Recently I have indicated I see a lot of problems in asset markets despite the economic acceleration in Europe, Japan, and the US. Commercial real estate is a problem that I want to highlight briefly since I believe it will be a locus of distress in the next global downturn.
This is going to be a quick hit post to get some thoughts down on paper because a few threads are coalescing for me that I want to give some coherence to. The essence of the threads revolves around the tension at the Fed between normalizing policy and the ability of the economy to withstand it. My view has been upbeat about the US economy – and that’s been without a trace of recession worry for the last several months. But there are some negative factors coming together that give me pause. And it begins with housing.
Between the first quarter of 2013 and the end of 2015, London property prices rose rapidly, the exchange rate appreciated, and the current account deficit widened. This column argues that the rise of the pound was in fact a financial bubble, riding on a property price-exchange rate carry trade.This unsustainable bubble was deflated by Brexit.
So where did they get the money?
It’s an all too familiar story. Inflows of foreign capital, mainly from Scandinavian banks, attracted by low interest rates and a population hungry for credit – credit advanced, of course, against property. Latvian house prices soared and there was a construction boom. Easy credit, wealth effects and incomes from construction and real estate activities also fuelled a consumption boom: suddenly Latvia, one of the poorest countries in Europe, was flooded with Porsches and Bentleys.
The US economy’s upswing over the last six years has been predicated on credit like the cycle before it because wage growth has been lacklustre. I want to describe where credit activity has created a lift in consumer spending and in capital investment that would otherwise have been absent. Afterwards, I want to describe where I think the weaknesses in this economic model lie and why I am inclined to believe we are closer to the end of cycle than near a mid-cycle slowdown a la 1994.
No one story sticks out for me today. So I thought I would make a few comments on the stories making the rounds today in the Internet. Let’s start in the U.S.
A couple of weeks ago I told you about two properties in London that I was familiar with as background for my post on house price inflation in the UK. What was clear from those two examples and dozens of others I found is that rental yields are extremely low […]
House price fluctuations take centre stage in recent macroeconomic debates, but little is known about their long-run evolution. This column presents new house price indices for 14 advanced economies since 1870. Real house prices display a pronounced hockey-stick pattern over the past 140 years. They stayed constant from the 19th to the mid-20th century, but rose strongly in the second half of the 20th century. Sharply increasing land prices, not construction costs, were the key driver of this trend.
I have a lot of threads to cover today. So let’s get right into it. New home sales. I want to start in the US first because the macro data backdrop is good. The first piece of data here is actually a bit soft and says that residential investment will […]
Economic and market themes: 2014-10-24 Technology earnings, Chinese housing and European hopelessness
I have three areas I want to explore today: earnings reports, China and Europe. The earnings reports are mixed but generally good enough to support continued job growth and economic momentum through this fourth quarter. I also want to deep dive on tech companies. On China, the slowdown is all about housing. And in Europe, there is zero sign that political differences can be smoothed over without crisis.
Yesterday, I saw a couple of stories about a sell off in luxury flats in London. The gist was that luxury homes in central London had corrected as much as 20% in the last year. The decline is severe and Foxtons, the estate agent, has been hurt by this according […]
There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.