Safe As Houses ?  

The Sydney Morning Herald has been calling the start of the housing crash this week, with fingers pointing at the Rodent for the combination of a real estate sector bloated by easy money and rising interest rates (and living costs) eating away the ability of some sections of the population to afford their mortgage payments (or, more frequently, their loans on speculative investment properties).

This isn't a widespread crash though - the inner ring suburbs of Sydney, particularly the better off ones, are showing no signs of dropping prices (the opposite in fact, if my experience of house hunting over the past 4 years, and particularly the last 6 months, is anything to go by). This is just one more symptom of the growing income gap between the well off and the less fortunate (though down here we are lucky enough, for now, that all boats have been rising - just some boats rise a lot faster than others).

The stagnant property market has taken a toll on a favourite Australian pastime: converting bricks and mortar into cash.

The boom in equity withdrawn from housing and used to boost superannuation, bolster share portfolios and buy cars, overseas holidays and plasma televisions has petered out, a report by the Reserve Bank says. "The strong growth in housing equity withdrawal over 2001 to 2003 contributed to strong growth in consumption relative to income (and a corresponding decline in the saving rate) over that period … [but] these trends have subsequently abated," a bank discussion paper published yesterday said.

Now many families who bought housing near the property market's 2003 peak are facing negative equity - the value of their home has fallen below the amount they borrowed to buy it.

The federal Opposition seized on revelations in the Herald yesterday that properties in St Clair, near Penrith, sold at the weekend for 42 per cent less than the previous sale in 2003. Labor's housing spokesman, Kim Carr, said hard-working families were being forced to abandon their dream of owning a home.

"Stretched beyond the limit by three interest rate rises, they are being forced to sell," he said. "Plummeting property prices mean that hard-working families are confronting the financial catastrophe of negative equity." Such a prospect may not be confined to Sydney's outer suburbs, Tom Western, a valuer and NSW president of the Australian Property Institute, said yesterday. "Anecdotal evidence suggests the market is slowing down in areas closer to the city, and not just in investment units," Mr Western said.

Billmon explained how housing bubbles tend to end recently in "Home is Where the Sink Hole Is"

Kevin Drum has a post that reminds me I haven't written anything about the housing bubble recently:

Here in paradise, the housing boom is over:

Southern California home sales fell to their lowest level in nine years last month as price appreciation continued to decelerate, data released Tuesday showed . . . .The figures could rev up the debate over whether the Southland's housing market will be able to navigate a "soft landing" that produces only moderate price declines, or face a brutal correction.

As Kevin notes, talk of a "soft landing" is one of the normal steps in a bubble addict's recovery program.

It goes something like this:

1.) We're not in a bubble. Prices are just recovering from years of underappreciation.

2.) It's a bubble, but it's a sustainable bubble because the fundamentals of the market have changed in the past decade. People need to recognize this. (Note: this stage is usually recognizable by an explosion in popularity of increasingly desperate and bizarre financing options.)

3.) Yes, growth is slowing, but we think we'll navigate a soft landing. It's absurd to think that housing in [fill in area where you live] will actually lose value.

4.) This is a disaster! Somebody better step in and do something! People are losing their life savings!

5.) Buyers have learned a permanent lesson this time. Homeowners need to accept the reality that the bubble of the past five years was a one-time fluke and we'll never see it happen again.

Rinse and (eventually) repeat.

These are actually the residential real estate versions of the more generic speculative cycle described by economist (and wise old man of the academic hills) Charles Kindleberger in his classic text Manias, Panics and Crashes.

The Real Deal points to an article by Paul Craig Roberts about the perils awaiting countries with gutted manufacturing sectors, large amounts of debt and inflated asset prices.

“American economists are yet to face up to the fact that offshoring high productivity, high value-added jobs that pay well and replacing them with waitresses and bartenders is a knife in the heart of the US economy. Charles W. McMillion of MBG Information Services reports that compensation is falling behind price rises and that the US economy has been kept afloat by consumers overspending their disposable incomes by drawing down their accumulated assets and going deeper into debt.

McMillion reports that according the Bureau of Economic Affairs, households outspent their disposable incomes by 1.5% in the second quarter of this year, a rate of dissaving equaled only by the depression year of 1933.

McMillion also reports that recent BLS data indicates that 25 states have lost manufacturing jobs year over year and that 25 states have lost jobs in the information sector.

Little wonder that permits for new private housing are down 20.5% year over year and that new housing starts are down 13.3% year over year. What will we do with the millions of illegal Mexicans when construction jobs dry up?”

Analysis: John’s suggestion for jobs for college grads time frame 2008-2012, Soup line server, pawn shop worker, 11B straight leg infantry in perpetual war on terrorism, TSA robot.

Jeffrey at Graphoilogy has a look at trends net oil exports and the implications for housing prices.

I thought that it would be interesting to compare the decline since December in world crude + condensate production to the decline in production from the top 10 net oil exporters (based on the 2004 list of top exporters).

As of the May, 2006 EIA numbers, the world is down 1.3% since December, an annual decline rate of 3.1% per year, but the top 10 oil exporters are down 3.0%, an annual decline rate of 7.2%.

Note that consumption is growing quite rapidly in most of the exporting countries, and note that in most cases domestic consumption is satisfied before oil is exported. In the captioned article, I showed, using my "Export Land" model, how a 25% drop in oil production and a 20% increase in consumption (over a five year period) would lead to a 70% drop in net oil exports.

I estimate that net oil exports from the top exporters are probably down by 4% to 5% (over a five month period), an annual decline rate of as much as 12% per year, which suggests that exports from the top exporters are falling about three to four times faster than world oil production is falling

As I have been relentlessly pointing out, I think that we are looking at a series of bidding cycles for declining net oil export capacity, with the oil going to the high bidders and with the losers having to reduce consumption. Leanan, on The Oil Drum, has documented several case histories of poorer countries having to reduce consumption. Soon, the developed and rapidly developing countries will be bidding against each other, instead of bidding against regions like Africa.

However, we are beginning to see clear signs of stress here in the US, among poorer households and among financially overstretched homeowners. Consider some recent numbers from the 8/21/06 issue of Barron's.

"The No-Money-Down Disaster" Lon Witter, Guest Column, 8/21/06 Barron's
Summary:

* 32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
* 43% of first-time home buyers in 2005 put no money down
* 15.2% of 2005 buyers owe at least 10% more than their home is worth
* 10% of all home owners with mortgages have no equity in their homes
* $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007

...

I believe that vast expanses of American Suburbia are going to become virtually abandoned in the years ahead. Alan Drake has noted that a good deal of suburbia was so poorly constructed that a lot of it is biodegradable. Alan has outlined how we can go back to what we used to have: electric trolley cars connected to electric light rail lines.

...

The US is not Switzerland, but Alan Drake has described how Swiss per capita oil consumption in the Second World War was about 0.15% of current US per capita oil consumption. They did it primarily by electrifying their transportation system.

I propose a sort of triage operation: "tiny" homes and multifamily housing along electric mass transit lines. In my opinion, it is the only way that we can preserve some semblance of a civilized society. The suburbs are, by and large, a lost cause.

The numbers are interesting (partiularly the Siss oil consumption figure) but I think the imminent demise of suburbia is being overly exaggerated in peak oil circles.

Transport usage patterns will shift, but houses (even McMansions) last a long time, and people will continue to live in them and catch buses (or rail transport, in cities that are willing to invest in infrastructure) to work instead of driving SUVs once fuel prices get high enough. I believe businesses and people will slowly migrate to locations which are mutually convenient - if you can walk, ride a bike or catch public transport to work, declining oil production won't seem like such a catastrophic event - it might even make you healthier. I think they key (and unkown factor) is how fast these transitions need to be made.

On a related note, Energy Bulletin pointed to an article by David Holmgren on Retrofitting the suburbs for sustainability.

But there were problems with the suburban dream and the resulting rush of young families to “nappy valleys” on the city fringes, notably “urban sprawl”. As the suburbs spread, they displaced important agricultural activities such as the market gardening and dairy farming that formerly provided fresh foods with minimal need for transport. Not only did public infrastructure become increasingly poorly used, but the disproportionate rush to build roads and sell more Australian cars led to a general decline in the use of public transport – leading eventually to the phenomenon we see today, that our suburbs are designed for cars not people.

Along with “sprawl” has developed an increasingly dysfunctional economic situation. We see speculative inflation of land values, capital invested unproductively, declining household (non-monetary) production of food and “backyard industry”, and a massive rise of consumer addiction based on rising household debt.

Large areas of our cities have become “dormitory suburbs”. The average household size is declining while ever-larger homes are increasingly empty during the working day. Their blind windows look out onto streets empty of people (but all too often filled with cars). There is an alienating lack of community resulting, ultimately, in increased crime and fear.

The conventional responses to this situation are familiar to us all. The first is a change of planning regulations to encourage increasing density, promoting smaller housing blocks in new developments, dual occupancy infill development, and medium-density redevelopment of older areas.

I can't remember the last time I saw a report on an oil or gas project not having a cost blowout - the mostly bad news flow for Oil Search continues the trend, with the SMH reporting Oil Search's PNG gas project blows out.

Oil Search Ltd says the cost of developing the Papua New Guinea gas project could pass the $5 billion mark.

Managing director Peter Botten said the capital expenditure for the project could go past $5 billion, up from current estimates of around $4.5 billion. "It ranges from the low $4 (billions) to the low $5 billions," Mr Botten told reporters and analysts. "There is a lot more engineering work to get that number right."

Mr Botten said the project was still on track for an investment decision to be made this year despite concerns about the ownership structure for the pipeline portion of the project. "We are endeavouring to close a range of commercial issues which will see this project move forward in the short term," he said. "We have seen substantial interest in the ownership of what we believe is a key quality asset."

He said if the pipeline did not go ahead it could send the cost gas in the eastern states higher. "Without this pipeline moving forward there will undoubtedly be an increase in energy pricing in the eastern markets," Mr Botten said.

The gas resources in PNG would still be developed even if the pipeline to Australia did not go ahead, but Mr Botten said he favoured the pipeline option.

Bloomberg is predicting energy price rises of 20% (an admirably restrained number) as more pipelines follow BP's example in Alaska and fall apart due to age and lack of maintenance.

BP Plc's shutdown of the largest U.S. oil field may be the first of many, as decaying pipelines threaten to add 20 percent to energy prices in the next decade.

``We'll look back on this event as the Pearl Harbor Day in energy,'' said Matthew Simmons, chairman of energy investment bank Simmons & Co. International in Houston. The chance that the leaks and corrosion found at Prudhoe Bay by BP, Europe's second- largest oil company, are an isolated occurrence is ``zero,'' said Simmons, who's writing a book on aging oil infrastructure.

A growing minority of analysts, oil executives and government officials say the current system for producing and transporting crude will be unable to deliver the energy needed in the next 10 years. Repairs and replacement of pipes, valves and refineries will help push oil to $93 a barrel by 2015, from around $70 today, says Barclays Capital analyst Kevin Norrish in London, the most accurate price forecaster in a survey by Bloomberg News last year.

Internal corrosion is the biggest reason for pipeline spills in the U.S. this year, causing 16 percent of all accidents through Aug. 9, according to U.S. Department of Transportation's Office of Pipeline Safety. Since 1990, the portion of oil lost because the inside of a pipe has been eaten away has grown to 78 percent from 4.7 percent, with 68,624 barrels spilled this year, the agency said.

London-based BP's admission that some pipes in Prudhoe Bay hadn't been inspected internally for corrosion in more than a decade was ``incredible,'' said oil analyst Charles Maxwell at Weeden & Co. ``They are in deep trouble.'' BP may face criminal charges in the U.S. over an oil spill in Alaska in March, which prompted inspections that found the Prudhoe Bay corrosion.

Repair of the oil production facilities built in the 1970s is part of the $6 trillion that needs to be spent by 2030 to meet global oil and gas needs, according to the Paris-based International Energy Agency.

Record oil prices are encouraging producers throughout Europe and the U.S. to keep old rigs running, rather than shut them down. BP's leaky pipeline, built to last 25 years, is now in its 29th year. The average pipeline in the U.S. is about 50 years old, according to NACE International, formerly the National Association of Corrosion Engineers.

``What we have is an entire generation of oil infrastructure that more or less came on stream at the same time,'' said Deborah White, an analyst at Societe Generale in Paris who helped plan the Prudhoe Bay field development in the 1970s. ``It's now all of a certain age, fragile, and can't be pushed quite as hard.''

Oil pipelines aren't the only pieces of infrastructure that are running down - the Boston Globe reports that the sewers are also corroding.

As bad as they are, the corroding Alaskan oil pipelines in the news are far from the worst in America -- though you might never know that from recent headlines, and as I found out in the media aftermath of the pipeline shutdown.

As head of a company that repairs more oil, water, and sewer pipes than any other firm, I found myself talking to print and electronic reporters from across the country who wanted to know the inside story of the Alaskan pipes. Some were just a tad disappointed when I reminded them that the pipeline was shut down because of potential problems, not actual ones. And the pipeline would probably be back in service within a few months, and crude oil prices were already headed back down.

The oil pipes received a lot of attention. But remember this: No one died. No one got sick. No pristine land was despoiled. It will cost us some money.

But only a few people are talking about the broken pipes that really hurt our environment, get people sick, cause people to die, and cost even more money than oil pipeline shutdowns.

We are talking about sewer pipes, of course. Even the worst Alaskan oil pipe is in better shape than your average city sewer pipe, including cities like Boston, where the first sewer system was installed in the 1800s and the harbor is still recovering from decades of dumped sewage. Say what you will about oil spills, but they are usually small and in remote places where damage to human life, property, and wildlife is minimal. I've seen enough of both to know this: Crude oil is much cleaner and less toxic than sewage. And oil spills are a lot less common. Yet oil gets all the ink, while sewage escapes scrutiny.

Pipelines (along with toll roads, airports and other pieces of peak oil vulnerable infrastructure) are a big favourite of investment funds down here managing retirement money - something I suspect may turn out badly for many retirees at some point.

As governments run away from providing either retirement savings or national infrastructure, I guess it's inevitable the retirement funds end up owning the infrastructure. It is, in fact, the modern realisation of a Marxist dream … apart from the fees, that is.

The bid by Commonwealth Bank-owned Colonial First State for the Victorian gas distributor GasNet yesterday is just another small step in an unstoppable global trend. For example, the bidding for Thames Water in the UK also got under way yesterday, and the bidders are all fund managers (including the ubiquitous Macquarie Bank).

Colonial will put GasNet into one of the wholesale infrastructure funds that it packages and sells to pension funds. It's already got the Hazelwood power station in there, as well as a jet fuel pipeline at Somerton and some gas pipes in the UK. There is plenty of this going around - last year, Industry Funds Management bought Pacific Hydro. Macquarie Bank kicks the tyres of everything. Hey - come to think of it, why isn't Macquarie bidding for GasNet?

Anyway, back to the Big Picture: super funds were given the ability to tax (via the superannuation guarantee levy) so like the Federal Government they now have more money than they know what to do with.

Infrastructure gives them a splendid way to match long-term liabilities with long-term assets that give an internal rate of return greater than the growth in obligations to pay retirement benefits, and there's plenty of it around because governments don't want to know about it any more.

Dave Roberts points to a presentation by Robert Hirsch at the nternational Peak Oil and Gas Conference in Pisa, Italy. Apparently Mr Hirsch is so focussed on peak oil anti-solutions that he'll have us frying in global warming hell instead.

For peak oil geeks, the Hirsch Report is a document of near-Biblical significance. It was written by Robert Hirsch at the behest of the Department of Energy, and published in 2005.

It's disappointing, then, to hear what Hirsch personally recommends as a response to peak oil. Over at Transition Culture, Rob Hopkins reports on a talk by Hirsch at the (ongoing) International Peak Oil and Gas Conference in Pisa, Italy:

What he basically argued was that we need to plan for keeping all the US's cars on the road, so how can we do that? By using the fuels that are technically feasible to bring onstream in time for the peak, such as coal to liquids and the tar sands, at a cost of $1 trillion per year, this could be done, so we need to get on with it.

I confess to being flabbergasted at the insanity of this proposal.

As Hopkins says, this is what you get when you take peak oil very seriously and global warming (or sustainable culture generally) not very seriously at all. I suspect Hirsch's thinking is closer to the norm than the exception in the halls of power

I'm not sure I've seen anyone in peak oil circles suggest we'll all be riding oxen to work in the future (except possibly for that French peak oil TV show), but resource Investor is pooh-poohing the idea anyway.

Brent crude had broken up past the WTI by August 7th as supplies of Brent became constrained by declines and increasing seasonal demand, pushing up past its historically higher-priced relative. The price was spurred by a number of reasons, not of which were crystal clear. One being the Israeli attack on Lebanon, others being the problems in Nigeria and the first signs of the difficulties for BP at Prudhoe Bay.

At the time we pointed out that although significant these events were underpinned by the - now seemingly age old - supply cushion absence. As there was no supply cushion the market had driven itself into hysteria. The Prudhoe Bay outage was not that significant although it was not helpful. Lebanon did not produce oil even though indirectly the invasion was about energy being a proxy war between the U.S. and Iran. Nigeria was going on the same as it has been in recent months.

Brent boomed up to an all time record of $78.64 intraday and $78.30 at the close with the WTI chipping in at a healthy $77.05 at the end of trading.

Now just 10 days or so later Nigeria actually seems to have got worse, armed men stormed a bar in Port Harcourt (who calls a bar Goodfellas in a place like that?) although the short-term outage at Nembe Creek of around 180,000 barrels per day has been restored. Meanwhile the Lebanon situation is still not really impacting oil and its supply. BP on the other hand has managed to keep somewhere around half of its Prudhoe Bay output online, even so you will note that is a loss of some 200,000 barrels per day. A loss is after all a loss.

Yet we are seeing the WTI hit exactly $70 intraday, some seven dollars off its high in around eight days active trading. Brent is around $72. A big, big move to the downside.

There is one other reason, Goldman Sachs. They are not excited about the new gasoline contract for - cough - reformulated gasoline blendstock for oxygenate blending or RBOB. New regulations in the U.S. have meant that RBOB is replacing methyl tertiary butyl ether (MTBE) in gasoline. Sachs are not about to risk a load of cash on this new contract so they have simply stopped playing.

The result of such a big player leaving the table is that there is no liquidity - or relatively little - in the gasoline market. This has pulled down the price of gasoline which has impacted on the price of crude. So the combination of events, Lebanon ceasefire, Prudhoe Bay, staying half-online, Nembe Creek being repaired and RBOB illiquidity have stuck a knife in the gut of the oil price. Then we hear stuff like this.

"Some of the factors and disruptions that helped drive us to very high levels have been resolved now," according to a statement by from Eoin O'Callaghan at the French bank BNP Paribas.

No they have not.

Lebanon is not resolved, Nigeria is not resolved, Prudhoe Bay and BP's general behaviour is not resolved, Iran is still awaiting the outcome of its nuclear enrichment programme and demand is still healthy. What has happened is the market has seen a great time to take a big chunk of profits. A breather. That is all.

If we were smart guys we would open a book on the first “Oil Makes Dramatic Surge” headline. No doubt you will see it in the next sixty days. We will be told all the stories about collapse, markets imploding, frenetic activity on the trading floor and ‘peak oil freaks’ will be telling us to ride Oxen to work. Then we will do the same dance all over again. Isn't energy great?

Japan Focus has an interesting article on the competition between Japan and China over oil in Africa - starting with Libya.

While Japan until recently has almost ignored Africa as an energy-resource supplier, China has been aggressively pursuing oil and gas interests in Africa. Japan and China are the world's No 3 and No 2 oil consumers, respectively. And they are both hungry for energy to feed their economies, the world's No 2 and No 4, respectively, in terms of gross domestic product.

Japan imports almost all of its oil, nearly 90% of which comes from the Middle East. Deeply concerned about energy security at a time of stubbornly high global oil prices and a global rush for oil and other energy resources, Japan's Ministry of Economy, Trade and Industry (METI) recently released a new long-terms strategy aimed at ensuring stable oil, gas and other energy-resource supplies.

The New National Energy Strategy calls for, among other things, strengthening relations with resource-rich countries, securing energy resources abroad through the fostering of more powerful domestic energy companies, and boosting to 40% by 2030 from the current 15% the ratio of "Hinomaru oil", that is oil developed and imported through Japanese domestic producers.

METI chief Nikai Toshihiro announced recently that Japan will send a high-powered mission, including the head of the METI-affiliated Agency for Natural Resources and Energy, to Libya to strengthen bilateral ties in energy and other areas. Libya, with an estimated 39 billion barrels of oil, has the world's ninth-largest reserves.

Last October, Japan scored a coup in its oil diplomacy. Five Japanese enterprises won international tenders to acquire the rights to develop a combined six oil blocks in Libya. The deals marked the first oil-exploration concession ever given to Japanese firms in Libya.

Japan is also eyeing interests in oilfields in the rest of Africa. The government sent a fact-finding mission of officials from oil developers, trading firms and engineering firms to Mauritania and Chad early this year. Mauritanian Petroleum and Energy Minister Mohamed Aly visited Tokyo recently and met with Nikai. The two ministers agreed to cooperate in developing oil resources in the northwestern African country. Nikai pledged to send a high-level private-public mission to Mauritania soon, led by the head of the Agency for Natural Resources and Energy.

Japan also views as promising the development of oilfields in other African countries such as Equatorial Guinea and Ivory Coast.

And to close, Boing Boing points to a blog about the end times called Signs of Witness. I was expecting some sort of christian rapturist version of a doomer mailing list, but it seems to be rather tongue in cheek.

Signs of Witness is a blog that covers news about religious people claiming that certain events and phenomena are evidence that the world is about to end. It's excellent entertainment, and a little scary.