The Twin Bubbles (imobiliário)
Enviado: 6/4/2004 14:04Tenho vindo há alguns meses a acompanhar o comportamento dos REIT's.
Devem estar a fazer um topo (têm tido uma performance excepcional, mas já me cheira a queimado.
Asia Pacific: The Twin Bubbles
Andy Xie (Hong Kong)
The risk of a global hard landing is rising rapidly, I believe. The trigger could be a policy action by China, a credit incident in the commodity market, or just the weight of the debt bubble in Australia.
Resilient consumption among Anglo-Saxon economies ─ in my view the most important pillar for the global economy today ─ is a bubble that mirrors the property bubble in these countries. This bubble results from their household optimism that interest rates will continue to decline and incomes continue to rise, which causes them to borrow at a faster rate than their current income growth.
China’s investment bubble is the other pillar for the global economy. Its cause is the ‘gold rush’ mentality that dominates businesses and property speculators. Massive capital inflow is supporting property demand and credit supply. China’s growth essentially comes from accumulation of speculative inventory in property and excess production capacity.
The key to the twin bubbles is low US interest rates that have sparked rapid growth in household leverage in the Anglo-Saxon economies and business leverage in China. The rapid growth in debt is manifest in rising consumption and property prices in Anglo-Saxon economies, but massive capacity increases in China.
The right way to watch the global economy, in my opinion, is to see how these twin bubbles develop. While financial markets are sensitive to cyclical data flow, the real question is how long the global debt bubble can last and what shocks could cause it to collapse.
The Anglo-Saxon Debt Miracle
Australia, Britain and the United States have substantially outperformed other developed economies in the past five years. The vaunted Anglo-Saxon flexibility has been cited as the major cause of the better performance of these economies. A better explanation, in my opinion, is debt. Household debt in Anglo-Saxon economies has risen much faster than elsewhere, or compared to their history. Australia’s household debt-to-GDP ratio rose by 39 percentage points between 1998–2003, Britain’s by 19 points and the US’s by 16.
Exhibit 1
The Leverage Game (% of GDP)
US UK Australia Euro-Zone Japan
Household Debt
1988 57.9 66.6 36.8 59.7
1993 62.2 74.8 42.9 63.3
1998 67.1 72.5 61.2 41.7 65.1
2003 83.5 91.8 100.3 48.3 67.3
Current Account
1988 -2.3 -4.1 -3.0 2.7
1993 -1.2 -1.8 -2.7 3.0
1998 -2.3 -0.5 -4.5 3.0
2003 -4.8 -1.7 -6.3 0.4 3.2
Real GDP Growth between 1998-2003 (%)
11.5 11.3 20.9 11.1 5.7
Source: ECB, RBA, Bank of England, the Fed, CEIC and Morgan Stanley
Unsurprisingly, Australia’s economy has performed twice as well as others between 1998 and 2003, as its leverage has been rising twice as fast. The euro zone’s growth was as strong as that of the US, but with less increase in leverage. The weak euro was the reason, in my view. This is why, if deprived of a weak currency, the euro zone cannot grow without creating a debt bubble.
The link between debt and GDP growth is property prices. Because of the regulatory constraints in mature economies, rising demand for property on low interest rates translates into rising prices rather than production. The wealth effect from rising property values is particularly powerful on consumption, as it spreads among most households.
The massive property bubble among Anglo-Saxon economies is the support for global consumption demand. In theory, this can last if household optimism and low interest rates persist. But, like any bubble, this one will also inevitably burst, in my view. Australia’s property market appears to be teetering on the brink, and could break soon. The resulting confidence shock could prick the Anglo-Saxon bubble.
China’s Investment Bubble
China is experiencing an investment bubble that in scale is unprecedented in terms of its own or international history. The excess this time is twice as large as the previous bubble in 1993. Because China stands alone in attracting foreign capital in this cycle, it has been able to fund a massive investment bubble without devaluing its currency, as was the case in the past.
China’s foreign exchange reserves more than doubled between 2001–03. Because China sterilizes little of the capital inflow, domestic credit rose by 55% during this interval. This bubble is the same as that experienced by Southeast Asia ten years ago: excessive business optimism and massive capital inflow turned into an investment bubble.
Exhibit 2
China’s Investment Bubble (% of GDP)
Gross Fixed Domestic
Investment Credit
1998 31.4
1993 37.6 96.7
1998 35.0 116.8
2003 42.9 est. 160.3
Source: CEIC and Morgan Stanley Research
Excessive optimism about the future is the cause of China’s investment bubble. The massive reduction in US interest rates triggered the return of a large amount of Chinese capital, causing the initial wave of the investment boom. The resulting improvement in the economy triggered more optimism and capital inflows. The rapid credit expansion began to depress real interest rates, triggering a huge jump in demand for property, further fueling investment demand in commodity industries and the property sector itself.
What is going on in China is a pyramid game on a gigantic scale, in my view. Local governments are borrowing massive amounts of money with land as collateral to build urban infrastructure, hoping that land will appreciate sufficiently to pay off the debts, as was the case in Shanghai in the past. But the Shanghai model does not apply everywhere. Shanghai has been bailed out by demand for its properties from Hong Kong and Taiwan residents. One Shanghai is already too much for Hong Kong and Taiwan. How could many other cities follow the same path?
A major correction in property prices in China is coming soon, I believe. Housing starts are rising much faster than sales. The properties under construction have exceeded the sales in the past five years. Double-digit vacancy rates are common in major cities. Speculative motives dominate both developers and buyers. The correction could come with either an interest rate hike or supply overwhelming speculators’ finances.
China Could Prick the Bubble First
The most obvious candidate for bursting the bubble is the Fed raising interest rates. The better US employment data from last week are pointing at that direction. However, as the current global equilibrium is still against strong employment growth in the US, I would not count on the Fed raising interest rates soon or aggressively enough when it does.
China’s pricking its investment bubble is becoming the most obvious risk to the global bubble, in my view. A consensus appears to have formed among Chinese politicians that the country is experiencing a major investment bubble and policy actions are needed to prevent further efficiency losses. As local governments continue to go against the central government’s wishes, new policy actions may be coming.
A large interest rate hike by the Chinese government could be in the offing. Such an action could only take place with further tightening in the capital account. Temporary suspension of non-FDI inflows could be introduced along with a major interest rate increase.
Devem estar a fazer um topo (têm tido uma performance excepcional, mas já me cheira a queimado.
Asia Pacific: The Twin Bubbles
Andy Xie (Hong Kong)
The risk of a global hard landing is rising rapidly, I believe. The trigger could be a policy action by China, a credit incident in the commodity market, or just the weight of the debt bubble in Australia.
Resilient consumption among Anglo-Saxon economies ─ in my view the most important pillar for the global economy today ─ is a bubble that mirrors the property bubble in these countries. This bubble results from their household optimism that interest rates will continue to decline and incomes continue to rise, which causes them to borrow at a faster rate than their current income growth.
China’s investment bubble is the other pillar for the global economy. Its cause is the ‘gold rush’ mentality that dominates businesses and property speculators. Massive capital inflow is supporting property demand and credit supply. China’s growth essentially comes from accumulation of speculative inventory in property and excess production capacity.
The key to the twin bubbles is low US interest rates that have sparked rapid growth in household leverage in the Anglo-Saxon economies and business leverage in China. The rapid growth in debt is manifest in rising consumption and property prices in Anglo-Saxon economies, but massive capacity increases in China.
The right way to watch the global economy, in my opinion, is to see how these twin bubbles develop. While financial markets are sensitive to cyclical data flow, the real question is how long the global debt bubble can last and what shocks could cause it to collapse.
The Anglo-Saxon Debt Miracle
Australia, Britain and the United States have substantially outperformed other developed economies in the past five years. The vaunted Anglo-Saxon flexibility has been cited as the major cause of the better performance of these economies. A better explanation, in my opinion, is debt. Household debt in Anglo-Saxon economies has risen much faster than elsewhere, or compared to their history. Australia’s household debt-to-GDP ratio rose by 39 percentage points between 1998–2003, Britain’s by 19 points and the US’s by 16.
Exhibit 1
The Leverage Game (% of GDP)
US UK Australia Euro-Zone Japan
Household Debt
1988 57.9 66.6 36.8 59.7
1993 62.2 74.8 42.9 63.3
1998 67.1 72.5 61.2 41.7 65.1
2003 83.5 91.8 100.3 48.3 67.3
Current Account
1988 -2.3 -4.1 -3.0 2.7
1993 -1.2 -1.8 -2.7 3.0
1998 -2.3 -0.5 -4.5 3.0
2003 -4.8 -1.7 -6.3 0.4 3.2
Real GDP Growth between 1998-2003 (%)
11.5 11.3 20.9 11.1 5.7
Source: ECB, RBA, Bank of England, the Fed, CEIC and Morgan Stanley
Unsurprisingly, Australia’s economy has performed twice as well as others between 1998 and 2003, as its leverage has been rising twice as fast. The euro zone’s growth was as strong as that of the US, but with less increase in leverage. The weak euro was the reason, in my view. This is why, if deprived of a weak currency, the euro zone cannot grow without creating a debt bubble.
The link between debt and GDP growth is property prices. Because of the regulatory constraints in mature economies, rising demand for property on low interest rates translates into rising prices rather than production. The wealth effect from rising property values is particularly powerful on consumption, as it spreads among most households.
The massive property bubble among Anglo-Saxon economies is the support for global consumption demand. In theory, this can last if household optimism and low interest rates persist. But, like any bubble, this one will also inevitably burst, in my view. Australia’s property market appears to be teetering on the brink, and could break soon. The resulting confidence shock could prick the Anglo-Saxon bubble.
China’s Investment Bubble
China is experiencing an investment bubble that in scale is unprecedented in terms of its own or international history. The excess this time is twice as large as the previous bubble in 1993. Because China stands alone in attracting foreign capital in this cycle, it has been able to fund a massive investment bubble without devaluing its currency, as was the case in the past.
China’s foreign exchange reserves more than doubled between 2001–03. Because China sterilizes little of the capital inflow, domestic credit rose by 55% during this interval. This bubble is the same as that experienced by Southeast Asia ten years ago: excessive business optimism and massive capital inflow turned into an investment bubble.
Exhibit 2
China’s Investment Bubble (% of GDP)
Gross Fixed Domestic
Investment Credit
1998 31.4
1993 37.6 96.7
1998 35.0 116.8
2003 42.9 est. 160.3
Source: CEIC and Morgan Stanley Research
Excessive optimism about the future is the cause of China’s investment bubble. The massive reduction in US interest rates triggered the return of a large amount of Chinese capital, causing the initial wave of the investment boom. The resulting improvement in the economy triggered more optimism and capital inflows. The rapid credit expansion began to depress real interest rates, triggering a huge jump in demand for property, further fueling investment demand in commodity industries and the property sector itself.
What is going on in China is a pyramid game on a gigantic scale, in my view. Local governments are borrowing massive amounts of money with land as collateral to build urban infrastructure, hoping that land will appreciate sufficiently to pay off the debts, as was the case in Shanghai in the past. But the Shanghai model does not apply everywhere. Shanghai has been bailed out by demand for its properties from Hong Kong and Taiwan residents. One Shanghai is already too much for Hong Kong and Taiwan. How could many other cities follow the same path?
A major correction in property prices in China is coming soon, I believe. Housing starts are rising much faster than sales. The properties under construction have exceeded the sales in the past five years. Double-digit vacancy rates are common in major cities. Speculative motives dominate both developers and buyers. The correction could come with either an interest rate hike or supply overwhelming speculators’ finances.
China Could Prick the Bubble First
The most obvious candidate for bursting the bubble is the Fed raising interest rates. The better US employment data from last week are pointing at that direction. However, as the current global equilibrium is still against strong employment growth in the US, I would not count on the Fed raising interest rates soon or aggressively enough when it does.
China’s pricking its investment bubble is becoming the most obvious risk to the global bubble, in my view. A consensus appears to have formed among Chinese politicians that the country is experiencing a major investment bubble and policy actions are needed to prevent further efficiency losses. As local governments continue to go against the central government’s wishes, new policy actions may be coming.
A large interest rate hike by the Chinese government could be in the offing. Such an action could only take place with further tightening in the capital account. Temporary suspension of non-FDI inflows could be introduced along with a major interest rate increase.