Canada Housing/Debt: Trust me, I'm a landlord.

The Something Awful Forums > Discussion > Debate & Discussion > Canada Housing/Debt: Trust me, I'm a landlord.

namaste friends: Sep 18, 2004; by Smythe

Lexicon posted:

I guess by bearish I meant 'consistent with reality and sanity', as to me they are essentially equivalent. I've yet to see an intellectually honest, salient bull argument at this point.

I read the first page of dunning's report on the shitter just now. 6/10 might try to read the whole thing when I get home.

# ? Mar 12, 2014 20:36

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# ? Apr 29, 2024 17:28

LemonDrizzle: Mar 28, 2012; neoliberal shithead

Lexicon posted:

That'll be a short list, post-filter.

I'd be surprised if the average economist has taken any mathematics beyond introductory differential calculus.

You will not be able to get an undergraduate degree in economics from a reputable university without covering a reasonable amount of higher mathematics. For what it's worth, the mandatory mathematical courses for a BSc in economics at LSE are mathematical methods, stats, and econometrics; you can also take a number of more advanced mathematical topics in later years if you so desire.

# ? Mar 13, 2014 01:19

ocrumsprug: Sep 23, 2010; by LITERALLY AN ADMIN

It is less the amount of math they have to do (which is actually quite a bit) in their education. It is just the averaging of those two metrics seems pretty junior high on the face of it.

Price-to-Rent is probably a reasonable benchmark. Price-to-Income is probably a reasonable benchmark. Are they equivalent benchmarks, and should you average them to find something worthwhile? Pretty debatable. Should you then issue a press release stating "Prices are 60% too high" based on it? Maybe not.

If this is the level of analysis the economists are putting into it, it isn't a surprise that the general populace is relying on folk wisdoms for it.

# ? Mar 13, 2014 01:43

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

More generally, whenever you find yourself averaging percentage quantities, especially when those percentage quantities measure different ratios, you have most likely made an extreme error in judgement, taste, and good sense.

By all means, create a hybrid weighted metric of some sort, but averaging P:I and P:R and calling it a result is the height of schoolboy analysis.

# ? Mar 13, 2014 01:51

on the left: Nov 2, 2013; I Am A Gigantic Piece Of Shit

Literally poo from a diseased human butt

LemonDrizzle posted:

You will not be able to get an undergraduate degree in economics from a reputable university without covering a reasonable amount of higher mathematics. For what it's worth, the mandatory mathematical courses for a BSc in economics at LSE are mathematical methods, stats, and econometrics; you can also take a number of more advanced mathematical topics in later years if you so desire.

Stats and econometrics at the undergrad level typically won't go into the higher math, or at least are definitely passable without a mastery of those subjects. Stochastic processes for economics is typically in grad school though, along with time series analysis which will use those concepts.

# ? Mar 13, 2014 02:21

namaste friends: Sep 18, 2004; by Smythe

bro, stochastic processes is hardly higher math. The same goes for diff EQ.

I think it says a lot when your average comp sci or engineering undergrad has to take more math courses than a loving economist.

namaste friends fucked around with this message at 03:05 on Mar 13, 2014

# ? Mar 13, 2014 03:03

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

LemonDrizzle posted:

You will not be able to get an undergraduate degree in economics from a reputable university without covering a reasonable amount of higher mathematics. For what it's worth, the mandatory mathematical courses for a BSc in economics at LSE are mathematical methods, stats, and econometrics; you can also take a number of more advanced mathematical topics in later years if you so desire.

That may be true, but the undergrad and masters economics graduates I've met (mostly from UBC, UVic, and SFU admittedly) have always given off a decidedly strong "I'm not a math guy" vibe. I retract my original comment; clearly it was myopic and anecdotal.

# ? Mar 13, 2014 03:05

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

Cultural Imperial posted:

bro, stochastic processes is hardly higher math. The same goes for diff EQ.

I think it says a lot when your average comp sci or engineering undergrad has to take more math courses than a loving economist.

Idle curiosity: where does higher math start in your estimation?

I don't know if there's a strict definition, but I'd venture somewhere around PDEs. Certainly anything real analysis and above.

# ? Mar 13, 2014 03:07

namaste friends: Sep 18, 2004; by Smythe

Lexicon posted:

Idle curiosity: where does higher math start in your estimation?

I don't know if there's a strict definition, but I'd venture somewhere around PDEs. Certainly anything real analysis and above.

PDE for sure. Definitely analysis. Anything where you see a ton of loving 'i's. Maybe discrete math. Logic beyond what they take for philosophy.

# ? Mar 13, 2014 03:16

JawKnee: Mar 24, 2007; You'll take the ride to leave this town along that yellow line

Cultural Imperial posted:

PDE for sure. Definitely analysis. Anything where you see a ton of loving 'i's. Maybe discrete math. Logic beyond what they take for philosophy.

I found discrete 2 difficult compared to other 2nd year math courses, computability/complexity theory was mind-boggling but I got through it.

# ? Mar 13, 2014 03:21

blah_blah: Apr 15, 2006

Lexicon posted:

That'll be a short list, post-filter.

I'd be surprised if the average economist has taken any mathematics beyond introductory differential calculus.

Most decent Ph.D programs in economics require a course in real analysis. Of course your average BA graduate in economics is a very different matter. That being said, I've interviewed a lot of econ Ph.Ds recently and most of them tend to be fairly weak in math. Especially the ones who didn't go to top schools.

# ? Mar 13, 2014 07:07

Kalenn Istarion: Nov 2, 2012; Maybe Senpai will finally notice me now that I've dropped :fivebux: on this snazzy av

For better or worse the rep at my school was that economists were lovely business students who couldn't meet the usually stricter b-school requirements for admission. I'd like to think the ones that go for a phd are a bit less lovely.

# ? Mar 13, 2014 14:13

Precambrian Video Games: Aug 19, 2002

Lexicon posted:

Isn't Tara Perkins typically more associated with the bearish side of the aisle? I guess she probably didn't write the headline - the article is far more nuanced than the headline suggests.

I don't doubt that there might be flaws in various metrics, but this whole thing does seem like grasping at straws a bit.

I read the article and like you said, there's some nuance to it. The main points seem to be that:

- Using a matched sample, or even only choosing homes that have sold at least twice, is not sufficient to remove changes in quality of the home, because even though the home never moves, it could be renovated between sales. Fine then, but I'm not sure what you can do about this bias. Presumably homes anywhere are being renovated, so this should only be a problem if homes with multiple sales are renovated more often than others, which sounds plausible. But I'm not sure how much this matters, because the rate or quality of renovations to homes that are off the market is irrelevant to anyone looking to buy.

- Not all of the rental pricing indices take into account absurdly inflated condo rents. Okay, fine. Presumably that Dunning fellow had a crack at correcting this bias. However, it seems fair to only use existing rental units in a matched sample. I would guess that most new condo units coming onto the rental market are in downtown Toronto, or at the very least distributed differently from existing rental buildings. Otherwise, why the hell are people paying a $500/month premium for condo rentals over apartments? The other question is - are they really? The vacancy rate in Toronto is tiny, especially downtown, but is that true of condo rentals as well? Anecdotally, I know a few people who rented out condos temporarily, but they were not being gouged to the extent that the article suggests. Why would you pay an extra 30-40% to rent a condo instead of an apartment unless you're really desperate and can't wait for a vacancy to pop up in a decent apartment building?

- I'm not sure what the right way to deal with this is, but it seems like a matched sample of houses and apartments is a better method than including new condos, considering that there are basically no new (semi)-detached homes being built in Toronto and only a few apartments, whereas condos are coming up like weeds. But then I guess the housing price index includes the price to buy condo units as well, so maybe I'm wrong.

Besides those points, the conclusion is still that housing overpriced, just not as much as one thought. Okay then. Can't we still compare to other countries' price-to-rent or -to-income ratios, assuming they're using similar methodology with perhaps the same flaws? I guess the issue is that Vancouver and Toronto are building insane quantities of condos compared to almost anywhere else in the world, and there's no neat and easy way to deal with that.

# ? Mar 13, 2014 21:51

Kalenn Istarion: Nov 2, 2012; Maybe Senpai will finally notice me now that I've dropped :fivebux: on this snazzy av

Speculation, but I would put money on condo rents being higher because all else equal, condo developments tend to be in higher rent neighbourhoods, and also come with more amenities than apartments (ensuite laundry, concierge, extensive gym or entertainment complexes, etc).

# ? Mar 13, 2014 23:04

Baronjutter: Dec 31, 2007; "Tiny Trains"

Yeah, when we were looking for a new apartment we wanted in-suite laundry but the only ones that had that were rented out newer condos and the rents were crazy high. I'm paying on the higher-end for my very nice 2br apartment steps from downtown Victoria, but if I wanted in-suite laundry it was an extra $200 a month minimum for the same size. Plus you have a random condo owner for a landlord that could kick you out any year when they finally flip their unit and make crazy money.

# ? Mar 13, 2014 23:08

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

From the aforesaid Dunning: http://m.huffpost.com/ca/entry/4948890?utm_hp_ref=canada-business

# ? Mar 14, 2014 00:33

etalian: Mar 20, 2006

Lexicon posted:

From the aforesaid Dunning: http://m.huffpost.com/ca/entry/4948890?utm_hp_ref=canada-business

If a mortgage lobbyist is whining over reducing to the max mortgage term to 25 year then at least something is being done right.

# ? Mar 14, 2014 00:37

ocrumsprug: Sep 23, 2010; by LITERALLY AN ADMIN

etalian posted:

If a mortgage lobbyist is whining over reducing to the max mortgage term to 25 year then at least something is being done right.

The part I'm amazed they get away with, without getting challenged on is;

1) There is no bubble. Stop talking about a bubble you rube.
2) It is dangerous meddling to put things back to how they were 6-7 years ago.

In the absence of a bubble what could possibly be the danger?

ocrumsprug fucked around with this message at 06:35 on Mar 14, 2014

# ? Mar 14, 2014 01:42

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

If your interest in the Canadian economy/housing is remotely beyond fleeting, do yourself a favour: grab a beer or a tea and sit down and read this: http://www.bankofcanada.ca/2014/03/stepping-outside-analyzing-canadian-economy/

# ? Mar 14, 2014 02:39

namaste friends: Sep 18, 2004; by Smythe

http://www.theglobeandmail.com/repo...hboard/follows/

quote:

My nomination for the understatement of the year goes to Finance Minister Jim Flaherty, who in early December observed that �regrettably, CMHC became something rather more grand I think than it was intended to be.�

Indeed. The Crown corporation, which originally had a humble mandate of helping first-time buyers obtain favourable financing, now insures $560-billion of some of Canada�s riskiest mortgages, more than double what it insured in 2005.

MORE RELATED TO THIS STORY

Ottawa names former investment banker as new CMHC chief executive
While Canada Post threatens balanced budget, CMHC is a huge help
Canada�s housing market most overvalued in the world, Deutsche Bank says

To their credit, the current government has implemented several measures since 2010 aimed at reducing taxpayer exposure to the Canadian mortgage market, but some structural issues remain. Below are four changes that the government should consider making in 2014.

1) Increase income documentation requirements on insured mortgages

Canadians are rightfully proud of the stricter mortgage underwriting that spared us from some of the particularly egregious lending practices seen stateside before their real estate bust.

However, most Canadians would be surprised to learn that �prime� Canadian mortgages, particularly high-ratio mortgages insured by Canada Mortgage and Housing Corp., involve far less documentation than comparably-labelled �prime� loans in the U.S. � and this was true even during the subprime years.

Today, a borrower can obtain a prime, CMHC-insured mortgage with as little as a pay stub and a job letter, which would make it a low-documentation Alt-A mortgage by U.S. standards. RBC recently tweeted about this, noting that securing a mortgage in the U.S. requires more documentation than in Canada.

Interestingly, CMHC places the integrity of the underwriting primarily with the lenders themselves who profit from the mortgages, as the insurer seldom sees the physical documentation and very rarely spot checks mortgage applications at origination.

This relatively low standard for mortgage documentation coupled with a very obvious moral hazard leaves the door open for what the mortgage industry calls �soft fraud� or �fraud for shelter,� which typically involves the applicant (often with the knowledge of the lender) misrepresenting their financial circumstances, usually related to their income or job status.

There�s really nothing �soft� about this form of fraud, particularly when it�s a CMHC-insured mortgage where taxpayers are holding the bag. And while it�s impossible to know the true extent of the problem, one highly respected Canadian mortgage website suggested that it is �one of the most widespread and under-reported problems in mortgage lending� and that it is �surprisingly common these days.�

Regardless of the scope of the problem, the solution is relatively simple: CMHC should demand Canada Revenue Agency notice of assessments (NOAs) for all mortgage applications. This is common practice for prime mortgages in the U.S. and is a simple way to ensure that income or employment has not been significantly misrepresented given that NOAs are very difficult to alter or forge.

Interestingly enough, many lenders insist on seeing NOAs for conventional mortgages that aren�t being insured. This suggests, not surprisingly, that their underwriting is more stringent when they are forced to bear the risk for the mortgage they originate rather than insuring the mortgage through CMHC and passing the risk on to taxpayers.

2) Reinstate the regional mortgage cap

Prior to 2003, CMHC had a regional mortgage cap that set a maximum dollar amount on the size of mortgage they would insure. This made a lot of sense given that CMHC�s original mandate was geared toward helping first-time buyers get into entry-level housing. The logic here is simple: If a buyer can afford a home that is priced significantly above the local average, they shouldn�t need what effectively amounts to a taxpayer-backed subsidy to do so.

In what can only be described as a massive policy blunder, this cap was eliminated in 2003. For nearly a decade, CMHC would insure mortgages of any size, from simple starter homes to opulent mansions, a truly epic case of �mandate creep.� In 2012, a nationwide limit was re-established; CMHC will no longer insure mortgages on homes that are purchased for more than $1,000,000.

This is a step in the right direction, but it ignores the fact that a million-dollar home is well above a starter home in nearly all parts of Canada. This should change. One possible solution would be to set the maximum mortgage cap to the average resale price in each census metropolitan area and have that cap change annually to reflect changing house prices.

3) Eliminate the second home program

CMHC currently has a program that allows buyers to purchase a second home with as little as 5 per cent down. This program is most commonly used for purchasing recreational properties such as cottages, but can also be used to purchase a �pied-�-terre� for those who have to often travel to another city for work, or to purchase a home for children while they are attending college or university.

In the context of CMHC�s original mandate, this program is simply indefensible. If someone is fortunate enough to have the income and assets to purchase a second home, for recreational purposes or otherwise, they should not require taxpayers to bear the risk, particularly considering that the majority of Canadians are not fortunate enough to own multiple properties themselves. This program needs to go.

As an aside, contacts in the mortgage industry suggest that some investors are also currently abusing this program. In 2010, the government wisely changed the rules so that investors must put down 20 per cent on investment properties. However, the door has been left open to purchase investment properties with 5 per cent down through the Second Home Program, with taxpayers bearing the risk. Of course, the applicant can�t state up front that the home will be rented out, but they are free to quietly rent out their second home after the deal closes.

4) Increase transparency and oversight

The ironic part about Mr. Flaherty�s comments that CMHC has become something more �grand� than it was intended to be is that Canadians still have no idea just how �grand� CMHC has actually become since we still don�t know exactly what is included in that $560-billion in insurance in force.

This was driven home to me last year when a developer told me that CMHC recently had a program (and perhaps still does) that allowed developers to get insurance on loans for their condo developments. This is unbelievably bad policy. This effectively lowers the interest rate the developer would pay, but you can be assured that those cost savings would not be passed on to consumers at the other end. In essence, taxpayers were assuming risk on these development loans to pad developer pockets.

Dr. Ian Lee from Carleton University�s Sprott School of Business has in the past been an outspoken critic of CMHC�s lack of transparency. He recently told me via e-mail that �CMHC is the least transparent of all Canadian Crown corporations concerning its numerous activities and detailed breakdown of its insurance guarantees.�

This needs to change. Canadians have a right to know exactly what is in CMHC�s insurance portfolio considering that all taxpayers are collectively on the hook if these insured loans were to sour.

As we enter 2014 with Canadian households having higher debt loads than ever and house prices in most Canadian metropolitan areas at all-time highs relative to local incomes, Canadians should increasingly be asking if CMHC, in its current form, is serving and protecting their best interests.

Ben Rabidoux is president of North Cove Advisors Inc., a market research firm providing services to institutional investors. He is the author of the weekly Canadian Housing, Macro, and Credit Newsletter.

I didn't even know the CMHC had a second home program. gently caress that loving bullshit.

# ? Mar 14, 2014 03:00

namaste friends: Sep 18, 2004; by Smythe

quote:

The Bank�s base-case projection sees household debt, housing prices and housing starts levelling off and then gradually declining (in real terms, in the case of housing prices): in other words, achieving a soft landing. Recent data, such as decelerating monthly price increases for existing homes, a declining number of housing starts and historically low rates of household credit growth, all support this view and indicate that the situation is stabilizing, although the risks remain elevated.

International evidence also provides some support for this more benign scenario. Countries such as Australia have managed a soft landing and the preconditions for this, one could argue, are even more favourable in Canada. Higher mortgage underwriting standards, higher home equity margins, historically low debt-servicing costs, a more resilient banking sector and a number of pre-emptive macro-prudential measures that have been undertaken, in the form of tighter mortgage insurance and mortgage-lending standards, all work in this direction. Indeed, credit quality in Canada has been increasing even as credit continues to expand.

In this instance, the international perspective illuminates the downside and the upside. It highlights the risks that might be realized if the situation is not well managed, but it also provides evidence that a more positive outcome is possible - and indeed more likely. Close monitoring is nevertheless required to help ensure that this cautionary tale does not become a reality.

oh for gently caress's sake

# ? Mar 14, 2014 03:42

Paper Mac: Mar 2, 2007; lives in a paper shack

Cultural Imperial posted:

oh for gently caress's sake

Ah yes a soft landing

*exits aircraft at 30k feet*

# ? Mar 14, 2014 06:31

etalian: Mar 20, 2006

Cultural Imperial posted:

oh for gently caress's sake

It's the old dream that the downside of the bubble won't be painful for everyone, while in reality bubbles tends to blow up in catastrophic ways.

# ? Mar 14, 2014 06:47

namaste friends: Sep 18, 2004; by Smythe

Hay guys Australia just had a soft landing so we're next lol

:rolleyes:

# ? Mar 14, 2014 14:13

Mexplosivo: Mar 8, 2007; The monetary system is not ratified by society yet it shapes and dictates our entire existence...

quote:

The Bank�s base-case projection sees household debt, housing prices and housing starts levelling off and then gradually declining (in real terms, in the case of housing prices): in other words, achieving a soft landing. Recent data, such as decelerating monthly price increases for existing homes, a declining number of housing starts and historically low rates of household credit growth, all support this view and indicate that the situation is stabilizing, although the risks remain elevated.

International evidence also provides some support for this more benign scenario. Countries such as Australia have managed a soft landing and the preconditions for this, one could argue, are even more favourable in Canada. Higher mortgage underwriting standards, higher home equity margins, historically low debt-servicing costs, a more resilient banking sector and a number of pre-emptive macro-prudential measures that have been undertaken, in the form of tighter mortgage insurance and mortgage-lending standards, all work in this direction. Indeed, credit quality in Canada has been increasing even as credit continues to expand.

In this instance, the international perspective illuminates the downside and the upside. It highlights the risks that might be realized if the situation is not well managed, but it also provides evidence that a more positive outcome is possible - and indeed more likely. Close monitoring is nevertheless required to help ensure that this cautionary tale does not become a reality.

One could argue we already soft landed.

VVVV Sorry the quote didn't go through when i posted. i was being sarcastic about the whole "one could argue" BS in your quote.

The things they note as "stabilizing" are precisely what i think will case the implosion, "decelerating monthly price increases for existing homes, a declining number of housing starts and historically low rates of household credit growth, all support this view and indicate that the situation is stabilizing". there's a very small amount of "deceleration" that i guess could be considered stabilizing but any other amount of deceleration and you got yourself a bubble bursting.

Mexplosivo fucked around with this message at 16:44 on Mar 14, 2014

# ? Mar 14, 2014 16:27

namaste friends: Sep 18, 2004; by Smythe

http://www.macleans.ca/economy/realestateeconomy/a-canadian-housing-chart-that-puts-the-bubble-in-perspective/

Mcleans asks Robert Schiller what he thinks.

# ? Mar 14, 2014 16:28

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

Mexplosivo posted:

One could argue we already soft landed.

How would that work?

# ? Mar 14, 2014 16:34

JawKnee: Mar 24, 2007; You'll take the ride to leave this town along that yellow line

Lexicon posted:

How would that work?

twisty logic and bad graphs

# ? Mar 14, 2014 16:55

Lexicon: Jul 29, 2003; I had a beer with Stephen Harper once and now I like him.

JawKnee posted:

twisty logic and bad graphs

REALTOR� Math�

# ? Mar 14, 2014 16:59

FrozenVent: May 1, 2009; The Boeing 737-200QC is the undisputed workhorse of the skies.

Gonna quote this:

WHERE MY HAT IS AT posted:

I have a real estate law question, located in Ontario, Canada if that helps.
I recently put in an offer in to lease a condo in a new building. The prices in this building have been dropping fairly steadily as the landlords who are buying them to rent them out simply can't find enough tenants to fill them so tons of them are sitting empty. I just got a call from the real estate agent saying the building company has to finalize deals, and they've decided not to allow any at the price point the units have been listing at, and are demanding that the landlords charge 1450-1500 rather than the 1100-1200 they've been listed at.

It doesn't make any sense to me that the building company is telling the people who own the units what they can lease them for, but I'm not a lawyer. Is this an actual thing that happens and is legal? Is the real estate agent bullshitting me? I tried googling around, but I can't seem to find anything (I'm probably not using the right search terms). Thanks goons!

# ? Mar 14, 2014 18:37

Rhobot Mk. II: Jan 15, 2008; Mk. II: Bigger, longer, uncut robo-cock.

FrozenVent posted:

Gonna quote this:

Edit: Ooops. Wrong thread.

Rhobot Mk. II fucked around with this message at 18:47 on Mar 14, 2014

# ? Mar 14, 2014 18:45

French Canadian: Feb 23, 2004; Fluffy cat sensory experience

So we're talking a soft landing at an airport whose runway ends at a cliff, I suppose?

# ? Mar 14, 2014 21:46

etalian: Mar 20, 2006

French Canadian posted:

So we're talking a soft landing at an airport whose runway ends at a cliff, I suppose?

Video example of the soft landing:
https://www.youtube.com/watch?v=BN3waJIc574

# ? Mar 14, 2014 23:48

namaste friends: Sep 18, 2004; by Smythe

Another soft landing
http://youtu.be/FUEhNKBi4DY

# ? Mar 15, 2014 00:52

Mrs. Wynand: Nov 23, 2002; DLT 4EVA

You know it's been about a year since prices stopped rising IIRC. That doesn't mean things won't collapse at the first sign of trouble (like a major euro collapse or Russia doing something insane), but until that happens it's not exactly crazy to describe what is currently happening as a "soft landing".

I really don't think a sudden violent crash is nearly that imminent. It's a precarious position yes but prices don't actually have a reason to come down until something actually begins to destabilize people's overstretched debt situations. Trudging along like this for another 2 decades or so is an entirely possible outcome for all this, and could be described as a "soft landing". What's notable about that is that people are still getting hosed, just slowly over a much longer timespan.

# ? Mar 15, 2014 18:15

namaste friends: Sep 18, 2004; by Smythe

I don't know about you guys but the only financial news that I'm completely focused on is the impending collapse of China's shadow banking system. It's been about a week since haixin steel defaulted and no one in western press is covering this except the FT.

Yes, a loving steel mill became a defacto bank. That's how hosed up China is.

# ? Mar 15, 2014 18:59

Paper Mac: Mar 2, 2007; lives in a paper shack

Cultural Imperial posted:

I don't know about you guys but the only financial news that I'm completely focused on is the impending collapse of China's shadow banking system. It's been about a week since haixin steel defaulted and no one in western press is covering this except the FT.

Yes, a loving steel mill became a defacto bank. That's how hosed up China is.

It's deeply frustrating to me that I'm still relying on Zero Hedge for quick updates on this stuff.

# ? Mar 15, 2014 21:44

EoRaptor: Sep 13, 2003; by Fluffdaddy

Cultural Imperial posted:

I don't know about you guys but the only financial news that I'm completely focused on is the impending collapse of China's shadow banking system. It's been about a week since haixin steel defaulted and no one in western press is covering this except the FT.

Yes, a loving steel mill became a defacto bank. That's how hosed up China is.

Don't ignore that this has happened in other countries. GM started offering financing for their cars, and eventually they became a financing company that happened to make cars. They grew into other types of lending, got huge, and then imploded (and got bailed out).

This type of thing happens when buying power drops below the capital cost of a good or service (industry or consumer). Nominally, banks are supposed to step in here and use their financial expertise to turn future revenue into current credit, allowing the transaction to proceed. Banks eventually became unable to overcome their own risk model, as they could no longer muster the internal expertise needed to evaluate a given purchase correctly. As a response, manufacturers borrowed from the banks against their own output, and lent that to their own purchasers based on the information their had about their business relationship.

The only risk in this model is the supplier 'pumping up' prices and loans to try to make more money, or financial diversification outside their core market where they are unable to properly asses risk. Other risks, such as payment defaults and industry downturn, exist in pretty much any model, and are accounted for.

Haixin seems to have gone for financial diversification strategy. This lead to a bunch of poorly evaluated decisions, and the end result is they are no longer able to pay back their underwriters. The only thing unique is that the government has chosen to let them implode rather than recapitalizing them.

I actually doubt this will have the desired effect. Instead, investment is going to concentrate in larger firms that have 'too big to fail' status, and the economy is going to slow while the financial sector consolidates its wealth. Rich will get richer, and whatever existed of the middle class will vanish.

EoRaptor fucked around with this message at 21:55 on Mar 15, 2014

# ? Mar 15, 2014 21:53

Franks Happy Place: Mar 15, 2011; It is by weed alone I set my mind in motion. It is by the dank of Sapho that thoughts acquire speed, the lips acquire stains, stains become a warning. It is by weed alone I set my mind in motion.

EoRaptor posted:

Don't ignore that this has happened in other countries. GM started offering financing for their cars, and eventually they became a financing company that happened to make cars. They grew into other types of lending, got huge, and then imploded (and got bailed out).

This type of thing happens when buying power drops below the capital cost of a good or service (industry or consumer). Nominally, banks are supposed to step in here and use their financial expertise to turn future revenue into current credit, allowing the transaction to proceed. Banks eventually became unable to overcome their own risk model, as they could no longer muster the internal expertise needed to evaluate a given purchase correctly. As a response, manufacturers borrowed from the banks against their own output, and lent that to their own purchasers based on the information their had about their business relationship.

The only risk in this model is the supplier 'pumping up' prices and loans to try to make more money, or financial diversification outside their core market where they are unable to properly asses risk. Other risks, such as payment defaults and industry downturn, exist in pretty much any model, and are accounted for.

Haixin seems to have gone for financial diversification strategy. This lead to a bunch of poorly evaluated decisions, and the end result is they are no longer able to pay back their underwriters. The only thing unique is that the government has chosen to let them implode rather than recapitalizing them.

I actually doubt this will have the desired effect. Instead, investment is going to concentrate in larger firms that have 'too big to fail' status, and the economy is going to slow while the financial sector consolidates its wealth. Rich will get richer, and whatever existed of the middle class will vanish.

A good post, but where your analysis breaks down (in my opinion) is in assuming that Chinese banks a) control a sufficient portion of lending activity in the economy to exert influence over the quality of loans, and b) assuming that Chinese banks aren't just as bone stupid as other lending vehicles.

The Chinese credit bubble is so well-documented and so huge at this point that it is pretty safe to say that some large portion of all loans/economic activity in that country will end up being near-100% writeoffs, either through corruption, misallocation of resources, or unproductive assets. Banks have a lesser proportion of that, sure, but it's definitely not zero, and their exposure to the shadow banking sector is huge.

# ? Mar 15, 2014 22:01

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# ? Apr 29, 2024 17:28

tagesschau: Sep 1, 2006; Guten Abend, meine Damen und Herren.

Mr. Wynand posted:

You know it's been about a year since prices stopped rising IIRC. That doesn't mean things won't collapse at the first sign of trouble (like a major euro collapse or Russia doing something insane), but until that happens it's not exactly crazy to describe what is currently happening as a "soft landing".

Great, now all it has to do is continue flatlining for another 15-25 years to remain a "soft landing." That's totally possible, right? :v:

edit: It's possible for that timeline to be shorter, but there would have to be a lot of inflation outside the housing sector for that to be the case.

tagesschau fucked around with this message at 22:06 on Mar 15, 2014

# ? Mar 15, 2014 22:02

The Something Awful Forums > Discussion > Debate & Discussion > Canada Housing/Debt: Trust me, I'm a landlord.

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