Sunday, Aug 20, 2006

Final warning given...........

SCMP: Why the housing boom is coming to an end

The Souch China Post gwarns wealthy expats that this may be their last chance to off-load their investments in the west with a sound summary of why we are in this mess..............

Posted by desertorchid @ 01:54 AM (540 views)
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1. indiablue19 said...

Would like to read the point of view from the East, but, no offense, not interested in a paid subscription to the South China Morning Post.

Sunday, August 20, 2006 05:52PM Report Comment

2. Desertorchid said...


Why the housing boom is coming to an end

"The eternal truth in the investment world is that every asset-class (whether stocks, bonds, commodities or real estate) goes through boom and bust cycles, which typically last for several years. However, it is ironic that towards the end of any bull market, when the risk is extreme, optimism towards the booming asset-class is usually at a record high.
On the other hand, during the final phase of a bear-market, when the downside risk is limited, the asset which is selling at a huge discount is always neglected and hated by the public. The reason for this irrational behaviour is that most people find it hard to foresee and accept change. The conditions which have been prevalent for a long time are considered to be permanent and investment decisions are made accordingly.

Once the technology bubble burst at the turn of the millennium and the US slipped into a recession, the central bankers decided to fight the slump by lowering interest rates to a multi-decade low. In the US, interest rates were pulled down to 1 per cent. As the cost of borrowing came down, Americans turned to real estate as the next sure thing. Real-estate prices surged as demand rose due to cheap and abundant credit. As home prices continued to rise, Americans started using their real estate as bank ATMs to borrow money. Falling interest rates and appreciating home values also created an explosion in re-financing and the US embarked on a spending spree.

Americans have extracted a ridiculous amount of equity from their homes - since the beginning of this decade, US$4.6 trillion. The chart shows the negative savings rate in the US, which confirms my view that the loans taken out against homes were not invested or saved for a rainy day. Instead the money was spent on consumption.

This recklessness has put the US economy in a precarious situation. Interest rates are now rising all over the world. After a pause over the coming months, I expect rates to continue their upward trend. The Federal Reserve has raised rates 17 times to 5.25 per cent and the impact is already being felt on American real estate.

The property industry in the US is falling into a serious recession. In June, new home sales fell to 1.49 million units, the lowest since November 2004 and down 18.1 per cent from the record high of 1.81 million units in January 2006. The supply of US homes for sale has recently jumped to a multi-decade high. Rising interest rates are starting to bite into the real-estate boom and trouble may be on the horizon.

I have been warning about housing for several months now and still urge you to get rid of your investment properties. In my opinion, we are in the final stages of the housing boom. Recently, the stocks of major US home-building companies declined sharply and I consider this an ominous development. The S&P 500 Homebuilding Index is down 46.2 per cent from its July 2005 record-high. Such a major sell-off is the market's way of forecasting deteriorating business conditions.

If US housing slips into a recession and prices decline, consumption will also be badly hurt due to an abrupt ending of the re-financing boom. Consumption accounts for roughly 70 per cent of GDP growth in the US and any slowdown may send its economy into a recession.

Real estate is generally overvalued in most nations. Due to poor wage growth and rising interest-rates, housing simply is not affordable any more and may deflate over the coming months as demand continues to evaporate.

Property is a scarce commodity due to rapid population growth, yet history has shown that this sector can also have wild swings from under-valuation to over-valuation. Anybody who bought real estate in Japan in the late 1980s or in Hong Kong in the mid-1990s can relate to this.

Now is the time to liquidate your leveraged properties and look elsewhere for investment opportunities. The prices of raw materials are in a long-term uptrend and better risk-adjusted growth can be achieved by participating in the commodities boom. "

Puru Saxena is chief executive of Puru Saxena Wealth Management

Monday, August 21, 2006 01:14AM Report Comment

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