The China Syndrome and American Real Estate
Recently I experienced some of the bad weather in Nebraska and Iowa. Very similar storm clouds are building on the economic horizon.
First, one has to look no further than China. With more than one out of seven people in the world residing on this landmass, China’s economy has grown 9.7 percent in GDP annually; however, some institutions are indicating that the growth rate might actually be as high as 14-15 percent. To compound matters, property values have increased 8 percent while urban real estate increased 28 percent in value and fixed investment increased 43 percent.
A huge storm cloud in China is its banking system, which is state owned. Many loans are being made in speculative real estate. Some experts say that problem loans could be as high as 40-50 percent. An increase in interest rates worldwide and a slowdown in the economy could accelerate this potential problem very quickly. The impact of this problem on Japan, Southeast Asia, New Zealand and Australia would be much more pronounced than in the U.S. and Europe.
In the U.S., urban and suburban real estate is hitting the end of a speculative bubble. Many people are making attempts to purchase houses and real estate before the interest rates increase. Keep in mind that two-thirds of economic growth last year was generated through home equity loans and refinancing. A decline in real estate takes the wealth effect of increasing asset values out of the equation and places more emphasis on cash flow and earnings.
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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