Economist calls bottom in 2010, based on US cycle
The Erection Index Points True Again
Forecasters do have a reliable signal: the Erection Index. Every time the latest “world’s tallest building” goes up, the economy goes down. Because such massive construction projects take so much convincing and investment, they occur at the cycle’s peak, when it’s brightest before dusk. The most recent is the Burj in Dubai, 50% bigger than the Empire State Building which marked the Great Depression. But people with sky-high incomes, bonuses, and bailouts can ignore such signs. We trim and blend two 2009 articles from New York Times, Feb 11, on the UAE by Worth, and from the Singapore Business Times, Feb 9, on cycles.
by Robert Worth and by SBT
Laid-Off Foreigners Flee as Dubai Spirals Down and Skyscraper Rises up
Because the Persian Gulf has vast oil and gas reserves, Dubai -- once hailed as the economic superpower of the Middle East -- had seemed at first to be insulated from the panic that began hitting the rest of the world last autumn. But Dubai, unlike Abu Dhabi or nearby Qatar and Saudi Arabia, does not have its own oil, and had built its economy on real estate, finance, and tourism.
Now Dubai’s economy is in free fall: real estate prices, which rose dramatically during Dubai’s six-year boom, have dropped 30% or more over the past two or three months in some parts of the city; scores of Dubai’s major construction projects have been suspended or canceled. Foreign workers, who made up 90% of the population, are leaving and have left parts of Dubai looking like a ghost town.
Foreigners face the prospect of being forced to leave or even end up in debtors’ prison. Newspapers report more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by debt-ridden foreigners; some taped notes of apology to the windshield. So many used luxury cars are for sale, they are sometimes sold for 40% less than the asking price two months ago. Dubai’s roads, usually thick with traffic at this time of year, are now mostly clear.
Economist calls bottom in 2010, based on an 18-year cycle seen in US
Phil Anderson -- who calls himself a renegade economist -- stands out from the crowd. He confidently calls a property market bottom next year.
“There will be substantial real estate buying opportunities for people with cash next year, which will set them up comfortably for the next 18 years,” the founder of Economic Indicator Services told The Business Times.
Investors, however, will need cash to buy because, by then, banks will have no money and will be very reluctant to lend, he said. So individuals, companies, and even countries with no debt, such as Singapore, will be well-placed to take advantage of the next boom.
Anderson bases his prediction on an 18-year cycle which he says has manifested itself in the United States since 1800. “The cycle is as regular as clockwork. It is quite bizarre,” he said.
There were peaks in land sales or real estate speculation in 1818, 1836, 1854, 1888, 1908, 1926 and 1944. The peaks were followed by downturns or depressions, typically lasting four years. World War II disrupted the pattern. But the cycle resumed in 1955.
The real estate market in the US again peaked in 1989 and bottomed in 1991. And 18 years later, in 2006-07, it hit another high. We are now into the third year of downturn, so by next year the market should bottom, which will mark the beginning of the new 18-year cycle.
The next boom, peaking around 2024, will be huge because hundreds of millions of Chinese will enter the market for the first time, he said. “Singapore is well-positioned to take advantage of the next boom because of its proximity to China. I am very bullish on Singapore. Although real estate is already expensive in Singapore, it is going to be more expensive.”
Anderson is confident the cycle will repeat itself as long as land is tradeable and in private hands. “It will continue to happen because people will chase the capitalized rent of land,” he said. “It will be gone only if the rent is collected by the government.”
China’s privatization of its real estate market guarantees a real estate cycle, according to him.
Also, everything that has been done to tackle the current financial crisis is to preserve the system. “So the system will start again.”
There are smaller cycles within the big 18-year cycles. The first seven years are characterized by a gradual improvement in activity and confidence following the previous crash. The next seven years see steeper increases in activity and prices, with the sharpest gains taking place in the final two of the seven years.
“That’s when most people take on more debt. That’s also the easiest time to buy real estate because loans are easy to get as banks have a lot of money. But that’s absolutely the wrong time to do so,” said Anderson.
The next four years, of course, are the downturn, during which the banks will clear their problem loans, the market will absorb the excess stock, and the governments will get organized.
Anderson has detailed his research in a book, The Secret Life of Real Estate -- How it moves and why, published last year. Based in London and Melbourne, his firm has “several hundred” online subscribers who pay Â£200 (S$442) a year each for his “big picture analysis and ways to take advantage of turning points in market cycles”.
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