Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

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