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Comment from The Daily Reckoning about Australian, UK and the USA housing bubble.
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Comment from The Daily Reckoning about Australian, UK and the USA housing bubble.
What if the property bubble does pop? Already, in both the UK and Australia, property prices seem to be headed down. But there has been no serious economic calamity so far.
Stephen Roach comments:
"To the extent that both the U.K. and Australia seem to have succeeded in gradually taking the excesses out of their residential real estate markets without seriously disrupting their economies, there is hope that the U.S. can pull it off, as well. Anything is possible, but I think those presumptions miss an important and very basic contextual point: The scale of U.S. property holdings dwarfs housing values elsewhere in the Anglo-Saxon world. For example, in 2004, the value of U.S. residential property hit $17.2 trillion - three times the $5.8 trillion value of the U.K. housing stock. But it's not just the
disparities in real estate values that hint at macro vulnerability to post-bubble adjustments. It's the link between property and consumption that makes for the biggest difference of all.
"For my money, the U.S. has set the global standard insofar as excess consumer demand is concerned - a consumption share that currently tops 70% of GDP. This
is well above the U.K. share of 63% and the Australian share at 60%. The excesses of U.S. consumption stand out all the more in a climate of weak labor income generation - with the worker compensation piece of U.S. personal income currently running some $265 billion (in real terms) below the profile of the typical expansion. The juxtaposition of excessive consumption and weak income is manifested in the form of striking disparities in personal saving rates - 4.8% in the U.K. in early 2005 versus 0.9% in the United States.
(Note: Australia 's personal saving rate has been in negative territory since 2002; however, given its relatively low consumption share of GDP, the risk of a
major post-bubble adjustment is lower than that of the U.S.)
"On balance, the saving-short, asset-dependent American consumer has made a much more aggressive consumption bet than has been the case in either the U.K. or Australia. As a result, there is good reason to believe that the U.S. economy would be much more vulnerable to a bursting of its residential property
bubble than might be implied by experiences elsewhere in the Anglo-Saxon world.
The United States relies on its property bubble far more than the U.K. or Australia to square the circle of excess consumption and weak internal income generation. This relative desperation of the asset-dependent American consumer should caution us from drawing comfort from the seemingly gentle aftershocks of other post-bubble workouts."
Stephen Roach comments:
"To the extent that both the U.K. and Australia seem to have succeeded in gradually taking the excesses out of their residential real estate markets without seriously disrupting their economies, there is hope that the U.S. can pull it off, as well. Anything is possible, but I think those presumptions miss an important and very basic contextual point: The scale of U.S. property holdings dwarfs housing values elsewhere in the Anglo-Saxon world. For example, in 2004, the value of U.S. residential property hit $17.2 trillion - three times the $5.8 trillion value of the U.K. housing stock. But it's not just the
disparities in real estate values that hint at macro vulnerability to post-bubble adjustments. It's the link between property and consumption that makes for the biggest difference of all.
"For my money, the U.S. has set the global standard insofar as excess consumer demand is concerned - a consumption share that currently tops 70% of GDP. This
is well above the U.K. share of 63% and the Australian share at 60%. The excesses of U.S. consumption stand out all the more in a climate of weak labor income generation - with the worker compensation piece of U.S. personal income currently running some $265 billion (in real terms) below the profile of the typical expansion. The juxtaposition of excessive consumption and weak income is manifested in the form of striking disparities in personal saving rates - 4.8% in the U.K. in early 2005 versus 0.9% in the United States.
(Note: Australia 's personal saving rate has been in negative territory since 2002; however, given its relatively low consumption share of GDP, the risk of a
major post-bubble adjustment is lower than that of the U.S.)
"On balance, the saving-short, asset-dependent American consumer has made a much more aggressive consumption bet than has been the case in either the U.K. or Australia. As a result, there is good reason to believe that the U.S. economy would be much more vulnerable to a bursting of its residential property
bubble than might be implied by experiences elsewhere in the Anglo-Saxon world.
The United States relies on its property bubble far more than the U.K. or Australia to square the circle of excess consumption and weak internal income generation. This relative desperation of the asset-dependent American consumer should caution us from drawing comfort from the seemingly gentle aftershocks of other post-bubble workouts."