Does The Economics Profession Understand Very Much At All?

Hugh Pavletich
Christchurch
New Zealand

August 25, 2008

It would appear the worlds Central Bankers had a “confusing time” at their annual retreat at Jackson Hole, Wyoming, USA – if this article from the Financial Times Bankers caught between hope and despair is any guide.

Let’s hope the “Hole” wasn’t too big between hope and despair!

Since the housing bubbles burst - firstly in California - where housing had ballooned out to in excess of 9 times household earnings – there has been no meaningful discussion by economists, researchers and media - to firstly estimate the quantum of the “bubble value” or “fake value” of individual markets globally, and secondly, to discuss the “comprehensive disruption costs” of allowing these bubbles to inflate, plateau and deflate.

Housing markets that exceed 3 times household income are in bubble territory.

A rough estimate would suggest that the US housing markets have around the equivalent of 80% of its GDP of “bubble value” – Australia, New Zealand, the United Kingdom and Ireland around double their GDPs of “bubble value”.

Another useful measure is the relationship of Total Residential Stock Value and Gross Domestic Product / Gross Area Product.

Housing markets such as Houston with a Median Multiple of 2.9 ( refer 4th Edition 2008 Demographia Survey – Sept Qtr 07 data ), a population of 5.6 million people and estimated residential stock of 2 million units – and an average sale price (refer HAR latest monthly report all residential types included – dollar volume divided by sales volume) of $217,507 – would roughly indicate that Houston’s residential stock is worth $435 billion. According to the US Dept of Commerce – Bureau of Economic Analysis – in 2005 the Greater Houston Area GDP was $316 billion. It is now likely closer to $400 billion (strong economic growth coupled with strong population growth).

This would suggest that Houston’s housing stock ($435 billion) and a GDP of near $400 billion – that its housing stock value is only some 1.09 times its GDP / GAP. It would be most interesting to learn what the quantum of household debt is in Houston.

No wonder the Central Bankers – and the rest of us for that matter – are so confused. It would be of some considerable comfort if economists, researchers and media could estimate the quantum of “bubble value” or “fake value’ within the stressed markets that needs to be dealt with.

ENDS

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