Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
TrueShopping.co.uk Real Customer Experience Review - Online Shopping Lessons - 26th Nov 14
Is There A New Global Consensus About Cheating Investors To Reboot Employment? - 26th Nov 14
EUR/USD – Currency Bulls Don’t Give Up - 26th Nov 14
Swiss Gold Referendum A Golden Opportunity for Switzerland - 25th Nov 14
Silver: What COT Analysis Tells Us - 25th Nov 14
Stock Market Big, Bold and Ugly - 25th Nov 14
U.S. Dollar Near Top? Gold and Silver Trading, Platinum Breakout Invalidation - 25th Nov 14
Buy Fear - Easily Pick Up Profits on Stock Market Dips - 25th Nov 14
The Islamic State Reshapes the Middle East - 25th Nov 14
Gold Price Forecast 2015 - 25th Nov 14
The Swiss Referendum On Gold: What’s Missing From The Debate - 25th Nov 14
Clash of Generations - Why Millennials Still Live at Home; Not Jobs, Student Debt, or Housing - 25th Nov 14
Stock Market Reminiscent of Pompeii - 25th Nov 14
Once Upon A Time There Were Philosopher Kings - 24th Nov 14
The 2014 Crude Oil Price Crash Explained - 24th Nov 14
China Stock Investing - Follow the Money! - 24th Nov 14
122 Tonnes of Gold Secretly Repatriated to Netherlands - 24th Nov 14
What Causes the U.S. Dollar to Move? - 24th Nov 14
Stock Market Indexes New Highs - Will Uptrend Extend Even Further? - 24th Nov 14
All Hail the King U.S. Dollar - Trend Forecast - 24th Nov 14
Where Is China Economy On The Map Exactly? - 24th Nov 14
Most of The World Economies Panic - Is The US Next? - 24th Nov 14
Stock Market Exhaustion Gap? - 24th Nov 14
Gold Golden Gains Come After The Pain - 24th Nov 14
Crude Oil and Stock Market Setting The Stage For The Next Recession - 23rd Nov 14
This Publicly-Owned Bank Is Outperforming Wall Street - 23rd Nov 14
Who’s Ready For $30 Crude Oil Price? - 23rd Nov 14
Strategic, Methodological and Developmental Importance of Knowledge Consumption - 23rd Nov 14
Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - 23rd Nov 14
Gold Price 2015 - 22nd Nov 14
Stock Market Medium Term Top? - 22nd Nov 14
Is the Gold And Silver Golden Rule Broken? - 22nd Nov 14
Malaysia's Subsidy and Budget Deficit Conundrum - 22nd Nov 14
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14
Currency Wars, the Ruble and Keynes - 21st Nov 14
Stock Market Investor Sentiment in The Balance - 21st Nov 14
Two Biotech Stocks Set to Double on One Powerful Catalyst - 21st Nov 14
Swiss Gold Poll Likely Tighter Than Polls Suggest - 21st Nov 14
Gold's Volatility and Other Things to Watch - 21st Nov 14
Australia Stock Market and AUD Dollar Analysis (ASX200 and AUDUSD) - 21st Nov 14
New Algae Research May Have Uncovered an “Energy Forest” Under the Sea - 21st Nov 14
The Cultural and Political Consequences of Fiat Money - 20th Nov 14
United States Social Crisis - No One Told You When to Run, You Missed the Starting Gun! - 20th Nov 14
Euro-Zone Tooth Fairy Economics, Spain Needs to leave the Euro - 20th Nov 14
Ebola Threat Remains a Risk - New Deaths in Nebraska and New York - 20th Nov 14
Stock Market and the Jaws of Life or Death? - 20th Nov 14
Putin’s World: Why Russia’s Showdown with the West Will Worsen - 20th Nov 14
Making Money While The World Burns - 20th Nov 14
Why This "Quiet Zone" Is Now Tech Stocks Biggest Profit Sector - 20th Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Gold Report 2015

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

© 2005-2014 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

Free Report - Financial Markets 2014