Thursday, July 13, 2006
Is there a real estate bubble or not?
The survey feels that there is no real estate bubble yet. One reason for such a benevolent outlook is that house prices are on the whole lower than they were in the mid-1990s. There can be a few giveaway clues that a bubble is forming. One such is `evidence of buying and selling to take advantage of the capital gains available in the market rather than for owner occupation.' India shares the top spot in real estate front with a 20 per cent hike in the last quarter of 2005.
Global economy was buoyant last year. The Asia and Pacific region, in which India is located, also experienced strong growth. "Despite high energy prices globally, price pressures rose only moderately in 2005 and are expected to remain muted, or even ease slightly, in 2006," notes `Economic and Social Survey of Asia and the Pacific 2006' from the UN's ESCAP, published by Academic Foundation (www.academicfoundation.com).
While on prices there can be varied views, especially after the recent round of fuel price hikes, the survey has a discussion of importance to real-estate trackers. It comes in the form of a question: "Is there a property bubble in the region?" For starters, the phrase `property bubble' or `real estate bubble' is marked by `rapid speculative increases in the valuations of real property,' as Wikipedia explains.
Misallocation
According to OECD (the Organisation for Economic Cooperation and Development), asset or housing bubble occurs "when the ratio of house prices to house rents exceeds a `fundamental ratio'." Another explanation cited in the survey is that bubble occurs "when average house prices are significantly higher than historical multiples of average annual earnings."
Like other economic bubbles, property bubble too leaves in its wake `misallocation of resources into non-optimal uses' and a crash that destroys much wealth. "In the Republic of Korea, for instance, house prices slumped by 45 per cent in the immediate aftermath of the Asian financial crises. Similarly, in Hong Kong, China, the average price of luxury homes tumbled 58 per cent in 1998 from their peak in mid-1997." How frightening!
Not empty babble
If you wonder whether talking about property bubble is only empty babble, you may be wrong. The topic is very much news. "China has ordered banks to restrict lending for real estate amid fears of a property bubble, prompting developers to raise funds by selling equity," informs www.thestandard.com.hk in a news report dated July 6. "Amid continued disputes over a possible property bubble burst, commercial lenders expect the credit risk for Korean households to be higher in the coming months," alerts www.koreaherald.co.kr citing Bank of Korea's numbers. And www.property-report.com has a story titled `Real estate: How much is enough?' which notes that with house price appreciation continuing in some countries such as the U.K., the property bubble is now looking `very stretched'. "Prices seem to have already peaked in the U.S. and Australia."
The book on hand presents the changes in real estate prices from 2004 to 2005. In this, India shares the top spot, along with Korea, with a 20 per cent hike in the last quarter of 2005, overwhelming the inflation rate many times over. In China the change is 6.6, and Singapore recorded half that. It is 1 per cent in Australia, and minus 4.7 per cent in Japan.
"The Asia and Pacific region has witnessed a sharp increase in property prices over the last few years, with this trend continuing in 2005," notes the book. "In certain parts of the region, the increase has been extraordinary in real terms given the relatively low rates of inflation currently prevailing." At 4.5 per cent, India's inflation is the highest, in comparison to the rates of Korea (2.9), Hong Kong (1.1), New Zealand (2.8), China (2.4), Singapore (0.5), Australia (2.4) and Japan (-0.1).
Widening gap
Disturbingly, the survey speaks of "a widening gap between the ratio of house prices and house rents". Thankfully, however, "evidence of a property bubble in the region in the strict sense of the word has not been found except in particular locations."
There are no signs yet that property prices in the Asian and Pacific region are likely to fall dramatically in the near future, predicts the publication.
There can be a few giveaway clues that a bubble is forming. One such is `evidence of buying and selling to take advantage of the capital gains available in the market rather than for owner occupation.'
Rest assured, though, that it is not wrong to borrow for buying real estate as investment rather than own occupation. "The action can be regarded as rational profit-seeking behaviour so long as borrowers are able to sell at a profit," explains the book.
"The buying becomes speculative when people begin to borrow to buy, regardless of price or of their ability to service the debt, in the expectation of selling at an even higher price." One obvious example of speculation is "people buying property with a loan and selling it before their first mortgage payment becomes due."
"The survey feels that there is no real estate bubble yet. One reason for such a benevolent outlook is that house prices are "on the whole lower than they were in the mid-1990s."
Global economy was buoyant last year. The Asia and Pacific region, in which India is located, also experienced strong growth. "Despite high energy prices globally, price pressures rose only moderately in 2005 and are expected to remain muted, or even ease slightly, in 2006," notes `Economic and Social Survey of Asia and the Pacific 2006' from the UN's ESCAP, published by Academic Foundation (www.academicfoundation.com).
While on prices there can be varied views, especially after the recent round of fuel price hikes, the survey has a discussion of importance to real-estate trackers. It comes in the form of a question: "Is there a property bubble in the region?" For starters, the phrase `property bubble' or `real estate bubble' is marked by `rapid speculative increases in the valuations of real property,' as Wikipedia explains.
Misallocation
According to OECD (the Organisation for Economic Cooperation and Development), asset or housing bubble occurs "when the ratio of house prices to house rents exceeds a `fundamental ratio'." Another explanation cited in the survey is that bubble occurs "when average house prices are significantly higher than historical multiples of average annual earnings."
Like other economic bubbles, property bubble too leaves in its wake `misallocation of resources into non-optimal uses' and a crash that destroys much wealth. "In the Republic of Korea, for instance, house prices slumped by 45 per cent in the immediate aftermath of the Asian financial crises. Similarly, in Hong Kong, China, the average price of luxury homes tumbled 58 per cent in 1998 from their peak in mid-1997." How frightening!
Not empty babble
If you wonder whether talking about property bubble is only empty babble, you may be wrong. The topic is very much news. "China has ordered banks to restrict lending for real estate amid fears of a property bubble, prompting developers to raise funds by selling equity," informs www.thestandard.com.hk in a news report dated July 6. "Amid continued disputes over a possible property bubble burst, commercial lenders expect the credit risk for Korean households to be higher in the coming months," alerts www.koreaherald.co.kr citing Bank of Korea's numbers. And www.property-report.com has a story titled `Real estate: How much is enough?' which notes that with house price appreciation continuing in some countries such as the U.K., the property bubble is now looking `very stretched'. "Prices seem to have already peaked in the U.S. and Australia."
The book on hand presents the changes in real estate prices from 2004 to 2005. In this, India shares the top spot, along with Korea, with a 20 per cent hike in the last quarter of 2005, overwhelming the inflation rate many times over. In China the change is 6.6, and Singapore recorded half that. It is 1 per cent in Australia, and minus 4.7 per cent in Japan.
"The Asia and Pacific region has witnessed a sharp increase in property prices over the last few years, with this trend continuing in 2005," notes the book. "In certain parts of the region, the increase has been extraordinary in real terms given the relatively low rates of inflation currently prevailing." At 4.5 per cent, India's inflation is the highest, in comparison to the rates of Korea (2.9), Hong Kong (1.1), New Zealand (2.8), China (2.4), Singapore (0.5), Australia (2.4) and Japan (-0.1).
Widening gap
Disturbingly, the survey speaks of "a widening gap between the ratio of house prices and house rents". Thankfully, however, "evidence of a property bubble in the region in the strict sense of the word has not been found except in particular locations."
There are no signs yet that property prices in the Asian and Pacific region are likely to fall dramatically in the near future, predicts the publication.
There can be a few giveaway clues that a bubble is forming. One such is `evidence of buying and selling to take advantage of the capital gains available in the market rather than for owner occupation.'
Rest assured, though, that it is not wrong to borrow for buying real estate as investment rather than own occupation. "The action can be regarded as rational profit-seeking behaviour so long as borrowers are able to sell at a profit," explains the book.
"The buying becomes speculative when people begin to borrow to buy, regardless of price or of their ability to service the debt, in the expectation of selling at an even higher price." One obvious example of speculation is "people buying property with a loan and selling it before their first mortgage payment becomes due."
"The survey feels that there is no real estate bubble yet. One reason for such a benevolent outlook is that house prices are "on the whole lower than they were in the mid-1990s."
# posted by mashup @ 1:10 AM 
