The Valor Blog.
Investment News and Views, Direct from Our Team.

Actively seeking rational opposing viewpoints

I always read as much as I can on views that oppose my own.

This article is one of them. Unfortunately the points it brings up about China being different actually enforce my belief that the real estate bubble is unsustainable, and the same as every other bubble.

“Use it or lose it” as a policy to force developers to build regardless of the economic viability is a very dangerous policy. This major point from Keith reinforces the idea that the current building in China is “unsustainable and uncoordinated”.

In China, you have to build, even if it means the buildings lie empty. And when it’s time for people to move in, they’ll see if the building’s held up over time. If it’s not, they’ll knock it down and, many times, build a new one.”

If Australia had a policy of “you have to build”, then I would expect our economy would be growing at 8% for the next decade too. We could rewrite the rules of economics and continue to build empty apartments for ever, eternally creating wealth and never having a downturn. Someone would have to rewrite Keynes’ “General Theory of Employment, Interest and Money” and state that endless stimulus can grow the economy at high single digits forever – regardless of overcapacity.

The biggest question is how all this mania will end. One area in which I possibly agree with this article is that China is different in the way it can handle the crisis. They can bail out their banks and local governments, however this will likely still result in less building at some stage and this is where I worry for Australia. China as an economy will likely be fine, but investors will probably lose out. Australia will also be ok, but we will probably be sending less dirt up north at lower prices in the next couple of years and this will slow our economy. There is no crystal ball, only rational allocation of capital. Allocating capital to mining and banking which are both reliant on metrics that are at multiples of their century long after inflation averages is not overly rational.

“You only know who has been swimming naked when the tide goes out” (Warren Buffett). Our best estimates is that the “building empty buildings” tide in China is ready to go out at some stage in the next year or two.

(P.S. I’m still looking for some rational opposing views)