East Meets West
June 29, 2009
Every time things seem to get out of control, there is always an excuse why it can be sustained. During the dot-com run up, we had the “new economy”. During the boom cycle of the housing run up, banks, investors, bankers, builders, the media, and everybody in between had their own reason why the market could be sustained. They all proved to be wrong.
In Hong Kong, banks are running out of control apparently lending at rapidly decreasing margins, and thereby increasing risks. In China, the government is working hard to keep it’s economic growth going in the hopes that demand for its products returns – they fell by some 25% last month (yoy).
Sooner or later, the Chinese will discover that artificial “floors” in growth models simply don’t work for very long and that they too will begin to experience their own economic trauma. The US and other countries are also employing massive amounts of debt to fuel recovery (trillions of dollars of debt will need to be issued by the US alone in the near future).
All these things will become an economic weight moving forward and it will have to be dealt with; taxes and interest rates will have to increase,growth will decrease, and that will all be reflected in proforma projections. That will cause a protracted period of slow growth and limited recovery as investors, particularly those which are IRR-driven stay on the sidelines or demand outsized returns, causing further slack in demand and prices to fall for commercial real estate.
Therefore, I suspect those green shoots we hear so much about are actually these:
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Nice Photo!
Another interesting post. As it happens, I just returned from a trip to Shanghai, China. I was amazed at the amount on construction going on there. Much of it is civil (new roads, freeways, etc), but there is also substantial amount of commercial and housing being built.
Whenever I tried to point out that the boom in China was due to the (now deflated) boom in the US, and that sooner or later the slowdown was going to come to China too – I was reassured that “It’s different here”.
Guess we’ll just have to wait and see what happens!