By David Olive Business Columnist Toronto Star

Frenzied developers with access to cheap money are creating a glut of premium office space and luxury apartments, priced at about 80 times the average income of the city’s residents. Prospective middle-class homeowners, in panic-buying mode, are snapping up two properties at once, hoping to flip the second one to finance the first. Civic officials are encouraging the building boom.

The sale of vacant lots bolster their municipal coffers.

Banks eager to reap upfront fees are granting mortgages to all comers. Even factory owners are in on the speculation, generating more profit from flipping property than from traditional manufacturing, which increasingly is moving offshore to Vietnam, Malaysia and other nations with lower labour costs.

No, this isn’t Toronto in the late 1980s, or Santa Barbara or Tallahassee six years ago at the height of America’s record housing boom, which culminated in a global credit crisis and ensuing recession.

This is Beijing today, where until recently one of the most popular programs on local television was a reality show called The Romance of Housing that spotlighted the struggles of families pursuing elusive affordable shelter.

And where the papers are reporting on suicides and violent protests after developers in cahoots with local officials seize someone’s land for a new office building or apartment block.

The disturbing phenomenon extends beyond Beijing, where housing prices are far higher than in Dubai’s overbuilt property market before that red-hot Persian Gulf economy imploded last year. In December alone, Chinese housing prices rose almost 8 per cent in 70 major Chinese cities, while housing starts leapt by 34 per cent nationwide.

Jim Chanos, the legendary U.S. short-seller who thrives on post-bubble bargain-hunting, claims the overheated Chinese housing market is “Dubai times 1,000 — or worse.”

Chanos has an obvious stake in chaos. Not so Patrick Chovanec, as associate professor at the business school at Beijing’s Tsinghua University. Chovanec cites the intoxicating impact of Beijing’s $586-billion (U.S.) stimulus package and an additional $1.4 trillion in lending by state-controlled banks to real estate and other industries last year alone.

With easy money in such abundance, it’s no wonder developers are on a building jag.

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land in Beijing — not even desirable plots of land — to astronomical rates,” Chovanec told Bloomberg News last week.

“At the same time, you have 30 per cent-plus vacancy rates and slumping rents in commercial property. So it’s just a case of when (lenders] recognize the losses — or don’t.”

For the moment, there are two Chinese property markets. There’s an over-served premium-priced office and luxury apartment sector, and a neglected affordable housing market so underserved for lack of profit margins that Beijing recently pledged on its own to build 15 million units of shelter for low-income people.

Limited though the boom is to the high end of the market, the stupendous sums tied up in it have the potential to impede, if not halt, China’s fast-track Industrial Revolution when the boom inevitably ends.

“It’s simply a matter of time before the Chinese real estate bubble bursts,” insists Yi Xianrong, longtime student of Chinese property trends at the finance department of the Chinese Academy of Social Sciences. “A bubble burst in China would not only deal a fatal blow to our own economy, but would also extinguish the world’s hope for recovery.”

Indeed, Western economies are counting heavily on China to lead the nascent global recovery. China’s projected GDP growth this year of about 9.5 per cent will account for about one-third of global economic growth this year.

China has been providing one of the bright spots in the recent global downturn.

Bankruptcy victim General Motors has lost money in North America and Europe for years, but it profits from booming Chinese sales.

And Paul Otelli, CEO of California-based Intel Corp., the world’s leading computer-chip maker, recently said, “Thank God for China. It buoyed our company through the depths” of the recent global downturn.

China has just overtaken Germany as the world’s largest export economy, and eclipsed the U.S. as the biggest vehicle market.

Wen Jiaboa, the Chinese premier, has acknowledged that “property values have risen too quickly,” and vowed a crackdown on speculators. China’s central bank has twice this month raised the amount of capital Chinese banks must hold in reserve to cover losses, reducing funds available for property loans. But government officials are in a quandary over how hard to apply the brakes. A sudden about-face in Beijing’s easy-money policy of ultralow interest rates could trigger widespread property devaluations that would hit not only homeowners but also construction, finance, steel, furniture and other sectors tied to the real estate market.

Yet the longer the bubble persists, the more punishing the inevitable implosion, as Western economies learned from the collapse of the U.S. housing market in 2007-08.

So, uncertainty rules.

A soft landing can be engineered if China’s recent, modest steps to cool the market send a powerful enough signal to developers and panic buyers — and provide enough time for a rise in average income levels to match exorbitant housing prices.

In the meantime, there are a few signs the mania is exhausting itself. The new “instant city” of skyscrapers and thousands of villas built in the coal city of Ordos in China’s Inner Mongolia is largely vacant — a sobering sign to overzealous developers.

“Who would go there?” a downtown resident told Bloomberg Business Week recently of the sprawling metropolis taking shape in the nearby suburban desert. “It’s a city of empty buildings.”

The Romance of Housing show was yanked from the air in November, ostensibly because state officials were offended by a scene depicting a corrupt state official. But the show more likely got the hook over concerns that it celebrated recklessness with personal finances. And in Beijing, dirt is accumulating around the entrances to the newly built twin-tower head office complex of the Bank of Communications Co.

In a business district with a 35 per cent vacancy rate due to over-exuberant developer activity, the lobby of the BCC landmark is now used as a bicycle parking lot.

http://www.thestar.com/business/article/769105–olive-china-s-building-bubble-about-to-burst

Paul Vieira, Financial Post 

OTTAWA — Canada will officially oppose international efforts to get the world’s major economies to impose a global bank tax, government sources tell the Financial Post.

This could potentially ignite a major divide among Group of 20 leaders at their summit meeting in Toronto this summer, and further thwart efforts to implement uniform financial regulations in the post-recession era.

Senior Canadian officials are in the midst of crafting a public response to be released shortly, say sources with knowledge of the plan. An official response is required, they say, due to recent public musings from Gordon Brown, the British Prime Minister, that the G20 countries were close to a deal on a financial services tax — the so-called “Tobin” tax.

Canada is co-head of the group this year with South Korea.

“Canada is going to oppose any tax on financial transactions,” said one source, adding the tax runs counter to the Conservative government’s reputation for lower taxes. “The government wants it known that a deal on a bank tax isn’t going to happen.”

Prime Minister Stephen Harper, as well as Finance Minister Jim Flaherty, want to use their influence as host of the next G20 meeting, in Toronto in June, to kill the proposal. The sources suggested the G20 would not agree to measures or policies unless all leaders sign on.

When he was at the World Economic Forum in Davos last month, Mr. Harper used the global stage to denounce “excessive” and “arbitrary” proposals from countries, such as Britain and France, to regulate the financial-services industry in the aftermath of the global financial crisis.

Among the proposals Mr. Harper was referring to is a levy on financial transactions, designed to make banks pay for the bailouts governments posted in 2008 and 2009 to deal with the financial crisis and to dissuade banks from making risky bets in the future.

Individually, U.S. President Barack Obama has proposed a levy on banks with assets of higher than US$50-billion, while Mr. Brown has taxed bonuses earned by London’s top bankers.

Last week, Mr. Brown told the Financial Times he envisaged a G20 deal on a bank tax at the Toronto summit.

Mr. Brown said he believed backing for a global bank tax had gained momentum after Mr. Obama introduced a similar levy.

“People are now prepared to consider the best mechanism by which a levy could be raised,” Mr. Brown said in the interview. “I’m interested in the way support is building up for international action.”

Mr. Brown’s comments have clearly irked Canadian officials. It was only a few weeks ago that Mr. Flaherty and other Group of Seven finance and central officials met in Iqaluit, and appeared to be united in finding a common front of global financial reform. As a show of unity, they agreed to commission a study on the usefulness of a bank levy.

Mr. Brown proposed a global transaction tax at a G20 meeting he hosted in Scotland last November, only to draw stiff opposition — from, among others, Timothy Geithner, the U.S. Treasury secretary.

Canada’s plan to officially quash talk of a bank-tax deal is the latest hiccup in efforts by global leaders to map out a uniform regulatory scheme in the post-crisis world. Leaders from the G20 had agreed to implement uniform rules to prevent companies from seeking out countries with less-stringent regulation. Working groups, such as the Financial Stability Board, are in the midst of developing rules that would apply, such as the levels of capital banks would need to keep on their balance sheets.

But now, despite Mr. Brown’s musings, countries appear to be as divided as ever. http://www.financialpost.com/news-sectors/economy/story.html?id=2583353

The Canadian Press

OTTAWA — House price increases will moderate as the resale market becomes more balanced, says the president of the Canadian Real Estate Association.

“The resale housing market is becoming more balanced in a number of provinces,” Dale Ripplinger said Wednesday after the association released January sales statistics that revealed another big year-over-year price increase.

“A more balanced market is likely to result in smaller price increases going forward, with buyers in less of a rush due to an increase in supply.”

While Canadian home resale volumes slipped in January compared with December, they came in far higher than in January 2009, when sales fell to the lowest levels in a decade as the country suffered through the global credit crunch and recession.

The association said 25,671 homes were sold across the country in January, up 58 per cent from the same month a year earlier when consumer confidence hit an ebb, drying up buying and lending activity.

The national average price for homes listed on the association’s Multiple Listing Service was $328,537, up 19.6 per cent from a year ago.

The Kitchener-Waterloo Real Estate Board recorded 416 sales in January, 64 per cent more than a year ago. The Real Estate Board of Cambridge registered 140 sales, an increase of 32 per cent.

The average price in Kitchener rose 12.3 per cent to $278,825 on a year-over-year basis. In Cambridge, the average price jumped 16.3 per cent to $278,527.

The association’s report was issued a day after Finance Minister Jim Flaherty announced that tighter rules for mortgage borrowers will be introduced in April. He described it as a measure to prevent a bubble in the housing market.

Under the new rules, effective April 19, borrowers will have to meet the standards for a five-year fixed-rate mortgage even if the interest they will pay initially is lower.

Compared month-over-month, seasonally adjusted home sales were down 2.8 per cent from the strong levels reported in December, giving a sign that the housing market could be already starting to cool in some regions.

Nearly half of the drop was linked to a slowdown in housing sales in Ontario.

“One car doesn’t make a parade, so a few more months of results showing a cooling trend will be required before talk of a Canadian housing bubble begins to fade,” said association chief economist Gregory Klump.

Klump suggested that Flaherty’s new plan and the harmonized sales tax, which replaces provincial sales taxes in Ontario and British Columbia on July 1, could encourage more Canadians to enter the market in the first half of the year.

“It could take until the second half of the year before a cooling trend becomes evident,” he said.

Resale homes were still drawing a stronger demand for January, with 170,199 listed homes on the Multiple Listing Service in Canada, a decline of 18 per cent over the same time last year, the report said. http://news.therecord.com/Business/article/672304

New Rules to Come into Force April 19th, 2010   Federal Finance Minister Jim Flaherty announced changes to mortgage insurance rules this morning, which are set to come into force on April 19th, 2010.   This means the government will adjust the rules for government-backed insured mortgages as follows:

1. Require that all borrowers meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
2. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90% from 95% of the value of their homes. This will help ensure home ownership is a more effective way to save.
3. Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties.

There were no changes to down payment requirements or length of amortizations for owner-occupied residences.   Click here for additional details on the changes.   Your DLC Head Office Team

Garry Marr And Theresa Tedesco, Financial Post 

 The Canadian Real Estate Association has proposed an overhaul of its rules in the wake of allegations by the federal competition watchdog that some of CREA’s practices are anti-competitive, according to internal documents obtained by the Financial Post.

The documents show the proposed amendments, which will be voted on on March 22, will ultimately give consumers some ability to decide how much they use a realtor on a transaction and allow consumers to conduct parts of a transaction without using a realtor.

The Ottawa-based association will present the proposed modifications to its bylaws to the representatives of the 100 real estate boards that comprise its membership.

The rule revision comes after the federal Competition Bureau filed an application with the Competition Tribunal five days ago. The dispute centres around the Multiple Listing Service system, owned by CREA, that handles about 90% of the real estate transactions in Canada each year.

A source familiar with the discussions said many of the proposed rule changes to be voted on are similar to those the Competition Bureau has already rejected.

“CREA’s leadership was unwilling to agree to changes that would have opened up competition, and offered options for consumers and real estate agents,” Melanie Aitken, Commissioner of Competition, said earlier this week. The bureau had been negotiating with CREA since October 2009 after a three-year investigation.

The source said the bureau filed the application after CREA was unwilling to make changes to the “three pillars,” the main rules that govern use of the MLS system.

In its application to the tribunal, the bureau laid out those three pillars. It described the first as allowing only a realtor to place a listing on MLS. The second requires that a listing realtor act as an agent for the seller of the property and assist them during the entire time of the listing contract. The third pillar demands the listing realtor agree to pay the co-operating realtor compensation that must be more than zero.

The rules to be voted on make only changes to the second pillar, removing the requirement that a realtor act as agent for the seller “throughout the entire time” of a listing contract. In CREA’s proposed amendments, its interpretations of the three pillars have eliminated the clause that required a realtor to handles all offers and counter offers.

It has also removed the qualification that made it against the rules to simply post property information without providing more service. The watchdog had singled out that rule in particular as anti-competitive in its release on Monday. “The Bureau is looking for removal of all of the three pillars. They are saying if you are lawfully licensed and a member of a board you should be able to list on MLS. They don’t want any another rules,” said the source.

Another source familiar with the workings of the federal competition agency said, “they’ve been trying to get CREA to bend and couldn’t get anywhere. The bureau decided it was taking too long and it was time to put some public pressure on them.”

If CREA is successful at modifying its bylaws and eliminating some or all of the alleged anti-competitive restrictions, the real estate association can go back to the competition bureau and ask the federal agency to discontinue its application to the Competition Tribunal.

“At that point, they can argue there are no longer any anti-competitive restrictions to haggle over,” said the source who asked not to be named.

If CREA is not successful at persuading the bureau to withdraw its complaint, it may continue to make changes to its bylaws, or decide to challenge the competition agency at the Tribunal, which is a legal battle that could take two to three years to resolve.

Lawyer Lawrence Dale, a part owner of Realtysellers (Ontario) Ltd., which was singled out as a victim of anti-competitive practices by the Bureau, said it now appears that CREA is retracting many of the changes it implemented in 2007. Back then CREA put in a series of rules on how you could sell on the MLS, saying they were vital to protecting its trademark.

“That position was obviously a sham given what they are proposing to do now,” said Mr. Dale, who sued the Toronto Real Estate Board (TREB) and Canadian Real Estate Association. “It appears to me the Bureau saw through their antics and wasn’t prepared to be maneuvered around.”

http://www.financialpost.com/news-sectors/story.html?id=2552890&p=1

Feb. 10, 2010

Since last October, home resale numbers have almost doubled, up 41.5 per cent and setting new records in Toronto, Ottawa and Montreal, all according to figures from the Canadian Real Estate Association (CREA). It’s stats like these that prompted economists from Scotia Capital, Derek Holt and Karen Cordes, to publish a report aptly titled, “Is there a Canadian Housing Bubble?”

And considering the data, it’s not an unwarranted question. Holt and Cordes plainly put forth that “Canadian house prices are rich no matter how one looks at it, but they are likely to become richer yet before material risks emerge later next year and beyond.”

They even answer their title’s question with the retort, “probably,” but elaborate that the combination of low rates, mortgage innovation and shortage of supply will keep it at bay for awhile.

In the Globe and Mail, Holt and Cordes said that “with prices up 20 per cent over year-ago levels and at all-time highs by virtually every measure, this is becoming an over-valued asset class in our opinion.”

As for the argument that increased affordability is driving the market, Scotia Capital claims that using affordability as a valuation measure is not a fair valuation at all, as “affordability is often just an interest rate at play.”

In other words, they believe that a housing bubble is well on its way.

Choose your words wisely
The word bubble, especially when it’s used in conjunction with the phrase real estate, has a fair amount of weight behind and shouldn’t be used lightly. When CMP contacted some of last year’s top 50 brokers, for instance, they tended to agree the so-called bubble was as imaginary as the mortgage monster under your bed, and what the industry is experiencing is simply a sharp rebound. For them, it’s the difference between performing the pole vault and landing on your back with the crash mat, or without it. In other words, the market will have its ups and downs, but this time when it does go down it won’t hurt too terribly.

Peter Kinch, of the Peter Kinch Mortgage Team in Vancouver, believes that everyone is confusing leftover pent-up demand from 2007 to 2009 and the current low interest rates as a possible bubble.
He defines the term bubble as “an overexuberance of activity not founded on any core fundamentals, resulting in irrational buying behaviour of the public.”

In a true bubble it’s not enough that consumers can afford a house, but they have to chase after it like a stock that they know is over-inflated, hoping to make a quick return on it. Kinch calls this chase “the greater fool theory,” in which the consumer hopes to buy an over-inflated priced house in hopes of flipping it in the short term to a greater fool.

Not only that, but for there to be a housing bubble Kinch finds it imperative that interest rates and unemployment rates increase sharply, resulting in a significant increase in defaults and fear. In turn, many houses need to be unloaded on to the market at once.

“I do believe there is fear-mongering that goes on in the media where people say, ‘Oh, geez. I saw in the Globe and Mail today that interest rates are going to go up and it’s going to cause a crash in the housing market.’ Well yeah, theoretically,” said Kinch.

However, he claims that the Bank of Canada would not drastically increase the interest rates at any given point. This is because of how closely tied the real estate market is to the economy, and more specifically, the Canadian dollar. The lower interest rates we see now are meant to stimulate the economy, and Kinch believes that the Bank of Canada would not arbitrarily destroy such economic stimulus by raising the rates too high or too quickly.

Dwight Trafford, of Mountain Mortgage in Orangeville, Ont., believes that people are currently being very reactionary to the market.

“There is some perception that there are still deals, and some perception that rates will rise,” he said. “With that, people are jumping in and trying to take advantage of both situations.”

He also blames the media for creating something new to report. “Saying that there isn’t [a bubble], that’s not news,” he said, adding that cases of multiple offers also tend to lead people to believe that there is a bubble.

After providing several comments on the potential housing bubble in Canada, ING Direct Canada president Peter Aceto told the Globe and Mail that Ottawa shouldn’t tighten mortgage rules.

Garry Marr, Financial Post 

Canadian real estate sales and prices are poised to set records this year, according to a new forecast that is bound to reignite calls in some quarters for tighter lending rules.

The Canadian Real Estate Association, which represents 100 boards across the country, said Monday it expects existing-home sales to reach 527,300, a 13.3% increase from a year ago and a 1.2% increase from the record high set in 2007.

The new-home market appears to be picking up steam, too. Canada Mortgage and Housing Corp. said there were 186,300 starts in January on a seasonally adjusted annualized basis, the highest level of new construction since October 2008.

Bank of Canada governor Mark Carney has warned about rising levels of household debt, which is reaching record levels. Finance Minister Jim Flaherty has suggested he is prepared to tighten mortgage requirements and continues to monitor the market.

“One of the legitimate concerns of the Finance Minister might be if you make qualifying for mortgage default insurance prematurely restrictive that it will quell housing activity even as erosion in affordability continues,” said Gregory Klump, chief economist with CREA.

There are have been some rumblings that the government is considering new rules that would require buyers who need mortgage insurance to have at least 10% down and amortize their mortgage over just 25 years instead of the current 35 years.

Anybody with less than a 20% downpayment must get mortgage insurance, if they are borrowing from a financial institution governed by the Bank Act.

Mr. Klump’s group contends the market is going to correct on its own in the second half of 2010. CREA has called for sales to drop 7.1% in 2011. The group says that while prices will rise by 5.4% in 2010, to a record high of $337,500, they will drop by 1.5% in 2011.

That view of the housing market is not out of step with some economists, who say that once interest rates rise and inventory levels increase, price increases will shrink. Year-over-year price increases in some markets, such as Toronto, have been around 20% for the past few months.

“There is still a sense of urgency to get into the market. The market will continue to be strong over the next few months,” said Benjamin Tal, senior economist with CIBC World Markets, adding he could see new construction also touching 200,000 starts before beginning to fall.

Part of that urgency in the housing sector is being driven by the introduction of the harmonized sales tax in Ontario and British Columbia on July 1. The tax would apply to real estate services and could increase the cost of buying a home by a few thousand dollars.

“It’s a factor fuelling a higher level of activity in Ontario and British Columbia,” Mr. Klump said. “What’s more Canadian than avoiding taxes?”

Elton Ash, vice-president of Re/Max of Western Canada, said he thinks the forecast put out Monday was a little optimistic for 2010, specifically the 4.2% price increase for British Columbia. “But I also think the market will be better in 2011 [than CREA].”

Mr. Ash is actually in favour of some measures to cool the market, like reducing the amortization period back to 25 years. But he wonders whether increasing the downpayment will take some people out of the housing market.

“I think leaving it at 5% would be okay,” Mr. Ash said.

Bank of Canada governor Mark Carney said Canada is not experiencing a housing bubble and he doesn’t see the need for structural changes to the country’s mortgage market, according to a report in Reuters.