An Irrational Market For A Global Commodity
A weekend topic on house prices and the outsider perceptions. The Independent. “Foreign criminals are pushing up UK house prices by buying expensive homes to launder money, according to a law enforcement chief. Donald Toon, director of economic crime at the National Crime Agency, told The Times he believed money launderers were using the booming UK property market as a front to hide their money from illegal activity. He said he was alarmed by the number of homes registered to offshore corporations with ‘corporate wrappers’ - layers of linked companies that make it hard to find the original owner.”
“Mr Toon said: ‘I believe the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.’”
The Business Spectator. “As the RBA’s latest minutes bemoan the Australian dollar’s decline as still inadequate, fresh evidence has emerged showing offshore buyers are snapping up Australian property at increasing rates. In a pertinent reminder of how residential real estate is increasingly a global commodity, foreigners bought more than 28 per cent of all new apartments in Melbourne in the June quarter, according to figures from National Australia Bank.’
“NAB’s survey of property professionals found foreign buyers accounted for more than 16 per cent of all apartment sales in the new property market, and more than 11 per cent of all houses. It is no longer possible to dismiss the influence of foreign buying on property prices as trivial, either here in Australia or in global markets such as the US and UK, Canada and Auckland. Jeremy Bendeich, portfolio manager at Avoca Investment Management, notes that if the worst punishment for buying a house in breach of foreign investment laws is that you have to sell it again, potentially to a related party, then the ‘downside is tolerable.’”
“Exchange-rate effects have already impacted foreign buying in the US. For years, Canadians were the biggest foreign buyers of US homes. But Canadian sales have declined recently, in part due to the weak Canadian currency. Chinese buyers have now surpassed Canadians as the dominant foreign buyers of homes in the US, according to the National Association of Realtors, purchasing $US28.6bn of properties in the US to represent 16 per cent of international buyers in the year to March.”
“Any further falls in the Aussie dollar are likely to result in even more attractive buying conditions for foreign buyers, with some observers predicting exponential growth in property investment from China for some time. That won’t help the case for local residents trying to get on the property ladder, or what Glenn Stevens has deemed ‘crazy’ sale prices in some areas of Sydney.”
The New York Times by Robert J. Shiller. “Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on ‘new information,’ even if you don’t know what that information is.”
“The problem with this kind of thinking is that the efficient markets theory is at best a half-truth, as a voluminous literature on market anomalies shows. What’s more, even that half-truth is grounded mainly in the stock market, which attracts professional investors who sometimes do make the market behave efficiently.”
“The housing market is another matter. It is far less rational than even the often irrational stock market, for a couple of important reasons. First, most investors find it difficult to understand how housing supply responds to changes in demand. Only a small minority of people think carefully about such things. Second, it is very hard for the minority of smart-money investors who do understand such matters to bet against bubble-level prices in real estate markets. In housing, the smart money has relatively little voice.”
“For the first point, in ‘A Nation of Gamblers: Real Estate Speculation and American History,’ a presentation at the 2013 American Economic Association convention, Edward L. Glaeser of Harvard University reviewed real estate booms and busts. He showed how real estate investors have repeatedly made the mistake of neglecting the supply response to rising prices. In the Alabama cotton farmland boom of 1815 to 1819, for example, high cotton prices seemed to justify high prices for cotton land.”
“What most investors failed to see at the time was that these cotton prices would induce new farmers around the world to begin to grow cotton. That same failure to anticipate how supply can respond to demand applies to many forms of real estate today. Developers and builders will, one way or another, exploit overpricing, increasing effective supply, in that way bringing real estate prices down.”
The News Press Now. “While housing sales have been looking bleak since about 2008, a new study has shown the market is increasing significantly and the Midwest is the top dog. Don Evans, owner of Evans Realty, said that the Midwest is usually behind the curve by about 30 to 60 days of any study, and that this year has been busy for them. ‘Local real estate professionals had said that we don’t have a bubble here in St. Joe, we never have, never will,’ he said. ‘But I think we did. I think we had a bubble, I could see, we kind of fell off the ledge with everybody else.’”
“While there may have been tough times in the past, things are definitely looking up, and there are a lot of reasons for this, Mr. Evans said — particularly with the media. ‘We’re not seeing negative stories, we’re seeing positive stories,’ he said. ‘I think the most important thing is, is that people are not afraid to buy a home.’”
“One buyer who was not afraid to buy a home in the Midwest was Sherry Pendleton, who moved back to St. Joseph from California after 25 years. But Ms. Pendleton did find it a little difficult finding a home, specifically when it came to pricing. ‘I found that on the value of their home … if they felt like their home was worth this much money, they’re not going to negotiate,’ she said. ‘Even though the values of the house were not (that high) … they would not budge.’”
“It is hard for homeowners to have people tell them their home is worth less than they think, she said, especially when they’ve lived in it for a long time. ‘This is your home,’ Ms. Pendleton said. ‘It’s a very personal thing and you think that your house is worth this much money and for somebody to come in and say that it’s not worth this much money … that kind of hurts.’”
‘In a pertinent reminder of how residential real estate is increasingly a global commodity’
The problem is it isn’t a global commodity. What good is a house in China or Australia to me if I’m in the US? This frenzy is going to find itself without a basis in reality.
‘Developers and builders will, one way or another, exploit overpricing, increasing effective supply, in that way bringing real estate prices down’
This is fascinating too. We can’t build houses anymore? Check out what new house sales did yesterday, and note what the prices have done. Builders are just paying too much for land and building over-priced shacks. It’ll catch up to them eventually.
“The problem is it isn’t a global commodity.”
Oops!
What do you want to bet the real journalist who penned that article never sat in a college economics classroom?
I was thinking of this yesterday; what if we were to write the story of how commodities were intertwined with the ultimate collapse of all these bubbles, as in it is happening right now? We’re familiar with the previous narrative; Lehman Brothers as some kind of rock that started rolling and created an avalanche. LB was a dead man walking. I ran into a young guy in Flagstaff around 2007 who hadn’t made a payment on a Tucson house in two years. He had never even seen the house. He told me he called LB and in an apparently candid moment, the employee revealed they were renting rooms and stacking paperwork to the ceiling. They didn’t even know who was making payments and who wasn’t!
No long later I was sent to a newly foreclosed “house” in Stoneman Lake AKA BFE. It had a trustee notice on it that said LB was owed $250k. This place was not more than a tree house. Point is, LB was complete toast all along but nobody knew it. (BTW, I learned there what happens when a house is infested by enormous rats, as that area is, and they are poisoned. It ain’t pretty.)
So what if this new rock is China? How will it be written up? China is basically all the worlds growth. But despite all the media attempts to explain it away, they are a dead man walking. Companies like Apple find out, China stinks for growth. Apples stock price is based on growth. Oops! Tech bubbles collapses, Bay Areans flee in their Teslas leaving behind million dollar condos with the dishwasher strapped to the roof. Australians find out Chinese money is actually finite, Vancouver too. Loans made to people bidding against Chinese comps suddenly look unreasonable. “How could you have loaned me so much money?” is the cry.
As I said recently, the Chinese stock debacle and especially the halting of trading might be the Lehman moment times 1,000.
“Bay Areans flee in their Teslas leaving behind million dollar condos with the dishwasher strapped to the roof.”
If anyone has a photo to document this development, please post!
“As I said recently, the Chinese stock debacle and especially the halting of trading might be the Lehman moment times 1,000.”
I keep seeing my Chinese neighbor standing around outside, looking extremely pensive, often with a cigarette dangling from his mouth. I can’t help but wonder whether he lost his shirt in the recent stock market debacle.
‘Cook pointed to the larger trend of China’s growing middle class providing a solid foundation for sales of Apple’s product. “I can’t overstate this,” Cook said. “The rise of the middle class there is continuing, and it is transforming China.” Upper middle class households will grow to make up 54% of all households by 2022 from just 14% in 2012, Cook said citing a study by McKinsey.’
‘If anything, the experts thought Cook might have underestimated the benefits to Apple from the upward economic mobility in China. In addition to a “vast” middle class, “there will remain a vast underclass who cannot afford these things but will want something to show for all their hard work and an Apple product fits the bill,” Schramm said. “In this sense I am a bit more optimistic – the market is in fact much broader than the emerging middle class.”
‘Steven Lewis, a China expert at Rice University, agreed. “Even lower income Chinese want trendy Apple products, and given that many young people in urban areas have relatively high amounts of disposable income — they live with parents for free and do not want to buy a car — you can get Chinese of lower income also buying Apple as well,” Lewis says.’
‘And even if Chinese economic growth is slowing, the middle class will continue to grow, argues Joe Foudy, an economics professor at New York University’s Stern School of Business. “Whether China grows GDP at 5% or 7% and hits a rough patch or dodges a recession, there are several hundred million people on the cusp of entering the middle class,” he says. ‘
‘Cook’s overarching outlook on China was completely positive for Apple. “China is a fantastic geography with an incredible unprecedented level of opportunity there,” he said. But the experts had some concerns that the CEO didn’t mention.’
http://finance.yahoo.com/news/with-almost-all-of-its-growth-coming-from-china–should-apple-be-worried–152905340.html
I know how the script says thing will go, but what if it’s wrong? The empty cities stay empty and fall apart? What if hundreds of millions stay poor? What if it’s all been a fairy tale all along? That these riches were accumulated by a one-off globalism event. There will be no growth from China, but rather they go into depression, maybe revolt. It is possible.
I find myself pondering how a big war would affect capital flows and ultimately real estate financing. It seems reasonable to expect that something will alter capital flows significantly at some point. What if at some point the major economies were all directing capital towards a war effort? Would housing prices then sink to some sort of intrinsic value? Would anyone still care about Twitter, Facebook, and the latest Apple gadget? Seems like the bay area would quickly become a very difficult place to be.
Speaking of irrational markets for global commodities, does anyone have any thoughts on when the freefall in precious metals and industrial commodities may finally reach bottom?
Regarding precious medals and industrial commodities, my opinion is that they will probably a bounce over the next 30 or so days and head somewhat higher.
After that, I think they will head back down again as that is the general trend due to too much debt, too little growth and winds of depression.
I think that they will bottom out when the central banks start to talk about new rounds of money printing/fiscal stimulus which will be unprecedented in scope.
If I had to guess, I would think gold will eventually get to about $850, silver to $12, oil to $25 and copper $175. Other industrial metals will probably rise a little higher but worldwide overcapacity will keep those prices relatively lower.
“If I had to guess, I would think gold will eventually get to about $850, silver to $12, oil to $25 and copper $175.”
Seems reasonable, though I am not sure whether your prediction takes into account incipient Fed tightening, which will hammer another nail into goldbugs’ coffins.
Gold could plunge to $1,000 quicker than you think
Arjun Kharpal
Friday, 24 Jul 2015 | 8:10 AM ET
CNBC.com
Gold’s woes continued Friday when its price slump hit a five-and-a-half year with analysts warning that the precious metal could plunge far faster than recently forecast and hit the $1,000 mark in just a few weeks.
Prices have come under pressure recently and are down around 5.4 percent in the last seven days. On Friday, spot gold hit a low of $1,077 an ounce and was trading down around $1,079.6 by mid-afternoon.
And analysts are seeing further pain for gold to come in the short-term.
“I think we see more of a downtrend particularly over the next couple of months ahead of the market speculation of a September rate hike in the U.S., so I think you can easily see prices over the next two months breaching below $1,000 round level,” David Wilson, director of metals research and strategy at Citi, told CNBC in a TV interview.
…
Do you really think anyone can time the bottom like that? If you’re interested in buying precious metals and commodities, and plan to hold for many years, start dollar-cost-averaging in over the next 2-3 years. You’ll never be able to time the exact bottom.
I am just taking a guess regarding the bottom prices of the metals and oil. As things progress, my opinion may change.
I am taking Fed tightening into account but I do not think they intend to tighten much. .25% Is that really a big deal for precious metals?
Any tightening whatever at this point would be a big deal for risk assets, due to the resulting expectations shock. (See discussion of The Boy Who Cried Wolf elsewhere among today’s posts.)
I agree with you that a tightening may be a big deal for risk assets. However, I think that a lot of that risk is already price into precious metals. Some risk probably does remain and that is why I think gold is in for another drop to around $850.
On the other hand, I do not believe that the risk is priced into the stock market and real estate so raising rates should be a big deal for them.
That is why I believe if the stock market tanks along with real estate, the central banks will reverse any tightening and we will go back to the only policy response they have (i.e. more quantitative easing). There might also be a fiscal response. All of which I believe is eventually positive for precious metals and to a lesser extent commodities.
“The housing market is another matter. It is far less rational than even the often irrational stock market, for a couple of important reasons. First, most investors find it difficult to understand how housing supply responds to changes in demand. Only a small minority of people think carefully about such things. Second, it is very hard for the minority of smart-money investors who do understand such matters to bet against bubble-level prices in real estate markets. In housing, the smart money has relatively little voice.”
Bingo! Let’s take a close look at this:
“First, most investors find it difficult to understand how housing supply responds to changes in demand.”
If prices are seem to be in a rising trend then two things happen:
1. Potential sellers tend to wait for higher prices before deciding to become actual sellers because they “do not want to leave money on the table”.
2. Buyers want to jump in right away or else “be priced out forever”.
Both 1 and 2, working together, tend to restrict supply and increase demand, which means both 1 and 2, working together, tend to strengthen the price rise. And it is this strengthening of the rice rise - the positive feedback of the price rise - that tends to strengthen both 1 and 2.
“In housing, the smart money has relatively little voice.”
That’s because smart money is overwhelmed by the actions of emotional money, both the hold-out-for-higher-prices potential sellers and the “buy-now-or-be-priced-out-forever potential buyers.
The emotional money would not be able to overwhelm the smart money if the emotional money could not get financing, could not find methods to break down lofty selling prices into how-much-a-month parcels. And it is these how-much-a-month parcels that enable prices to become lofty, enable the term “affordable” to become redefined.
“… it is very hard for the minority of smart-money investors who do understand such matters to bet against bubble-level prices in real estate markets.”
And this is because nobody knows when this craziness will end.
It’s the sudden reversal of your 1. and 2. upon reaching a tipping point which eventually precipitates a crash.
Exhibit A: Last month’s action on the Chinese stock market
Raging bull
What the hell is going on with China’s stock market, charted
A mop is placed on a statue of a bull to dry at a commercial bank building at the financial street in Beijing December 1, 2014. REUTERS/Kim Kyung-Hoon
China’s wooly-headed bull market charges on.
(Reuters/Kim Kyung-Hoon)
Written by Gwynn Guilford
Obsession
China’s Transition
July 24, 2015
In case you turned away from China’s economic carnage for a moment, some surprising news: China’s stock crash has turned itself inside out.
The Shanghai Composite Index closed out this week up 16% since its July 8 nadir. The benchmark index in Shenzhen, meanwhile, popped a whopping 23%.
…
Interesting. Who knows if this is a really a reversal. Could be. But in case anyone gets their hopes up too high, I’ll just leave here a link to another chart, one of the NYSE starting in 1929. Most people think of the crash of 1929 as a single one-time crash, but there were lots of false bottoms before reality sank in. People were calling the botttom all the way up to the real bottom 3 years later in 1932.
http://www.sniper.at/crash-29/stock-market-crash-1929-DJIA.GIF
Outside the Box
Opinion: China has only itself to blame for its stock market collapse
Published: July 24, 2015 6:01 a.m. ET
By Satyajit Das
Most things in China are unfamiliar to foreigners — especially its stock market.
Chinese stock markets involve multiple types of shares and convoluted ownership arrangements.
There are A-shares: renminbi denominated shares in mainland China-based companies whose ownership is restricted to mainland citizens and foreigners under the regulated Qualified Foreign Institutional Investor system.
There are B-shares: quoted in foreign currencies (such as the U.S. dollar) and can be purchased by domestic and foreign investors (with a foreign currency account).
There are H-shares: Hong Kong dollars denominated shares in Chinese companies which are listed in and trade on the Hong Kong Stock Exchange.
There are even shares which are not really shares, such as the rights in Variable Interest Entity used by foreigners to get around ownership prohibitions to acquire stakes in Chinese Internet companies such as Alibaba Group Holding (BABA, -1.03%). These are typically Cayman Islands-domiciled companies that use contracts to provide an economic interest in a Chinese business.
…
The core of any bubble is the “magic asset” - an asset that has no reasonable possibility of going down in price. Additionally, it goes up quickly enough in price so that people can sell it shortly thereafter for more and get profit/currency.
Why do people buy things? They get some value from it. From small ceramic bric-a-brac to food and clothing to cars to stocks to houses to sex and drugs.
The value from a magic asset, like a financial product (for example), or a tulip bulb, or a house, is how much profit (excess currency) they can obtain on the sale.
But - for a house, there’s also the value from consuming the product - living in it, and externalities like sending the offspring to a good school. For a tulip bulb or a stock, there’s signficantly less value from consumption, if any at all.
When a government steps into create a magic asset, the question to me is, how long can it keep it up? There is the supply and demand factor as well for housing. Having commuted on the DC and Baltimore beltways, I can tell you that 45-90 minute (one way) commutes focus one on reducing those timeframes. So location is a factor in demand.
The housing finance market today involves lenders matching government (taxpayer) and Fed (printed) money to borrowers (the loans are mostly immediately sold off). How much can that grow before it’s forced to stop? What is the limit to the Fed’s balance sheet and the national debt?
Also, peak debt (i.e. maximum serviceable debt). Interest rates are low allowing current debt levels to be quite serviceable. As debt grows until it reaches a new peak at these current interest rates, what then?
“But - for a house, there’s also the value from consuming the product - living in it, and externalities like sending the offspring to a good school.”
Not always.
Markets | Fri Jul 17, 2015 5:31pm EDT
Related: Markets, Private Capital, Financials
COLUMN-China pulling the levers nearest to hand: James Saft
(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
(Reuters) - China may be throwing its all at the stock market not because that is its most important problem, but it’s the one Beijing can most easily, if ham-handedly, control.
Intimidating short-sellers is, after all, a lot easier, and cheaper, than breathing life into a sagging housing market suffering chronic (and worsening) over-supply.
Allowing people to pledge their houses as collateral for the purchase of more shares is easier than managing the transition from over-investment to, well, whatever comes after.
Suspending trading in major issues, trapping investors, is easier, and quicker, than addressing the ways in which pledged shares are part of the expanding web of indebtedness in China.
China’s resolve to overawe markets into rising seems to harden daily.
…
HOUSING, DEBT AND OVER-INVESTMENT
China’s effort to control its stock market is best seen in the context of the difficulties it faces in controlling the rest of its economy, which present problems just as deep but require solutions that may be much more difficult to engineer, or to endure.
“In our opinion, China’s combination of a triple bubble (with the third-biggest credit bubble, the biggest investment bubble and second-biggest real estate bubble of all time) remains the biggest risk to the global economy,” Credit Suisse strategists led by Andrew Garthwaite wrote in a note to clients.
Take housing. Despite falling prices and despite sky-high valuations, with Beijing and Shanghai buyers paying average prices that are more than 20 times average incomes, supply continues to flow unabated. Housing starts in China are running at 12 percent above demand, according to a Credit Suisse estimate, and 18 percent of completed homes become vacant.
It is not at all surprising that a housing bubble has gone hand-in-hand with a credit bubble, one that Credit Suisse calls the third-biggest they’ve seen, behind only Spain and Ireland during the last lamentable excess. The ratio of private sector debt to GDP is not only nearly 200 percent, but the rate of ascent has risen very steeply since 2011, taking it 40 percent above trend. Bank for International Settlements research has found that many financial crises are proceeded by credit rising by only 10 percent above trend.
Investment as a percent of output is now running at 44 percent, compared with the peak of 36 percent in Japan in the early 1970s when it was rapidly industrializing. China recognizes that investment-led growth is a process with a finite limit, and that its economy must transition to one with higher consumption and services as opposed to exports and the laying of concrete over ground.
Given the excesses in China’s economy, and the opaque but undoubted links between its banking system, its web of private, public and quasi-public debts and the stock market, a plunge must have been nothing short of terrifying for authorities. Debt fault lines, as we’ve seen in other economies, run deeply but can cause much damage.
The reaction to the stock market crash may not be so much a matter of injured prestige, but of looking at the moving pieces and moving those over which China has most control.
If there is one lesson of the last financial crisis, it is that it is easier to manipulate financial markets and hope reality conforms than to try and change reality and wait for financial markets to catch up.
China has learned this point well.
…
‘The debate over ride-hailing firm Uber is laying bare divides in the Democratic Party and on the left about how to handle the new “sharing” economy. Republicans are hungry to exploit that ambivalence and make inroads into a wealthy sector of the tech industry.’
‘Former Treasury Secretary Larry Summers has noted that Apple employs a far smaller share of people than companies of its size did in the past. Silicon Valley and the surrounding Bay Area have become a symbol of the income inequality that Democrats bemoan.’
‘But it is the recent, explosive growth of Uber and other “sharing economy” companies that have attracted the most concern. HomeJoy recently announced it would shut down in the face of four lawsuits alleging it should treat the people who clean homes on its behalf as employees rather than as independent contractors not entitled to the same workplace protections.’
‘Lyft, Uber or the grocery delivery service Instacart and others rely on independent contractors to provide services for a fee: driving, house cleaning, grocery shopping and the like.’
“If a technologist wants to disrupt an industry that has middle-class jobs and replace them with insecure, not-as-good jobs, there has to be a conversation about that,” said Heath McGee, president of the liberal think-tank Demos. “Just because there’s an app doesn’t mean it’s anything different. … It’s a question as old as the economy.”
http://finance.yahoo.com/news/democrats-fret-over-sharing-economy-gop-moves-134546371.html#Aside
See, these are the things that have me wondering. Is driving people around really all that new? I’ve never known a person who said, “when I grow up I want to drive people around for less money than a cab.” Or I want strangers to use my bathrooms and I’ll get to clan it up. Groceries! That’s the ticket, I’ll pick out lettuce for somebody, think of the riches!
I don’t know Silicon Valley, sounds kinda snake-oily to me.
http://247wallst.com/investing/2015/07/25/insiders-heavily-dump-former-high-flyer-biotech-stock/
‘What a commodity bust would mean for Canada’s economy
‘Given that we’re already in a slow-growth environment, the risk is stagnation in the economy, or something worse’
‘Jason Kirby October 25, 2014′
‘Back in the 1980s, Ron Carey was sitting in a Calgary bar with a fellow oilman, reflecting on the great oil bust that had levelled Alberta’s economy, when he came up with the idea for a bumper sticker that would capture the grim mood in the province: “Please God, let there be another oil boom. I promise not to piss it all away next time.” It wasn’t as pithy as that other famous Alberta decal, “Let the eastern bastards freeze in the dark,” but a cultural phenomenon was born as the sticker’s popularity spread.’
‘Three decades later, Carey, now 75, has watched another boom grip the province and is ready to print another run of those stickers if need be. That’s because he sees worrying signs of another bust on the horizon: soaring wages, “ridiculous” house prices and people living “high on the hog” because they assume the good times will go on forever. Carey knows better. “You have to keep people mindful that these things can happen,” he warns. “I’ve been forecasting this could happen again for the past two years, and it damn near did last week.”
‘And while falling oil prices have grabbed the headlines, crude is far from alone in enduring a steep decline. The agricultural fertilizer potash, another commodity that has underpinned the Canadian economy and briefly made Potash Corp. of Saskatchewan the country’s most valuable company, is plagued by oversupply. Shares in Potash Corp.—once a top holding for many Canadian mutual funds—have shed half their value since 2011. Metallurgical coal, used in steelmaking, has lost two-thirds of its value since 2011, falling to US$119 per ton from US$330 amid a coal glut. Uranium and nickel, of which Canada is one of the world’s largest producers, have shed 45 per cent of their value since 2011. Copper, a metal that at its height spawned a bizarre crime wave of thieves stealing wires from phone companies, is down 35 per cent. So too is gold.’
‘The effects on Canada’s economy are already showing.’
‘In other words, the 15-year commodity boom—which gave Canada its Teflon-like strength during the deep global recession and helped make us the envy of the world—has run its course. This is all taking place against the backdrop of a global economy that is dramatically gearing down.’
‘China’s slowdown matters, because it was the industrial revolution in the Middle Kingdom that spurred the explosion in commodity prices in the first place. Year in, year out throughout the mid-2000s and then again after the financial crisis, China’s GDP posted double-digit gains as Western analysts outdid each other with stories of the country’s economic achievements. They’re building 20 new cities a year! They’re building more high-speed rail in a year than the rest of the world combined! They’re building 50 airports a year! Instead, China’s investment-driven growth model led to massive waste, overcapacity and dangerously high debt levels. One IMF study estimates as much as 10 per cent of China’s annual growth has been driven by “excessive” or wasteful investment spending.’
‘That hasn’t stopped some observers, including the Bank of Canada, from predicting China will continue to keep oil and other commodities afloat.’
‘Larry Summers, the former economic adviser to the White House, cautions against that type of thinking, warning that investors have succumbed to what he calls “Asiaphoria.” “Abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth,” Summers wrote.’
“I keep telling people, it’s not boom and boom, it’s boom and bust,” says Michael Lynch, a Massachusetts-based energy analyst who is bearish on the outlook for oil prices. “People complain about short-termism in the private sector, but short-term thinking is also in government. Prices go up, and people think this is how it’s going to stay, that they can keep spending money the way they had. But the good times don’t always last.”
http://www.macleans.ca/economy/economicanalysis/what-the-commodity-bust-means-for-canadas-economy/
‘Asiaphoria Meets Regression to the Mean
Lant Pritchett, Lawrence H. Summers’
‘NBER Working Paper No. 20573
Issued in October 2014′
‘Consensus forecasts for the global economy over the medium and long term predict the world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth.’
‘Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap. Furthermore, statistical analysis of growth reveals that in developing countries, episodes of rapid growth are frequently punctuated by discontinuous drop-offs in growth. Such discontinuities account for a large fraction of the variation in growth rates.’
‘We suggest that salient characteristics of China–high levels of state control and corruption along with high measures of authoritarian rule–make a discontinuous decline in growth even more likely than general experience would suggest. China’s growth record in the past 35 years has been remarkable, and nothing in our analysis suggests that a sharp slowdown is inevitable. Still, our analysis suggests that forecasters and planners looking at China would do well to contemplate a much wider range of outcomes than are typically considered.’
http://www.nber.org/papers/w20573
“We have lived through a series of major events in our lifetime none of which were widely predicted by experts in the appropriate domain. Not just the obvious example of the financial crisis or perhaps idiosyncratic individual events like the attacks of 9/11 but major geopolitical shifts like the collapse of the Soviet Union and the Arab Spring (and its seasonal sequalae) have not been anticipated.”
“All that said, we suspect that the reason for slowdown that will come in China and India is for a similar reason but which will manifest differerntly [sic] given the very different politics. That is, in neither country does investor confidence rely on rule of law. In both countries there are plausible scenarios in which disrptions [sic] of the current ‘political settlement’ that is providing a climate for ‘ordered deals’ … will be disrupted. This disruption of the arrangements that provide settled expectations of investors can easily create processes with non-linear sudden stops.”
“India and even more so China are into essentially historically unprecedented episodes of growth. China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest ever. The ends of episodes tend to see full regression to the mean, abruptly.”
“It is impossible to argue that either China or India have the kinds of ‘quality institutions’ that have been associated with the steady dynamic of growth in the currently high productivity countries. The risks of ‘sudden stops’ are much higher with weak institutions and organizations for policy implementation. China and India have very different modalities of this risk, but both have tricky paths to continued prosperity.”
“While there were some concerns raised about a bubble in Japanese real estate, we remember almost no one predicting in 1991 that Japan’s real GDP per capita would be only 12 percent higher in 2011 than twenty years earlier …”
http://qz.com/148253/its-ok-if-your-kid-isnt-fluent-in-chinese-yet-thats-the-bottom-line-of-new-research-from-larry-summers/
Hmmm, and Japan had a stock and real estate bubble.
“India and even more so China are into essentially historically unprecedented episodes of growth. China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest ever. The ends of episodes tend to see full regression to the mean, abruptly.”
Do abnormally long periods of anomalously high grow lead to abnormally long subsequent busts? Japan’s recent experience worked out thusly. I know it’s different in China and India.
“India and even more so China are into essentially historically unprecedented episodes of growth.
Real Estate In India Is Heading For 50% Collapse In Prices
http://www.realtytoday.com/articles/22469/20150724/real-estate-india-heading-50-collapse-prices.htm
Realty Biz News says that in Delhi the real estate property prices have crashed by in so far as 25% for the past 12 months. In addition to the prices the transactions have also considerably gone down.
In smaller cities, the situation is even worst. Every year, the prices have to be changed as low as 20%. The sellers are having difficult time to get bids for the properties that have been listed for sale. However, the price correction has been expected since the real estate property prices have ballooned each year with an average increase of 20% for over a period of 10 years. The interest rate is still not included in the 20% increase.
This present condition of Real estate market in India has been forecasted by experts. They said that “the real estate bubble in India would eventually burst for the past two or three years.
‘Noida property market witnessed new sales of only about 3,800 homes during the April-June period, lowest in the last eight years, due to dip in demand from investors, according to a report by Bank of America-Merill Lynch.’
“The housing market in Noida continues to remain difficult — absorption rate lower than 2009 levels, new supply/launches halved compared to period (calendar year 2008-13) and pressure on pricing,” BofA-ML, an American brokerage firm, said in a research report.’
‘The second quarter of calendar year 2015 witnessed “new sales of about 3,800 units which is lowest in the last eight years”, it added.’
“Absorption rate at 3.7 per cent is the lowest in last eight years as investors who held the housing market in the past seemed to have deserted the market given poor visibility on timely delivery, price appreciation and exits,” said the report.’
‘It also expressed concern over the unsold inventories in the Noida property market. “Although we believe unsold inventory has peaked at about 1 lakh units, the same equates to 16 quarters at current sales velocity; again highest in last 8 years… 4-year inventory is worrisome…,” the report said.’
‘Gurgaon’’s unsold inventory has seen an exponential rise over last 2.5 years indicating significant slowdown in sales. “We foresee weakness to stay through calendar year 2015 before possible recovery in calendar year 2016,” the report said.’
‘To improve sales and cash flow, the brokerage said that there is a need for notable rise in new launches with freebies and discount schemes as well as reduction in investor inventory in secondary market.’
http://www.tribuneindia.com/news/real-estate/housing-sales-dip-in-noida/110940.html
Thanks for the geography lesson, Ben. After Googling Noida and Gurgaon, I leaned they are in the vicinity of the capital city of New Delhi. So I guess a real estate crash in those municipalities might be somewhat akin to a US real estate collapse in areas surrounding DC?
‘What a commodity bust would mean for Canada’s economy
A looney that is worth 65 US cents?
Costa Mesa, CA Housing Prices Fall 14%
http://www.zillow.com/costa-mesa-ca-92627/home-values/
“If it’s empty, it’s overpriced and going to stay empty until prices fall.”
BINGO
Alexandria, VA List Prices Dive 8% YOY; Inventory Balloons As Demand Craters
http://www.movoto.com/alexandria-va/market-trends/
Price reductions the past 7 months:
147 217 180 241 368 508 536
Quick graph here (don’t know why PicPaste is cutting off my title…)
Keep on a slashin’ boys. Keep slashin’.
BTFD!
CTFK!
Granite Bay, CA Housing Prices Fall 9%
http://www.movoto.com/granite-bay-ca/market-trends/
‘Canadian Housing’s Chilly Future, Part 2′
A comment:
‘Boomer.88′
‘I live in Toronto and I say this, as long as China doesn’t crush this housing bubble won’t burst. My house has more than doubled in price since I bought it 7 years ago and nowadays most houses sell way above asking price attracting multiple bids, It’s absolutely insane. Recently I noticed that most parents at our community playground speak Mandarin and I’ve never seen that many luxury cars in my neighborhood. Vancouver is even worse. All you need is one deep pocket buyer who will pay above the asking price and the new benchmark on your street is set. I would be looking to China for clues when this bubble is about to blow up.’
http://realmoney.thestreet.com/articles/07/24/2015/canadian-housings-chilly-future-part-2
‘I live in Toronto and I say this, as long as China doesn’t crush this housing bubble won’t burst. … I would be looking to China for clues when this bubble is about to blow up.’
Roger that, bro’!
‘According to C.A.R.’s newest housing market indicator which measures the sales-to-list price ratio, properties are again generally selling below the list price, except in the San Francisco Bay Area, where a lack of homes for sale is pushing sales prices higher than original asking prices. The statewide measure suggests that homes are selling at a median of 99 percent of the list price, slightly up from 98.7 percent at the same time last year. The Bay Area is the only region where homes are selling above original list prices due to constrained supply with a ratio of 106.3 percent, up from 104 percent a year ago, but down from 107.3 percent in May.’
http://www.record-bee.com/lifestyle/20150724/lake-county-homefront-home-sales-robust-in-june
so, one little indain
SB is the last standing
Tech is coming off the boil here… this won’t last.
“It is hard for homeowners to have people tell them their home is worth less than they think”
Makes sense when you’ve been told(lied to) that a depreciating house is an “investment” thus you continued to dump everything you’ve got into it for 30 years.
Whose fault is that?
When a Californian tells you you’ve over-priced your house, that’s something!