Tuesday, October 13, 2015

GLOBAL REAL ESTATE JUST WAITING FOR CRISIS


The global real estate market is going to slow down in the coming 2016 as prices are just 7% away from the historic highs of 2008 pre Lehman Brother’s collapse. I have highlighted the story f this slowdown in my previous article on December 2014 http://www.ianalysis.co.in/2014/12/real-estate-bubbleburst-to-be.html. Commercial property prices in major U.S. markets, as measured by Moody’s and Real Capital Analytics, have exceeded their previous peak by more than 30%.China has already set the tone for its slowdown as it has already exhausted its over capacity of production and now its dwelling with Ghost City. Prices in US are just 7% away and UK homes are only able to sell somehow. The biggest factor to be watched out is that slowdown in new construction has already began hence demand of steel, cement and other ancillary industries are getting cooled off. This is a big threat for the global economy. Luxury real estate segment is also cooling off which means buyers are thinking that a collapse will begin soon. At the same time stamp duty hike in London has created a negative effect on the real estate market.

Now the biggest question is that how long freebies can fetch bread and butter for an industry like real estate. How and where the government will hike the taxes to fill up its pocket. Being an economist I find that we are trying to run the economy at the cost of freebies. Unless there is any sop provided by the Government or by the Central Banks industries don’t run. Well this is going to be the key factor behind the global economic slowdown when the central government across the globe will not be able to bear the cost of freebies. Further we are creating more income and wealth inequalities through freebies. Yes  the more freebies are given the more the taxes going to increase disproportionately and create a economic problem for the society. This is one of the key areas which is being ignored. Now just calculate that China’s local governments have financed a vast array of extravagant construction projects via a $1.7 trillion “subprime” credit bubble, of which $540 billion is likely to be from bad debt, according to Moody’s. This bad debt will hit the society and further more freebies will be added to grow the industry and again creating more income and wealth inequalities among the society through taxes.  Times come when freebies don’t work and again the central banks inject liquidity. Real estate prices in many Chinese cities have been falling continuously for at least seven months, despite several rounds of quantitative easing and various policy measures designed to boost the market. According to the National Bureau of Statistics, total property sales in China fell by 7.6 per cent in 2014. New land purchases by developers fell by 31.7 per cent year-on-year.


We need economic policies which will push up growth but not at the cost of the society or through creating income and wealth inequalities created through taxation levels. When ground policies don’t work we create freebies. Just like RBI was asked to do by the government but will that bring growth when Indian corporate are export dependent. They are yet to recognize that domestic market is an opportunity rather than a ground of exploitation. Now apart form construction slowdown job market which is highly linked with global real estate market is also set for a slowdown. Foreign buyers who were seeking diversification have stopped as global economic slowdown has struck and we are very much skeptical about what is going to happen in the near future. Remember that last time I depicted that foreign buyers are more compared to domestic buyers of the industry. According to a National Realtors Association survey, the Chinese spent $22 billion on U.S. housing in 12 months through March 2014 — 72% more than they spent the year before. The problem is not with FDI investments coming into US economy but the change of strategies adopted by business where constructions were desgined to meet the Chinese culture rather than looking forward for the affordable house for the US citizens. Hence the slowdown is bound to happen and we will witness a global crisis of the industry borne by the society and economies across the globe. We Are just heading for an massive global crisis in the real estate market which will trigger surprisingly one fine morning.

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