It's the Liquidity, Stupid

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

March 2010

In 1992, when former USA President Bill Clinton was campaigning against the senior George Bush, he uttered “it’s the economy, stupid!” implying the latter had missed the big picture. The USA economy was not doing too well in 1992. Bill won.

By the same token, whenever real estate markets get hot, especially the residential sector, people tend to lay blame on insufficient supply, rising land prices, or developers getting greedy and holding back units for sale. Not that these are entirely unfound, but in the current round of things, they might have missed the big picture: liquidity!

Let’s say we start with $1000 and 10 assets and the average price of each could be $100. Say money now grows to $5000 [a 400% increase] and assets also increase their number to 20 [a 100% increase]. Thus, the average now is $250 [a 150% increase] reflecting money growth is faster than asset growth. Say money grows again to $8000 [a 60% increase] with no further increase in the number of assets [0%], thus leading to an average of $400 [a 60% increase]. Obviously the above is a highly simplified scenario but it illustrates that simply an increase of $ could be sufficient at times to push (the nominal) prices up. Whether the purchasing power of the assets has been enhanced (or decreased) is another matter and is beside the point here.

Naturally, not every $ is used for investing in assets and some could remain as cash in the bank. Generally, more $ is invested in assets in good times and vice versa in down times. As such, and referring to the above example, the average asset could approach $400 in good times and may fall even below the original $100 in bad times. Nonetheless, unless the $ is depleted in the process, or for that matter not replaced-replenished, the assets will again rise above $100 when the good times are back or merely anticipated.

The point here is that given the various fiscal and economic stimulus dished out worldwide in the past year owing to the financial tsunami which occurred in the year before, it would be strange not to see asset price go up, real estate included.

While insufficient supply and the like could also be contributing factors, their influence might have been over-hyped. IF people wish to and / or decide to reign in asset price appreciation e.g. with a view to let the less endowed buy their own homes, they need to address the liquidity issue.

As to why we tend to view the current situation this way, part of the rationale includes:

A)      In our study of residential markets, GDP per capita tends to be a major or dominant factor with regards to price performance = and the correlation between them tend to be high and possibly seems to explain the bulk of the price behavior. That is to say, while supply, mortgage rates, and the like could be contributing factors, if one is only allowed to monitor just 1 aspect, GDP per capita is usually the pick.

B)      Contemplating further, GDP per capita may reflect or may be a function of liquidity = the more $ there is, and given any fixed number of people or households, the higher the household income.

C)    Real estate supply, (nominal) mortgage rates etc do not appear to have a long term relationship to price.   

As for the recent call by some in Hong Kong to revive the home ownership scheme, readers may refer to an earlier article dated December 2009 “Call for Home Ownership Scheme is Uncalled for”  http://www.real-estate-tech.com/articles/SRS120901.htm. 

Note: Interested readers may wish to read a relatively new book titled “The Corruption of Capitalism” written by Richard Duncan and published by CLSA. It gives a good account of the liquidity issue.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.    

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