Friday, April 08, 2005

Andy Xie gives us the straight dope: "The Party Doesn�t End Until Property Prices Fall".
A global property bubble is at the heart of demand creation in this cycle. Real interest rates will have to rise much farther for property prices to turn down. It is too early to expect this growth cycle to end, in my view. . . .

The Party Doesn�t End 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. The Bank of Japan began to tighten in May 1989. The stock market peaked five months later. The land price peaked in the third quarter of 1991 -- one year after the BoJ ended its rate-hiking campaign. Japan�s economy weakened seriously in 1992 after the land price rolled over. Japan is a good example to show that the lag between demand response and monetary tightening can be quite long in a property-driven boom. . . .

It is difficult to see real interest rates surging quickly in either China or the US. The Fed is unlikely to follow such a course voluntarily. 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.
Indeed, central banks seem to be extremely wary of bringing a pin anywhere near the property bubbles raging in all four corners of the global economy these days. Say globalization keeps consumer inflation well in check, and waning growth in Japan and Europe eventually brings global oil prices back to earth. Why does the Fed raise interest rates any longer? Why not stop around 3.5% and keep pumping fuel into the housing market ad infinitum? Hell, you could even start bringing rates down again in 2006 . . . until the US current account blows the world economy wide open.

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