ONCE home prices in the United States start to bottom out, talk of an economic recovery will be realistic, according to a senior regional economist.
Mr Arjuna Mahendran, managing director and head of investment strategy in Asia for HSBS Private Bank, told a briefing at the Four Seasons Hotel yesterday that property prices are the key to consumer spending.
Singapore-based Mr Mahendran said consumer spending will be the key growth engine behind the US' economic recovery when it eventually comes.
The strong link between the average US consumer's net worth and the nation's savings rate means that home owners will be more inclined to cut spending as the value of their property dips.
Net worth is defined as the combined value of a consumer's home and pension plan, which is based on the value of the equity market.
'This recession was marked by a massive increase in US savings, with the savings rate increasing from 0 to about 6.5 per cent in the last 18 months. That is 6.5 per cent of US$13 trillion (S$19 trillion) lost, which is the annual US gross domestic product,' said Mr Mahendran.
That cash that is now being saved would have been spent on consumer goods, often imported to the US.
Mr Mahendran said the pension plan side of the net worth equation has been taken care of, with the bottoming out of equity markets in March.
The share markets have bounced back to a degree but house prices are still falling, prompting savings rates to rise further.
Mr Mahendran attributed falling house prices to a demand-supply imbalance in the housing market: New homes are being completed faster than expected, thanks to government stimulus plans, while take-up rates are low because of rising mortgage rates.
'What we are looking for, therefore, is a bottoming in US housing prices... when that bottoms out, we will see the start of the next bull market,' said Mr Mahendran.
He believes the US savings rate is already near its peak, and expects home prices in the country to hit their bottom in the second half of this year, after dropping some 10 to 12 per cent from current levels.
Source: Straits Times, 3 July 2009
No comments:
Post a Comment