Events of Note and to Note

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

August 2008

Sometimes your humble author would receive enquiries from our www.real-estate-tech.com web visitors and newspaper readers (we have a weekly column in the financial daily Hong Kong Economic Journal www.hkej.com) wishing to know how real estate prices might perform and if there were any imminent factors of note.

Many probably had expected us to say prices would go up or down 5%, 10% in the next 6 to 12 months etc or to utter statements like “real estate prices depend on the interest rate trends” etc. Yet normally they would be disappointed if these were what they had expected or wanted.

Here are a few reasons: 

A)     Real estate markets going up or down 5%, 10% etc within 6 months or a year are not worthy of too much attention = unless you are leveraged to the tilt that a slight price change down would already have meant foreclosure. Otherwise, most of us, even if one deals in megabuck commercial deals, do not suffer significantly if that is all the market would fluctuate. These minor movements are to be expected, just like you need to make turns, left and right, while driving as few journeys involve just a straight road.

B)     Many factors are not as significant as the market portrays them to be = for example, land sales are usually NOT significant events. The news media loves to cover them but this does not automatically make land sales significant. Another example is interest / mortgage rates which generally have an image of having significant influence on prices and people tend to think the lower they are, the higher the asset-real estate prices. Yet this is only sometimes true based on studies we had done in the past, which means at other times the reverse seemed true i.e. higher rates, higher prices. This in turn may mean, not substantiated yet, interest rates actually have nothing or little to do with price movements. Read our past analytical articles: 

http://www.real-estate-tech.com/articles/Simple_read_stuff_200100206.PDF

http://www.real-estate-tech.com/articles/ret4Q07.pdf = 3rd article

Readers may be enticed to ask at this point if the above are not significant factors to take notice of, then what? Here are a few suggestions:

1)     A long term global credit contraction = easy credit has been responsible for much of the global economic expansion and asset price growth in the past couple of decades. If credit becomes scarcer, then it is only reasonable to expect the opposite. Naturally this contraction is unlikely to occur evenly and equally across the board, i.e. some economies suffer less, some more, but tighter and tougher times may lie ahead. Note having a lot of cash in the banks does not by itself automatically translate into credit or liquidity if a) there are few willing borrowers; and / or 2) there are few willing lenders. It takes 2 to tango, you know. It only means the system has sufficient cash to create the credit and liquidity, i.e. if and when required.  

By the way, as inflation seems to be a major concern in many economies, one way to ‘fight’ it is to tighten up credit availability, notwithstanding some governments appear to be hesitant on this. There appears to be some dilemma.

2)     A huge population of baby-boomer retirees or semi-retirees = as they enter their 50s and 60s mostly in the developed economies around the world. The issue is not whether it is a good or bad thing, just that in recorded history this is the first time we see a bunch of senior-elderly people retire-semi-retire en masse. And they tend to live longer and to lead more active lifestyles. If all goes well, they should have more than enough money as a group to take care of themselves without posing too much burden on later generations. If not, they could pose a drag on the economy. In any event, a dividend economy may arise:

http://www.real-estate-tech.com/articles/SRS070601.htm

3)     A large population of generally more pampered off-springs of the baby-boomers entering the workforce and gradually taking charge = for instance, USA presidential candidate Barack Hussein Obama, being 46 years of age, technically is NOT a baby-boomer, at best a borderline case. Even if he is one, he is at least half a generation younger than the current President Bush or the once-hopeful Clinton. While the following description may have some form of bias or even suspected truth, this post-boomer generation collectively gives an impression of being tech-savvy and expressive, but at the same time being over-sensitive and somewhat immature. The focus here is not the overtaking of one generation by another (and it is not as discreet as it sounds) which is only natural, but by a more pampered generation whose upbringing included positive encouragement even for being able to recite the alphabet or color up Donald Duck. And this does not just apply to the more developed economies like the USA, but to some developing economies too like China which typical family, the urban one at least, had not so long ago gone from having numerous children living with grandparents under one roof to having one kid living with just Dad and Mom (and sometimes Dad or Mom). Perhaps readers may wish to read this article on “Kindergarchy”: 

http://www.weeklystandard.com/Content/Public/Articles/000/000/015/161yutrk.asp 

4)     An increasing reliance on the internet = if the radio and television had been an important part of growing up to the pre-boomer and boomer generations respectively, then the internet is the radio or TV to the post-boomer generation. Unplug a computer from the internet would make the computer almost useless and the computer user depressed. By no means are we implying the internet is a good or bad thing, we think it is a tool and like all tools, it is how it is used and what it is used for which matter and make it good or bad. And both good and bad ideas could flourish, sometimes blown to proportions unseen before, via the internet.

5)     An increasing trend toward conformity = this may agitate quite a few business academics, and even professionals and executives. It seems, perhaps in part due to a more interactive world (globalization?), business related educational programs and professional courses appear to mimic one another in content, format, and structure more than they had in the past. In short, some schools and programs appear to have lost their character and uniqueness. Having similar business courses in itself is not a problem and it is unreasonable to ask for courses which differ in most or all aspects. After all, 1 + 1 = 2 [except to sophisticated mathematicians] no matter where this is taught or who is teaching it. Yet, business courses are different from say the scientific ones such as physics, medicine etc where there are processes to test new hypotheses, new theories, new drugs, and so on. More importantly, these new scientific ideas generally do not depend on items like market sentiment or whether your uncle Joe has enough money to back a stock on a particular Monday etc. But business theorems and models do depend on and do get affected by what the Joes and Janes think and how they act in a particular stock market on a particular day. That is, business-related theorems and models are not likely to contain some universal truth (even scientific theories cannot claim this); they appear to work in some cases but not in others, yet some of these are taught as if some form of gospels. When one adds the less critical learners and students of such content to the formula, one sees the word ‘danger’. As one of my friends had said “the problem is not that there are too many MBAs, the problem is there are not enough MBAs who think”.

In summary, we may see: 

n           Reduced credit or credit becoming more expensive

n           Boomers focusing more on investment income than investment gain

n           Post boomers adjusting to harsher (from their angle) realities

n           A networked system which enables ideas to multiply geometrically

n           An increasingly conformity in the business or investment methods 

Like Obama, we expect ‘change’, good or bad (may depend on the viewpoint), big or small (likely to be big), financial or otherwise. But we do not know exactly where, what, when, or how, or even why.  

Does the above spell doom and gloom? NO but investment opportunities instead, notwithstanding probable significant market busts and tougher times ahead. Business-financial-economic-investment set backs alone cannot destroy the world, and they always come around.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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