This Time is Different!

Charles N. Steele
 
Issue CCXXXVII - March 6, 2010
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45 million USD for a new apartment in Shanghai?  150 percent increase in real estate prices in China since 2003?  Almost ten percent increase over the last month?  Does this remind you of anything from the recent past?  (If not, see "Data Note" below.)
 
Here's a fascinating piece on housing prices in China from today's New York Times.  The explosion in China's real estate markets has some talking "bubble," but of course this situation is quite different from, say the United States experience of recent past.  Why?  

  • China exhibits strong economic growth.  
  • The burgeoning middle class has plenty of pent-up demand for housing.  
  • China is developing new and better mortgage instruments for financing these purchases.  
  • And, of course, housing prices never go down.  

I suppose I should have saved the above for April 1.  A bubble is a bubble.  This time is not different.  BBC cites a Mr. Lu Wanpeng of Beijing who is caught up in the "investment" frenzy: "I already got a flat, but I want to upgrade and make an investment at the same time.  Investing in property is the best way to maintain the value of your money."  To which I can only add, "poor guy."  It's so easy for us human beings to kid ourselves; we observe the mistakes of the past, congratulate ourselves on our ability to learn from them, and then jump onto the same old bandwagon when it comes around, all the while explaining why things are different this time.
 
I'm reminded of this every time I hear people seriously arguing that the solution for rising health care expenses is to let government do for the health care industry in general what it has done with Medicare, or that recent "profits" in our "too big to fail" banks are signs of productivity and recovery, or that the massive flood of "liquidity" from the Fed won't ultimately generate price inflation, and a whole host of other "this time is different" arguments.  Our inability to "learn from what we've earned" is why I think we have substantial economic and political difficulties ahead.
 
I would find it all depressing, except that our ability to fool ourselves takes on elements of comic absurdity, and nevertheless our tendency is to keep trundling along, despite our human failings.  In general, the world is a wealthier, healthier, more peaceful, and freer place than at any time in history. This time it's not different, which means it's also not the end of the world.  
 
Data note: Look at these for a comparison of year-to-year housing price changes in China and the United States.


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