Juggling Dynamite

This past spring Canadian realty prices leapt to a fevered peak that was far beyond historical norms of affordability or investment valuations in many areas.  Since then prices have weakened pretty much all over and many are in shock.  See:  Toronto home buyers and sellers try to stay afloat in a rocky market:

“…buyers who purchased in the spring have become spooked by the decline in prices in the past few months. Tales of buyer’s remorse are common. Some buyers are trying to back out of deals or renegotiate. Mr. Rocca understands the predicament; he has clients who purchased a bungalow on a very good street with the intention of selling it again for a profit.

“They paid a big buck,” he says. “They paid $1.9-million. Now, that bungalow’s worth $1.6-million. It’s scary.”

Scary? Let’s do some math.  If a buyer were funded enough to possess a conventional 20% down payment on 1.9 million, they needed 380K down and a mortgage of $1.520m to close.  Five months later, a price decline of just over 15% has evaporated 79% of their notional equity, reducing it to 80K while still owing a mortgage of 1.520 million.  And that’s if they did not borrow some of the down payment from relatives or other revolving credit.

And we have hardly even started into this mean reversion process.  After leaping 40 or so percent between December 2016 and April 2017 to an average price of $1.455 million in the GTA, and giving back most of that since, average sale prices in the greater Toronto area in July were still $1.177m and some 12k higher than at the start of 2017.  Year over year, many prices are not even negative yet.

But for the majority of households who were already paying more than 50% of their disposable income just to keep the roof over their heads, a 15 to 20% price decline is not manageable and has already wiped out their equity or put them in a position of owing more than the house is now worth.  This makes refinancing or locking in to fixed rate mortgages very challenging already even without further price corrections or higher interest rates.

This is the math of paying too much.  Whether it’s for investment securities, real estate or anything else that is supposed to hold value or appreciate over time.  The price we pay locks in our return experience for years thereafter.  A great many people are going to learn this lesson the hard way yet again in the months and years ahead.

Former Fitch credit analyst Charlene Chu was one of the first to warn of rising risks in China’s shadow banking system.  Chinese banks have been concealing risky credit in ‘off balance sheet vehicles’ (same accounting tricks that bankrupted Enron and Worldcom et al).

The chart below offers a big picture of the Chinese debt explosion since 2007 even on the understated officially reported numbers.  Chu believes that bad debt in China is some $6.8tn above these official figures as the government has propped up the appearance of growth and allowed underlying problems to go unchecked.  See: Prominent China bear warns of $6.8 trillion in hidden losses.

“Ms Chu said the ability to avoid recognising losses allows problems to fester for longer — and grow larger — than in an economy where actors respond purely to market incentives. “What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”

Watch a video report on the topic here and here.

Interesting historical perspective and update on evolving shared transport services using mobile apps and EVTAL (electric, vertical, take off and landing) rotorcrafts.

Fifty years ago, a helicopter company called New York Airways whisked passengers from the rooftop of the iconic Pan Am Building in midtown Manhattan to any city airport in just 10 minutes. A fatal accident in 1977, however, brought the era to an end. 40 years later, new technology could open a new chapter in short-distance airborne commuting. Here is a direct video link.