Aussie Property Market Collapse Looms As Chinese Flee Amid Capital Controls

Given the recent admission by the Australian Central Bank that property prices "have gone crazy," it appears new Chinese 'regulations' may just kill Australia's golden goose of 'weath creation' as Aussie's largest trade partner sees its economy collapse. While the Aussies themselves proclaimed a "war on cash," it appears, as AFR reports, thatChinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls. With Chinese banks now limiting any overseas transfer to USD50,000 - in an effort to control capital outflows - and with China dominating the Aussie housing market, one agent exclaimed, "it has affected 70 to 80 per cent of current transactions and some have already been suspended."

To date Chinese investment has been overwhelmingly focussed on the most familiar capital city property markets of Melbourne and Sydney, with around 80 per cent of foreign investment hitting Victoria and New South Wales. As PeteWargent shows, China dominated the foreign buyer of Aussie homes...

As Bloomberg notes, Chinese buyers were approved to buy A$12.4 billion ($9.9 billion) of Australian real estate in 2013-14, the Foreign Investment Review Board said in its annual report, without differentiating between commercial and residential property. China's total approved investment in Australia was A$27.7 billion over the period, compared with the U.S.'s A$17.5 billion.

And Q1 2015 showed no signs of a slowdown in that flood of capital to Australia...

But now, as AFR reports, China's capital controls will kill that flow of money into Aussie property...

Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls.

One Chinese agent said the latest efforts by the central government to avoid large capital outflows werehaving a "significant impact" on his business.

"It has affected 70 to 80 per cent of current transactions and some have already been suspended," said the agent who asked not to be named.

The tighter foreign exchange rules are also set to impact the federal government's relaunched Significant Investor Visa (SIV), which provides fast-tracked residency for those investing at least $5 million into Australia.

"I think it will be big, big trouble for the SIV program because the amount of money is just too large," said one Shanghai-based adviser, who sells Australian property and advises wealthy clients on their migration plans.

Only seven SIV applications have been submitted since the new rules were introduced on July 1, which require investors to put their money into riskier assets such as venture capital and emerging companies.

China has previously tolerated significant capital outflows via so called "grey channels", but has tightened up enforcement in recent weeks as the economy slows and fears over capital flight put downward pressure on the currency.

The crackdown from Beijing has seen Chinese banks setting up watch lists for unusual transactions, according to one bank manager, who asked not to be named as he was not authorised to speak about the policy.

He said the operation was aimed at cracking down on a practice whereby family and friends of those wanting to purchase a property overseas all transfer US$50,000 into an overseas account. That's the limit each Chinese individual is allowed to move out of the country each year.

The purchaser then pays back his friends and family in China and uses the money from the overseas account to put down a deposit on the property.

However, banks are now tracking the source of funds for overseas bank accounts that have received more than US$200,000 within 90 days, according to the bank manager, who works in Shanghai for one of the major state-owned banks.

"We have always had this policy but now it has been restated and is being enforced more strictly," he said.

"In the past we could find a way around these rules but now all those ways have been blocked."

"I'm sure this would be having an impact on overseas property purchases," he said.

And here is the punchline!!

The tighter rules in China come as Sydney recorded its lowest auction clearance rate for the year this past weekend, while Melbourne has now recorded two weekends below the same time last year, according to Corelogic RP Data.

*  *  *

Finally, as we have noted previously,

The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

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zerohedge.com/Tyler Durden/ September 15, 2015

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Canada's Real Estate Bubble Turns Bust

A report from the Financial Post shows that Calgary in Alberta Canada now has 1.7 million square feet of empty office space, the most in North America with another 5.2 million under construction! After years of booming construction, the natural resource rich country is starting to feel the pinch.

CALGARY – The number of half-empty office buildings in Alberta is projected to spike, as Colliers International predicts an “ill-timed” building boom should push up vacancy rates in Calgary and Edmonton.

In a report released Tuesday, the real-estate brokerage’s chief economist Andrew Nelson said, “the fall in oil prices has had a negative impact on the energy-reliant markets (in Western Canada),” which has contributed to rising vacancy rates and falling rental prices in Alberta’s two largest cities.

Vacancy rates jumped over the course of the second quarter. In Calgary’s case, Colliers reported the downtown vacancy rate rose to 13 per cent from 10 per cent, while Edmonton’s vacancy rate increased to 11.2 per cent from 10.6 per cent.

A glut of new buildings under construction in both cities could push those numbers up even higher.

“Canada is also in the midst of an ill-timed supply surge that caused vacancy rates to rise even in markets with positive absorption in (the second quarter),” the report noted.

There are 5.2 million square feet of office space under construction in Calgary right now, which is the largest amount of new commercial space being built in any city in Canada and could further push up vacancy rates.

Edmonton, a city with a current total of 17 million square feet of office space, is in the middle of its own building boom with over 2 million square feet of space under construction.

But here comes the silver lining!

Some observers see at least a partial silver lining in the numbers.

In recent years, Calgary Chamber of Commerce director of policy and research Justin Smith said, commercial real estate costs downtown Calgary were “going through the roof” and “accelerating at a pace far beyond the Canadian average.”

He said those escalating costs made it difficult for some companies to stay in downtown Calgary and noted that even large companies like Imperial Oil Ltd. and CP Rail Ltd. moved their head offices to the suburbs.

The uptick in vacancy rates, he said, could provide some relief to smaller companies looking to do business downtown, as rental rates are projected to fall as vacancies rise.

However, the numbers in Calgary may understate how much office space is sitting empty as a result of a phenomenon called ghost vacancies, where companies that have cut staff hold onto more office space than they need.

Colliers executive vice-president and partner Jim Rea said that ghost vacancies mean that, even if employment levels rise, vacancy rates may hold steady.

“The ghost space may never come to market, but those companies that currently have excess capacity of office space, as they continue to staff up, you can’t assume that they’ll be back in the market looking for more space,” Rea said.

Weakening demand for office space in both Calgary and Edmonton has resulted in large quantities of commercial real estate coming back on the market this year.

The report showed that 1.7 million square feet of office space has become available in Calgary’s downtown core, thanks in part to thousands of layoffs in the oil patch and a decline in the need for commercial space.

That is the largest quantity of newly empty space in any downtown in North America, including Houston, an oil and gas town where 1.6 million square feet have become available this year.

 HT: RW

mises.org/blog/Mark Thornton/September 10, 2015

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What’s Coming Unglued Now in Canada?

Canada lumbered through the first half of 2015 in a “technical recession,” Statistics Canada confirmed this week, as GDP shrank in both quarters. Among the culprits: the swooning energy sector and an investment slump.

Now everybody is lining up behind the hope that a sudden acceleration will put the economy back on track in the third quarter, despite oil that has re-crashed and despite the ongoing collapse – and that’s what it is – of the all-important energy sector.

To get to this acceleration, the once booming residential and commercial construction sectors have to hold up, or else Canada’s economy is in real trouble. Alas….

“Canada is also in the midst of an ill-timed supply surge that caused vacancy rates to rise even in markets with positive absorption” in the second quarter, warns a new report by commercial real estate firm Colliers International cited by the Financial Post. It paints a picture of an epic office boom turned into an even more epic office glut, particularly in Calgary and Edmonton, Alberta, the epicenter of Canada’s oil patch.

This office glut comes on top of Calgary’s housing meltdown. For the first eight months, total home sales in Calgary plunged 25%, according to the Calgary Real Estate Board. Condo sales collapsed 39% in August and 30% year-to-date. Inventory sits a lot longer on the market before it sells, if it sells. And pressures are building on prices: the average condo price was down over 10% in August from a year ago.

Commercial real estate is heading in a similar direction. Only worse. Calgary was a boom town. Office towers have been sprouting like mushrooms. In recent years, commercial real estate costs downtown were “going through the roof” and “accelerating at a pace far beyond the Canadian average,” Calgary Chamber of Commerce director of policy and research Justin Smith told the Financial Post. But it takes years to plan and build office towers, and now no one can just turn off the flow.

With 5.2 million sq. ft. of office space under construction, Calgary ranks eighth in North America and first in Canada, ahead of mega-city Toronto with 4.8 million sq. ft. Houston, the epicenter of the US energy boom and bust, crowns the list with 12.3 million sq. ft.

In downtown Calgary alone, there are 3.4 million sq. ft. of office space under construction, almost as much as in downtown Toronto (3.8 million sq. ft.) and 28% of the 12.3 million sq. ft. under construction in downtowns across Canada!

In relationship to the size of the market, Calgary ranked third in North America, with office space under construction amounting to 7.8% of existing inventory.

It’s behind only Silicon-Valley boom-and-bust-town San Jose, whose 7.8 million sq. ft. under construction amount to a breath-taking 10.1% of existing inventory, and Edmonton, the capital of Alberta, whose 2.2 million sq. ft. under construction amount to 8.3% of existing inventory.

“With seven new office towers under development and coming to the market between now and 2018, it is no surprise that Calgary is leading the way in new construction in North America,” Joe Binfet, managing director at Colliers International in Calgary, told the Calgary Herald. “The new developments will add an additional 12% of new inventory to the downtown market.”

“Add to this the new developments in the suburban, retail and industrial markets and it is clear Calgary would be among the top cities in terms of new construction,” he said. The report explained it this way: “The new construction speaks to the long-term vision developers have for the city and the confidence they have in Calgary going forward.”

That vision was perhaps a tad grandiose. Now companies are cutting back on costs and capital expenditures to preserve precious capital, they’re scaling back operations, laying off employees – ConocoPhillips, Nexen, and Talisman recently announced layoffs in Calgary – and reducing or eliminating hours for their contractors. They’re shrinking their footprint.

Companies gave up 1.7 million sq. ft. of downtown office space, the largest quantity of newly vacant office space in any downtown in North America, beating even Houston, where 1.6 million sq. ft. have become available.

So the vacancy rate in Calgary soared to 13% in the second quarter, from 10.6% in the first quarter, according to Colliers International. In Edmonton, it jumped to 11.2%.

“The number of half-empty office buildings in Alberta is projected to spike,” according to the Financial Post.

Tom Dixon, manager of real estate, transportation, and logistics with Calgary Economic Development, remains (sort of) upbeat:

“The best test is have you seen any cranes stop? Have you seen any being disassembled and projects capped? We’ve seen that in other situations. I haven’t seen any this time,” he told the Calgary Herald. “I think the commitments are strong, firm, and people are moving ahead based on the fact that once you start construction it makes sense to just complete it. Who knows? When each of those buildings is completed, maybe oil is back at $60, $80, or $100. We don’t know.”

They’re all waiting for the deus ex machina, the next oil boom.

But as terrible as these vacancy rates are – and they’re bound to get much worse – they understate the problem. As a company sheds employees and contractors, it might nevertheless hang on to the thinly staffed or vacant space. These “ghost vacancies” don’t enter into the official vacancy rates.

“The ghost space may never come to market, but those companies that currently have excess capacity of office space, as they continue to staff up, you can’t assume that they’ll be back in the market looking for more space,” Colliers executive VP and partner Jim Rea told the Financial Post. And so even when the slump ends, and employment rises again, it might not reduce the vacancy rates for years to come since companies will first fill the empty offices they already have.

This is how an epic office construction boom – not just in Alberta but in much of Canada and the US – boosts the economy for years only to run afoul of the eventual business cycle or, as is the case in the oil patch and Silicon Valley, the boom-and-bust cycle.

Businesses get “crunched” in the Canada’s oil patch, consumers lose it, and indexes hit Financial Crisis levels. Read… It Gets Even Uglier In Canada

wolfstree.com/Wolf Richter/September 4,2015

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First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia

A housing market set for the mother of all corrections.

“I think it’s important that people don’t hyperventilate about these type of things.” With these words, Australian Prime Minister Tony Abbott tried to soothe the world’s rattled nerves today about the ongoing crash in China. Australia is heavily exposed to China, the biggest consumer of its commodity exports.

“It is not unusual to see stock market corrections,” he said about the relentlessly brutal three-month crash that has taken the Shanghai Composite down 43% so far.

“It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound,” he said, speaking of the Chinese fundamentals, and by extension, of the Australian fundamentals that depend so much on Chinese fundamentals.

And he said this though factory activity in China shrank at the fastest rate since the Financial Crisis, other indicators are heading south, cars sales are suddenly plunging, and the People’s Bank of China started devaluing the yuan to mitigate the problem, thus further hurting Australian exports to China.

So here’s Lindsay David, founder of LF Economics in Australia, weighing in on the “sound” fundamentals in Australia.

By Lindsay David, Australia Boom to Bust Blog:

It’s truly surprising since LF Economics released its chart pack on the Australian housing and debt markets the great interest that hedge funds and financial institutions in the US, Europe and Asia have in our product and work. The same however, cant be said for Australia. But that’s no big deal. Based on the analytics of this blog, Aussie institutions and government prefer or try to scrape the free data on this blog. I’m sure the same happens on the Macrobusiness website.

It felt just like yesterday when I released Australia: Boom to Bust. As I argue in the book, the Australian economy is incredibly dependent on what I call the “Three Pillars of the Australian Economy”: mining, banking, and real estate sectors. And as I argue, at least three of the five largest iron ore producers will go bust. And “at least” one of the big four banks will either go bust, be nationalized, or bailed out before the end of 2017.

The mining sector is already in dire straits. In order for miners such as Fortescue to survive, they must continue to increase output to keep their extraction costs low; and the spot price of iron ore must not fall any further. This is not sustainable. Unfortunately, only a small handful of us over the last year or two were warning about this scenario taking place. And today it is.

Now to the banking sector. More specifically the Big Four banks – ANZ, Commonwealth (CBA), National Australia Bank (NAB), and Westpac (WBC) . Yes those banks that are apparently strong and safe even though their stocks continue to slide off a cliff.

It is only now that the broader public is starting to question the fundamentals of these banks. And the media is now honing more attention to their balance sheets, capital ratios and their ability to withstand an economic shock. Aside from a small handful of us, I strongly believe that if we look back to say January 2014, hardly any Australians in their own right would have thought that the stability of our mining sector and banking system would be under such scrutiny today. And day by day a darker picture is rightly portrayed.

So, if our miners are stuffed, and our bankers are more than likely, and desperately trying to explain to the international wholesale lending community that there is no housing bubble in Australia, what happens when emphasis moves from the miners, to the banks… to the housing market?

A society caught off-guard

Whilst the overwhelming majority of our real estate analysts work for and are employed by entities with too much skin in the housing market game, which restricts their ability to make a fair analysis, they have essentially become more like property cheerleaders than anything else, fly-squatting any view that suggests Australia is experiencing a credit-fuelled housing bubble. Clear examples can be found here, here, here, here and the real estate guru with a silver necklace here,

What none of these media commentators (alongside almost every other commentator) ever mention is the unsustainable growth in household debt in this nation.  $1.6 Trillion economy and $1.9 Trillion in household liabilities and growing. Have any of these real estate pundits ever given a clear indication what our national household debt load will look like a year from now? Two years? Here is a hint. It’s comfortably over $2 Trillion.

Under the current mathematical metrics, House prices in any market that has the same debt levels as Australia’s can crash, and have crashed. If our housing market looks and smells like a bubble while every stakeholder denies it’s a bubble, it’s a bubble. And society will unfortunately be the biggest loser caught with its pants down when the housing market has the mother of all corrections.

The debate on the risk of the mining sector taking a hit was too late. We are only now starting to get traction with the debate on the safety of our banking system. But the debate that is happening today about the housing market conditions is simply a whisker. But a whisker is a lot compared to early 2014. And expect the voices in sum to continue to grow. And remember with housing bubbles, when they burst there is no such thing as a soft landing. 

By Lindsay David, author of Australia: Boom to Bust andPrint: The Central Bankers Bubble. David recently founded LF Economics and holds an MBA from IMD Business School.

wolfstreet.com/Wolf Richter/August 25, 2015

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Hong Kong Luxury Sales Tumbling, Retail Rents Plunging

Retail rents in prime areas are under renewed pressure as high-end fashion brands feeling the pain of lackluster consumer sentiment and falling numbers of mainland shoppers seek rent cuts.

Business is getting tougher for Hong Kong’s retailers with the value of total retail sales dipping 1.6 percent in the first half of 2015 from a year back, according to the Census and Statistics Department’s latest data.

Valuable gifts, including jewelry, watches and luxury goods, were hardest hit, with sales falling for 10 consecutive months. Sales value slumped 10.4 percent in June compared with a year earlier, despite efforts by several luxury brands – including Italian fashion house Prada – to boost sales by cutting prices.

Squeezed by slimmer pickings in Hong Kong and the mainland market, top global luxury brands are looking to renegotiate store rents to cut costs.

The latest to plead for landlords’ mercy was French luxury goods conglomerate LVMH. Revenue from its signature brand Louis Vuitton slumped 10 percent year- on-year in Hong Kong, Macau and China for the first half while Europe and the United States saw stronger sales of fashion and leather goods.


It is also planning to close a directly operated shop of its biggest watch brand, Tag Heuer, in Causeway Bay. “I’m not sure if the shop will be closed this year or next but for sure I want to close it because of high rental costs and a drop in traffic,” chief financial officer Jean-Jacques Guiony told Reuters on Monday.

British high-end fashion house Burberry, which has 16 shops in the SAR, said it may trim its local store network and negotiate for lower rents after the Hong Kong market, which accounts for about one-tenth of the brand’s total sales, saw a double-digit percentage fall in sales over the period.

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davidstockmanscontracorner.com / By Frances Sit and Adam Xu at The Standard / August 8, 2015

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