my readership can now see, one dissident I have yet to convince is my own father.

    But thank you for highlighting the very social stigma my post referenced.

  3. pascal says:

    Great job ! So many good man and woman have no idea of of those fact. So this blog its a good place to refered pepole.

  4. cs says:

    I just finished reading the book “The Greatest Trade Ever”, and one of the things that stuck out to me was a chapter where a Deutsche Bank bond / derivative trader discovered that foreclosure rates were very tightly correlated to rising prices (0.98 correlation, I believe). As long as prices were rising, people in trouble could refinance and stave off foreclosure. As soon as prices stop rising, foreclosure rates start to rise.

    The housing market may not even need an interest rate rise to kill it. As appreciation starts to die off, more borrowers will have trouble with their loans and end up in foreclosure.

  5. cs says:

    Another thought. How prevalent are HELOC loans in Canada? These aren’t CMHC insured (and as such the CMHC has no stats on them), but a little googling finds articles such as this one:

    Key quotes:
    As of June 30, 2009, the mortgage portfolio comprised approximately 7,000 reverse mortgages with an accrued value of $833 million.

    HomEquity Bank will increase its portfolio reserves by $1.7 million following which the total of its non accrued interest and portfolio reserves will be $2.1 million, equivalent to 0.25% of the total value of the mortgage portfolio.

    Liabilities of 833 million and reserves of 2.1 million? Can that be right?

  6. mac says:

    It’s funny you mention R. Shiller. He was on BNN a week or two ago and, as an aside, when talking about the US housing bust, mentioned that “Canada’s in a boom”. His words, not mine.

  7. mac says:

    Canada housing, that is.

  8. Ang says:

    You can find vancouver statistics at this website right now

  9. mac says:

    Can’t wait for Ben’s spin on Vancouver detached. That’s the one thing Ben and SFH Van Westside have in common, they’re both detached from reality. I wonder if you can help me read that graph Ben? Why is it the line keeps moving north by northwest during this incredible buyer/seller stalemate of yours?

  10. mac says:

    North by northeast, that is. Tired. Long day. Tired of snarky, know-it-all bears who dispense financial advice.

  11. LOL! Spoken as intelligibly as any bull I know! You are an asset to your kind.

  12. mac says:

    You’ve gotta thing for cheap shots, but that’s OK, that’s you–not me. I wish I were a bull, Ben. I know it’s hard to accept someone who can see both sides of an issue. I think your data and analysis are right in theory but there are many, many reasons why they may not come to fruition in the bubbliest city in the land to the extent and in the time-frame you imagine.

    You can tear apart actors, real estate agents and greater fools who have made simply shocking amounts of money in a decade and you can be the last bear in a series of worn-out bears bloggers posting the same ol’ theories and maybe you’ll be right eventually. But woe to the person who makes a financial decision based on what you think is “news” and “insight” into the Vancouver market.

    I challenge you to publish the city or town where you publish this blog from. Anyone in Vancouver who follows your deconstruction of the “mythical” foreign investors should know how close to home are Dunbar & Point Grey for you.

    • I guess you have to live in Vancouver to ‘get it’.

      And apparently I have a thing for cheap shots….from the guy criticizing my writing behind an internet pseudonym.

      Get real, man! You’re wasting my time.

  13. mac says:

    I am real. Just asking for a simple answer to a very simple question.

    I also don’t think you’re “getting” blogging. If you can’t handle an opposing viewpoint, you’re wasting everybody’s time.

  14. John in Ottawa says:

    “It’s a new paradigm!” That’s the rallying cry of anyone with a vested interest in a continuing bubble. Who is vested? The banks, real estate agents and developers, and anyone hoping their recent purchase doesn’t turn turtle.

    We heard this rallying cry at the top of the tech bubble and again, from very credible (by their position in the community) people at the top of the US housing bubble. In fact, when we hear the rallying cry it is time to be afraid.

    Opposing viewpoints are great and blogs become interesting when there is debate.

    There is nothing special about Vancouver. There is something special about North Vancouver. It is an enclave of limited real estate bounded by mountains and the river. Perhaps the “rich Asians” will sustain prices in North Vancouver. Perhaps they will turn it into a South Naples of $50 million houses and change the name to Little Asia. What does that have to do with Vancouver south of the river? What does that have to do with ordinary Canadians making ordinary wages? How does that ordinary Canadian pay $800,000++ for an ordinary home south of the river?

    If you were lucky enough to get in early and you have a ton of equity in your home, that’s great. You won the lottery! May I suggest you get down to your local 7/11 or real estate agent and cash in your ticket?

    This debate about Vancouver reminds me of my brother-in-law. He bought into the tech bubble, specifically Nortel, right at the peak, just when I was getting out. He was a certified CFA at the time and he gave me a tough time for getting out because he was managing my money and getting the commissions. He got in and I got out.

    He got burned, but when Nortel got down to $60 he put the pressure on for me to get back in. I didn’t, but he re-mortgaged his house and put everything he could raise into Nortel. He isn’t a CFA anymore.

    I can see how someone can look at the entire western world burning up in a financial crisis that hasn’t been resolved and appears to be getting worse crying, “We’re different, it’s a new paradigm!” And that argument that we have to live in Vancouver to understand the paradigm? That’s convincing. Lord knows, I don’t live in the US, or any of the PIIGS and I didn’t work for Nortel. Couldn’t see any of their problems coming….or could I?

    Ben, your argument seems risky. Too risky for my blood, but if my brother-in-law had any money left, I bet he would invest in what ever it is you are selling. Where is that one last greater fool when you need him?

  15. mac says:

    John, I am not selling anything. It’s so easy to dismiss people this way, isn’t it?
    I see both sides, that’s all.

    Ben is the 5th blogger on this subject in Vancouver. He is about 5-6 years after the first (and best) with the same prognostications. If anything, he has more chance to be right simply because of his late-to-the-game timing.

    But his position could have been held in, let’s say, London in 1980, 1990, 2000 and 2010 and now after 2 years of carnage on the market, a near financial meltdown, an almost run on the pound, the collapse of their neighbours in Iceland, the near collapse of Ireland and homegrown austerity measures and London house prices have barely budged from their highs. London, San Francisco, Palo Alto, New York and maybe, yes, maybe Vancouver… what am I selling other than WAKE UP AND THINK OUTSIDE THE BOX?!

    PS: Rich Asians + North Vancouver is not the story. In fact, North and West Vancouver house prices have been outpaced by areas where rich Asians actually have bought and bid up prices, despite the fact that they don’t leave a data trail. It was all pretty clearly explained in the G&M piece that was scoffed off this blog.

    Again, “Vancouver south of the river” is meaningless to me. What river? The Fraser? Pitt Meadows? You’re defining an overly large area if you wish to discuss the most recent wave of foreign money. But you may be defining a too small area if you wish to discuss the in-migration since the 1980s.

  16. mac says:

    “He got burned, but when Nortel got down to $60 he put the pressure on for me to get back in. I didn’t, but he re-mortgaged his house and put everything he could raise into Nortel. He isn’t a CFA anymore.”

    That is extreme. And a bit akin to a gambling addiction. Why would he focus so much on one stock when there are thousands to pick from. And why would he not follow the golden rule of diversification?

    Housing, as you know John, is very different. Selling one’s home and timing the market is very difficult. There are a lot of costs and risks associated with stepping out in a market like Vancouver and treating your home like lottery winnings. Because what are you going to do with those winnings? Put it in stocks? GIC at 0.79%? Preferreds at 5%? And what is this anyway? A pitch for stock brokers?

    • John in Ottawa says:

      Mac. Great debate.

      Please allow me to be a bit confused. It seems to me that you are a housing bear for Canada in general, but a bull for Vancouver in particular. Am I reading this correctly?

      I don’t think you are trying to sell me on anything particular, such as real estate or stocks, but it does seem to me that you are trying to convince Ben’s readers that Vancouver has very special attributes that will keep house prices elevated in the long run.

      Let me please take you back to my brother-in-law’s situation because you convinced me he was foolish.

      Is it really a bad bet to go “all in” on a premier company that has already fallen 50% from the peak? At least he knew exactly where the peak was and by how much the stock had fallen.

      Compare his bet to some young couple putting zero down (CIBC 7% cash back for the deposit) or even their life savings to come to, say 7%, on a house in Vancouver when it appears to be bubbly and there is no way to know where the peak is. This would be no different than buying all that Nortel stock, some where close to the peak, on margin. This hypothetical young couple risks losing everything they have or will have for a very long time to come.

      Why would you counsel this young couple to diversify their stock portfolio to protect their capital, but go “all in with margin” on Vancouver real estate? Really, the way I’m reading you, this is what you are doing.

  17. mac says:

    No. My comment regarding stock was me wondering if the “divest yourself of housing” was “an invest in stocks message” coming from this blog. I am in no way saying sell your house and buy stocks. Just the opposite. I’m questioning what the heck you would do with your house “winnings” if you sold and sat on the sidelines as Vancouver marginally went up or down a little or sideways. Hardly worth the trouble.

    My point of view is that this blog suggests that people step out of real estate because it’s dangerous and poised to go down (even collapse if you were to count one of Ben’s 50% price decline predictions). My point of view is that readers of this blog should be very careful before taking that type of advice.

    We both know that homeowners in Vancouver are comprised of very different people with different financial situations. Some repeat & multiple buyers have gained huge equity over the years. Some first time buyers may be contemplating getting in over their heads but feel like it’s OK because of low interest rates.

    Why assume “the average buyer” is 7% down kind? Buyers in Vancouver may not be as vulnerable to a market decline as Americans were. Perhaps they are more comparable to our American urban dwelling Americans cousins–the ones who live in SF, NY, Palo Alto and other seemingly insulated cities. A buyer selling and sitting it out in Palo Alto since 2005, waiting for that 50% drop would be in a world of pain, in a crappy rental or an expensive version of the house they used to own.

    In Vancouver, many people are well capitalized by their parents, their foreign families and businesses, ill-gotten gains as well as the banks and myriad other factors. It is also worth considering that these and other factors, which admittedly are not market fundamentals, may be enough to keep Vancouver prices up or sideways for a long time.

    (By the way, what’s that about an extension on our own stimulus funds? And didn’t I just see on the TV right now speculation by Wall St. that Bernake will attempt QE3?)

    I believe that the government will do what they can to make sure a US-style bust doesn’t happen in Canada (although I believe that if Vancouver were to collapse by itself, Ottawa would not intervene, whereas if continued low-interest monetary policy benefitted manufacturing in Ontario yet blew our house prices sky high, they’d do it in a heartbeat). Hence a different “it’s different here”. It’s different because no one is administering government policy ensure safe house prices for Vancouver. Whether it’s immigration or monetary policy, it is set for other parts of the country.

    I am also aware there is very little the government can do to prevent a collapse where there is overbuilding and poor lending standards. Yes, I’ve seen the charts on Canadian debtloads, scary. Yet the other data showing how many Canadians have high-ratio mortgages–not scary enough to burst our bubble.

    Certainly on the overbuilding front, Vancouver had an overhang which neatly co-incided with the financial meltdown in 2008. Unfortunately for bears, developers put every piece of inventory on sale and sold them in tandem with low-interest rates. This sparked our most current run up in prices.

    As for your brother-in-law… wow… I’m actually speechless. But J0hn, we don’t live in substantial times. Stuff rules. Punishment and condemnation are out of style. Government policy favours risk-takers not GIC-sitters. IF there is a massive price decline in Vancouver, your 5% downers and reckless specuvestors will probably walk away THROUGH PERSONAL BANKRUPTCY, other locals will probably sit it out on top of their bags of cash and equity from a decade of RE investing, and the “mythical” foreign investors probably won’t care, it’s money and family safely out of country.

    I guess you can sell your house now and wait for it… but market timing is as big a mug’s game as getting back in on Nortel because it’s down.

    • NOTE: I have said that I suspect a 50% peak-to-trough decline in Vancouver and Toronto condos. That’s it.
      For all of Canada I have said that a 30% peak to trough decline is likely on aggregate, but will distributed unevenly, with certain large centres bearing the brunt.

      Let’s at least be clear on that.

  18. mac says:

    Quick answer to your question above:

    1. Like Ben, I was an overconfident Bear 2003-2008, although I held onto real estate throughout this period

    2. Last run up in prices made me question myself

    3. I don’t know what I think for Canada as a whole

    4. I am not a Bull for Vancouver I’m a …. snake? … what else goes sideways 🙂 a crab ? … those names will only make you and Ben too happy.

    5. I wonder if Toronto is beginning to go through the same thing Vancouver has been over the last two years but I cannot comment with confidence

    6. Regions outside the city are in big trouble. They don’t have the demand like Vancouver does.

    7. Condos in Vancouver are more susceptible to flat prices and small declines than is single family housing, which continues to suffer from competitive bidding, (See Garth’s recent post) and continued price increases

    8. Older people divesting of their houses is already underway in Vancouver with huge competitive bids for their properties, giving these geezers unparalleled access to wealth, which they will now have to share with their children so that they can get on the ladder, further supporting the madness.

  19. Pingback: Rant against the Toronto Star; Albert Edwards chimes in on China’s “freak economy” and deflation | Financial Insights

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