January 20, 2013

Playing With Fire

A reader suggested a topic on global bubbles. “I recently took a trip to Qatar and India. Doha (Qatar) had a lot of high rise buildings and more in construction with more than 60 floors each. The surprising thing was that all were empty with no occupants. They are just building like Ghost-towns in China. There was a bigh sign that read: ‘Vision 2030′. They are building for 2030. Too much money is being spent in infrastructure (Keynsianism) and it looks to the World that the economy is growing. What happens when these emply buildings find no occupants in the end. Or growth slows.”

“Same was the story in India. Many high rises with residential flats all over the major metros. If you drive at night time, the lights will be on in only a few flats in a building. Most are being bought by investors. Surprisingly, the prices in New Delhi were more than any major big US city. Like a flat in Delhi suburbs was around 3 crores which is roughly $600K. A flat is like an apartment here in US. If you go inside the ciry, they could be anywhere from 6crores to 15 crores. Basically in millions of US dollars. Do Indians really have that much money?”

“The most interesting thing was after talking to some local folks in Delhi, they said we are different. In India they said there is too much black money and prices will never go down. They think what happened in US RE market was local to USA. Indians seemed very content and happy. Almost everbody who owns a house is very rich out there. And most houses they said were paid off. So there is no RE bubble out there as per the locals.”

“I recently met a friend from Toronto and he said Toronto is different. He claim was that RE in Canada will double in price from today’s price in the next few years. The whole World is on dope.”

A reply, “Did you learn the source of the money behind any of these projects? And did you get to tour any of the projects to see what sort of technological/security innovations they may have incorporated? (Or left options for?)”

“Actually, 2030 is right about were I’ve long thought the global economic imbalance would shake out– when the bulk of the Boomers are in mass die-off, and after we’ve cracked the vacuum energy conundrum. I’m betting that not much of the millenial development here in the US was constructed with the next generation at the forethought.”

One said, “Doha is getting it’s money from native promoters who are selling these investments around the world - mostly Europeans and North Americans. They are in a lot of trouble with their backers. Tons of money from Kuwait as well. The only way we Canadians are different than the USA is that when your recovery becomes real we will start to come out of our recession about the same time - on your coat tails ! Therefore, we will have been in a recession for a shorter time than you.”

And finally, “I had some doubts about what you said until I started talking to all of the immigrants I know. Many people seem to have better lives here. Housing may be 5 or 6 times their income, but in their birth country, it would be way more than 12 times. This is especially true of the Filipinos I know.”

The South China Morning Post. “With the property market growth hitting double digits this year, Manila has turned out to be one of the surprise packages. For the past few quarters, the Philippines’ capital has consistently ranked among the top three among Southeast Asian countries - enough to at last catch the eye of overseas investors. Many properties are being snapped up by Filipino nationals working overseas, fuelling the growth of high-rise condominiums. ‘More recently, we have also witnessed an explosion in condo development in the central areas of the city with good public transport links,’ says David Young, managing director of Colliers Philippines, noting that close to 50,000 new units were launched in 2011 and 2012.”

“Foreigners who do buy Philippine residential property purely for investment purposes are attracted by relatively cheap prices compared with the rest of Asia and attractive rental returns of 6 per cent to 7 per cent, Young says. ‘They have seen good capital appreciation since the market bottomed out in 2002, and expect this to continue.’”

The Macau Daily Times. “Combined with the economic instability in global markets, there is a possibility that Macau’s real estate bubble will burst this year if the authority takes no action. Analysts also cited the soaring prices, or inflation, as another reason for concern behind the property bubble, and despite the government’s efforts to deter speculators, including the launch of a special stamp duty on purchase by non-local residents or corporate investors, property prices are still rising. The financial industry is worrying that a burst of the bubble will happen this year.”

“But the real estate industry is more optimistic. Agents cited the chronic shortage in supply of housing as a strong supportive force in the market, while the strong economy means more foreign workers and a greater demand for accommodation. But the industry also admitted that Beijing’s visa restriction is a potential threat, but might not be enough to trigger a burst of the bubble, should there be any.”

From Arabian Business. “The 50 percent cap on UAE expatriate mortgages, unveiled by the central bank earlier this week, will curb rising prices and chances of a new Dubai property bubble, but will hamper efforts to stimulate a recovery in the market, experts said. The move was part of a circular issued to commercial lenders by the UAE central bank and appears to be an effort to curtail any possible new housing bubble. Property prices plunged by more than 50 percent between 2008 and 2011, triggering a corporate debt crisis in Dubai that forced the restructuring of billions of dollars of debt.”

“‘It is good news in the short-term as this will have an effect on prices rising too quickly recently so to curb credit should ensure we have a sustainable property recovery rather than a bubble that will burst,’ Mario Volpi, head of residential sales and leasing at real estate agency Cluttons, told Arabian Business.”

“‘The long-term effect remains to be seen as the region is generally cash rich so leverage is not a major factor in buying property here, although a lot of transactions recently were by expats buying a property to get away from wayward landlords who are doing all they can to increase the rents. So short term happy, long term not so sure,’ he added.”

“Bankers said they were shocked by the circular, which could hurt confidence in the real estate market’s recovery and hurt the share prices of property developers and banks. ‘They are trying to regulate banks, but are controlling consumers by giving them limited choices,’ a senior executive at a local bank told Reuters. ‘It will lead to less investment by end-users.’”

“An Abu Dhabi-based analyst said: ‘If implemented, this will impact on the real estate sector. After the property market improved, some banks had started lending up to 85 percent on some projects.’ The analyst added: ‘It’s positive when we look at the financial and lending perspective, but the question is whether this lending cap is practical.’”

From Andy Xie. “The US and China are the two biggest economies in the world. Both are trying to control asset prices to manage their economies. The global economy depends on how effective their policies are.”

“Manipulating asset prices is like playing with fire. The people who play are either fools, or bubble chasers who want to make money from the fools. Whatever the benefits to the economy in the short term, this would be more than offset by the calamities that follow. In the current scenario, the calamity ahead is inflation. Printing money inevitably leads to inflation, and when asset prices are kept high, the lag time is shortened.”

“Inflation is already high in emerging economies, though their statistics don’t fully reflect the fact. It takes longer for inflation to hit the developed economies, because they are more weighted towards the labour-intensive service sector and their labour market is still depressed. Inflation in emerging economies only becomes a crisis when their currencies tumble. That moment will arrive when the Fed has to raise interest rates quickly to counter inflation in the US. The Fed said that it would react if inflation rises above 2.5 per cent. But US inflation was already close to 2 per cent in 2012. It won’t take much for it to breach 2.5 per cent. This is why the Fed is anxious that asset prices don’t go up too fast. But history is not in its favour; prices rise quickly when the asset market is bubbly.”

“China will have a tougher job controlling its property market for two reasons. First, government officials probably own millions of empty flats. Second, properties under construction - residential and commercial - exceed 10 billion square metres, according to the National Bureau of Statistics. No matter how successful the government is at manipulating expectation, there is just not enough money to marketise the inventory at the current price levels. Hence, any market revival, like the current one, would be short-lived. China must face up to its vast property bubble and prepare for the consequences.”

“Policymakers around the world resort to short-term measures to delay the inevitable. It symbolises a global leadership crisis. The people who led the global economy into the crises are trying to lead it out, but old dogs cannot learn new tricks.”

“A government’s job is to keep the prices low and quality high of basic social goods like education, health care and housing. The labour market should be flexible, and an effective tax system is required to support low-income earners. The worst policy is to inflate the prices of basic goods for temporary gains. But that’s what politicians are doing.”

“This year may seem like one when we muddle through, and a reminder of the good old days from time to time. But another crisis is in the making. Inflation may force the US Fed to raise interest rates quickly next year, which would cause a 1998-style emerging market meltdown.”

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