Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

BubbleOmics 101: China Does Not Have a Residential Property Bubble

Housing-Market / China Economy Aug 04, 2010 - 07:39 PM GMT

By: Andrew_Butter

Housing-Market

Best Financial Markets Analysis ArticleBubbleomics 101:

1: Fundamental Price = Demand divided by Supply (Adam Smith)
2: If not – sorry folks…the market’s  not working properly (Albert Eintein?)


I’m not too sure about #2, but it might explain that awful-brain-wasting disease called “physics envy” that has atrophied so many otherwise brilliant minds.

How do you spot a bubble?

Simple, divide price by the fundamental and if that’s bigger than one you got a clue, the bigger that number is, the bigger the clue. If you want to run a check on your estimate of the fundamental work out the Depreciated Replacement Cost (DRC).

Well at least that’s what International Valuation Standards (IVS) says, and me I’m just a “paint-by-numbers” guy….I always do what IVS say, and when they say I must report Other Than Market Value rather than Market Value, well that’s what I do. Oh…and by-the-way they invented a BIG word for when the market isn’t working properly, they call it “disequilibrium”.

Of course there’s nothing new there, the first edition of IVS was published in 2000. Although sadly not a lot of people read it, certainly not the resident “bubble spotters” in USA, and most certainly not the blind-leaders of the blind-lenders in the Bank of International Settlements; that’s by-the-way, why they have credit crunches.

Anyway Chinas been in the “Bubble-News” recently. All those amateur bubble-spotters who failed to spot the US housing bubble are out in force, making sure they don’t get caught with their pants down again.

The logic is… well actually I was speed-reading and I kept nodding-off so I may have missed a bi…but I think the idea is that prices on new homes have gone up a lot, like really a lot, so that HAS to be a bubble!!

Perfect logic (for a physics-envier), and oh…silly me…sorry I forgot, there is something else…”USA had a housing bubble that started in 2000 and it popped in 2006, so that proves that China’s going to have one too! Because…Err…bubbles are infectious”?

Sorry to disappoint, but thanks to an excellent analysis of the housing market in China by Wu, Gyourko, and Deng (http://www.nber.org/papers/w16189.pdf ), you can work out what’s wrong with that logic on the back of an envelope.

Well pretty much, the way that goes is as follows:

The “fundamental” (what International Valuatuion Standards calls “Other-Than-Market-Value), can be roughly figured out from the demand (nominal GDP of China is a good first estimate (from Wikipedia and Google), and let’s assume the algorithm for the appropriate yield is a constant over the period – for the sake of argument), then you divid that by the urban population (also a bit of a rough number – kindly provided by  Wu, Gyourko, and Deng), and again, assuming for the sake of argument (rough numbers) that those people are living in housing units (however cramped) rather than in tents and also, that the bodies per unit remained constant.

Note: For an explanation about how all that works see:  http://www.marketoracle.co.uk/Article6250.html

OK that’s a lot of “wild assumptions” but I reckon it’s “good enough for a ten-minute back of the enveloped analysis; do the arithmetic, and this is what you get:

My (valuation)  opinion (done strictly in accordance with the International back-of-the envelope valuation standards (IBOEVS)) , house prices (in general) in China, are 85% of the “fundamental”, and that the huge price rise in recent years can be explained by:

1: Nominal GDP growing a lot faster than supply of decent new housing.

2: Market distortions arising from the fact that housing only started to be “privatized” in 1998 (and initially since there were no benchmarks it got sold to cheap – which is why you had to pay a kickback to a government official to buy anything).

i.e. the Chinese are waking up to the idea that they can afford to live in the cramped lousy apartments that the State provide with about 5m2 per person; and so they are “trading-up”.

Sure, in an evolving and chaotic market where the State and the Semi-State is still heavily involved (as is pointed out by Wu, Gyourko, and Deng ), there will be local areas of bubbles, and sure, some of the developers who didn’t know what they were doing and built “luxury” for a market that is much more pre-ocuped with air-conditioning and (indoor) flushing toilets, are going to get cremed, but that’s not a bubble, that’s just the market working.

http://www.voxeu.org/index.php?q=node/5353

Just how risky are China’s housing markets?

Yongheng Deng   Joseph Gyourko   Jing Wu
28 July 2010

Financial bubbles are governed by something like the economic equivalent of physics Heisenberg's uncertainty principle. It is impossible to observe a bubble with certainty without actually altering the bubble itself. If people knew it was a bubble, it wouldn't be a bubble – it would have already collapsed. It would not, however, be impossible to envision “diagnostic tests” that would provide a probabilistic identification of a bubble. Unfortunately the state of economics does not provide such a procedure (see Flood and Hodrick 1990 for an early analysis of what would be required to determine convincingly whether or not a speculative bubble exists).

I’m sorry to be sounding-off like an “obnoxious ass” again (as one kind commentator remarked recently), but my view on that exhibition of economic physics envy is that if you can’t figure out what a bubble is, and you don’t have a model that proves you can predict the dynamics of a bubble in at least ONE instance, then you shouldn’t be talking about the subject.

This is how you tell if there is a housing bubble, anywhere:

1: You work out nominal GDP per housing unit.

2: You plot that against price per housing unit.

3: If you want to be “super scientific” you divide that by a function of the yield (Y) on what is considered a 100% safe asset (in USA the 30 year treasury is a good benchmark – in China I have absolutely no idea what it is).

That get’s you to a formula which says:

Fundamental Price per unit = C1 + C2 x (nominal GDP per unit) x (function of1/Y)

That formula works out the fundamental in every housing market I have looked at and the constants (C1 and C2) are pretty constant whether you are in USA, UK, Germany, Hong Kong or Dubai (the function.

Divide the price per housing unit at the time by the “fundamental” and you can work out how big the “bubble” is (anything over 20% is not good, anything over 40% is alarming).

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Len
04 Aug 10, 21:07
China RE Bubble

"All those amateur bubble-spotters who failed to spot the US housing bubble..."

Actually it was the amateur bubble spotters who spotted and warned of the housing bubble and its collapse such as Ben Jones from housing bubble blog, Neil from real estate comments, Keith from housing panic, etc. It was the professional real estate experts who failed to spot the US housing bubble.

ÔÇťOther-Than-Market-Value"

Sounds like the same fuzzy logic that led to the rise in CCDO and MBS.

Real world litmus test to determine if there is a real estate bubble in China-

Can a Chinese buyer afford the mortgage WITHOUT resorting to gimmicks from the lender, the government, the seller, etc? Can they afford to buy on their salary and still have money left over for food, bills, fun money, etc?

If yes, then there is no bubble.

If no then there is a bubble in the making.

Why make it so hard or complicated when the simple answer is not only the easiest to reach but also the most correct?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules