The World Housing Bubble

The title of this article is a bold statement…world housing bubble.

The near-failure of the U.S. economy in 2007 brought with it the ultimate Keynesian response: extremely low interest rates, all across the globe. Shockingly, although countries lowered their rates in response to a real estate collapse in America, the result has been bubble-like housing growth all over the world.

Consider this selection of recent articles…

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CHINA

Overseas realty proves safer bet
“More wealthy Chinese are buying overseas properties for better investment returns as skyrocketing property prices in the country makes domestic home purchases more risky.”

www.cs.com.cn/english/ei/201003/t20100322_2373066.htm


AUSTRALIA

House surge leads to mortgage stress
“VICTORIA'S resurgent housing market is putting borrowers under severe financial strain, even if they are employed or earn more than $80,000 a year.”

www.news.com.au/money/property/house-surge-leads-to-mortgage-stress/story-e6frfmd0-1225843130252


CANADA

House prices to hit record: Scotiabank
"Canada's housing boom will continue this spring as exceptionally low mortgage rates and the expectation that borrowing costs will soon be headed higher – add a sense of urgency to consumer buying."

www.theglobeandmail.com/report-on-business/economy/house-prices-to-hit-record-scotiabank/article1509303/


ISRAEL

This bubble won’t bust, if we build over the Green Line
"The great crisis in the financial market drove people out of financial assets while historical low interest rates made mortgages much cheaper. The feeling that the only safe assets are the old-fashioned ones, first and foremost solid buildings, combined with a wave of foreign Jewish investors rushing to buy homes in the land of the Jews as a kind of an insurance policy drove the prices of homes in Israel to the top."

www.jpost.com/Business/BusinessFeatures/Article.aspx?id=171505


SOUTH KOREA

Housing Market Bubble possibility not high nationwide
"A KCCI representative commented that 'although there are many ongoing debates about the possibility of housing bubble...the possibility of house bubbling is quite low,' and further added that 'we must rather focus and prepare ourselves for the possibility of sudden drops in house prices due to unstable economic situations.'"

english.korcham.net/bbs/viewnotice.asp?code=reports&page=1&id=460&number=460


U.K.

Fears grow that new mortgage drought could hit house prices
"House prices fell 1.5 per cent in February after seven months of uninterrupted growth, according to the Halifax, the UK’s biggest mortgage lender. It says that buyers were deterred from visiting estate agents by the severe cold weather and changes to stamp duty."

www.timesonline.co.uk/tol/money/property_and_mortgages/article7060101.ece


LEBANON

Salameh rules out any real estate bubble
"Central bank Governor Riad Salameh said on Thursday that he does not expect a real-estate bubble to take place in Lebanon, and that the surge in property prices in the country is due to a real increase in demand."

www.beirut-online.net/portal/article.php?id=6669


SWEDEN

Economists reject 'housing bubble' report
"Economists from state-owned mortgage lender SBAB have rejected as unfounded warnings from the National Housing Credit Guarantee Board (BKN) that Sweden stands on the precipice of a house price crash."

www.thelocal.se/25236/20100226/

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The worldwide economic recovery, which is only now taking shape, is threatened by the very thing that started the crisis in the first place: real estate. Only this time it doesn’t just involve a single country.

The world's economies are in a dangerous position. On one hand, increasing rates could slow down or even derail the recovery. On the other hand, the longer interest rates stay low, the more unsustainable long-term real estate prices will become.

Somewhat perversely, the U.S. economy seems to be the real winner here. After two years of suffering, U.S. banks have recapitalized and are sitting on cash; home prices are affordable; consumers have been paying down debt. Although the U.S. economy looks ragged at the moment, it is in the best position to move forward.

One can only hope that the world real estate reversal will be more anticipated, more orderly and more methodical than the earlier U.S. meltdown: yet somehow, I doubt it.

Investors can do some simple things to prepare for the inevitable. First, take some profits and build cash. That does not mean selling all your stocks, for heated markets can rise for much longer than you may think. It does, however, mean selling parts of your portfolio related to housing and construction. It also means making sure that if you have a margin trading account, you are using margin sparingly, if at all.

Most importantly, be vigilant -- which includes checking this website from time to time. When the “things have slowed down but are still fine” headlines start making regular appearances on the news, it’s time to start considering making money on the downside.

As manias subside, the result is never pretty.
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"When money is free [interest rates are lower than inflation], the rational lender will keep on lending until there is no one else to lend to." George Soros

America Wasn't Ready

This Sunday, the U.S. health care bill was passed after a furious battle.

The center and left were virtually silent this week, giving the limelight to those who believe that Barack Hussein Obama is not working in their best interests, to say the least. In fact, the opposition united in what both looked and sounded like a religious crusade to save America.

“We have to deny the power of the devil and his disciples in our midst,” wrote one blogger. “Pray to the father God to wake up Congress,” pleaded another. References to “rebuke,” “wickedness,” and “righteousness” were everywhere.

Then there was the coming revolution. There were calls for “bloodshed” if the bill was passed, for “revolution in the streets,” and to “impeach the foreign born dictator.” Conservative talk-show host Rush Limbaugh said that Obama’s secret goal is to divide America before destroying it, while house Minority Leader John Boehner likened the bill to "Armageddon." An ad on the Washington Post's website offered free handguns and knives to those who enrol in a self-defense training course, to prepare you "for what's coming."

The conservative right says that their hatred of Obama is politically – not racially – motivated. Casual observation suggests otherwise. One commenter on a national news website called President Obama a “lying sack of Kenyan dog crap.” Another said that he “lies through purple lips.” Yet another said that the “monkey man will get beaten.”

Of course, the health care bill passed and will now become part of American life. Citizens will have health coverage, whether they like it or not.

For investors, the big question is “what to do now?” When propaganda is rampant & emotions high, what can investors expect? At the opening bell this Monday morning, the 22nd of May 2010, two possible scenarios could occur: A) The right will demonstrate its genuine belief that Obama has destroyed their economic future by selling off U.S. stocks like mad, creating one of the largest stock market crashes in history. Or B) nothing dramatic will happen, showing that it was all just crazy talk.

Personally, I’m hoping for “A.” If so, you will find me at my computer, happily buying underpriced stocks of great American companies, while everyone else loses their minds.
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“Reactance – the urge to do the opposite of what someone wants you to do out of a need to resist a perceived attempt to constrain your freedom of choice.” Wikipedia, “List of Cognitive Biases”

Thomas Malthus couldn't foresee this

In 1798, Thomas Malthus, in an essay on the principle of population, put forth the idea that "the power of population is indefinitely greater than the power of the earth to produce subsistence for man.” Ever since, people have been worried about the capacity of human beings to produce enough food to sustain their growing population. Yet, the data seem to indicate that the inevitable conclusion of Malthus’ theory – food shortages & starvation -- are a long way off.

Malthus could not have foreseen how modern farming methods have transformed the productivity of the farm. Machines have taken the place of farmhands, and computers have revolutionized the business. Farms are getting larger and productivity higher. In the last 30 years, for example, sow productivity (for pork production) has increased by 70%. With high protein diets, it now takes only 6.5 months for a piglet to become a 260-pound hog. Corn yields in the U.S. have increased from about 40 bushels per acre in 1950 to 150 bushels per acre today (U.S. Dept of Agriculture). Other farm industries are experiencing the same level of productivity growth.

Last year I had the opportunity to visit a state-of-the-art dairy farm in Canada. The whole concept of the farm is too maximize milk productivity by keeping the cows fat, happy, and pregnant.

The barn is divided into gated areas: one for milking, one for eating, and one for resting. Each cow has a radio controlled collar that limits the amount of time they spend in each area. When a cow has been in the feeding area, if it wanders near the gate of the rest area, the gate will open and allow the cow to pass. Once in the rest area, the collar will only open the gate to the milking area, and not back into the feeding area. Thus, the cows go from milking to eating to resting on a rotating basis.

The rest area consists mostly of “water beds” (that look like large yoga mats) for the cows to lounge on. If they get bothered by flies, overhead fans whisk them away. If their backs get itchy, the cows stroll over to the automatic back scratcher. Comfortable, low-stress cows produce more milk, so no expense is spared.

Once they become uncomfortably full of milk, the cows walk themselves to the milking area and their radio collars open the gate. In the milking area a laser scans the udder, and a robotic arm attaches the milkers. A computer interface keeps track of each cow’s production, analyzes the milk (and therefore the health of the animal), and sends the information to a central computer. Any minor problems, such as a non-milking teat, also gets relayed to the computer. The milk itself flows into a stainless steel storage tank. Once done milking, the suction cups detach and the cow is free to stroll back to the feeding area.

The farmer pointed out to me that in addition to keeping stats on the cows and opening gates, the radio collars also keep track of the cow’s movements. When cows go into heat, they get frisky and tend to pace. Thus, a spike in activity indicates a cow that can be taken out for artificial insemination. I asked if I could borrow one of these collars for my girlfriend, but the farmer basically ignored me.

All told, the farm is virtually self-sufficient. Once the cows know the process they do most of the work themselves. In general, farms are becoming larger and more businesslike.

In recent years, the trend has been to accept Malthus’ theory, and to believe that with the rise of India and China food shortages will soon become a reality. Long-only commodity index funds, which assume rising food prices, are popular. Yet, while theorists talk about shortages, the reality is that every year foodstuffs such as apples, peaches, hogs etc. are left to rot or culled to reduce gluts caused by overproduction and/or lack of demand. Other industries, such as sugar, milk, and Japanese rice production are heavily subsidized.

Thomas Malthus’ theory of population growth may become true some day, but not for a long, long time. Investments that assume a steady rise in food-related commodity prices are not, in my opinion, a good way to make money.
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“…cattle are ruminants, a term that refers not to their capacity for deep thought but rather to their distinctive ability to digest plant fibers.” Dunsby, Eckstein, Gaspar and Mulholland: Commodity Investing