Monday, November 27, 2017

Housing: Part 271 - Another Canada quote.

Sorry, I don't mean to be obsessing on Canada.  It's just that these stories about Canadian housing keep crossing my path.  Here's one I saw today:
And with unemployment at cycle lows, the stock market back at cycle highs and the economy still not yet officially in recession, the cash crunch is just getting started. A comment I received this week from a reader in the Greater Toronto Area offers a glimpse of the pressures building as low yields and high costs prompt boomers (many still in debt) to try and downsize. 
"Being a mortgage broker for 11 years - a bank employee for a dozen years and a previous real estate agent & real estate appraiser; I think I have some insight into the real estate market and buyers, sellers and clients. I see a lot of financial hardship. So many people are struggling. Currently, I have several clients wanting to downsize but are not getting any showings on their houses for sale. They are overpriced and reluctant to drop their prices because once they pay off their mortgage and debts, there will not be enough for a down payment on a cheaper home."
 We see here the budding catastrophe.  There will be a debt deflation spiral where households face shrinking balance sheets, defaults will pile up, etc., etc.

Notice the inevitability about it - "still not yet officially in recession" - reminiscent of the Fed's "ongoing" housing "correction" in 2007.  Even an inevitability about a "cash crunch".  Hmm.  Where does cash come from?  Could the Canadians get their hands on some?  Would that help?

But, they won't get their hands on any cash, because people are unanimous in blaming cash, credit, the banks, and government stimulus for the problem.  From the comments:
The governments around the world should have never allowed it to get out of control.
I think it's time to crack the whip on the money-changers.  
Has this been the result of cheap money and money printing: very inflated property valuations?  
What's worse, the government will eventually bail out those who over-reached by taxing every other single prudent taxpayer later on. How can you lose when there's always a bailout around the corner?  
But yes, it's a great time to be a big bank.  
It would be outrageous to suggest that the closest thing Canada has to a solution is to print lots of money and build lots of houses.  That is such nonsense, it would clearly be worthy of ridicule.  It wouldn't even lose the argument.  It's a solution from another dimension.

So, Canada will likely walk right into the final act of this drama, just as the US has.  Everyone convinced of its inevitability, patting one another on the back, pleased with their own foresight as the inevitability of collapse seems to be proven by the coming events.  As one commenter notes:
Meanwhile, Down Under: "National Australia Bank (NAB) said on Thursday it had fired 20 bankers and reprimanded dozens more for submitting home-loan applications that had inaccurate or incomplete customer information."
With the median Canadian house selling for 7.5x income, do you think there are some mortgages that are flouting convention?  Do you think some desperate brokers and home sellers might tell a fib or two?  Do you think you might find some e-mails on a bank server somewhere where workers are sharing the same sentiments as these commenters?  Pretty self-incriminating, since we all know, they're responsible for all of this.

The selfish question is how to play it.  Short Canadian equities?  Buy Canadian bonds?  Short Canadian banks?  Is there a way to go long on Canadian law firms?  Will there be a Canadian "The Big Short"?

20 comments:

  1. If Canada were to "print a lot of money" it would never be used to build "lots of houses." You are forgetting that under our current system money always finds it's way into the hands of those who profit from status quo. Printing money is actually counterproductive (increasing the influence of those who benefit from status quo) unless you've found better ways to channel that money in the first place...and i've yet to hear any good ideas on that front.

    ReplyDelete
    Replies
    1. True. The core policy change has to be allowing more housing expansion in the high cost cities. Printing money only would be the means to try to stabilize balance sheets when supply caused home prices to decline to reasonable valuations. This is what is so corrosive about the housing supply problem. Economic growth - either real or nominal - shouldn't just line the pockets of a set portion of the citizenry, but if there is a cap on access to productive metropolitan economies, and ownership of real estate is the binding constraint to that access, then inevitably, any gains are captured.

      Delete
    2. I fully agree. It may simply be that we need to get rents high enough that society begins to "demonize" urban landowners and political change becomes possible. I know this isn't a smooth process but I don't see an alternative. Under the current system, such landowners are simply too well-connected for any hopes of political change.

      Another idea is for governments to throw lots of money at "Tier 3" cities in hopes of building competitor to the existing "Tier 1 & 2" cities.

      Delete
    3. Possibly. I am mainly focused on giving the public a new paradigm through which to view this. The gulf between the consensus view of what has happened and what I believe to be the accurate version is so wide that I think some marginal shift in public understanding would shift the political calculus in ways that change these dynamics. But, to be honest, there is so much work to do on the "just understand what's happening" front, that I don't think much about the political machinery aspect.

      Delete
    4. Yes, and I think you have...your work has been very helpful. Here is the challenge: the spread of the "zoning narrative" is very slow. While the "fix" of "printing money" is very quick. These need to proceed side-by-side or the problem actually becomes worse in my opinion..this is the story of the last two decades.

      Delete
    5. Maybe. That might be the case in Canada and Australia, where the very sparsely populated hinterlands mean that the high priced cities have more of a hold on the national economy. So, accommodating reasonable nominal growth while cities persist in inelastic housing supply has led to very high home prices.

      In the US, it is more a matter of migration. In the US, there are many 2nd & 3rd tier cities with reasonable economic potential. How it got out of hand in 2004-2005 was that migration out of the Closed Access cities became so high that it overwhelmed the Contagion cities, and that was what kicked the country into "bubble" mode, where we became intent on self-immolation. So, in the US, there would be some theoretical balancing point where economic growth triggered enough migration to allay urban housing costs but not so much that cities like Phoenix develop short-run supply inelasticity, too.

      But, while these things are interesting to think about, the government isn't capable of that sort of specificity. And, you're right, the politics is messy, and feed populist sentiment. Surely there is some better solution than self-imposed financial crises, though.

      Delete
    6. Curious about your thoughts on this article. Have you studied San Diego in particular (in theory few zoning restrictions?)...

      https://shelterforce.org/2016/06/21/the-high-costs-of-policy-shortfalls-in-housing/

      Delete
    7. If I had the time I would take a whole post to run through the errors and contradictions in that article. It's a great example of how strong enough presumptions can be used to dismiss reality. Affordable housing in California will happen over that author's objections, not because they will be swayed.

      Delete
  2. Great post. It is remarkable--property is the crucial structural impediment of our era, yet orthodox macro economists nibbled-number about wages and interest rates...

    ReplyDelete
  3. I am shorting the currency as my play (have been since ~1.05 iirc). Shorting cad banks might be worthwhile as well, though because most cad mortgages are full recourse I don’t know if it will be as lucrative as shorting us banks..

    ReplyDelete
  4. "The average (US) new home sale price spiked upward by $19,100 in October 2017 to reach a new record value of $400,200."

    I would say it is nearly complete: The industry is only building housing for the upper class. As directed by federal and local policies.

    ReplyDelete
  5. Waaaayyy OT: any thoughts on bitcoin?

    I am thinking something along the lines of money shortages.

    If we were on the gold standard only, we would get some radical deflations from time to time, especially in growth spurts (assuming a gold standard did not lead to a permanent recession). Gold would be worth more in spurts, in other words.

    just thinkin'

    ReplyDelete
  6. Any general thoughts on the Chicago housing market that you might have? You mentioned it in the previous post's comments section, hence I'd be curious to hear.

    ReplyDelete
    Replies
    1. Cook County seems similar to the Closed Access cities in terms of permits issued and population growth, but the metro area allows quite a bit more housing expansion. It seems like Chicago is a sort of mixture of all the city types - a little bit of Dallas (suburbs expanding into farm areas), a little bit of Detroit (declining rust belt issues), a little bit of Closed Access (Cook Co. already built out and difficult to increase density), and a little bit of Washington DC (somewhat higher costs, some post-industrial economic advantages, attracting talent from other cities, some outmigration of low SES households, but not as much as the Closed Access cities).

      Delete
  7. https://www.aei.org/publication/august-2017-first-time-buyer-index-from-aeis-center-on-housing-markets-and-finance/comment-page-1/#comment-189386

    Meh. They say cut people off from credit to bring down housing prices. Mention supply in passing.

    ReplyDelete
    Replies
    1. Good Lord. What are they drinking? Homeownership has just barely begun to stabilize.

      Delete
  8. And Bill McBride over at Calculated Risk is finding exactly what Ben was predicting. And it looks like the new Tax bill will have an impact on all the high end homes on both coasts.

    Chuck E.

    ReplyDelete
  9. link for the above
    http://www.calculatedriskblog.com/2017/12/black-knight-mortgage-monitor-tax.html

    ReplyDelete
    Replies
    1. "One thing that seems clear is that a reduction of the MID could further constrain available housing inventory, which itself has helped to push home prices even higher in many places."

      This sort of logic seems common in real estate, and it seems so odd. A subsidy will be removed for asset owners, and this will cause prices to rise because inventory will be lower? Strange. But it's conventional as far as I can tell.

      Delete
  10. I read that Post and got it fine and informative.
    Bar Mandalevy

    ReplyDelete