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It is not a well known fact, but 1998 produced what is now considered
possibly the most dramatic real estate bubble event noted in world history.
It happened during 1997 and 1998 in Shanghai China, in the commercial office
tower real estate sector.
MASSIVE overbuilding of commercial real estate built during the high growth,
over-inflated mainland China economy, resulted in hyper land speculation in
Shanghai, which has ended in a commercial real estate CRASH of epic
proportions. As quickly as many of the enormous new commercial office tower
complexes are being completed, they are being pad-locked shut, sitting
completely empty, whole towers across the horizon, with hundreds of
thousands of square feet of high end commercial real estate sitting empty.
It is now estimated that without ANY new commercial construction, it will
take fully FIFTEEN YEARS of normal economic activity to totally occupy these
new office tower complexes in Shanghai. This has resulted in spreading real
property deflation and contributed to general price deflation in the area,
admitted officially by the Chinese government today.
The earlier post made on the Hong Kong economy is a partial result of the
classic unwinding of the SHANGHAI real estate BUBBLE.
As was pointed out in another recent post here, there is no real estate
bubble in the US. But there is a true BUBBLE in the stock market. During the
recent price peak, at the July 1998 market high, the price earnings ratio
for the S&P 500 hit 29 times earnings for the market as a whole. This is BY
FAR the highest US market PE Ratio ever recorded, and by a wide margin.
What many analysts fail to mention is that it is not just the reduced
earnings expectations that cause the stock prices to drop, it's the 'reduced
price earnings ratios' that also result from reduced earnings expectations,
that really start to kill inflated stock prices in a bear market. This is
reflected in the recent S&P 500 futures prices, which have corrected exactly
10% from that July 20th high close, in only 11 trading days!
On Acompora, he simply restated in plain language, based on market tape
action, what Greenspan recently said about stock prices to Congress on July
10, 1998:
"These rising expectations have, in turn, driven stock prices
sharply higher and credit spreads lower, perhaps to levels
that will be difficult to sustain unless economic conditions
remain exceptionally favorable -- more so than might be
anticipated from historical relationships."
"Reduced prospects for the return to capital would not only
affect investment directly but could also affect consumption
as stock prices adjusted to a less optimistic view of
earnings prospects."
Michael Paauwe
mpaauwe@xxxxxxxxxx
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