Who can forget the time when the property bubble burst in Hong Kong? Between 1997 and 2003, property prices plunged by more than half, many property owners experienced negative equity and consumer sentiment was severely dented.
With those bad memories still fresh, many Hongkongers see the bursting of the US property bubble and the subsequent global economic crisis as dampening consumption and demand for a long time. Hong Kong people are understandably pessimistic.
I am far less bearish. Apart from the massive rescue packages launched by governments around the world, I think the US property market is likely to stabilise in the foreseeable future.
In fact, the bursting of the US property bubble was not that big to begin with. Hong Kong’s was definitely much bigger as prices rose 20 per cent to 30 per cent annually before 1997.
In the US, the S&P Case Shiller Index, which tracks property prices of 10 major cities in the country, rose 13 per cent a year on average from the beginning of 2001 to its peak in mid-2006. Now the index has fallen 30 per cent from the peak, not as big a fall as the one witnessed in Hong Kong.
The House Price Index (HPI), which reflects overall residential property prices in the US, went up 5.1 per cent annually from 1980 to peak in mid-2007. The growth was particularly pronounced, at 7.6 per cent a year, from early 2001 to mid-2007.
This shows the rally in the US property market was generally healthy and the surge was mainly concentrated in major cities. In fact, the HPI peaked a year after the S&P Case Shiller Index did, and had only dropped 4.6 per cent by the end of last year.
According to Fannie Mae data, from the second quarter of 2006 to the second quarter of last year, properties in metropolitan states such as California and Virginia went down by more than 15 per cent. Among the 50 states in the US, home prices in 11 dropped less than 5 per cent while 23 states experienced price increases.
In other words, two-thirds of the property owners in the US were not affected by the price slump. So the situation is indeed less serious than many think it to be. Since the overall US property market is actually not that grim, the shrinkage in the US consumer market will also be restricted.
In fact, many Hong Kong manufacturers have recently received rush orders from the US, which indicates that consumer demand there is alive and kicking. When the inventory is cleared up, new orders will come.
In addition, the quantitative easing policy of the US Federal Reserve has pushed down mortgage rates.
Property prices in most major US cities have come back to reasonable levels and might well stabilise there.
But unlike in the housing sector, the derivative market bubble in the US was alarming.
Derivatives such as mortgage-backed securities and collateralised debt obligations were mainly linked to the property market. When the property rally ended, the derivative bubble burst and many derivatives turned into toxic assets because it was difficult to price them.
There are various views on the extent of toxic assets. According to the latest International Monetary Fund projections, toxic assets of global banking and insurance companies will exceed US$4 trillion.
At present, banks and insurance companies have only written off about US$1.29 trillion, which means there will be a huge write-off for financial companies later on.
Market focus on toxic assets has been lax because of encouraging first-quarter earnings at US financial institutions. But despite a US$4.25 billion profit, Bank of America’s non-performing loans increased sharply over the fourth quarter of last year.
That got the market worried and toxic assets returned to the spotlight again.
The US has relaxed the “mark to market” accounting policy so companies can report the value of toxic assets according to their own situation. This will help alleviate short-term market sentiment, but won’t solve the problem.
What will indeed solve the toxic assets problem is a stabilisation of the US property market. I expect that to happen this year.
If Washington’s public-private investment programme works, it will improve the transparency vis-a-vis toxic assets.
But you can expect more write-offs. Unless US property prices rise significantly - which is improbable - financial institutions will continue to write off toxic assets this year and the next, with consequences for their earnings.
I would not buy financial stocks if I were a long-term investor.
1 comment:
Market Mood
Paul Pong
26 April 2009
Who can forget the time when the property bubble burst in Hong Kong? Between 1997 and 2003, property prices plunged by more than half, many property owners experienced negative equity and consumer sentiment was severely dented.
With those bad memories still fresh, many Hongkongers see the bursting of the US property bubble and the subsequent global economic crisis as dampening consumption and demand for a long time. Hong Kong people are understandably pessimistic.
I am far less bearish. Apart from the massive rescue packages launched by governments around the world, I think the US property market is likely to stabilise in the foreseeable future.
In fact, the bursting of the US property bubble was not that big to begin with. Hong Kong’s was definitely much bigger as prices rose 20 per cent to 30 per cent annually before 1997.
In the US, the S&P Case Shiller Index, which tracks property prices of 10 major cities in the country, rose 13 per cent a year on average from the beginning of 2001 to its peak in mid-2006. Now the index has fallen 30 per cent from the peak, not as big a fall as the one witnessed in Hong Kong.
The House Price Index (HPI), which reflects overall residential property prices in the US, went up 5.1 per cent annually from 1980 to peak in mid-2007. The growth was particularly pronounced, at 7.6 per cent a year, from early 2001 to mid-2007.
This shows the rally in the US property market was generally healthy and the surge was mainly concentrated in major cities. In fact, the HPI peaked a year after the S&P Case Shiller Index did, and had only dropped 4.6 per cent by the end of last year.
According to Fannie Mae data, from the second quarter of 2006 to the second quarter of last year, properties in metropolitan states such as California and Virginia went down by more than 15 per cent. Among the 50 states in the US, home prices in 11 dropped less than 5 per cent while 23 states experienced price increases.
In other words, two-thirds of the property owners in the US were not affected by the price slump. So the situation is indeed less serious than many think it to be. Since the overall US property market is actually not that grim, the shrinkage in the US consumer market will also be restricted.
In fact, many Hong Kong manufacturers have recently received rush orders from the US, which indicates that consumer demand there is alive and kicking. When the inventory is cleared up, new orders will come.
In addition, the quantitative easing policy of the US Federal Reserve has pushed down mortgage rates.
Property prices in most major US cities have come back to reasonable levels and might well stabilise there.
But unlike in the housing sector, the derivative market bubble in the US was alarming.
Derivatives such as mortgage-backed securities and collateralised debt obligations were mainly linked to the property market. When the property rally ended, the derivative bubble burst and many derivatives turned into toxic assets because it was difficult to price them.
There are various views on the extent of toxic assets. According to the latest International Monetary Fund projections, toxic assets of global banking and insurance companies will exceed US$4 trillion.
At present, banks and insurance companies have only written off about US$1.29 trillion, which means there will be a huge write-off for financial companies later on.
Market focus on toxic assets has been lax because of encouraging first-quarter earnings at US financial institutions. But despite a US$4.25 billion profit, Bank of America’s non-performing loans increased sharply over the fourth quarter of last year.
That got the market worried and toxic assets returned to the spotlight again.
The US has relaxed the “mark to market” accounting policy so companies can report the value of toxic assets according to their own situation. This will help alleviate short-term market sentiment, but won’t solve the problem.
What will indeed solve the toxic assets problem is a stabilisation of the US property market. I expect that to happen this year.
If Washington’s public-private investment programme works, it will improve the transparency vis-a-vis toxic assets.
But you can expect more write-offs. Unless US property prices rise significantly - which is improbable - financial institutions will continue to write off toxic assets this year and the next, with consequences for their earnings.
I would not buy financial stocks if I were a long-term investor.
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