NORTH AMERICAN INVESTORS & DEVELOPERS IN REAL ESTATE
GRI
2011
USA
Jobs-plenty growth or yet
another bubble?
John Calverley, Head of Macroeconomic Research
March 2nd 2011
We are living in extraordinary times
Low interest rates
 Fed funds rate near 0%
 Quantitative easing
 HK mortgage rates at less than 1%
High unemployment
 US unemployment highest for 27 years
 Political unrest in North Africa, Mid-East
Housing in disarray
 US government guaranteeing most mortgages
 House prices falling US, Spain, Ireland etc
 House prices surging in Asia
Huge budget deficits
3
GDP in recession and recovery
Q2 2008 = 100. Chart shows the decline in the recession (y axis) and the level Q4 2010 (x axis)
112
CN
108
NG
Up and away
ID
GDP at trough
104
100
AU
PH
ZA
CA
96
EU
GB
92
IN
MY
US
KR
HK
Rebounding
TH
Struggling
JP
SG
TW
88
90
95
100
105
110
115
120
GDP now with Q2 08 = 100
Sources: Bloomberg, Standard Chartered Research
4
U.S core PCE
Sources: Bloomberg, Standard Chartered Research
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Inflation low in the US, surging in China
% y/y
10
8
6
4
2
0
-2
-4
China core PCE
5
Fiscal problems in developed countries
Structural deficit against net debt liabilities 2010
0
Switzerland
Hungary
Belgium
-2
Australia
Italy
Austria
Canada
New Zealand
-4
Iceland
Germany
Netherlands
Euro area
Spain
Greece
France
-6
Portugal
Japan
Deficit
United Kingdom
Poland
-8
United States
-10
Ireland
-12
-20
0
20
40
60
80
100
120
Net Debt
Sources: Bloomberg, Standard Chartered Research
6
The European debt crisis – not solved
 Portugal is another small problem
 Need more money if Spanish government borrowing costs rise too far
 Problems in Italy would overwhelm
 Liquidity for problem country banks is a worry for the ECB
 Austerity fatigue may kick in
 Real estate still very weak in Ireland, Spain
 Competitiveness is the underlying issue
7
Greece
Germany
Sources: Bloomberg, Standard Chartered Research
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
Dec-97
Jun-97
Dec-96
Jun-96
Dec-95
Greece, Spain competitiveness problem
OECD Unit labour cost index
200
180
160
140
120
100
80
Spain
8
US: Employment change since peak, by recession
The most recent experience is by far the worst for job losses in post WWII history
Jul-48
Mar-53
Jul-57
Apr-70
Jul-74
May-81
Mar-90
Mar-01
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
7.5%
6.5%
5.5%
4.5%
3.5%
2.5%
1.5%
0.5%
-0.5%
-1.5%
-2.5%
-3.5%
-4.5%
-5.5%
-6.5%
Nov-07
Sources: Bloomberg, Standard Chartered Research
9
Unemployment and nominal wage growth
Slack in the labour market points to still soft wage growth in coming years
12
10
8
6
4
2
Unemployment (%)
Jan-11
Nov-09
Oct-08
Aug-07
Jul-06
May-05
Apr-04
Mar-03
Jan-02
Dec-00
Oct-99
Sep-98
Jul-97
Jun-96
Apr-95
Mar-94
Jan-93
Dec-91
Oct-90
Sep-89
Jul-88
Jun-87
Apr-86
Mar-85
Jan-84
0
Nominal Wage Growth (%, yoy)
Sources: Bloomberg, Standard Chartered Research
10
Slow growth partly because housing starts have not rebounded
000s
3000
2500
2000
1500
1000
500
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
0
Housing Starts
Sources: Bloomberg, Standard Chartered Research
11
Mortgage Purchase Index vs. Home Affordability
600
210
500
190
400
170
300
150
200
130
100
110
90
Jan-90
Oct-90
Jul-91
Apr-92
Jan-93
Oct-93
Jul-94
Apr-95
Jan-96
Oct-96
Jul-97
Apr-98
Jan-99
Oct-99
Jul-00
Apr-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
Mar-07
Dec-07
Sep-08
Jun-09
Mar-10
Dec-10
0
Mortgage Purchase Index
HOME AFFORDABILITY Index
Sources: Bloomberg, Standard Chartered Research
12
House price declines by city
X-axis is the peak in prices since 2000. Y is the maximum decline from the peak.
0.0%
-10.0%
Dallas
Charlotte
-20.0%
Boston
ClevelandDenver
New York
Portland
Seattle
Atlanta
Chicago
-30.0%
Washington DC
Minneapolis
San Diego
-40.0%
Los Angeles
Tampa
Detroit
Miami
San Fran
-50.0%
Phoenix
Las Vegas
-60.0%
-70.0%
0
20
40
60
80
100
120
140
160
180
200
Sources: Bloomberg, Standard Chartered Research
13
Wealth effect (net worth as % of disposable income)
Overall wealth is back down to more ‘normal ‘long term levels
650
600
550
500
450
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
400
Net worth as a % of Disposable Personal Income
Sources: Bloomberg, Standard Chartered Research
14
Household liabilities to income ratio
The case for continued deleveraging is strong
120%
110%
100%
90%
80%
70%
60%
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
50%
HH Liabilities/ HH Income
Sources: Bloomberg, Standard Chartered Research
15
US Consumer sentiment improving slowly
200
180
160
140
120
100
80
60
40
20
Conference Board Expectations
Dec-10
Aug-08
Mar-06
Oct-03
May-01
Dec-98
Jul-96
Feb-94
Sep-91
May-89
Dec-86
Jul-84
Feb-82
Sep-79
Apr-77
Nov-74
Jun-72
Feb-70
0
Conference Board Current Situation
Sources: Bloomberg, Standard Chartered Research
16
Commercial real estate prices
Moodys/REAL indices. January 2000 = 100
250
225
200
175
150
125
100
Real CPPI
CPPI-National Retail
CPPI - National apts
CCPI - National industry
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
75
CPPI - NY Metro
Sources: Bloomberg, Standard Chartered Research
17
U.S investment in non-residential real estate low too
USD bn
500
475
450
425
400
375
350
325
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
300
U.S Gross private domestic investment nonresidential
Sources: Bloomberg, Standard Chartered Research
18
ISM surveys vs. NFIB
Small business not as positive as large businesses
30
80
Manufacturing PMI ISM
Non-Manufacturing PMI ISM
Jan-11
85
Jan-10
35
Jan-09
90
Jan-08
40
Jan-07
95
Jan-06
45
Jan-05
100
Jan-04
50
Jan-03
105
Jan-02
55
Jan-01
110
Jan-00
60
Jan-99
115
Jan-98
65
NFIB (RHS)
Sources: Bloomberg, Standard Chartered Research
19
Leading economic index pointing up
Conference Board Leading indicators
120
115
110
105
100
95
90
85
Leading Index
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
80
3MMA
Sources: Bloomberg, Standard Chartered Research
20
Money supply M2 growth has picked up modestly
M2 %y/y
16%
14%
12%
10%
8%
6%
4%
2%
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
0%
6m change
Sources: Bloomberg, Standard Chartered Research
21
Is QE creating another bubble?
 QE works partly by boosting asset prices
 But no bubble in the US now
 Food prices – mainly due to supply interruptions in my view
 Real estate in Singapore, HK, China – but because of their own
monetary policy
 My view – QE is a good policy and has worked. Controversial!
22
Inflation vs deflation?
 Deflationary forces still powerful for the US
 Deleveraging
 Need for fiscal tightening at some point, possibly severe
 Core inflation currently low, but likely turning up this year
 Risk that the Fed is too slow to tighten – inflation problem later
 Urgent need to tackle the US fiscal crisis
 Will the US be saved by fast growth in Asia?
23
The third global Super-cycle
Real world GDP growth since 1820
10%
1946-1973: 5.0%
8%
2000-2030: 3.6%
6%
1870-1913: 2.7%
4%
1820-1870: 1.7%
2%
0%
-2%
1973-1999: 2.8%
-4%
1913-1946: 1.7%
-6%
-8%
-10%
1820
1840
1860
1880
1900
Actual world GDP growth
1920
1940
1960
1980
2000
2020
Average world GDP growth
Sources: Maddison, IMF, Standard Chartered Research
24
The shift in the balance of power
Nominal GDP 2010, USD 62trn
Nominal GDP 2030, USD 308trn
% of global
% of global
ROW
6%
Japan ROW
5%
3%
China
10%
India
3%
Japan
10%
China
23%
EU-27
14%
Asia ex CIJ
6%
SSA
2%
MENA
3%
Latam
6%
EU-27
27%
US
12%
India
10%
CIS
3%
CIS
5%
US
24%
Asia ex CIJ
8%
Latam
9%
MENA
6%
SSA
5%
Sources: IMF, Standard Chartered Research
25
The New World Order
1990
USD trn
2000
USD trn
2010
USD trn
2020
USD trn
2030
USD trn
1
US
5.8
US
10
US
14.6
China
24.6
China
73.5
2
Japan
3
Japan
4.7
China
5.9
US
23.3
US
38.2
3
Germany
1.5
Germany
1.9
Japan
5.6
India
9.6
India
30.3
4
France
1.2
UK
1.5
Germany
3.3
Japan
6
Brazil
12.2
5
Italy
1.1
France
1.3
France
2.6
Brazil
5.1
Indonesia
9.3
6
UK
1
China
1.2
UK
2.3
Germany
5
Japan
8.4
7
Canada
0.6
Italy
1.1
Italy
2
France
3.9
Germany
8.2
8
Spain
0.5
Canada
0.7
Brazil
2
Russia
3.5
Mexico
6.6
9
Brazil
0.5
Brazil
0.6
Canada
1.6
UK
3.4
France
6.4
10
China
0.4
Mexico
0.6
Russia
1.5
Indonesi
a
3.2
UK
5.6
Source: Standard Chartered Research
26
Implications of Super-cycle
 Rising tide should lift all boats – the West can rise above its problems
 Super-cycle does not mean the business cycle is eliminated
 China’s economic fortunes will become crucial - the next world recession could
be “made in China”
 World real and nominal interest rates likely to rise
 Huge demand for real estate in the rising countries
 Real estate companies from the East may seek to diversify to West and viceversa
27
Conclusions
 US recovery is on a slow track and still vulnerable
 But most likely will continue and gradually strengthen, helped by Asian growth
 US fiscal deficit is a grave risk
 Inflation not a near term problem for the US
 Bubble risks today are in Asia
 “Macro-prudential policies” are the new answer
28
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Data available as of 21 February 2011. This document is released on 3 March 2011
Document approved by: John Calverley, Head of Macroeconomic Research
NORTH AMERICAN INVESTORS & DEVELOPERS IN REAL ESTATE
GRI
2011
USA