About bubbles in China, Sweden and elsewhere

Currently, there is an intense discussion going on whether there is a bubble on the Swedish real estate market or not. But this question should not be the point anymore.

In my view, there is already a bubble without any doubt after all these years of credit boom and enormous price increases on this specific market in mainly major Swedish cities.

The question is instead whether this bubble will burst or not. Children know about this distinction when producing bubbles with their chewing gums. They want the bubble to burst by inflating it further. Financial analysts, however, have many times no feeling for such a necessary distinction between the existence of a bubble per se and its possible bursting.

So, why does the Riksbank – not literally spoken – refuse to apply this bubble phenomenon taken from the world of childhood? They do, of course, hope – unlike most children – that the bubble within the forseeable future will diminish more or less by itself and/or by the already visibly weakened Swedish currency – preferably without a major explosion, of course.

Is this, however, still possible under current overheating conditions? May be not. Probably, something drastic must happen to deflate the existing bubble on the Swedish real estate market, whatever the tool or the triggering event may be.

Moving the analysis to the Far East, China is another country having a real estate bubble right now, both what regards residential investments and the commercial real estate sector (city offices and industrial parks). Concerns (should) still increase.

What we do know from history is the fact that it normally takes quite some time until a bubble on real estate markets finally bursts – but also that the consequences of such a bursting bubble tend to be severe and long-lasting.

A very micro-oriented observation may be illustrative. I recently had the opportunity during a flight to read a leading Hong Kong-based newspaper completely from the first to the last page. One micro-oriented article was striking me particularly.

This article was about massive property sales of an extremely rich Chinese tycoon (on the highly-valued Shanghai market). He had simply concluded that the risks on Chinese real estate markets had become too high.

Ten years ago, the same tycoon paid around 3000 yuan for one square meter in this specific Shanghai project. Now it is noted that square meter prices in neighboring locations have been soaring up to 50 000 yuan. What a bubble! It may burst – or not. But risk-upgrading is still in place.

Sometimes, micro observations can cause or strengthen real macro concerns …