The Uncontrolled Housing Price in Real Estate Market

 Jack Huang

Consultant in the UN Office of Information and

Communication Technology (OICT)

“Will the price increase continuously?” People who have paid attention on real

estate like to ask questions like that, especially in those “over-speculation” markets

in Southeast Asian region: Bangkok, Hanoi, Manila, and even Phnom Phem and

Sihanoukville, all you can name it. Not surprisingly, those cities are benefited

from so-called “Belt-and-Road” program initiated by Chinese government, and

numerous investments (associated with huge debts) have flew into these regions

and abnormally stimulated the price of local properties. Of course, it has also

created impressive economic growth in the short-term. However, can the real estate

price increase forever in those Southeast Asia megacities? The answer is both easier

and more complicated than it appears at first glance. The easy response is “No, it’s

not going to grow forever”. Instead, at certain points, the asset price inflation must

be self-corrected back to the mean value. On the other hand, “when this property

bubble is going to burst” is the complicated one. It has to consider multiple factors

including micro & macro economics, monetary & financial policy, and other “black

swans”, for example the trade war or natural disaster.

Like any other market under the capital manipulation, the real estate market in

Southeast Asia is also supposed to follow the free competition, and its prices are

determined by basic economic rule: supply and demand. If we take house as the essential in one’s life, then the housing price should correlate with the inelastic

demand from, for example the population growth or urbanization and migration.

But the problem is that the demand never comes from such simple reason. The

built-in greedy and rent-seeking behavior always lead the risky situation (e.g.

housing prices are too high) to even worse. House itself is not just an essential

with intention to be lived or possibly be rented out, but it’s more like financial

commodity which allows people to invest and earn capital gains like in the stock

market. In this way, the more the demand surpasses supply, the more the prices will

increase. The interesting question will be: what makes demande strong in some

specific regions?

In global and historical context, the over-printed money (or quantitative easing

if you prefer a formal term) has driven this crazy trend of investing in real estate

and other derivatives since decades ago. If we measure the US dollar M2 supply

(coins and currency in circulation and savings deposits in banks) according to

the latest statistics, it almost reached 15 trillion globally by June 2019. Compare

with the money supply in the early 1990s, the total value was only 1.6 trillion.

Once all money pumps into the market, the inflation problem becomes another

headache for most governments and policy makers. It will be very dangerous if

the consumer price index (CPI) uncontrollably increase while the public is very

sensitive to their daily consumption (e.g. food, transportation, and entertainment).

In order to keep stimulating economic growth by flooding more money in the

market, it needs a “pool” to absorb these surplus capitals without the terrible

effect on people’s necessities (e.g. serious inflation). Thus, at the time around

2000, financial innovation and physical property seemed to be that good pool. The

former can be referred to those derivatives (created by elites in Wall Street which

tried to “securitize” everything in our life); the latter is real estate - combining with the low-interest rate and easy mortgage policy (central bank also encourages

commercial banks to lend more money), it further motivates people to buy houses

and the "warming" real estate market can generate extra asset value in real without

pushing inflation in other consuming goods (or at least not that much).

To be fair, the risk behind crazy housing price is the rampant debt and credit

abuse in such real estate market, especially in those financially fragile households

and the countries have inappropriate monetary policy. Indeed, to some extent,

every country has implemented expansionary policy since 2000, or even since the

1970s - after the US President Nixon tore apart Bretton Agreement which allowed

all sovereign money could be backed by national credit, instead of something with

intrinsic value like gold or silver.

It’s not surprising that the housing bubble bursts have happened several times

in the past, and it should happen again in the future due to “the governments and

people have never learnt anything from history” (the statement was made by

Hegel).

The tragic death of property prices can be seen in Japan (1990s) and the US

(2008), and there were actually some signals before the comprehensive crash.

For example, rents had softened from peak levels, uncertain mortgage rates,

even the inventory was slowly creeping higher while rents were flatlining, etc.

These are relatively useful indicators to check if it needs to start worrying about

the market again. From the macro perspective, the debt level and flows may be

another interesting reference to observe, specifically, the domestic household debt

and private debt. We can put public debt (government debt) aside for a moment

because, ideally, the government should have unlimited debt-paying ability through QE or other fiscal operations. However, the private sectors should always

be responsible for their own solvencies and no one is going to save them from

bankruptcy. Hence, we can use debt-to-GDP ratio to assess if that certain “pool” (i.e.

real estate market) still has room for hot money inflow and credit levage, or the

bubble is almost reaching its limitation, and then burst will destroy a large amount

of wealth and cause continuing economic malaise.

To conclude, mainstream economists consider that having the debt-to-GDP

ratios of 150% in the private sector (household and corporate) is a dangerous level

and the coming downturn of asset prices and economic crisis are highly possible.

Here we share the top one by the survey in the beginning of 2019: Japan, with its

population of 127,185,332, has the highest private debt in the world at 221% of its

GDP, while the US is about 150%. The idea that many people (even institutions)

consider housing to be expensive but still expect the prices to continue to rise could

be irrational, it just needs to take a look at some basic economic figures and the

overall demand & supply.