Toronto housing market – heads up, your peak has been called. Sometimes money just needs a home (in a foreign country).

First, Happy St. Patrick’s Day!  

Headlines

FT – China tries to restrict access to foreign children’s books 3/10. Hearts and minds.

Bloomberg – Saudi Arabia Says It Has Reversed a Third of Its Production Cuts 3/14. The Kingdom is losing patience with the free loaders.

WSJ – Home Builder Confidence Jumps to Highest Since 2005 3/15. Just like that…

Special Reports / Opinion Pieces

• Bloomberg – Why Robert Shiller Is Worried About the Trump Rally – Jason Clenfield and Adam Haigh 3/13
• FT – Erdogan’s informers: Turkey’s descent into fear and betrayal – Laura Pitel 3/15
• FT – Dalian Wanda is hitting Hollywood too hard – John Gapper 3/15
• NYT – Large Sections of Australia’s Great Reef Are Now Dead, Scientist Find – Damien Cave and Justin Gillis 3/15
• NYT – Corporate Japan Is on Foreign Buying Spree. Toshiba Shows Pitfalls. – Jonathan Soble 3/14

Briefs

• The team at the Economist put together an interesting article on whether Venezuela’s dictatorship will survive?
  • “Venezuelans are suffering privation previously unheard of in what was once South America’s richest country. According to a study by three universities, 82% of households now live in poverty. That compares with 48% in 1998, when Chavez came to power. The rise in poverty follows Venezuela’s biggest-ever oil windfall. Of the $1tn the regime received in oil revenue, perhaps a quarter was stolen by insiders, according to the International Crisis Group, a think-tank. Infant mortality is rising, and Venezuelans are needlessly dying because of the shortage of medicines. Those who can, leave; perhaps 2m Venezuelans now live abroad.”
  • “To remain in power, Mr. Maduro’s state-socialist regime is extinguishing democracy.”
  • “His new hardline vice-president, Tareck El Aissami, heads a ‘national anti-coup command.'”
  • …
• Jeevan Vasagar and Gabriel Wildau of the Financial Times covered the hiccup (China capital controls) in the large real estate development project named Forest City at the edge of Malaysia next to Singapore.
  • Resulting from capital controls in China, Chinese property developer “Country Garden has closed its showrooms in mainland China for its flagship $100bn Forest City development” at the southern tip of Malaysia.
  • The project which is scheduled to have its first move-ins next year, is projected to take two decades to develop and will house 700,000 people. The hiccup is that mainland Chinese have accounted for 70% of the buyers to-date.
  • To give a sense of the marketing message, “above the main reception desk [in Shanghai], the project appealed directly to investors looking to move money abroad with the slogan, ‘Preferred selection for overseas asset allocation. Forest City, adjacent to Singapore.'”
  • Bottom line, “capital control measures appear to be having an impact. Outbound foreign direct investment from China tumbled by 36% in January, including an 84% decline in outbound real estate investment by companies.”
• Alistair Gray and Robin Wigglesworth of the Financial Times highlighted the delicate path the Fed walks in regard to mortgage-backed bonds.
  • “Fed officials have put markets on notice that they are thinking about reducing the central bank’s $1.76tn portfolio of mortgage-backed securities, amassed through its crisis-fighting quantitative easing program, but have so far provided few details.”
  • “Fed policymakers are widely expected to raise interest rates by another quarter point, but investors and analysts are also anxiously awaiting any further clues on what the US central bank plans to do with its $4.5tn balance sheet.”
  • “The Fed unveiled its mortgage-backed assets scheme at the height of the crisis in November 2008 and began the purchases soon after. Its MBS holdings have since swelled to account for almost a fifth of the entire $8.9tn market. Every month the central bank still buys billions of dollars worth of MBS as it reinvests the proceeds of maturing securities.”
  • Michael Fratantoni, chief economist of the Mortgage Bankers Association expects “all things being equal, just the removal of the ongoing purchases would push up mortgage rates relative to Treasury yields by at least 10 basis points.”
  • It is to be seen how the Fed unwinds itself and how the markets react – get ready.
• Sarah Mulholland of Bloomberg covered a recent interview with billionaire real estate investor Richard LeFrak and his position that NYC apartment rents need to drop as much as 15%.
  • “Apartment rents in cities such as New York and San Francisco will need to fall as much as 15% for a glut of high-end developments to be absorbed, according to billionaire real estate investor Richard LeFrak.”
  • “New York landlords are already feeling the pinch as renters take advantage of a flood of new buildings to negotiate concessions and price cuts. Rents fell last month for Manhattan apartments of all sizes, the first across-the-board decline in at least four years, as property owners compromised to keep units from going empty.”

Graphics

MarketWatch – The No. 1 stock of the bull market… and 39 others that soared 1,000% – Sue Chang 3/11

WSJ – Daily Shot: Bespoke Investment – S&P 500 Trading Days Since Last 1%+ Decline – 3/13

WSJ – Daily Shot: Natixis – China vs Europe Credit Expansion 2005 – 2016 – 3/13

NYT – The Fed’s Era of Easy Money Is Ending – Neil Irwin 3/13

WSJ – Asset Manager Deal Wave Has Just Begun – Aaron Back 3/14

WSJ – Daily Shot: The falling cost of US shale production 3/14

WSJ – Daily Shot: Pension Partners – Global Central Bank Policy Rates 3/15

WSJ – Daily Shot: National Association of Home Builders Optimism Index 3/15

Metrocosm – The Global Extremes of Population Density – Max Galka 7/22/15

• “Only 5% of the world’s population lives in the entire blue region. For comparison, the same number of people live in the small red region.”

FT – Chinese private equity: look elsewhere – Lex 3/15

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Toronto’s Housing Bubble Has 24 Months to Live: BMO. Daniel Tencer. Huffington Post Canada. 13 Mar. 2017.

“Desperate homebuyers, take a two-year breather. Housing speculators, take warning.”

“Toronto’s house-price juggernaut is two years away from the sort of peak it reached in 1989, when a housing bubble burst in the city, BMO Economics says.”

“‘At the rate we’re now going with 20% year-on-year price increases, assuming stable mortgage rates and continued income growth, we’ll be at 1989 valuation levels in about 24 months,’ senior economist Robert Kavcic wrote in a note last week.”

Presumably that would imply that Toronto will get there faster if mortgage rates rise and income growth slows/flatlines.

“Toronto’s average house price jumped 27.7% in February from a year earlier, to $859,186. Single-family homes soared to $1.57 million on average, a jump of nearly 30% in a year.”

“The 1989 housing market peak led to a seven-year period of house price declines in Toronto, with prices falling 39% from their 1989 peak by 1996.”

“The most common explanation given by real estate industry insiders for Toronto’s rising house prices is that there is a shortage of housing supply in the quickly-growing city. That’s the argument used by the Ontario Real Estate Association to call for looser density requirements and looser restrictions on urban sprawl.”

However, looser restrictions won’t relieve pressure in the short-term. At this point “house prices are being driven upwards not by a real shortage but by ‘powerful expectational dynamics’ – the belief that prices will continue rising, causing people to rush buying homes.”

Animal spirits…

Searching for sanctuary – Foreign buyers push up global house prices. Economist. 11 Mar. 2017.

One of the offshoots of globalization is that while capital flows generally where it will attain its best return, it also flows to where it feels safe.

“In some places, foreign investment has led to a construction boom. In Miami apartments are being built in numbers not seen since the financial crisis, financed in part by Venezuelan money. Australia lets foreigners invest only in new-build properties, and they do: 26,000 new flats are due on the market in Sydney and Melbourne over the next 18 months. In London 45,000 homes have been built since 2014 – the highest rate in ten years – but locals grumble many are pads for footloose foreigners.”

“In many of these countries affordability looks stretched. The Economist gauges house prices against two measures: rents and income. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable. By these measures house prices in Australia, Canada and New Zealand look high. In America as a whole, housing is fairly valued, but in San Francisco and Seattle it is 20% overpriced.”

“Haven investors may disregard affordability measures. Property can either be a bolthole [place where you can escape to and hide] or earn an income; in many supply-constrained cities its value may rise rapidly; even if not, the risks may be lower than at home… A study in 2016 found that increased political risk in places such as Greece and Syria explained 8% of the variation in London’s house prices since 1998.”

“Policymakers may well scratch their heads [and they do]. It is difficult both to make housing more affordable for a country’s own citizens and to encourage foreigners to buy. Britain has in fact tried to curb foreign enthusiasm with higher taxes, and by publishing a registry of 100,000 British homes owned by foreign companies – a potential embarrassment for some.”

“But unintended consequences lurk. After a 15% levy on purchases from abroad was introduced in the Canadian city of Vancouver last August, the number of foreign buyers dropped by 80%. That helped dampen house-price inflation there but pushed up demand in nearby Victoria. It also deterred highly skilled immigrants. The levy will soon be amended to exclude foreigners on skilled-work visas.”

At times it can be hard to understand how property markets can continue to rise despite a seeming lack of buyers at price points necessary to bring new product to market. Bottom line, people have different motivations for the things they do and spend their money on (even if it means losing some of it).

Other Interesting Articles

Bloomberg Businessweek

• Alaska’s Big Problem With Warmer Winters

The Economist

• Flying high – Are stockmarkets in a bubble?
• Schumpeter – Mukesh Ambani has made the business world’s most aggressive bet
• Free exchange – The end of ‘secular stagnation’?

 

FT – Cheesegrater price expected to spur City of London property sales 3/12

FT – Investors switch tack on distressed Europe debt 3/13

FT – Clampdown puts brakes on Chinese house price boom 3/13

FT – China real estate investment grows at fastest pace in 2 years 3/13

Huff Post (Canada) – Realtor Promises ‘Goldmine’ In Listing Proving Toronto’s Gone Nuts 3/8

Investment News – Investors accuse Nicholas Schorsch of plundering RCAP for own gain 3/10

NYT – After $225 Billion in Deals Last Year, China Reins In Overseas Investment 3/12

NYT – Kushners, Trump In-Laws, Weigh $400 Million Deal With Chinese Firm 3/14

NYT – China Pushes Legal Overhaul That Would Bolster State Power 3/15

WSJ – Hoteliers Cast Airbnb as Fast-Growing Professional Rival 3/9

WSJ – Chinese Banks’ Latest Funding Trick Gets Scrutiny It Deserves 3/13

WSJ – A Split Decision for Neiman Marcus Debt Holders 3/14

WSJ – China’s Amazing Disappearing, Reappearing Infrastructure 3/14

WSJ – As Retailers Go Silent, Big Data Fills the Void 3/15

WSJ – Housing Market Madness: Denver is Now a Worse Deal Than San Francisco For Tech Workers 3/16