Posts Tagged ‘real estate’
“Seek truth from facts”*…
China’s property sector is enormous, under tremendous financial strain– and, as Jeremy Wallace explains, a very big contributor to climate issues (e.g., construction on China accounts for 5% of global energy consumption)…
China has ended zero-Covid. The resultant viral tsunami is crashing through China’s cities and countryside, causing hundreds of millions of infections and untold numbers of deaths. The reversal followed widespread protests against lockdown measures. But the protests were not the only cause—the country’s sagging economy also required attention. Outside of a few strong sectors, including EVs and renewable energy technologies, China’s economic dynamo was beginning to stutter in ways it had not in decades.
Whenever global demand or internal growth faltered in the recent past, China’s government would unleash pro-investment stimulus with impressive results. Vast expanses of highways, shiny airports, an enviable high-speed rail network, and especially apartments. In 2016, one estimate of planned new construction in Chinese cities could have housed 3.4 billion people. Those plans have been reined in, but what has been completed is still prodigious. Hundreds of millions of urbanizing Chinese have found shelter, and old buildings have been replaced with upgrades.
The scale of construction has been so prodigious, in fact, that it has far exceeded demand for housing. Tens of millions of apartments sit empty—almost as many homes as the US has constructed this century. Whole complexes of unfinished concrete shells sixteen stories tall surround most cities. Real estate, which constitutes a quarter of China’s GDP, has become a $52 trillion bubble that fundamentally rests on the foundational belief that it is too big to fail. The reality is that it has become too big to sustain, either economically or environmentally….
The “Chinese real estate bubble” is the world’s problem: “The Carbon Triangle,” from @jerometenk in @phenomenalworld. Eminently worth reading in full.
Analogically related (and at the risk of piling on): “China must stop its coal industry“
* Chinese maxim, popularized by Mao, then Deng Xiaoping
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As we get real about real estate, we might spare a thought for Deng Xiaoping; he died on this date in 1997. A Chinese revolutionary leader, military commander, and statesman, he served as the paramount leader of the People’s Republic of China from December, 1978 to November, 1989. Deng led China through a series of far-reaching market-economy reforms, earning him the reputation as the “Architect of Modern China”.
The reforms carried out by Deng and his allies gradually led China away from a planned economy and Maoist ideologies, opened it up to foreign investments and technology, and introduced its vast labor force to the global market, thus turning China into one of the world’s fastest-growing economies.
But China’s real estate bubble is a reminder that every solution can all-too-easily turn into the next problem.
“Location, location, location”*…
Adam Tooze on the biggest vulnerability in the global economy…
In this precarious moment – in the fourth quarter of 2022, two years into the recovery from COVID – of all the forces driving towards an abrupt and disruptive global slowdown, by far the largest is the threat of a global housing shock…
In the global economy there are three really large asset classes: the equities issued by corporations ($109 trillion); the debt securities issued by corporations and governments ($123 trillion); and real estate, which is dominated by residential real estate, valued worldwide at $258 trillion. Commercial real estate ($32.6 trillion) and agricultural land add another $68 trillion. If economic news were reported more sensibly, indices of global real estate would figure every day alongside the S&P500 and the Nasdaq. The surge in global house prices in 2019-2021 added tens of trillions to measured global wealth. If that unwinds it will deliver a huge recessionary shock.
In regional terms, as a first approximation, think of global real estate assets as split four ways, with the US, China and the EU each accounting for c. 20-22 percent and 35 percent or so belonging to the rest of the world.
The housing complex is at the heart of the capitalist economy. Construction is a major industry worldwide. It is one of the classic drivers of the business-cycle. But beyond the constructive industry itself, the influence of housing as an asset class is pervasive. Compared to equities or debt securities, residential real estate is owned in a relatively decentralized way. Homeownership defines the middle class. And for the majority of households in that class, those with any measurable net worth, the home is the main marketable asset.
Middle-class households are for the most part undiversified and unhedged speculators in one asset, their home. Furthermore, since homes are the only asset that most households can use as collateral, they pile on leverage. For households, as for firms, leverage promises outsized gains, but also brings with it serious risks in the event of a downturn. Mortgage and rental payments are generally the largest single item in household budgets. And household spending, which accounts for 60 percent of GDP in a typical OECD member, is also responsive to perceived household wealth and thus to home equity – the balance between home prices and the mortgages secured on it. For all of these reasons, a surge in mortgage rates and/or a slump in house prices is a very big deal for the world economy and for society more generally…
More background and an assessment of the outlook: “The global housing downturn,” from @adam_tooze.
For Tooze’s follow-up piece on the risk inherent in the $23 trillion US Treasury market, see here.
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As we mortgage our futures, we might recall that it was on this date in 1914 that the Federal Reserve Bank of the U.S. was opened. In actuality a network of 12 regional banks, joined in the Federal Reserve System, they oversee federally-chartered banks in their regions and are jointly responsible for implementing the monetary policy set forth by the Federal Open Market Committee.
In that latter role, they are central to the housing market in that they set interest rates and purchase mortgage securities from Fannie Mae and Freddie Mac (Government-Sponsored Enterprises in the mortgage market). At this point the Fed owns about a quarter of the mortgage-backed securities issued by Fannie Mae and Freddie Mac.
The Federal Reserve Banks in 1936 (source)
“The whole of the global economy is based on supplying the cravings of two percent of the world’s population”*…
Perhaps that’s an oversimplification; but as a new McKinsey Global Institute study suggests, perhaps not by much…
We have borrowed a page from the corporate world—namely, the balance sheet—to take stock of the underlying health and resilience of the global economy as it begins to rebound from the COVID-19 pandemic. This view from the balance sheet complements more typical approaches based on GDP, capital investment levels, and other measures of economic flows that reflect changes in economic value… [and] provides an in-depth look at the global economy after two decades of financial turbulence and more than ten years of heavy central bank intervention, punctuated by the pandemic.
Across ten countries that account for about 60 percent of global GDP—Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States—the historic link between the growth of net worth and the growth of GDP no longer holds. While economic growth has been tepid over the past two decades in advanced economies, balance sheets and net worth that have long tracked it have tripled in size. This divergence emerged as asset prices rose—but not as a result of 21st-century trends like the growing digitization of the economy.
Rather, in an economy increasingly propelled by intangible assets like software and other intellectual property, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These savings have found their way instead into real estate, which in 2020 accounted for two-thirds of net worth. Other fixed assets that can drive economic growth made up only about 20 percent the total. Moreover, asset values are now nearly 50 percent higher than the long-run average relative to income. And for every $1 in net new investment over the past 20 years, overall liabilities have grown by almost $4, of which about $2 is debt…
“The rise and rise of the global balance sheet: How productively are we using our wealth?,” from @McKinsey_MGI
(Image above: source)
* Bill Bryson
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As we recalculate: we might spare a thought for composer, musician, director, and producer Frank “anything played wrong twice in a row is the beginning of an arrangement” Zappa; he died (of pancreatic cancer) on this date in 1993 at age 52.
“Politics is the entertainment branch of industry”
“The bottom line is always money”
“Home is the nicest word there is”*…
Suburban housing developments, simultaneously loathed and loved, began in the mid-20th century. Two of the major figures who built these developments were William Levitt (1907-1994) and Joseph Eichler (1900-1974), both sons of New York Jewish immigrant families. Yet the communities they created differed in one very important respect—one whose legacy endures to this day: While Levitt & Sons built “whites only” communities and refused to integrate their developments, Eichler and his son Ned fought just as hard to oppose discrimination in housing, even helping to write California’s fair-housing law…
William Levitt and Joseph Eichler both pioneered suburban development. But one fought for fair housing, while the other refused to integrate his communities: “The Kings of Suburbia.”
* Laura Ingalls Wilder
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As we focus on fairness, we might send stark birthday greetings to Denys Louis Lasdun; he was born in this date in 1914. An eminent British architect, he is probably that countries leading practitioner of the Brutalist style. He is probably best known for his designs of The Royal National Theatre on South Bank in London, and for his work at the University of East Anglia (where, as it happens, your correspondent did time during his juior year abroad).
“Oh housebuilder! Now you are seen”*…
Movie star Leonardo DiCaprio’s Malibu dream house hit the market on Friday, listing for $10.95 million. Leo purchased the midcentury California bungalow (can you still call something a bungalow when it costs more than $10 mil? The jury is out!) back in 1998, and the three bed, two bath home is a beaut. It’s on star-studded Carbon Beach, the views are killer, and the interiors are gorgeous.
But the truth is, life is probably meaningless and there is a strong chance that we all die alone. Could buying this house change any of that? Is it possible that life at 21844 Pacific Coast Highway, with your own private hot tub and large ocean front deck, could actually offer a reprieve from the agony of being a human in the world? Or, is it certain that “we cannot escape anguish, for we are anguish,” as John-Paul Sartre once put it? Great question!…
An existentialist interview with Leonardo DiCaprio’s real estate agent: “Leo DiCaprio’s $11 Million Malibu Beach House And The Soul-Crushing Agony Of Being Human.” [via the always-illuminating Pop Loser]
* Gautama Buddha
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As we sigh, we might send nihilist birthday greetings to Friedrich Wilhelm Nietzsche; he was born on this date in 1844. A philosopher, poet, composer, cultural critic, and classical philologist, Nietzsche is probably best remembered for his concepts of the “death of God”, the Übermensch, the eternal recurrence, the Apollonian and Dionysian dichotomy, and the will to power… which, among them, have had an extraordinary impact on thinkers as diverse as Martin Heidegger and Ayn Rand on the one hand, and Michel Foucault (whose birthday this also is) and Jacques Derrida on the other.
When someone hides something behind a bush and looks for it again in the same place and finds it there as well, there is not much to praise in such seeking and finding. Yet this is how matters stand regarding seeking and finding “truth” within the realm of reason. If I make up the definition of a mammal, and then, after inspecting a camel, declare “look, a mammal’ I have indeed brought a truth to light in this way, but it is a truth of limited value.
– Über Wahrheit und Lüge im außermoralischen Sinn (On Truth and Lie in an Extra-Moral Sense), 1873
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