Tags: Ex-Treasury | Secretary: | Economic | Outlook | Bleak

Ex-Treasury Secretary: Economic Outlook Bleak

Wednesday, 14 December 2005 12:00 AM

The Economist has taken a magnifying glass to the global housing economy – and it's probably no surprise that the magazine has concluded that the market is slowing down.

What could be more distressing about this diagnosis is that even in countries where prices aren't falling, housing markets are so overvalued that they'll be in a major funk for the next 10 years.

Each quarter, The Economist commissions a new study on global housing trends. The magazine says that for the third quarter of 2005, America finally joined places like the UK and Australia, which have been stagnant for over a year now.

"America's market has remained hot for longer than most, but even it now seems to be coming off the boil," says The Economist.

"The 12-month rate of house-price inflation slowed to 12% in the third quarter of 2005, from 14% in the second. Prices of new homes, however, rose by only 1% in the year to October, down from 16% in early 2004."

The Economist points to a high inventory of new buildings resulting from a glut of new building that is overwhelming the market, causing developers to slash prices. It also cites a major rise in unsold homes in the U.S. for the month of October. These are staying on the market for an average of 4.9 months – up from 3.8 months in January 2005.

Those numbers are more akin to data from the UK and Australia over the past 18 months. According to The Economist, growth in one housing survey slid from 20% in 2004 to a miserable 2% in 2005.

In Sydney, Australia, housing prices have fallen 10% in the third quarter. Similar numbers are being reported in Melbourne, Brisbane and other major cities down under.

The Economist reports that similar declines in housing sales are visible in France, Spain, Italy and Ireland.

But Japan is a different story.

After a 15-year slide, the Asian power is finally seeing home prices bounce back. But Japan's downward spiral was a long and painful one, with home prices declining 40% since 1991.

"Japan shows what can happen when home prices lose touch with reality," says The Economist.

"But exactly how overvalued are property markets elsewhere? A recent report on the rich world's housing markets by the OECD [Organization for Economic Co-operation and Development] concludes that Australia has the most overvalued housing market, with prices 52% above their ‘correct' level. Next in line is Britain, where prices are 33% overvalued."

To measure its results, the OECD used a "price-to-rent" ratio by which it calculates at what point people will choose to rent a home instead of buying it.

Based on this formula, the OECD says Australia's price-to-rent model is up 70%. Britain, the Netherlands and Ireland all have price-to-rent north of 15%, while America and France look overvalued by about 20%.

Overall, global housing looks to be about 14% overvalued, according to the OECD analysis.

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Robert Rubin is once again happily ensconced on Wall Street, serving as director and chairman of the executive committee at Citigroup. 

From that perch, the former Clinton Treasury Secretary told Maria Bartiromo in her weekly BusinessWeek column that the U.S. economy is at a critical juncture.

Rubin says we must be concerned with "the enormous global imbalances, particularly those focused on the U.S. – the fiscal imbalances, trade imbalances, virtually [nonexistent] personal savings compared with debt."

"[It faces] a competitive challenge of historic dimensions coming from China, India and many other emerging-market economies," says Rubin.

"India, China, Korea and Southeast Asia will be the most robust part of the global economy and will become the center of it over the decades ahead. At some point in that period, China will likely become the world's largest economy."

Later, Bartiromo asks how can anything get done, given the disarray and disruptions at the White House.

"The projections of mainstream forecasters haven't changed: $4.5 trillion to $5 trillion of deficit over the next 10 years if the 2001-02 tax cuts are made permanent. When you get to the middle of the next decade, the rate of growth of Medicare and Social Security all of a sudden increases rapidly because baby boomer retirements increase dramatically," he says.

"The federal health-care challenges represent five or six times the problem of Social Security. Meantime, you have competition from emerging markets. Can you get things done? I suppose. But we need a vastly improved education system, basic research ... and nothing is being addressed."

On deficits, Rubin isn't that much more optimistic. He tells Bartiromo that the U.S. deficit just doesn't add up in good economic terms.

"It's not indefinitely sustainable to have these deficits and imbalanced accounts. If you had enormous savings rates, then maybe. But we don't have enormous savings," says the former Treasury Secretary.

Rubin does give the thumbs-up on Federal Reserve Chairman-in-Waiting Ben Bernanke, calling him a good choice.

"I've said that I thought the next chairman, in addition to being deeply knowledgeable about macroeconomic theory and insightful about reading data, could well need the experience to deal with market disruptions, given the enormous global imbalances we have...and [Bernanke] doesn't have that experience around markets."

"But he is fortunate because the Fed bank of New York has a long tradition of good capability with respect to markets, so he has a lot of [experience] he can call on."

Some in the financial world doubt that the year-end rally will have enough momentum to carry over into the early part of 2006.

Yet some investment professionals are recommending portfolio allocations in the area of "sin stocks" such as alcohol, gambling, fast food and tobacco companies. 

"With the uncertainties in the economy, we are looking to buy companies whose demand for their products is inelastic, and they tend to be sin stocks," explains Scott Airey, vice president at Legacy Advisors.

"Budweiser, Altria and Harrah's Entertainment are among our portfolio selections for our clients given our feelings on what the consumer is up against in 2006."

As the first Baby Boomers turn 60 in 2006, many still have misconceptions about retirement.

Here are the most damaging, according to certified financial planner Wayne Starr of BKD Wealth Advisors LLC:


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The Economist has taken a magnifying glass to the global housing economy - and it's probably no surprise that the magazine has concluded that the market is slowing down. What could be more distressing about this diagnosis is that even in countries where prices aren't...
Wednesday, 14 December 2005 12:00 AM
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