From a small northwestern observatory…

Finance and economics generally focused on real estate

GDP, Housing, and post-Thanksgiving musings

with one comment

First, the good news.  My good friend, Dr. Bill Conerly, in his Businomics blog of 11/17, brought to my attention Dr. Mark Perry’s Carpe Diem post of that same date.  Dr. Perry brings up two great points, both good news for the U.S.  First, the global GDP is poised to hit $50 Trillion for the first time this year, up 2.7% from last year.  Second, and a bit unfortunately, this good news isn’t evenly distributed.  Somewhat surprisingly, the U.S. share of Real GDP has held fairly constant for the past four decades, hovering between 25% and 30% of the world’s total.  While the U.S. share is down slightly from its peak a decade ago, it’s actually higher today than it was in the early 1980’s.

Courtesy Dr. Mark Perry, Carpe Diem

The most interesting — and obvious — observation is that growth in the Asian share has come at the expense of the Europeans.  For more, I’d refer you to Dr. Perry’s exellent commentary on this.

In addition, this week’s Economist magazine just hit my mailbox.  I cannot speak to highly of this weekly — anyone who really wants to be informed on the complexity of the world needs to read it cover-to-cover the moment it’s printed.  It comes with a decidedly British feel and a slightly right-of-center focus, but with those caveats aside, it’s simply the best news magazine in the world.   And no, I have to pay for my subscription just like everyone else.

This week’s issue has an intriguing piece on the softness of global housing market.  I’ve long held that corrections in the U.S. bubble were triggered by the inablity of the secondary financing market to accomodate slight changes in underlying default rates.  In short, the secondary market is basically made up of derivatives of derivatives of derivatives.  Each layer of “securities” (a more ironic name for these instruments could not be found) assumes away a certain level of risk, applying a totally falatious reading of Markowitz.  However, the pain in the U.S. market may be close to ending, as the bubble in home ownership rates nears a nadir.

The more global problem, however, is that other markets have not fallen in the same way as the American market.  In the U.S., house-price-to-income ratio now stands below 80 (1977 to 2011 average = 100).  On the other hand, Britain and France — two economies with some pent-up troubles ahead of them — both stand at between 120 and 140, and indeed France is near its peak for the past three decades.  (Britain is slightly down, but not by much).  By their measure, most of Europe (except Germany and Switzerland) is in trouble, as well as Canada and Australia.     Japan has now declined even more than the U.S., but Japan’s market was widely considered to be terrifically overvalued before (maybe even worse than America’s).

While this is new territory for most countries, Britain’s housing market got out-of-whack back in the late 1980s, and fell about as far, relatively, as the U.S. market has fallen in the past few years (and over about the same time frame).  If Britain’s experience provides any indication for the U.S., it’s market stayed relatively low for several years before rebounding.

Not all economists agree with this perspective, and many feel that systemic low interest rates make this particular measure of housing prices invalid.  The problem with this perspective is that European interest rates are rising, and may continue to do so in the wake of the various debt problems in the Eurozone.

Written by johnkilpatrick

November 27, 2011 at 1:18 pm

One Response

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  1. Our prorata share of GDP appears to have been in decline the past ten years. Perhaps we’ve now joined the Europeans unless we can bounce back again as we did 30 years ago. Given growth in the BRIC and other emerging markets I suspect we’re headed below 25% of global GDP permanently which is not necesarily the end of the world as long as the pie is getting bigger.

    If housing prices drop in Europe, Canada and Australia it may put the world back into recession (assuming we ever left)? If I’m not mistaken mortgage rates in most of the world tend to be tied to shorter term interest rates, more adjustable than in the US so the rising rates could pop that bubble. I suppose we can at least be grateful we’re not in Europe.

    Stephen Bullock

    November 28, 2011 at 6:42 am


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