Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 4th Qtr 2014

Almost all countries discussed in this blog post, with the exception of Thailand, have been experiencing rapid growth in home prices that have outstripped inflation by a wide margin.  The gap between home prices and their inflation adjusted levels are at the widest ever, particularly in Singapore, Hong Kong, and the Philippines.

Singapore


Singapore's home prices have now been declining for five straight quarters, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  78.90% above their year end 2004 levels. Overall prices levels, as measured by inflation have just increased by 30.33% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by almost 50 percentage points.

Malaysia


Neighboring Malaysia's House Price Index actually topped out at 181.64 in the second quarter of 2014 and has plateaued at 180.95 for the past two quarters of 2014.  Home prices are 80.95% above their year end 2004 levels.  General price levels are a staggering around 50 percentage points lower, at 30.15% above their year end 2004 levels.

Thailand



In Thailand, which has been experiencing political turmoil for some time, home prices have remained essentially flat since the end of 2004. Home Prices ended 2013 with the index at 100.54, just 054% higher than the end of 2004, but showing a substantial recovery since the recent low of 74.08 posted in the third quarter of 2009. In the fourth quarter of 2014, home prices have rebounded to 105.44, or 5.44% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 35.05% above their year end 2004 levels.

Indonesia


Meanwhile in Indonesia, home prices have showed no signs of slowing down their upward trajectory.  In fact, prices seem to have gone parabolic, climbing 4.63% in the last quarter of 2013, from a base of 121.49 as of the third quarter of 2013 to 127.11 as of year end 2013.  In the fourth quarter of 2014, home prices have climbed an additional 7.44% to reach 136.57.  Since the first quarter of 2007, home prices have risen 36.57%. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Hong Kong

Hong Kong real estate prices have leaped by 219.33% in a little over 10 years to reach a staggering 319.33 from a base of 100 since year-end 2004. General inflation levels have just climbed 35.36% during this same period.  In other words, Hong Kong home prices have outpaced inflation by an astounding 183.96% during this period, the highest rate of appreciation in the countries covered in this post.

Philippines

Philippine house price index stands at 210.64% at the end of the fourth quarter 2014 or over 110.64% above their year-end 2004 levels.  Philippine home prices, with the exception of Hong Kong, have posted the largest 10 year gains among all the countries considered in this blog post.  Like Singapore and Malaysia, Philippine home prices have outstripped inflation by around fifty percentage points.  Like Indonesia and Hong Kong, Philippine home prices have so far no signs of slowing down their upward trajectory for the foreseeable future.   The question is, is this momentum sustainable?  Or will the Philippines and Indonesia follow its ASEAN neighbors, Singapore, Malaysia, and Thailand, in exhibiting plateauing or declining house prices?  That remains to be seen.

Source: Global Property Guide, World Bank, Trading Economics

Construction Gross Value Added as a Percentage of GDP Has Now Surpassed Its Asian Financial Crisis Peak!

Last September 29, 2014, we noted that Construction Gross Value Added (Construction GVA) at 11.20% as of the 1st Semester of 2014 was already well above its historical average of 9.48% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of year-end 2014, Construction GVA as a percentage of GDP now stands slightly higher at 11.21% of GDP.  But the real story is that Cumulative Construction GVA has gone well above equilibrium and now stands at 1.2% above equilibrium, a rise of 0.8% in just nine months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

The Filipino Worker is Due for a Raise

The Filipino worker is due for a raise.  Although gains in the minimum wage for the National Capital Region (NCR - Top of the Range) have outpaced inflation since 1998, the gains have not kept up with productivity growth.  If wages had kept up with productivity growth, wages would have been around 27% higher as of 2013, or Php 592 per day versus the actual rate of Php 466 per day.  This means that the gains in productivity are being captured by the employers and has been leading to increasing income inequality.

Great Depression vs. Great Recession GDP Growth Rates

For the past few days, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By 2014, the US economy is only 23% larger, in nominal terms, than the bottom in 2009, averaging only 4.19% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 12% larger than the bottom in 2009, averaging only 2.2% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"


Given this very sluggish recovery with no end in sight, it is no wonder that Ben Bernanke, who is only 60, said that he doesn't expect the price of money (interest rates) to rise in to its long-term average of around 4 percent in his lifetime.

Another Sign that the Philippine Real Estate Bubble May Have Already Peaked? - Updated as of 4th Qtr. 2014

In a technical analysis of the price trends of financial securities, volume is a very important technical indicator. If the volume moves with the trend, the volume confirms the trend.  When price and volume diverge, it is often indicative of a shift in the trend. For example, if an uptrending stock price is accompanied by lower and lower volumes, it may indicate that the price trend is weak and that prices may start to decline.

The same holds true for the real estate market.

US Real Estate Market

In the US, sales volumes peaked for US Total Home Sales (New and Existing Home Sales) at 8,4 million homes in 2005, a year before the US Median Sales Price peaked at US$ 225K in 2006.  By 2007, the US Median Sales Price slipped by only 1% to US$ 223K while sales volumes had already dropped an astonishing 30.58% from the peak sales volume in 2005, to 5.8 million in 2007.

From then on, the US Median Sales Prices continued to decline year after year, bottoming out at $170K in 2011, or some 25% below the peak price level.  By then sales volumes had already bottomed out a year earlier in 2010 to 4.5 million homes, or some 46% below peak volumes.

As of 2014, Median Sales Prices and Sales Volumes have begun to diverge, indicating a slowdown in the US Housing market.

Sources: Realtor.org, St. Louis Fed
Median Sales Price is a weighted average of the median sales prices of New Home Sales and Existing Home Sales


The same dynamic played out in both segments of the US Residential Real Estate Market: New Home Sales and Existing Home Sales.


Here is the chart for New Home Sales:

For the past year, US New Home Sales volumes have already flatlined.  


And here is the chart for Existing Home Sales, the much larger market segment.

In 2014, US Existing Home Sales volume have begun to decline, and could be heralding another decline in US Home Prices.


Philippine Real Estate Market

Might the same dynamic be playing out in the Philippine residential real estate market?  One problem bedeviling such an analysis is the dearth of data.

To my knowledge, the Philippines does not have adequate market data.  For instance, there seem to be no published figures for sales volumes for residential homes.  The best approximation of such data is HLURB's statistics for licenses to sell residential homes.  This statistic represents only new homes and only represents licenses to sell for each residential unit and not the actual sales volumes.

Another issue is that there seems to be no price data on residential sales.  The best data is assembled here, which in turn, is assembled from the Philippine Office of Colliers International, a global real estate agency.  These prices, in turn, are based on the average prices of a prime 3 bedroom condominium unit in the heart of the Makati Central Business District.  This is like basing nationwide US housing prices on the price of a prime 3 bedroom coop unit in Manhattan in New York, one of the priciest real estate markets in the US.  The data available in the Philippines is not representative of the true state of the entire national residential real estate market.  At best, it is an approximation of the Philippine Real Estate Market.  The BSP has stepped into the picture to overcome this deficiency by developing their own real estate index, which would be more comprehensive in scope. Here is a possible candidate for such an index.


But based on the data available, we arrived at this chart:

Based on this data, volumes (as indicated by Residential HLURB licenses to sell) may have already peaked in 2012, while prices have continued their upward climb to date.  Volume seems to have peaked at 264,237 units in 2012 and dropped 15% to 225,051 units in 2013.  In 2014, volumes declined further to just 212,081 units or 20% below peak volumes. In other words, sales volumes have been declining for two solid years in a row.

Prices though, have continued to climb since 2012, another 14% in 2013 and another 7% in 2014, representing a 22% increase over 2012 prices.


Is the same dynamic that played out in the US Residential Real Estate Market playing out in the Philippines?  It looks like it now that the downward trend in sales volumes has continued for two solid years in a row, but it may still be too early to tell.

The Divergence: A Tale of Two Countries

They started on the same path, really.  Two young and very poor countries in Southeast Asia that had just shrugged off hundreds of years of colonial rule.

The first country was at a distinct disadvantage. It was a tiny country - a city-state that was only a third the size of the second country's largest city.  It had no natural resources, not even the most basic resource to sustain life: water.  It's very survival was always under constant threat from its two next door neighbors, one of which was its former master.

The second country had a larger land mass, a larger population, and strong political, economic, and even cultural ties to the most powerful nation on earth, which had two large military bases that served to protect the young country from a dominant and belligerent country to its north.

Both countries were strategically located at the historical nexus of trade and commerce in the Far East.

Both were ruled by two ruthless dictators who assumed power at the same time and who wasted no time consolidating their power under One Party Rule (in essence, one-man rule).  Both leaders were hell-bent on ruling their respective nations for life.  Both rulers groomed their offspring to assume power after their regimes. Both were brilliant, geniuses even.  The ruler of the first nation was a governance genius who gave up his life to enrich his country.  The ruler of the second nation was a criminal genius who enriched his family at the expense of the nation.  And that made all the difference.

The two rulers of the two countries?  As you should have guessed by now, the first ruler was Lee Kuan Yew of Singapore.  The second? Why our very own Ferdinand Marcos of the Philippines!

Yesterday, Lee Kuan Yew died, leaving his country as a first world nation, a model of governance throughout the world that routinely tops the governance indexes in terms of transparency and effficiency.  Its political leadership and civil servants among the world's highest paid and least corruptible in the world.  Lee Kuan Yew's son, Prime Minister Lee Hsien Loong, has continued to guide the country in the same benevolent manner of his father, continuing Singapore's transformation into the economic superpower that it is today.

Lee Kuan Yew left this earth with a reputation as a political giant, the "Wise Man of the East."

As for Marcos?  Marcos left his country in disgrace, booted out by his own countrymen in the 1986 "People Power Revolution." Because of his rampant looting of the economy, he left the nation as poor and even more in debt than when he first took over.  He thoroughly earned the moniker "Ten Most Corrupt Leaders of the World." Marcos so thoroughly institutionalized corruption that the nation consistently ranked at the bottom half of many governance indicators even decades after his death.

In 1993, Singapore, with a population one twentieth of the Philippines, surpassed the Philippine economy in absolute size and has remained there ever since.

Source: www.worldbank.org

It is only very recently that the Philippines has shrugged off its reputation as the "Sick Man of Asia" and has powered ahead of other nations to become the second fastest growing economy in the world.

Singapore and the Philippines started on the same path at the same time and were led by similarly autocratic leaders.  But those paths diverged over time.  The first leader took the route to economic success and glory, the second leader took the route to infamy.  How we wish it had been the other way around.

Does China Even Have a Business Cycle - Construction Wise?

Does China even have a business cycle - construction wise?

This is a picture of China's business cycle from Business Insider.

On the face of it, this looks like a normal, ordinary business cycle with its ups and downs, booms and busts.

Business cyles invariably cause significant fluctuations in investment.  Factories shut down as sales dry up and revamp up production once sales pick up.  This is true for just about anything: Factories, Mines, Housing, and Buildings.  Not so in China.  The pace of China's Investment has been relentlessly trending upward, business cycle or not.

But from an investment perspective, China has been on an investment tear for almost for over fifty years straight.  Gross Capital Formation (GCF) as a percentage of GDP has been on a relentless climb upward since 1962 and is still trending upward.  At 49% of its GDP in 2013, China's GCF is 2.2 times the World Average of 22% as of 2013. It's historical long-term average GCF as % GDP is an astonishing 36.20% - almost 50 percent more than the long-term historical World average of 24.43%.  

This is a pace that no other major national economy has been able to duplicate on a sustained on a long-term basis, not even the largest and fastest growing economies called the BRICs (Brazil, Russia, India, and China).  At 49% of GDP, China's GCF currently stands at almost double that of the historical average of the fast growing BRICs (inclusive of China): 26%

This is not just true of China's Invesmtnent Cycle, it is also true of its Construction and Real Estate Sectors (CRES)  At 12.75% of the economy, the CRES is 37% higher than its historical long term average of 9.25%. It has stayed that way for a long time since the early 1990s, contributing to a substantial over investment.

An extended period of over investment invariably leads to an extended period of mal-investment and misallocation of investment resources to enterprises and ventures of dubious economic value that may eventually go bust.

Sources: www.worldbank.org; China National Statistical Yearbook