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Broyhill Asset Management Q2

Broyhill Asset Management Q2



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Published by zerohedge

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Published by: zerohedge on Jul 29, 2010
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 T H E B R O Y H I L L L E T T E R 
“House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely re 
ect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”  – Current Chairman of the Federal Reserve, Ben Bernanke, 2005 
Executive Summary
 While most investors today probably understand that Europe isn’t exactly a poster-child for prudent government spend-ing or budget planning, we’re not sure that the consensus is bearish enough on the spillover effects from a prolongedEuropean Debt De
ation. Exports are still the foundation of the China story, but with their largest customers still lying in intensive care, we doubt appetites for cheap Chinese goods will be quite the same. At the same time, strategists today are still debating whether or not the massive, credit-induced spike in Chinese real estate prices is in fact, a bubble. We’ll letinvestors answer that one for themselves, but consider that the ratio of residential real estate to GDP in China looks a lotlike California in 2006, while levels in Beijing and Shanghai match the Japanese peak in 1990.Market participants around the world have obsessed over every blip in Chinese economic data for the better part of thelast decade; and rightly so, as China has been a rare source of strength in a fragile global economy. This year, the ShanghaiComposite is among the world’s worst performing equity markets, as the government’s visible hand has taken measures tocurb speculation, dampen money growth, slow loan growth, and launch an aggressive attack on housing prices. Leading indicators of Chinese growth have responded accordingly, and have been slowing along with the stock market since lastfall. We view this speed bump in the high-growth China story as an important leading indicator for global markets andexplore one such consequence Down Under, in this letter.
 Who Can It Be Now 
Leading up to Japan’s bursting real estatebubble in 1990, we were told that this time was different – house prices simply re
ectedthe growing economic power of Japan Inc.and there was a land shortage in overcrowded Tokyo. Today, Japanese real estate prices arestill less than 50% of that peak value reachedmore than two decades ago. During the UK bubble, Brits blamed zoning requirements forcreating land shortages until prices crashed tothe lowest multiple of income on record in1997. Similarly, builders in Northern Irelandpredicted severe housing shortages if plan-ners did not release more land in 2003. Andbefore America’s bubble burst, there wereland shortages across the country, from Florida’s undeveloped west coast to the deserts of Nevada. While prices at homehave already fallen 30% from their peak, they’d have to fall another 45% just to reach the long term trend, which according to Robert Shiller, has been
at in real terms for three and a half centuries!! The recurring theme in every case is that housing bubbles are almost always justi
ed by “new era” thinking, land shortages,and are considered unique right up until the moment they pop. Most bubbles around the world have at least partially de-
ated in the wake of the Great Contraction, yet the property market Down Under continues to chug along ignoring the
Source: Steven Keen’s Debtwatch 
gravitational forces of mean reversion as Aussie consumers continue their American-inspired credit binge. US housing prices nearly doubled in the decade leading to their ultimate peak as shown in the above chart. Australian real estate keptpace with these gains until US home prices lost nearly a third of their value as US home owners deleveraged their balancesheets. Since then, Australian households have watched their home prices appreciate by at least that much, while they con-tinue to feast at the trough of easy credit.
Here We Go Again
Financial deregulation in Australia began slowly in the1970s before accelerating more quickly in the 1980s. Anumber of factors contributed to a shifting focus withinthe banking system from business towards housing in the1990s, resulting in a doubling of the share of housing loans to banks’ total lending in the past two decades. Inother words, Australia’s banks are very exposed to thebubble in household real estate. Deregulation predictably led to considerable “product innovation” in the Austra-lian mortgage market. Homeowners in the US under-stand that “product innovation” is a nice way of saying  weaker lending standards. Wholesale lenders competedaggressively for market share by undercutting the banksand creating sexy new mortgage products like home-eq-uity, interest-only and low-documentation loans. Soundfamiliar? These lenders, with no balance sheet and littlecapital, quickly garnered 15% of housing loan approv-als (see chart below). Low-doc loans accounted for 10percent of new housing loans in 2006, compared withless than one half percent in 2000. This trend continuedunabated until the Credit Crisis sparked a near closureof the RMBS market, and several large wholesale lenders were acquired by major banks. As a result, the marketshare of Australia’s major banks rose from 60 percent toover 80 percent of the entire housing market!!Granted, lending standards in Australia did not loosen asmuch as some other markets. There was little sub-primelending of the kind we grew to love here in the states,and non-performing housing loans have remained low,for now. Yet, according to Guy Debelle, Assistant Gov-ernor of the RBA, low-doc loans still account for almost10 percent of new loans and almost half of all new homeowners are opting to not make any principal repayments. We also
nd it curious that “investor’s” (i.e. speculator’s)share of new home loans has risen almost uncontrolla-bly, while
rst time buyers disappear from the market – aclear indication that affordability is declining, and a big red
ag, as
rst time buyers represent an important link 
in the residential food chain. Standard & Poor’s recently  warned that Australia’s record mortgage debt could exposesome borrowers to ‘’
nancial shock’’ should interest rates orjoblessness rise, while
agging the danger associated with thehigh levels of debt held by Australians. Australian households currently hold more than $1 trillion indebt, a record level. The ratio of household debt to dispos-able income in Australia was 158 percent, at the end of the
rst quarter. About one in seven Australian tax-payers hasan investment property other than the family home. Despiteall the talk about Australian lenders being more responsiblethan those in the USA, mortgage debt in Australia rose threetimes faster since 1990, according to Steven Keen. Having started with a mortgage debt to GDP ratio that was just 40%of America’s, Australia’s ratio is now higher than ours and still increasing (see chart). No deleveraging here. More punchplease.
 Whack A Banker
 A survey by Australia’s Finance Sector Union shows that nearly onethird of Australian bank employees are worried about their customers’ability to repay loans, while nearly half say they are under pressure topush more credit on customers even if customers don’t ask and may not be able to afford it. In the survey, nearly 60 percent of bank work-ers said selling debt to customers had ‘’become a much higher priority and sales targets always go up’’. Acting FSU National Secretary, Wendy Streets, said that bank workers uniformly reported being under con-stant pressure to sell more products to customers and have concernsabout customers’ capacity to manage their debt. The survey found that79% say Australia needs tougher regulations to stop personal debt get-ting out of control. Australian Bankers’ Association chief executive Steven Münchenberg claims, “Banks undertake a detailed assessment of a customer’s ca-pacity to pay before providing a home loan. Banks’ conservative risk pro
les and the rigorous assessment of the customer’s capacity to pay are re
ected in the low level of banks’ loan delinquencies.” We thoughtthis was particularly interesting in light of comments by a lender in theindustry that explained, “They cannot write the stuff quick enough,”and despite stories of prudent lending practices down under, “Some-times the bank just asks for a few bank or recent credit card statementsbefore approving multi-million dollar loans.” Another customer wrote,“I maxed my $10,500 credit card limit during my travels offshore and upon my card’s expiration I decided not to reactivethe new card so that I could easily repay this huge debt. When later talking with a call centre representative not only did sheoffer to increase the limit on my maxed out card but also pressured me into reactivating the new card and creating furtherdebt.” Wow. Conservative risk pro
les indeed.

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