Saturday 9 April 2005

Property bubble and global demand

In his recent commentary, Andy Xie of Morgan Stanley says that the global economic expansion will last until property prices fall.

The main engine for demand creation is property. In China, profit optimism originates from the booming property market in terms of price and volume, which is supporting the fixed investment boom. Surging property prices support the spending power of the US consumer despite relatively weak income.

The boom or burst due to a property bubble tends to be long-lasting...

Unless the US suffers an inflation shock from either a sustained surge in oil prices or a dollar crash, it is hard to envisage a collapse in global demand. This is why I do not want to turn bearish on demand until there are sufficient signs of property prices declining.

Calculated Risk sees some signs that the property market is at risk of a decline. In a recent post, he quotes Robert Schiller, author of Irrational Exuberance, as saying:

We looked at ratios of median home price to per capita personal income. We find that in many places in the US that is only about 2, the median home is only like 2 years income or 3 years income. But in other cities it is 10 years income. So -- I think that is getting a little -- more than a little high.

In another post, he points to a report that foreclosures are up, especially in the so-called "non-bubble" states. "But I think the real problem will start when the bubble states see a slowdown and a drop in transaction volumes," he says.

Andy Xie would probably agree.

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