Residential Construction in Europe

According to LBS Research (the think-tank of LBS building society), Germany has far too few housing starts relative to both demand and to all other European countries.

In 2008, 175,000 permits for housing starts were issued. Based on 40 mio households, that's equal to 0.45 % of existing households. For 2009, the number is expected to be flat, probably contracting slightly.

In terms of housing starts per 1,000 population, Germany is at the bottom of the list (figures refer to 2009 forecast):



In particular, it is projected that the UK will still see slightly more housing starts than Germany in spite of the real estate bust, and both Spain and Ireland will continue to have three times as many housing starts (in 2007, both countries apparently had seven times as many housing starts as Germany!).

LBS argues that yearly demand over the next 15 years will be 270-350,000 new housing units, or 50-100 % more than current construction volumes. Otherwise, there will be sharp increases in prices and rents in many regions of Germany.

But why would so much new housing be needed?

- Overall population has been contracting slightly (at 0.1-0.2 % p.a.), and this decline will accelerate, unless net immigration picks up sharply, which seems unlikely.

- LBS Research argues that the number of households will continue to grow. No reasons are given, except a nebulous reference to "demographics". What will indeed happen is that the absolute number of working-age people will go down, whereas the number of old people (65+) will increase. As old people are more likely to eventually live alone due to the death of a spouse, this could explain the projected increase in no. of households. However, single old people are much more likely to move to smaller apartments or retirement homes, so I don't think that a statistical increase in the number of households necessarily implies bigger housing demand.

- If internal population movements continue (away from East Germany and rural regions, towards Southern Germany and big metropolitan areas), this would imply that more and more housing is vacant in parts of the country, while additional demand is created in growing regions.

- LBS Research points out that 150-200,000 housing units will be demolished or changed to office-use every year. I don't quite see why that number should be so big. And in any case, most of the demolished units are related to oversupply in East Germany (if you add housing demand due to population movements and due to demolished apartments, you are double-counting). As for "change to office use", that won't be too frequent considering the oversupply of commercial real estate.

- LBS Research argues that their assumed "loss" of housing units only equals 0.4-0.5 % of all units annually, i.e. a 200 year life-span per housing unit. However, this argument is based on a "long-term equilibrium" that doesn't make much sense for German housing: After the war, most of urban housing was either newly built or thoroughly renovated, i.e. the overwhelming majority of German housing stock is less than 50 years old. And even much of the old housing stock is in pretty good shape (the house my grandmother got born in is more than 100 years old now, and it's far from being a candidate for the wrecking crew).

Summing up, I don't believe that housing starts equal to 0.4 % of existing stock are objectively too low. Unless internal population movements accelerate (more people moving to growing regions), or net immigration picks up sharply, I don't think there is a major risk of an impeding housing shortage.

So what about the comparison to other European countries?

In recent years, many of the countries with lots of building activitiy have seen population growth, mostly due to net immigration. In addition, many European countries have seen a trend to much larger living space per household (creation of bigger apartments, more houses instead of apartments), and most countries have an older average age of housing stock than Germany does (mostly due to the war, but also due to lots of German building activity in the 90s, due to large-scale immigration from Eastern Europe).

I do find it bizarre that Spain and Ireland are still at the top of the list for 2009 building activity. Either the forecast is too optimistic, or their construction industry hasn't reached the bottom yet: Ireland is probably experiencing a population decline in 2009 and 2010. Why would it need housing starts equal to more than 1 % of existing housing stock?

China's Stock Market

Year to date, PRC stock markets have rallied: Shanghai is up 33 %, and Shenzhen 45 %.

(For comparison: Taiwan is up 20 %. Hong Kong, Japan and Singapore are flat, and most European and American indices are down 5-10 %.)

From the low point in October 2008, the rally is even more impressive: Shanghai is up 42 %, Shenzhen 78 %.

On the other hand: Compared to early 2008, both indices are still down by more than half.

Fundamental reasons? I'm not even trying to have an opinion. And I don't think PRC investors base their decisions on fundamental assessments. Who needs to go to Macao or Vegas, when it's so much easier to gamble on the stock-market instead?

Oil - Update

This seems to be turning into a habit: For the second time now, I bought oil futures with the intention of holding them for the longer run. Then oil rallied over the next few days, and on impulse, I sold them again.

Not exactly very helpful for the purpose of long-term hedging. But somehow, I have the feeling that it's too early for a sustained rally in the oil price, so when the price goes up 10 % in just a few days, I'd rather take my profits and wait for the price to dip again. Though of course there is the possibility that it will not dip, and the rally will continue. In which case I won't be hedged the way I wanted to be...

The reason for the latest rally seems to be mild optimism about the state of the world economy. I'm not sure this is sustainable:

- For all we know, the world economy will continue to shrink in coming months. Probably only a bit, as compared to the severe contraction over the last half year. But it's rather unlikely that we will see significant output growth anytime soon.

- To some extent, oil consumption lags the real economic cycle: Unemployment will continue to rise sharply just about everywhere during the rest of this year. People without a job don't need to commute to work. They don't go on business trips. And unless they are wealthy ex investment bankers, they are less likely to fly off for expensive long-distance vacations.

- There's a deepening sense of gloom in Russia, where domestic oil consumption is likely to go down sharply, and the government will be happy eager to sell as much oil as it can abroad to raise money.

Exodus from Ireland

According to a recent poll, 1/3 of Ireland's 200,000 Polish residents plans to leave over the next 12 months.

Many of the 10,000+ Germans are also sitting on packed suitcases, trying to find jobs back home in Germany or elsewhere.

And 1/2 of the students at a Dublin university plan to go abroad after graduation, preferably to Canada, the US or Australia. Applications for work visas have been rising considerably.

Though I'm a bit doubtful regarding the Irish themselves: Foreigners losing their jobs have a natural tendency to head back home. But the Irish are already home, and job prospects elsewhere aren't that much better.

(Sources: Forbes LA Times FTD )

Singapore Real Estate

Singapore has joined the club:

A 20-30 % drop of residential property prices is now expected for 2009. This forecast assumes that the pace of decline will slow in Q2-Q4. I wouldn't bet on that, as Singapore's GDP will decline 5-10 % this year, most likely causing an exodus of foreigners, including many high-income expats.

Q1 was dismal: In just one quarter, prices dropped 14 % (in Q4, they already dropped 6 % from Q3, following a 2 % drop in Q3).

Sounds pretty nasty. But then, Singaporean property prices were sky-high at their peak in late 2007 / early 2008.

Oh, and rents for high-end apartments are down 19 % Q4 to Q1 - i.e. they've basically been falling off a cliff during the last 3 months.

(source here and here)

Chinese Real Estate

China Daily is running a piece entitled "China's housing prices may fall sharply":

The Beijing Academy of Social Sciences expects a "slump" in housing prices once 50,000 low-income housing units (currently under construction) come to market. I assume they are refering to Beijing, not all of China, because otherwise 50,000 would be a ridiculously low number. Even for Beijing, a city of >10 million, 50,000 apartments doesn't sound extreme. But the article goes on to argue that the average Beijing family only has a disposable monthly income of 600 € (note: Chinese families are usually double-income), and as a 100 sq.m. apartment costs 150,000 €, only rich people can afford to buy. The article also claims that 1/3 of all housing space (>10 mio. sq.m.) is currently vacant - though that sounds hard to believe: It would translate to total housing space of only 3 sq.m. per person (based on a city of 10 mio. and 30 mio. sq.m.). Presumably, they are referring to a subset of residential property (excluding most existing low-income housing).

The article also cites a Sina.com poll, according to which 71 % of 12,400 respondents expect a drop in property prices. Maybe not a representative poll, but if that's the prevailing mood, it's not a good sign: More than anything, Chinese real estate investors are speculators hoping for value appreciation. If people don't expect prices to rise, they will not buy.

And this article is downright bizarre:

According to the Chinese Realtor Association, the new high-speed train linking Beijing and Taiyuan (Shaanxi) will give a boost to Beijing's sluggish real estate market. Apparently, there are lots of rich coal mine owners in Shaanxi, and a high-speed link to Beijing makes it more attractive for them to buy Beijing real estate because of the "developed cityscape and education opportunities for their children". So a train service which reduces travel time from 8 hours to 3 hours will lead to a flurry of buying activity from wealthy Shaanxi entrepreneurs? Sounds like clatching at straws to me. The situation must be really bad if the Realtor Association can't find a better reason for a market upturn than this...

Opel and German politics

According to the FTD, SPD politician Ute Berg (deputy leader of the SPD's "business and technology working group"; her qualification? she used to be a school teacher) doesn't understand why other troubled companies are complaining about the special attention the SPD bestows on Opel. According to her, "Opel has been exploited for many years. Money, patents and innovations were withdrawn from the company for years and years. Opel is an extreme case. It doesn't mean that the government should take stakes in all companies that have problems."

So Opel should be helped (partly nationalized) because it has been "exploited" by the mother company? And apart from the interesting choice of words, in what way have "patents and innovations" been withdrawn? Sure, formal ownership of the patents went to the US, but Opel was and is using them, right? And in what way were "innovations" withdrawn? Does she mean that GM America is using all of Opel's innovations, but Opel isn't allowed to? As for money: Has it been withdrawn? When? How much? How does Ms. Berg know? And even if true, isn't it standard practice for subsidiaries to pay dividends to the mother company? And finally: Assuming she is right, and GM has "exploited" Opel. So a company that has been "exploited" has a moral right to be helped and saved, whereas a company that has been treated "properly" by the mother company has no such moral right?

I thought Steinmeier's babbling was bad enough. But this "discussion" is becoming more and more absurd.

Oil Price

I used to be a firm believer in an ever-increasing oil price not too long ago, based on the rather unambiguous data concerning availability of supply. However, I did not expect the sharp reduction in demand that has unfolded since last fall.

Now I don't know what to think:

If/when the world economy starts growing again, demand will soon bump into a hard supply constraint. From what I understand, the marginal cost of bringing new supply on line is higher than the current oil price, and in addition, the amount of new supply that can be brought on line without needing too much time and effort is limited. As existing wells decline, total potential supply will stay at best stable, it might even start declining.

However, demand may continue to contract or at best stay stable for quite a while, depending on how the crisis works out. In particular, if worldwide unemployment goes up sharply, the need to commute to work (one of the main reasons for using a private car) will decrease noticeably. There are signs that the US is finally weaning itself off the worst aspects of its petroleum-addiction: Gas guzzling monster-cars no longer sell, and outlying suburbs are suffering worst in the real estate disaster. And there's lots of excess oil being stored in all available ships and storage facilities, just waiting for a time of higher demand and higher prices (and China has apparently also used the low prices to sharply increase its strategic oil reserves).

On the other hand, China, India, Southeast Asia and the Middle East will inevitably see growing demand for oil. Maybe not so much this year and next, but thereafter, demand will grow again, even if developed countries' economies stay sluggish.

So this is what I predict:

In the short-term, there is excess supply, and the oil price will depend mostly on the behavior of oil-producing countries (to what extend can OPEC succeed in bringing production down?), and I won't even try to predict their politics.

But in the mid- to longer-run, supply-constraints will become binding again, and then the oil price will go up very sharply (if it triples from today's level, it will only be back to last summer's highs in US$ terms).

So I have gone ahead and once more invested a few thousand Euros into oil futures, in spite of the rising forward curve (to break even on the rolling futures contracts based on the current curve, oil will have to rise at least 20 % this year, and another 10-15 % next year, i.e. a flat oil price implies significant losses).

I think of it not so much as speculation, but as an inflation hedge.

Asia's Travel Industry

Worldwide air travel has been seeing large declines over the last 6 months. Business/first class traffic is down very sharply, but economy is also down.

For some reason, Asia seems to be hit even harder than the rest of the world:

Singaporean hotel revenues in Jan/Feb 2009 are down 29 % yoy. Roughly half of the drop is due to lower visitor arrivals, the other half due to lower prices.

Hong Kong airport and Cathay Pacific Airlines are also seeing sharp declines in Jan/Feb passenger numbers.

Mainland China, on the other hand, is seeing two conflicting trends: International passenger numbers are down 16 % (roughly in line with Singapore's experience), whereas passenger numbers on domestic flights are up 17 % (figures are also Jan/Feb). Extremely aggressive price cutting might have something to do with the growth in domestic air traffic, though.

Germany's car scraping frenzy

It appears that Germany's Abwrackprämie (the 2,500 € subsidy paid to anyone who scraps a 9+ year-old car and buys a new one) is a smashing success.

A spokesperson for the recycling industry (representing the various companies involved in scraping cars) has now warned people to think twice before scraping a car, because many of the cars that are being scraped in order to get the Abwrackprämie are apparently worth more than 2,500 € on the used-car market.

Imagine that: An industry lobbyist profiting from this measure is telling people they should stay rational and think twice!

The funds earmarked for the subsidy were 1.5 bn €, enough for 600,000 cars. Apparently, nearly 900,000 applications have come in by now, and the government has more or less promised that the subsidy will be extended to everyone who applies until year-end.

From an economic point of view, this is sheer madness:

So many pefectly good cars that could have been driven for several more years by students or poor Eastern Europeans are now being needlessly destroyed. Most of those cars are fine from an ecological point of view (I drive a 13 year old Mazda, and the car had no problem getting the "green" eco-sticker), so calling this an "eco-measure" is ridiculous. Meanwhile, used-car prices are skyrocketing due to lack of supply.

And that's not all: For years, politicians have tried to make driving more expensive, because it was considered the correct thing to do from an ecological point of view. Plus, there is wide-ranging agreement that as a society, we will anyway have to get used to living with fewer cars in the longer run due to resource-constraints. But what do we do? We heavily subsidise car buyers.

Sure, the car industry is in trouble and needs some sort of help. Sure, this particular measure appears to create quite a bit of extra demand in the short run, and it probably doesn't crowd out too much other consumption (I suppose most car buyers will either dig into their savings or take out a loan). But still...

Anyway, at least those anglo-saxon commentators perennially asking the "surplus countries" to stimulate demand should be happy about the German government subsidising the purchasing of small foreign cars: The trade surplus will be several billion Euros lower as a result, and some ailing Eastern European (and Asian) countries will be thankful for a bit of extra export demand. Of course the US and Britain won't benefit much, considering they don't export small cars... (ok, strictly speaking that's not correct: Britain exports the Mini and some Ford/GM models, so maybe they are selling a few thousand extra cars to Germany)