Australia Warned To Prepare For “Severe Housing Collapse” And “Banking Crisis”

Just weeks after we noted that Australia’s household debt to income ratio has ballooned to shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world, Australia’s regulators have been warned to prepare “contingency plans for a severe collapse in the housing market” that could lead to a “crisis situation” in one or more financial institutions.

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Australia has transitioned from the lowest household debt-to-income ratio to the highest in the world, in just three decades.

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And now Australia’s News.com.au reports that The Organisation for Economic Co-operation and Development’s (OECD) latest in-depth assessment of Australia maintains that while the “current trajectory” of house price declines “would suggest a soft landing… some risk of a hard landing remains.”

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Wage stagnation and elevated home prices have turned into the perfect storm that will bring forward a housing crisis.

The Paris-based global forum recommends the Aussie Reserve Bank begin raising the cash rate from its record low as soon as possible to prevent “imbalances accumulating further”.

The RBA last cut the cash rate to 1.5 per cent in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an official cash rate increase since November 2010.

Australia’s housing market is a source of vulnerabilities due to elevated prices and related household debt. A direct hit to the financial sector from a wave of mortgage defaults is unlikely,” the report says.

“However, if house prices collapse consumer spending could suffer, via negative impact on wealth, including from exposures to bank shares, which would encourage deleveraging. Together with reduced housing-related expenditures, this would put pressure on the whole economy.”

Additionally, News.com reports that while describing the housing market slowdown as “welcome” after a period where prices were overvalued by 5 to 15 per cent and noting current evidence pointed to a soft landing, the OECD said its research in the past “has found soft landings are rare”.

The OECD report recommends contingency plans in the form of “a loss-absorbing regime in the case of financial-institution insolvency”, including controversial “bail-in provisions”.

“… the possibility of financial-institution crisis should not be discounted entirely.”

Finally, the OECD notes, unlike in the US or EU, the law does not include provisions that would automatically convert some unsecured senior bonds and deposits from other banks into equity in the event of a crisis

 “The absence of explicit bail-in provisions could slow down the speed of resolution and risk encouraging financial institutions to gamble for resuscitation.”

Notably, OECD’s ominous warnings come after RBA deputy governor Guy Debelle raised alarms (after Q3 GDP dramatically undershot expectations at just 2.8%) by suggesting the next move in rates could be down, not up, and floated the possibility of controversial money printing policies known as quantitative easing in the event of a crisis.

As John Rubino recently noted, for the past few years, homeowners just about everywhere have been able to finesse life’s problems by thinking “at least my house is going up.”… But now that’s ending, and a reverse wealth effect is kicking in. Homeowners are seeing their home equity – aka their net worth – stop growing and in some cases drop by shocking amounts. In Australia it’s $1,000 a week, which is enough to darken the mood of pretty much anyone not in the 1%. A consumer with a dark mood is an unenthusiastic shopper because new debt accelerates the decline in net worth.

As home prices fall, so therefore does “discretionary” spending. Australians will continue to eat and to air condition their bedrooms, but they’ll cut way back on vacations, new cars, etc. And the debt-based part of the economy will suffer. This will cause stock prices to fall, knocking another leg out from under the average citizen’s net worth and making them even less likely to splurge. And so on.

Credit-bubble capitalism depends on mood, which makes it fragile. That fragility is about to be on full display pretty much everywhere.

Source: ZeroHedge

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The Heat Is Off!

Chill’en: FHFA House Purchase Price Index

Chill’en: Fed Assets

Chill’en: Smart Money Flow Index

https://confoundedinterestnet.files.wordpress.com/2018/12/fhfasmart.png?w=622&h=448

In other words, the housing asset bubble is Already Gone.

Source: Confounded Interest

Credit “Death Spiral” Accelerates As Loan ETF Sees Record Outflow, Primary Market Freezes

One week after even the IMF joined the chorus of warnings sounding the alarm over the unconstrained, unregulated growth of leveraged loans, and which as of November included the Fed, BIS, JPMorgan, Guggenheim, Jeff Gundlach, Howard Marks and countless others, we reported that investors had finally also joined the bandwagon and are now fleeing an ETF tracking an index of low-grade debt as credit spreads blow out and cracks appeared across virtually all credit products.

Specifically, we noted that not only had the $6.4 billion Invesco BKLN Senior Loan ETF seen seven straight days of outflows to close out November, with investors pulling $129 million in one day alone and reducing the fund’s assets by 2% to the lowest level in more than two years, but over 800 million has been pulled in last current month, the biggest monthly outflow ever as investors are packing it in.

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Fast forward to today, when another major loan ETF, the Blackstone $2.9BN leverage-loan ETF, SRLN, just suffered its largest ever one-day outflow since its 2013 inception.

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Year to date, the shares of this ETF backed by the risky debt have dropped 2.6%, hitting their lowest level since February 2016; the ETF’s underlying benchmark, the S&P/LSTA Leveraged Loan Index, has also been hit recently and is down 2.3% YTD, effectively wiping out all the cash interest carry generated YTD and then some.

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BLKN and SRLN aren’t alone: investors have pulled over $4 billion from leveraged loan funds in the three weeks ended Dec. 5, the largest cash bleed in almost four years for such a period, according to Lipper data.

https://www.zerohedge.com/sites/default/files/inline-images/Lev%20loan%20outflows%2012.7.jpg?itok=jp4pwY7v

“The price action in the ETF hasn’t warranted investors to justify keeping it on to collect the monthly coupon it pays,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital. “The risk/reward hasn’t been there compared to short-term treasury products like JPST,” he added, referring to the $4.2 billion JPMorgan Ultra-Short Income ETF, which hasn’t seen a daily outflow since April 9.

Analysts have pointed to widening credit spreads and the fact that loan ETFs have floating-rate underlying instruments, assets that become less attractive than fixed-rate ones should the Fed skip its March rate hike, which after Powell’s latest dovish turn and today’s weak payrolls may – or may not – happen.

The ongoing loan ETF puke comes at a time when both US investment grade and junk bond spreads have blown out, while yields spiked to a 30-month high this month. In November, investment grade bonds suffered their worst year in terms of total returns since 2008 and December isn’t looking much better. Meanwhile in high yield, junk bonds yields just had their biggest one-day jump since April.

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According to a note from Citi strategists Michael Anderson and Philip Dobrinov, leveraged loans in the U.S. may no longer be the “star performer” amid a potential pause in rate hikes by the Fed, while the recent redemption scramble has caused ETFs to offload better quality loans to raise cash, according to the Citi duo. That’s despite leveraged loan issuance being at its highest since 2008 largely as a result of insatiable CLO demand.

If investors are, indeed, unloading to raise cash, Anderson and Dobrinov write “this is a bearish sign, particularly if outflows persist and managers eventually turn to deep discount paper for cash. Furthermore, as we get closer to the end of the Fed’s hiking cycle, we expect further outflows as traditional fixed-rate credit products become more in vogue.”

Incidentally the behavior described by Citi’s strategists, in which ETF administrators first sell high quality paper then shift to deep discount holdings, was one of the catalysts that hedge fund manager Adam Schwartz listed three weeks ago as a necessary condition for credit ETFs to enter a “death spiral.” And with virtually everyone – including the Fed, BIS and IMF – all warning that the next crisis will begin in the leverage loan sector, the question to ask is “has it begun“?

One answer comes from the primary market, and it hardly reassuring.

As we discussed last week, while the leveraged-loan party isn’t quite over, jitters around the world have made lenders and investors less willing to give loans to heavily indebted companies, with numerous loan offerings getting pulled and lenders are demanding – and getting – sweeter terms.

As Bloomberg reports, on Tuesday JPMorgan had to slash the price on a $210 million loan to 93 cents on the dollar from par to sweeten investor demand and help finance a private jet takeover.  Specifically, JPMorgan offloaded loans financing the takeover of XOJET at 93 cents on the dollar, one of the steepest discounts seen in the leveraged loan market this year. And with the market on the verge of freezing, the size of the deal was cut by $70 million from the originally targeted amount.

In Europe, the market appears to have already locked up, as three loans were scrapped over the last two weeks, victims of the Brexit tensions gripping the UK. To wit, movie theater chain Vue International withdrew a 833 million pound-equivalent ($1.07 billion) loan sale. While the deal was meant to mostly refinance existing debt, around 100 million pounds was underwritten to finance the company’s acquisition of German group CineStar.

Last week more deals were pulled when diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan. Additionally, Perimeter Solutions also pulled its repricing attempt, Ta Chen International scrapped a $250MM term loan set to finance the company’s purchase of a rolling mill, and Algoma Steel withdrew its $300m exit financing. Global University System in November also dropped its dollar repricing.

Fears of a slowing global economic growth even as rates continue to rise, combined with anxiety over trade talks between the U.S. and China, reluctance to take risk before year end and the recent rout in credit products, have all led to a widespread fear across markets; investors are also concerned about higher interest rates weighing on corporate profits. These fears are spreading across credit markets, from investment-grade debt to junk bonds.

“No one thinks this is the big one,” said Richard Farley, chair of the leveraged finance group at Kramer Levin told Bloomberg. “But on the fear to greed continuum we have definitely moved closer to fear.”

The fear has resulted in the S&P/LSTA leverage loan price index tumbling to a two year low.

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The sharp shift in sentiment has been remarkable: for most of 2018, investors couldn’t get enough of floating-rate products like leveraged loans based on the assumption that they will fare better in a rising-rate environment. As a result of blistering demand, companies were able to sell new debt with virtually no covenant protections and higher leverage, triggering warnings about deteriorating standards from regulators and bond graders in recent months (see above).

And, in the aftermath of Chair Powell infamous Oct 3 speech which sent risk assets tumbling and tightened financial conditions, leveraged loan price indexes in Europe and the U.S. have dropped to their lowest level in over two years, while nearly all of the loans outstanding are now trading below their face value. According to JPM, the percentage of loans trading above face value has dropped to just 3.9%, a 29-month low, down from 65.4% in early October. This suggests that virtually all leverage loan investors are now underwater on a total return basis.

* * *

With the leveraged loan market freezing up – and potentially entering a death spiral – the recent weakness has raised concerns that other debt sales currently in the works may be sold at discounts that are so deep underwriters may have to book a loss, if they can be sold at all. This is precisely what happened in late 2007 and early 2008 when underwriters found themselves with pipelines of debt sales that sudden got blocked, and were forced to take massive haircuts to keep the credit flowing.

Still, optimists remain: “The downdraft in loans has been very orderly thus far,” said Chris Mawn, head of the corporate loan business at investment manager CarVal Investors. “We anticipate most managers will keep buying in this market trying to be opportunistic and those who don’t have to sell will just hold.”

Of course, speaking of flashbacks to 2007/2008 it was just this kind of investor optimism that died last…

Source: ZeroHedge

Chinese Firms Dumped $1 Billion Of US Real Estate Last Quarter

After being one of the most steadfast buyers of American real estate for years, large Chinese firms continued dumping high-profile US real estate in the third quarter, the Wall Street Journal reports, selling more than $1 billion of property as Beijing forced insurers, conglomerates, and other big investors into debt-reduction programs.

Chinese investors dumped $1.05 billion worth of prime US real estate in the third quarter while purchasing only $231 million of property, according to data firm Real Capital Analytics. This marks the second consecutive quarter where investors were net sellers of US commercial real estate, and the first time investors sold more US property than they bought since the 2008 crash.

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In the last decade, Chinese investors plowed tens of billions of dollars into US real estate, with a concentration in major metro areas like New York, Los Angeles, San Francisco, and Chicago. The Journal notes that Chinese buyers “never represented more than a fraction of the buying power in any U.S. market,” however they made headlines for paying massive premiums. 

Now, the party has unexpectedly ended.

Rising corporate debt levels and concerns over currency stability has forced the Chinese government to tighten capital outflows and clamp down on overseas acquisitions. 

As ZeroHedge discussed last month, total Chinese Credit Creation unexpectedly collapsed, resulting in shock waves of weakness across the domestic and global economy. Amid speculation that Beijing is engineering a “slow landing” through a significant slowdown in credit issuance, investors – hungry for liquidity – are unloading US properties at a rapid clip. In global markets, this will likely create a deflationary chill and lead to a further slowdown in 2019.

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Trade tensions between Beijing and the Trump administration have not helped the situation, as more Chinese firms sold properties amid worries the trade war could deepen in the coming quarters, and potentially lead to more aggressive blow back at Chinese investors. 

“This has to do more with a change in how capital is permitted to behave rather than Chinese investors saying ‘I don’t like the U.S.’,” said Jim Costello, senior vice president at Real Capital Analytics.

“Ping An Insurance Group Co. of China and partners in August sold a 13-story Boston office building for $450 million, the largest sale by a Chinese investor during the third quarter, Real Capital Analytics said. Its U.S. partner Tishman Speyer said it was the one that drove the decision to sell the building.

China’s retreat showed signs of continuing in the fourth quarter. Dalian Wanda Group sold a glitzy development site in Beverly Hills, Calif., last month for more than $420 million. The Chinese conglomerate purchased the eight-acre parcel in 2014 for $420 million and had planned to develop luxury condominiums and a boutique hotel on the site, but feuds with a local union and contractors stalled progress.

Anbang recently engaged Bank of America Corp. to help it sell a portfolio of luxury hotels that it acquired two years ago for $5.5 billion, though the Waldorf isn’t part of that sale, according to a person familiar with the matter,” said the Journal.

“Anbang is reviewing the company’s U.S. real estate portfolio after seeing price recovering in local property market due to strong recovery of the U.S. economy,” said Shen Gang, a spokesman for Anbang.

Still, some strategists believe that Chinese selling may slow in the months ahead.

“I do not think it will be a tidal wave of sales,” said Jerome Sanzo, managing director and head of U.S. Real Estate Finance for Industrial & Commercial Bank of China. “Some of them are not able to move forward for various reasons and will take gains now while waiting for future changes.”

In a highly leveraged economy such as China’s, growth is a lagged result of changes in the supply of credit. And with credit creation waning in China, it is less of a mystery why local corporations are rushing to “liquify” as fast as possible: the Chinese credit squeeze is well underway. Prepare for a global slowdown in 2019, one which has already hit the US housing market hard.

Source: ZeroHedge

Revealing The Naked Truth Of China’s Real Estate Slowdown

Warren Buffett has famously told Berkshire Hathaway investors: “You only find out who is swimming naked when the tide goes out.”

Buffett’s market wisdom can be applied to the Chinese property market.

Now, the tide is going out and the boom days are over, the industry is rapidly slowing as credit growth is the slowest on record – pointing to a weakening in the economy in coming months.

As for “swimming naked when the tide goes out,” well, it seems like one real estate firm, in southwest China used topless models covered in body paint as a last-ditch effort to unload a new property development before the market implodes.

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Nanning Weirun Investment Company, a real estate developer in Nanning, capital of the southwestern Guangxi Zhuang, hired a bunch of models to advertise its condominiums by using their bare skin as a canvas, said Asia Times.

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Floor plans of the condos were painted on the back of each model, and their breasts were painted with logos and other advertising slogans.

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While it is unclear if the topless models helped to spur sales, Asia Times indicated that the stunt attracted many people to the showroom last Friday.

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Hundreds of Sina Weibo users, China’s Twitter, criticized the promotion and called it disgusting, as others thought it was an interesting method, in the attempt to generate sales in a slowing market.

An employee at Nanning Weirun told the website Btime.com that the bodypainting promotion was a one-off event to drive sales.

The strategy is one of the more unconventional approaches being taken by desperate developers to attract new buyers as GDP growth, and the housing market are expected to fall in the first half of 2019.

Was the marketing stunt worth it for the developer?

Probably not, as the city planning authority suspended the firm’s marketing permit on Monday.

Video: Revealing the naked truth of China’s real estate slowdown

Source: ZeroHedge

Home Builder Toll Brothers Shocks With 13% Plunge In Orders As California Falls A Staggering 39%

Toll Brothers announced its fourth quarter results on Tuesday, unleashing a fresh flood of concerns about the state of the housing market after it disclosed its first drop in orders since 2014. Orders were down 13% from the year prior, missing the analyst estimate of a 5% increase in dramatic fashion.

The company focuses much of its business on the California high-end home segment, which – as a result of the housing bubble in most west coast cities and rising rates, is facing an “affordability crisis” coupled with a sharp drop in overseas demand. According to the company, orders for the state were down an astounding 39%.

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The company blamed rising rates for the drop off in buyer demand, as well as sinking stock prices. What is odd is that stock prices haven’t really “sunk” – unless the company was referring to its own stock…

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... with the CEO blaming “the effect on buyer sentiment of well-publicized reports of a housing slowdown” for the plunge in orders. You see, it’s not the housing market that is slowing: it is perceptions about the market slowing, that is hitting the company.

That said, “perceptions” are correct: as we noted last week, new home sales crashed in October, suffering the biggest plunge since 2011.

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Even so, the atrocious quarter didn’t deter all analysts, who promptly defended the stock. Drew Reading, Bloomberg Intelligence analyst stated that “there are many positive factors underpinning the economy that we believe are supportive of the housing sector longer-term, and our affluent markets particularly.”

Tolls dismal results follows signs that we have been discussing for much of the past year, which have confirmed that the luxury housing market is cooling off across the country.

Recently, we profiled a mansion in Chicago that was taken off the market after being listed for $50 million and only being assessed for $19.4 million. United Automobile Insurance Chairman and CEO Richard Parrillo constructed the 25,000 sq ft Lincoln Park mansion a decade ago, after buying the property in 2005 for $12.5 million from the Infant Welfare Society.

After two years on the market, Parrillo and his wife held firm at $50 million, a record for the region, their original listing agent told the Chicago Tribune. The agent said the couple plowed more than $65 million into the estate, including land cost.

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$50 million Lincoln Park mansion — Chicagoland’s priciest listing — taken off the market

Cook County Assessor’s Office reports shows the mansion’s $50 million asking price was hugely overinflated versus its most recent estimated market value, which stood some 60% lower, at $19.4 million. The report notes the 2018 property value is significantly higher from the assessor’s $14 million estimated market value for the mansion in 2017, due to a quick burst in high-end home sales in the last several years that had since cooled.

Source: ZeroHedge

Bubble Trouble: Silicon Valley & San Francisco Housing Markets Head South

The underlying dynamics changed in August and have worsened since. And, this is still the tech boom.

It’s high time to unload houses and condos in Silicon Valley and San Francisco, one of the most expensive housing markets in the US. Sellers are now flooding the market with properties. Inventory listed for sale in those three counties that make up the area – San Francisco, San Mateo, and Santa Clara – surged by 102% in November compared to November last year, to 3,931 listings.

In each of the past three months, the number of active listings (new listings plus old listings that have not sold yet but haven’t been pulled from the market) was the highest since August 2014. The chart below shows the year-over-year percentage change in active listings. The red bars in the chart mark the beginning of bubble trouble in this housing market (all data via the National Association of Realtors at realtor.com):

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When inventories are piling up because sales are slowing, sellers have to figure out where the market is, and the market is where the buyers are, but buyers have become listless and refuse to participate in bidding wars. They see the prices and they do the math with higher mortgage rates, and they walk. So, motivated sellers have to do something to move the properties. And they started cutting prices.

In November, the number of properties on the market with price cuts, at 1,038, skyrocketed by over 400% year over year.

The chart of the year-over-year percentage changes in price cuts in Silicon Valley and San Francisco shows that the change of direction in the market occurred around August. By September, price cuts hit the highest level since Housing Bust 1:

https://wolfstreet.com/wp-content/uploads/2018/12/US-Silicon-Valley-San-Francisco-price-reductions-percent-2018-11-.png

The median asking price for the three counties had peaked in May at $1,369,200 and has since fallen by $132,100 or by nearly 10% from the peak, to 1,237,100. Median asking price means half are listed for more and half are listed for less. It differs from the median selling price at which homes are actually sold. Compared to November last year, the median asking price dropped by $71,200 or 5.4%:

https://wolfstreet.com/wp-content/uploads/2018/12/US-Silicon-Valley-San-Francisco-median-asking-price-2018-11.png

The chart below shows the percentage change of median asking prices, which clarifies further the underlying dynamics in the market:

https://wolfstreet.com/wp-content/uploads/2018/12/US-Silicon-Valley-San-Francisco-median-asking-price-yoy-change-2018-11-.png

After years of blaming the surging home prices in the area on a shortage of inventory for sale, the industry is suddenly faced with all kinds of inventory coming out of the woodwork, just as sales are slowing and as mortgage rates are rising, while the affordability crisis bites the market.

Buyers have lost their blind enthusiasm. They’re still buying, but at lower prices, and they’re taking their time.

Yet the hiring slowdowns – or worse, layoffs – at area tech companies and the broad wind-down of countless and hopelessly cash-burning start-ups – both a prominent feature of every tech downturn here – haven’t even started yet. The area is still booming and companies are still hiring, and this housing downturn is starting during the tech boom, and not as a consequence of a tech meltdown. Though share prices of local companies such as Google, Apple, Facebook, and many others have taken a big hit since the summer, we’re still far from a classic tech meltdown. That is yet to come.

The Case-Shiller home price index lags by about three months, but it too is now picking up the changes in the market: Seattle home prices dropped at fastest pace since Housing Bust 1, while the first price declines cropped in San Francisco, Denver, Portland, and other markets. Read…  The Most Splendid Housing Bubbles in America Deflate

Source: by Wolf Richter | Wolf Street

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New-Home Prices Drop Nearly 7%, Supply Spikes to Highest since Housing Bust 1

Home builders not amused.

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Update on the Housing Bust in Sydney & Melbourne, Australia

This is not exactly slow motion anymore.