Superbugs in Indian Chicken…and Global Property
Debt and the current property cycle continues
December 26, 2016
Callum Newman
Economic Consultant

Oh dear, watch out. If you’ve ever thought about turning vegetarian, you might want to fast-track that idea. Bloomberg reports that bacteria which resist treatment, and which have the ability to infect humans, are appearing in Indian chickens. Contaminated meat may be spreading superbugs through the food chain and the environment alike. This is the kind of thing that can go ‘global’, literally speaking.

The country’s skyrocketing demand for chicken protein has created an intensive farming industry on a huge scale. But even the free-range option is showing up with the unwelcome garnish. Apparently, Indians eat 14 times the amount of chicken as they did in 1985.

The increase in the incident rate of infectious diseases looks to be on track to go hand in hand with the ‘extreme’ demand now generating in India and China. You know the story. As societies get richer, they eat more meat. These two Asian giants are going to rumble the world for the next century.

Just take the news about the demand Chinese have for global property right now. We can think of the global property market in a similar way to the superbug problem afflicting chickens. First the rise with incredible demand, then the swift transmission from market to market, and then sickness, as it goes right over the top.  

Bloomberg calls it the world’s biggest real estate frenzy. Chinese citizens are going shopping worldwide. One figure suggests that the first half of the year saw the same amount spent as all of last year. It doesn’t matter that the Chinese government is trying to keep the money at home. It’s getting out.

What nobody can really tell is how much. There are no genuine statistics because it’s mostly illegal according to the letter of Chinese law. But there’s at least this consensus: It’s the biggest overseas buying spree in history, and it’s going to get bigger.

On the frontline of this wave are the cities you already know about: Sydney, Vancouver, Hong Kong and London. These are already at extremely high prices for locals.

But the property boom within China is so prodigious that these international cities for China’s rich can actually be considered cheap by certain Chinese-city standards. That’s especially true if the Western cities have features you can’t buy in China — like ocean views.

But the middle-class Chinese buyer is following the lead of the Chinese elite, and looking overseas. But they’re now looking for cheaper alternatives to the premier Western cities. Consider places like Thailand and Malaysia. Apparently, Houston and Seattle in the US have become popular recently.

The downturn in the oil price has brought Houston property values down of late. Agents are now working to attract Chinese money to the city. You can see this recipe being trialled anywhere there’s a downturn of sorts. This has the potential to buffer prices somewhat at times. Brokers, developers and agents don’t care about affordability at the local level.

This could run for years. Consider the scale of the Chinese middle class. It’s already overtaken the US one for sheer size. And it’s still growing. And, of course, if India can get its act together, they’ll most likely do the same thing.

One group that’s rather pleased with all this is US private equity and real estate giant Blackstone Group [NYSE:BX]. Back in October, it sold its 25% stake in hotel group Hilton Worldwide Holdings to a Chinese conglomerate. They made three times their original stake. There have been other deals like it.

Blackstone was one company in a position to buy up a lot of cheap assets in the wake of 2007. They’re now cashing in the gains. But note the wider effect. Most of these real estate deals are swapping an existing asset.

It’s a round robin, where the only thing that changes is access to finance. These assets are usually bought with debt. As the property cycle continues, the debts outstanding on the assets just keeps ratcheting up. The more these debts and asset prices go higher, the more unstable it all becomes. But this is where the gains come from early on.

This is why timing your entry into the markets is so crucial. You want to catch the uplift from this expansion of debt and buying, all the while staying aware that it cannot continue indefinitely. 

Timing this expansion and contraction is what we study over at Cycles, Trends and Forecasts. And, as we keep saying, everything we see is pointing to a massive boom generating worldwide. The time to be doing something about it is now. The boom times can’t last forever. Get on with it..

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Callum Newman
Economic Consultant

CALLUM NEWMAN is an editor at The Daily ReckoningAustralia’s biggest daily financial email. He’s also the associate editor of investment advisory Cycles, Trends and Forecasts and hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why property markets, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.