GLOBAL REAL ESTATE BUBBLE...BURST TO BE CATASTROPHIC

In continuation to my articles on Asset Bubbles today I will present you all one of the asset class which has a global bubble and is just on the sidelines of getting burst. It might take 1 year or may be next 3 years from now to burst, depending upon the size and the level to which the asset class can be carried on till the last minute of the great show.

The global real estate market is on the verge of the biggest collapse which will be prolonged slow growth trigger for the global economy. Under the tag line of Infrastructure the every country has developed and invested heavily on the sector. Even after the collapse of the US big giants like Lehman Brothers and many companies who were involved in the mortgage business. But the lessons learnt from the same seem to be of no effect as after the crisis of 2008 many countries invested their stimulus back into the real estate market.

The current slowdown of the various economies in terms of significant drop of manufacturing and consumption demand has lead to plummeting investment climate for these countries. Now unemployment is also high for example in Euro-zone countries we find unemployment’s:

Now the youth unemployment who are the buyers of the real estate are very much shocking than the common unemployment rate. Strong number of unemployment leaves option of not getting married and not having children’s . This leads to no demand of houses for the new young generations. We all know that young fellows within the age of 22-25 prefer to leave their parents and develop their own families etc.

Now tell me form where will you get growth in real estate and how the ancillary industries like steel, cement,  employment, taxes revenues will remain unaffected from the slow down and bubble burst. Further, significant drop of new investments in real estate cuts down the demand for the ancillary industries which leads to a significant drop the demand and consumption leading finally to slow growth.

Further the weak wage market in US and in many other economies leave negligible scope for investments in real estate either in the form of Hedge funds products, ETF,FOF or direct real estate. Weak faith on government economic revival policies followed with skeptical and conservative approach of consumption and more prune towards savings leads negligible investments in real estate.

But this high unemployment forces them to stay with their parents and hence no demand for homes. We must understand that there is a physiological change among the culture and life style due to the recession which began in 2008. 

Currently over the past 5 years we have kept the legacy of high burden of debt followed with mortgaged assets and less owned assets for the next generation. Dowjones made new historic highs but with a legacy of debt. The same things applies for all the developed economies where rising debt burdens are more compared to the scope of owing a new asset.

Now come to story of Asia where China has created one of the historic bubbles of unsold inventory of real estate with a long term vision that these inventories will be absorbed over the long term. Now if china dreams that whole of the world will open their shops and offices only in china then that’s a big flaw.

Growth, business expansion and research analysts predication of numbers followed with manipulation of numbers are the reason behind the huge surge of inventories build on the gossip of economic growth and expansion. The capitalist minds have created bubble of slow growth for the world economy in the long term. Developers are currently sitting on 5.6m units of unsold property, according to official statistics, a figure that has almost doubled in the space of two years. Working age decline is also going to add fuel to the decline of real estate market as less buyers would be there to buy.

Now real estate along with not bring slow down for the world economy but the ancillary industries like steel, cement, employment and etc would find significant slowdown. Putting all these together where the growth will come when manufacturing itself is collapsed.

Lest measure the depth of bubble of China’s real estate:

• Revenue dropped a shocking 75 per cent, with prices down 52 per cent.
• For the first time in years, when they put up land for auction, local governments suddenly found themselves with unsold parcels.
• In the past six months, almost 20 per cent of land for sale failed to find a buyer.

Now come to the biggest part of the bubble burst where common men who are outside the real estate game of capitalist will suffer, is through the banking channels. Just imagine when Zero interest rates have failed to bring buyers then just imagine when the cash flow of these real estate developers have dried up then what type of debts these developers are  having on the books and the banking exposure to them. Further through Real Estate Investments trust investors risk and its liquidity aspects are on the highest point which is hard to be measured.

• REIT IPOs globally exceeded US$20b in 2013, 55% higher than the pre-financial crisis peak in 2005 and more than double the total seen in 2012.1
• The first half of 2014 saw a further US$6.8b raised globally, primarily due to the high level of activity in Spain
• The size of REIT IPOs has been remarkably consistent every year since 2009, with transactions averaging approximately US$300m.

The size and the investors are too big and global liquidity have been entangled in such way that it will take decade to wash out the stains of the collapses. These REITs might have been able to provide short term returns but in the long term when the bubbles are going to go for a wild toss then the world crisis will be a prolonged one.

Further the gate of globalization has opened up the competitiveness of real estate market across the globe. Chinese buyers might find China to be old and their real estate market to be priced too high. They plunge into European real estate market or US real estate markets as prices are too attractive over there. In the same way Indian real estate market might look to be cheap compared to the developed economies across the globe. In key Asian cities such as Singapore, Hong Kong, Beijing and Taipei, real-estate prices are extremely high by comparison to some of the U.S.'s best markets, including New York and San Francisco. Today’s buyers have wide option but that leads to a significant bubble creation as one cheap price might lead to exploitation for the economy or market. Well the history and the present history as plethora of examples where the same is being exploited.  

A list of convoluted Real Estate crosses border deals followed with foreign appetite for investments in cross border deals:

• U.S. real estate is attracting massive foreign investment.
• In October, Kensington Realty Advisors Inc. and SEDCO Capital, a Jiddah, Saudi Arabia-based firm, purchased a 97-unit assisted-living and memory-care facility in McKinney, Texas.
• In August, the Canada Pension Plan Investment Board committed US$500 million to a joint venture with real estate investment manager Goodman Group that invests in U.S. warehouses. That commitment brought the fund's total allocation to the Goodman North American Partnership joint venture, launched in 2012, to US$900 million.

If residential segment finds stagnant growth then the commercial segment is betted highly.  But now it seems that both the bets are going wild and any one bubble burst at any part of the world would create catastrophic collapses as all deals are entangled with one another’s economies.  One example of exploitation and how investors across the globe are fooled is that foreign capital has been boosting prices in the 25 biggest U.S. office markets since the fourth quarter of 2012 — a low point in the cycle — with prices growing 8.8% in the second quarter of 2014 up from 3.2% growth in the fourth quarter of 2012, according to data from Jones Lang LaSalle.

Well the conclusion which can be drawn is that bursting of these bubbles would create wave of Tsunami across the global liquidity and will bring forth one of the strongest decline for the global economy in the long term. Keeping the current scenario is mind all it can be said that 2008 was a trailer and the picture is yet to be released.