housing

Canadian mortgage fraud – Laurentian Abyss(m)al

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Laid up in bed this week with the flu I watched The Hunt for Red October where Sean Connery plays a Russian sub commander with a thick Scottish accent. To rendezvous with the CIA to complete the defection they head to the deep waters of the Laurentian Abyssal, ironically the name of the Canadian bank which has seen the proverbial torpedo hit the propellor.

It seems that Laurentian Bank in Canada has been caught over mortgage fraud, the second lender to do so. Canada’s property prices have trebled since 2000, seeing but a minor blip during GFC. Zerohedge noted,

An audit “identified documentation issues and client misrepresentations” with some mortgages…Laurentian said it will repurchase about C$89 million ($70 million) of those mortgages in the first quarter, or 4.9 percent of such loans sold to the firm….It will buy back an additional C$91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

The total value of the loans made to the 3rd party was around $1.16bn. Of course the CEO of Laurentian Bank is brushing aside the scale of it.

As we know Home Capital Group, Canada’s largest mortgage lender was busted for mortgage fraud and required a $1.5bn bailout facilitated by the 321,000 Healthcare of Ontario Pension Plan (HOOPP) members. Not to worry those emergency loans are backed by the mortgages!! Naturally “safe as houses”

Perhaps in the immortal words of Red October Captain Ramius, “be careful what you shoot at in here…things inside here don’t react well to bullets

Or perhaps in the words of Canadian born Inspector Frank Drebbin, “nothing to see here!”

Houston we have a housing problem

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Yes, Australian banks are the most levered to the Home mortgage market. Over 61%. Daylight comes second followed by Norway and Canada. US banks are half the Aussies. Of course any snapshot will tell us that prices are supported by immigration and a robust economy. However when Aussie banks are c.40% exposed to wholesale markets for credit (Japanese banks are around 95% funded by domestic depositors) any turn around in global interest rates means Aussie banks will pay more and eventually be forced to pass it on to tapped out borrowers. The Reserve Bank of Australia kept interest rates flat while tacitly admitting its stuck

A study back in March showed that in Western Australia almost 50% of people with a home loan would be in stress/severe stress if rates jumped 3%. Victoria 42% and bubbly NSW at 38%. I can’t remember bubble Japan property (as dizzy as it got) experienced such stress. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

The Weekend AFR reported that according to Digital Finance Analytics, “ there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

The problem for Aussie banks is having so many mortgage loans on their books backed against lofty housing prices means that we could face a situation of zombie lending. The risk is that once the banks mark-to-market the real value of one house that is foreclosed upon the rest of the portfolio then starts to look shady and all of a sudden the loss ratios blow out to unsustainable levels. So for all the negative news flow the banks cop for laying off staff while making billions, note net interest margins continue to fall and when confidence falls out of the housing market, the wholesale finance market will require sizable jumps in risk premiums to compensate. Indulge yourself with the chart pack from the RBA on pages 29 & 30 where net margins are 50% lower than they were in 2000, profitability under pressure, non performing loans starting to rise back toward post GFC levels…call me pessimistic but housing prices to income is at 13x now vs only 7x when GFC bit, how is that safety net working for you?

Some may mock, but there is every chance we see a semi or total nationalization of the Aussie banks at some point in the future. Nobody will love the smell of napalm in the morning but then again when the Vic government is handing out interest free loans to the value of 25% of the house price for first home buyers you know you’re at the wrong point in the cycle. Maybe TARP is just short for tarpaulin.

Crime in Japan – Geriatric Jailbirds

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CM – Crime in Japan – Geriatric Jailbirds

I have been asked by several people to rehash a report I wrote on elderly crime in Japan back in Feb 2016. The above link contains the entire report. Below is a brief summary.

While retirement for many of us is some way into the future, common sense would dictate that once we reach it, committing crime is probably furthest from our minds. Hugging one’s grandchildren is surely a better option than talking to them through a glass window. If you are in prison you are supposed to be old when you leave not when you enter it. Not so in Japan.

The incidence of crime committed by the elderly is soaring. 35% of all arrests for shop-lifting involve the retiree demographic, up from 20% (2001). Since 2001, their representative percentage of the prison population has doubled and 40% of repeat offenders among the elderly have committed crimes six times or more in order to return as a guest of His Excellency. While much of it is petty crime, there seems a deliberate attempt to ‘break into prison’ as a way to survive. A roof over their head, three square meals a day, no utility bills and unlimited free health care. The only real negative being the harsh prison rules about when one can talk to fellow inmates. To the state, one inmate costs ¥3.8mn to incarcerate and we estimate around ¥300,000 in court and administration fees per incarceration. Furthermore supplemental healthcare to the prison system has doubled in the last 7 years. We study the economics of what might drive someone to make the choice to commit crime and look at the government’s current funding for income support. Is it being spent wisely?

Such has been the overpopulation in prisons, the government has had to increase capacity by 50% in the last decade and boost the incidence of early release and parole to create space for what one can only guess is a way of developing state sponsored retirement villages. Female prisons are already full but the MoJ wants to increase the number of female prison guards to prepare for the anticipated increase in elderly crime.

At the last (average) count in 2010, there were 4,069 elderly inmates. While that is only 14 people per 100,000 aged over 65 that rate has been climbing from 12 in 2004 and around 8 in 2000. We estimate at the 5.4% compound growth rates experienced to date, that 31 people per 100,000 is possible by 2036. At that rate, 11,636 elderly citizens would be in jail at a cost to the government of ¥42bn per annum as health cost related budgets have been appropriated at around ¥120,000 per elderly inmate.

‘Supplemental welfare’ or income support paid by the Japanese government is approximately ¥3.6 trillion per annum and spread across 5.9mn people (an average of ¥605,000 per person). ¥1.7 trillion of that total is for medical and nursing care (c.¥1.2mn per person). Note this portion of healthcare is separate from the ¥36 trillion annual healthcare budget.

What are the economic sums that drive a pensioner to consider committing crime? We surmise that a measly base pension of ¥780,000 (US$7,000) per annum won’t get one very far. When throwing on top of that healthcare, rent, utilities and food it is not hard to get someone into net-negative income territory. Sure, supplemental income through part time work may close the gap but perhaps that some are resigned to their fate to consider jail as an option.

There is another elephant in the room. Suicides among pensioners are now 40% of the total, up from 27% in 1983. One gets the feeling that all of the things that retirees had come to expect from a society is in reality against their long-entrenched cultural thinking. Wives of retirees now make up 6% of all reported suicides. They are obviously not adjusting to having the bread winner at home every day. We break down suicides by prefecture and show the clear link to elderly populations, low population growth and relatively smaller GDP compared to national averages. The economic malaise in the regions contradicts a vibrant Tokyo and much of what is going on does not get reported. Domestic violence committed by the elderly has surged 2.4x in the last 5 years. The number of murders committed are even higher.

Solutions are hard to fathom. By 2060, 40% of the population will be above 65 years of age. Would Japan be better off building large scale dormitories that would include medical facilities in return for pension sacrifice? This way these pensioners could trade off prison life for state sponsored shelters at one would expect a fraction of the cost of adding to prison population. Surely if the government met potential pickpocketing pensioners half way then it would be preferable to both parties on cost and shame grounds. Would a Benesse (9783) be interested in running a public-private initiative (PPI) to help the government build such centres given they are already investing in old age care facilities? Benesse wants to expand its elderly care business to 20% of the group total by 2020. The government has taken this approach of PPI with building day-care centres as JP Holdings (2749) has benefitted greatly from. The government needs to think of how to revitalise the regional areas. With slowing economic growth, working age employees flock to the cities where jobs are more likely. It exacerbates the pressure on the regions to survive and poses longer term risks for the companies in the region to sustain employment. PPI projects in the regions makes sense from a variety of perspectives which we discuss might alleviate the pressure

40,000 Aussies have 6 or more investment properties

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The AFR reports that Mark Burgess, chairman of asset management firm Yarra Capital and the investment committee of industry fund HESTA said,“Two million people had investment properties in 2013 and I’m sure it’s much higher today, 40,000 had six or more.” 

It reminds me of the scene in The Big Short when Mark Baum is talking to the lap dancer about what she’ll do when mortgage rates reset  and admits she has 5 properties and a condo.

It also reminds me of a time when working in London in the early 2000s and my uncle mentioned one of his staff had nine properties. Nine. That’s what I call leverage.

Of course being on the property ladder is sort of a right of passage in Australia. The angst and wailing of first time property buyers not being able to pursue the Aussie dream is ringing louder. When the Victorian government offers 25% of the value of a home as an interest free loan or the federal government allows access to ring-fenced superannuation funds as a way of assisting them it is hard not to think that the bubble is reaching bursting point.

Unlike shares or bonds, properties aren’t liquid in a downturn. With private debt to GDP ratio of 180% and four spots in the global top 10 most expensive property markets what am I missing? Yes relentless overseas buying and a supply shortage but “affordability” exceeding 13x average income vs 7x prior to GFC doesn’t bode well.

Interesting to see another article which read,

“According to a new survey from Manulife Bank, nearly 75% of Canadian homeowners would have difficulty paying their mortgage every month if their payments increased by as little as 10%.”

I’m sure it’s nothing! I guess aliens haven’t entered the global property markets yet.

The McTurnbull Burger – 2017 budget that says ‘waistline be damned!’

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Remember the Big Mac jingo? “Two all beef patties, special sauce, lettuce, cheese, pickles,  onions on a sesame seed bun?”  Well the 2017 budget From the Coalition might as well be called the super sized McTurnbull Burger. Two all thief parties, special porkies, levies, fees, spun on a $600bn dollar bomb. While the government needed to introduce a vegan budget of lentils, tofu and alfalfa to get the country’s nutrition properly sorted they’ve said waistline be damned. Morgan Spurlock couldn’t keep up with this super sized meal. As my wise sage Stu told me last week, “About as well-timed as Mining Super Profits tax – ding ding ding – top of the banking cycle just called by inept bureaucrats”

If people wanted a tax and spend party they’d have voted Labor. In a desperate attempt to supersize the meal they’ve made of the economy since Turnbull took office the debt ceiling will be raised. Wage growth has slowed for the past 5 years from 4% to under 2% according to the RBA. Throw higher Medicare on top why not?!. Cost of living is soaring. So let’s look at the extra calories they’ll inevitably load on the taxpayer.

1) Let’s tax the big 4 banks. That’ll work. What will they do as responsible shareholder owned organizations? Pass those costs straight on to the tapped out borrower where 1/3 mortgagees already under strain and 25% odd have less than a month of buffer savings. NAB already jacked interest only loans 50bps.

2) allowing retirees to park $300,000 tax free into super if they downsize their empty nest. Wow! So sell your $5mn waterfront property so you can park $300k tax free into superannuation. Can see those Mosmanites queue up to move to Punchbowl to retire. Hopefully the $1mn fibro former council shack the Punchbowl pensioner flips will mean they can move to a $500,000 demountable in Casula in order to free up the property market for the first home buyer who is getting stung with higher interest rates, .

3) Australia has a property bubble. The Reserve Bank has recently had an epiphany where they’re afraid to raise rates to crash the housing market and they can’t cut because they’ll fire it up more. Allowing creative superannuation deposit schemes (max $30,000 per person & $15k/year) to help with a deposit only doubles down on encouraging first home buyers to get levered up at the top of the market using a system designed to build a safety net for retirement. When governments start abusing sensible policies in ways it was never designed for then look out for trouble down the line. This doesn’t help first home buyers it just pushes up the hurdle to enter.

4) Australia’s credit rating is on the block. Australia’s main banks are 40% wholesale financed meaning they have to go out into the market unlike Japanese banks which are almost 100% funded by their depositors. Aussie banks could see a rise in their cost of funds which the RBA could do little to avoid. That will put a huge dent in the retail consumption figures.

5) speaking of credit cards. Have people noticed that average credit card limits have not budged in 7 years. If banks are confident in the ability of consumers to repay debt, they’d let out the limits to encourage them to splash out! Not so – see here for more details.

6) Infrastructure – I live in the land of big infrastructure. Jobs creation schemes which mostly never recover the costs – especially regional rail. The Sydney-Melbourne bullet train makes absolute sense. We only need look at the submarines to know that waste will be a reality.

7) small business – tax concessions of $20,000 not much to write home about. Small businesses thrive on a robust economy which is unlikely to occur given the backdrop. Once again this budget is based on rosy assumptions and you can bet your bottom dollar Australia won’t be back in surplus by 2021.

Some  media are talking of Turnbull & Morrison stealing the thunder of the Labor Party, providing a budget more akin to their platform. Sadly I disagree that this legitimizes Turnbull. It totally alienates his base, what is left of it. Tax the rich, give to the poor. Moreover voters see through the veneer. The stench of the Coalition is so on the nose that without ditching Turnbull they have no chance of keeping office. Labor is not much better and One Nation and other independents will hoover up disaffected voters by effectively letting the others dance around the petty identity political correctness nonsense.

In the end the McTurnbull Burger meal will look like the usual finished product which resembles nothing like the picture you see on the menu. A flattened combination of squished mush, soggy over-salted fries and a large Coke where the cup is 90% ice. Yep, the Coalition has spat between your buns too. This is a meal that won’t get voters queuing up for more. Well at least we know Turnbull remembers that smiles and selfies are free after all ‘he’s lovin’ it‘! After all virtue signaling is all that matters. All this to arrest some shoddy poll numbers which will unlikely last more than one week.

Reserve Bank of Australia in a Hurt Locker of its own making

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The comments made by the Reserve Bank of Australia (RBA) today take some beating. The AFR wrote, “The [RBA] signalled that it is in no mood to deliver official rate hikes to cool the market amid fears the heavily leveraged household sector would react badly to higher borrowing costs at a time of sluggish wages growth.” Two things are obvious. The RBA finally admits it has a bubble on its hands yet it is so out of control that lowering rates would exacerbate the situation. The most dire prediction I can think of is the risk posed to Aussie banks – part of whole nationalization. We can talk about theoretical stress tests TIL the cows come home but in the real world Aussie banks source 40-50% of their funding from wholesale markets not savings. With a rising rate environment in the US, growing risks of a local sovereign credit downgrade and the most unstable period of politics in Aussie history the upside risk on funding costs is unhinged. Aussie banks balance sheets are saddled with 60% mortgage debt. Housing prices in Sydney are 12x income vs 7x leading up to the GFC in 2008.

It is almost impossible to topple the group think that pervades the US Federal Reserve, ECB or BoJ but the RBA has joined in. Almost a year ago I finally put to paper what I’d argued for years – central banks had lost the plot. Endless printing with less and less impact to show for it. Just asset bubble creation. The RBA is somehow surprised by the bleeding obvious.

Australia has 4 of the top 10 most expensive property markets globally. No other country has anything close. The US has two. Sheer common sense would tell you it is unsustainable. Now we have governments like Victoria thinking they’ll solve the first homebuyer conundrum by removing stamp duty under $600,000 and giving an interest free grant for 25% of the value of the property. I think Premier Daniel Andrews may have indeed called the top of the property market in the space of two weeks. You can take it to the bank (no pun intended) that when governments get deeply involved in markets they must be channeling Ronald Reagan who said, “If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”

Searching for more data points, note that the Australian Bureau of Statistics has not updated the people working multiple jobs data since 2009. If one looks at the US data, those working two jobs or more is at an all time high as people struggle to get by. Look back to Australia and note that electricity prices have doubled in a decade, health insurance is up another 20% this year alone (my own experience).

Sifting through the Reserve Bank of Australia’s statistics section I stumbled over an interesting selection on credit cards. It is quite detailed. After cutting, dicing and slicing the data I noted that financial institutions are perhaps hiding their hand with respect to confidence in consumers. Aussies have around 16.6mn credit cards in service yet since 2010 average credit card limits have stayed stagnant. Normally if wages are rising and confidence is booming credit card companies can up the limit and feel confident of being repaid. Other data suggests that Aussies aren’t going overboard on nudging the limit but could it be that with 180% household debt to GDP ratios that household budgets are stretched. Average cash withdrawals and debit card usage don’t explain away the gap but to me this is telling of how tapped out the average Aussie punter is. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

The Weekend AFR reported that according to Digital Finance Analytics, “there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

What we can be assured of is if we get a housing collapse, Australia’s economy will implode in such a way that these numbers may end up being conservative given the knock on effects of the rapid drop in consumption that would follow causing unemployment to surge. Don’t be surprised if some Aussie banks require a bail out.

The RBA has lost credibility. The Aussie housing market has depended on it for confidence but comments like those made here are evidence that it is chained to an unexploded bomb

Dan Andrews plays his hand as a property tycoon

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Victorian Premier Daniel Andrews is now turning the government into a property tycoon using taxpayer dollars to pour gasoline on the 6th most expensive property market in the world. His latest plan to push the greater fool theory in a country that has a 180% private debt to GDP is to encourage those who can least afford to climb on the property ladder to spend even more. While a 25% interest free loan looks exceptionally generous, rational thought for a first time buyer is to spend closer to 125% of what they would originally looked to fork out. While the government gets its 25% back simple economics tells us this is a bubble waiting to pop. To think people will stick to financing 75% of the median house price is bonkers.

If the mortgage borrower defaults, will the government accept NAB, CBA, ANZ or Westpac et al wish to do a fire sale because their balance sheet may not sustain unrealized losses in their balance sheet? Sure it is only 400 people to start with (unfair in itself because 401 onwards will face a steeper wall) but this stinks of the antics pre GFC. People then were lured into borrowing more because appraisals were massaged higher and without knowing it buyers were actually $100,000s in the hole before they started.

So let’s assume that Andrews lends $162,500 to the first 400 on average (median home price $650k). $65mn. Victoria’s tax receipts are around $20bn. Not a huge dent but you’d only need 12,300 people on a scheme to speak for 10% of the budget. There are 25,000 people wanting to climb the property ladder. If all stepped up for that, Victoria’s taxpayers would be stung for $4bn or 20% of the budget. Property-based taxes including stamp duty, land tax, the congestion levy and the Growth Areas Infrastructure Contribution are projected to contribute more than 42% of Victoria’s tax revenue base in 2016-17. That could drop like a stone.

Andrews would be better off addressing supply issues. Aussie property prices are a function of restricted supply. By subsidizing the first home buyer he inadvertently supports investment property owners by inflating the value of their properties even further exacerbating the problem he’s trying to fix.

Andrews is also copying  the South Australian playbook on renewables which could have a reverse effect on the economy. Note South Australia was the only state which recorded negative tax revenue growth no thanks to making it a less attractive place to invest . It has the highest unemployment rate, the highest energy costs, slowest growth and is now forced to spend 13% of its revenues on a hairbrained emergency energy plan.

In any event if the private sector is unwilling to lend to these people it is a signal they’re concerned about levering already overstretched balance sheets. NAB just raised variable rates not because the RBA ticked cash rates higher, they’re facing higher funding costs via the wholesale markets where they source 40% of the cash they lend. Don’t kid yourself that already overinflated asset bubbles aren’t being recognized. Australia’s increasingly destabilized political scene and pending sovereign credit rating cut aren’t lost on investors. Take a look at US bond markets readjust in the last 4-5 months.

While as well intentioned as this plan of Premier Andrews may indeed be, shoveling the desperate into a property market using taxpayer funds will likely end up hurting them over the long term. Listen to the market. The invisible hand is about to grab many by the throat.