Toronto condo data; China about to hit a wall?; Fiscal austerity to weigh on public sector jobs; The Age of Deleveraging; Another video primer
JANUARY 20, 2011
Toronto condo data
The Toronto Real Estate Board released their most recent rental market report yesterday. It showed both a substantial jump in rental transactions and a jump in rental inventory.
"From September until the end of 2010, TREB Members reported 4,920 rental transactions for condominium apartments and townhouses, representing a 27 per cent increase from the 3,859 transactions recorded during the same time period in 2009. There were a total of 9,227 apartments and townhouses listed for rent during the reporting period, representing a 22 per cent increase compared to the last four months of 2009. There was substantial growth in condominium apartment completions in 2010, which explains the strong growth in the number listings that were available during the reporting period. Many of the condominium apartments that were completed over the past year were owned by investors. Some of these investors chose to list their units for rent.
If you've read this blog for any time now, you'll know exactly how I feel about the Toronto condo market. This data only strengthens my conviction for the following reasons:
1) Most condos in the city of Toronto are cash flow negative, meaning most investors are actually speculating on future capital gains, which may or may not appear.
2) The jump in transactions can reflect movement of tenants, but the jump in inventory can only be explained by an increase in investors.
3) TREB suggests, and other data confirms, that many condos are purchased by investors. Note that 'some' of these investors choose to rent them out while others hold them simply for cap gains.
All of this is shadow speculative inventory that, if history is any guide, will flood the market once the prospects of future price increases evaporates. My position remains: If you are going to buy a condo as a long-term residence, feel free. Make sure you put a good chunk down and be prepared to lose equity over the next few years. If you're thinking of buying one as an investments, there are far better ways to lose your money. Go to the casino. Sit at the roulette table. Put all your money on 22. At least you'll have some fun losing it.
China about to hit a wall
Most commodities are getting spanked today....with the exception of natural gas :)
As I've suggested many times, the greatest risk facing the commodity complex (and the TSX by extension) is a hard landing in China. You may also recall that China's GDP is 60% driven by construction. Considering they are building empty cities and roads to nowhere, I have my doubts about the sustainability of their current growth.
The Business Insider ran an interesting article yesterday where they referenced a Nomura report (Hat tip to DR for pointing this out).
"If the history of Asian development is anything to go by, China is about to hit an investment wall and its loans to the property and construction sectors are about to collapse, according to Nomura.
...Other Asian economies (Japan, Korea, Singapore, and Thailand) have hit the wall on investment share of GDP at the seven- to eight-year mark. The building out of railway network has reached art form status. Individuals facing negative real deposit rates save via housing, but prices are declining with an uncertain tail risk and negative liquidity conditions."
With China's moves to mop up excess liquidity, the risk of a hard landing certainly remains. If it is a tail risk as Nomura suggests, it's about as fat as a porpoise. Below is a depiction of other Asian property booms and their untimely end.
Fiscal austerity to weigh on public sector jobs
Despite some recent strength in unemployment numbers, I remain skeptical of the long-term job growth trend particularly as public sector employment and construction have been two major catalysts for job growth:
With mortgage rule changes set to dampen already slowing housing starts, it's a fair prediction that construction employment will fall from its current level of nearly 1.3 million. Just how far will be the big question.
But what about the public sector, which managed to navigate the Great Recession relatively unscathed? We know that relative to past recessions, this one was a walk in the park.
I have suggested that the coming austerity will certainly put the axe to public sector employment growth. A new report by CIBC World Markets provides some interesting graphs on just how this may play out:
There's no doubt that the public sector will see significant pressure over the coming years as all levels of government seek to repair their tattered finances. If other areas of the economy slow significantly (such as construction and consumer spending), tax revenues will also decline leading to deeper cuts at all levels. The big question is whether the big public sector unions will recognize the inevitability and necessity of these cuts or will they hang themselves in the arena public opinion by staunchly refusing to recognize reality.
The Age of Deleveraging
Jason Leach, Director of Research and Portfolio Manager for Cravens Brothers, who obviously has far more artistic talent than yours truly, released a brilliant report (hat tip once again to DR): The Age of Deleveraging
It's a hoot! You have to read it! I think it's bang-on in its conclusion, yet it conveys it in such a clever manner.
New video primer
A new video primer has been released by my brother. This one deals with the primer on mass psychology.