A news item in The Times of India on Saturday on the relentless rise in apartment prices in Mumbai caught my attention. Apparently, the asking price for a 620 sq. ft apartment was around Rs44 lakh (just under $100,000). Buyers are turning away. But developers do not appear to be deterred. The story should resonate in other parts of Asia.
Construction of residential real estate is unending in Singapore. A successful land auction in Hong Kong at a high price has supposedly buoyed sentiment there. In China, property prices, based on published statistics, do not seem to have responded to the various administrative measures unveiled thus far. In May, the annual home price appreciation was 12.4%, not very different from the 12.8% appreciation reported in April.
As written in these columns, recent decline in commodity prices might have alleviated immediate inflation risks in some countries in Asia, but I think Asian policymakers need to focus on a broader definition of overheating.
On page 65 of their book Animal Spirits, George Akerlof and Robert Shiller have this excellent description of overheating:
“The term overheated economy, as we shall use it, refers to a situation in which confidence has gone beyond normal bounds, in which an increasing fraction of people have lost their normal scepticism about the economic outlook and are ready to believe stories about a new economic boom. It is a time when careless spending by consumers is the norm and when bad real investments are made, with the initiators of those investments merely hoping that others will buy them out, not feeling independently confident that the underlying real investment is sound. It is a time when corruption and bad faith run high, since they rely on trusting behaviour on the part of the public and of apathetic government regulators. This corruption, however, is mostly recognized publicly only after the fact, when the euphoria has ended. It is often also a time when people feel social pressure to consumer at a high level because they see everyone else doing so, do not want to be seen as laggards, and do not worry about such high levels of consumption because they feel that others don’t either.”
Bare Talk would like policymakers across Asia to put their hands on their chests and declare that this description above does not apply to their economies and societies. Very few can do that with a clear conscience. The question is what are they doing about it. Not much that would address the core of the problem, which is behavioural in nature.
Bare Talk concedes that, in a global environment of loose monetary policy and footloose capital, financial conditions do not tighten nearly enough with such conventional measures.
Countries are beginning to deal with footloose capital. Brazil had imposed taxes on short-term capital inflows. South Korea is actively considering one. They are necessary because they raise transaction costs for those seeking to make easy money since their trading bets have real consequences for economic and social outcomes. They send out the message that policymakers are uncomfortable with a rapid rise in asset prices—currencies, stocks, real estate, etc. Hence, these are necessary components of an anti-overheating policy package. But they are insufficient.
The key is to send out the message—a lot of it can come through verbal suasion and repetition—that policymakers are mindful of risks of unsustainable growth and would welcome a period of low growth as an antidote to correcting past excesses and would also work actively to prevent build-up of further excesses. Combination of interest rate increases, currency appreciation, capital controls, anti-speculative measures targeted at specific sectors and moral suasion with the financial sector and with the public have to form part of the policy response in Asia.
Honestly, that is not only missing, but overheating is also being fanned due to the pursuit of short-term economic growth as an end-goal in itself. Asia is still anxious to catch up fast and to compress the two or more centuries that Western nations took to achieve their current status into a generation. That is neither desirable nor feasible. There is needless insecurity and breathless activity, consequently. The social, environmental and geopolitical costs of such a pursuit are eluding their grasp. A quarter century of living the “greed is good” has produced the “wealth fatigue syndrome” —a phrase that returns six million hits in 0.2 second in Google search.
Inter-generational political leaders and policymakers cannot afford to be frogs in the well—like most institutional and individual investors are—bad at “absorbing bigger structural trends and understanding when structural breaks have occurred” (see http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2010/06/11/the-frog-in-the-frying-pan.aspx).
Absent that intellectual and moral capacity, Asian governments cannot hope to decouple from the effects of many fault lines that still criss-cross the developed world. To paraphrase Jonathan Tepper (see link above), Bare Talk hopes that governments around Asia would know how to choose wisely between bad choices and worse ones.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org
To read V. Anantha Nageswaran’s previous articles, go to www.livemint.com/ananthacol.htm