Of Bubbles

Two contrasting views from the Intelligent Investor blog (Doddsville) on whether there is a bubble in Australian real estate prices make for an interesting read:

• Gareth Brown's Jeremy Grantham calls Australian property market “a bubble”
• James Greenhalgh's follow-up The myth of the house price bubble

Shiller's Irrational Exuberance is great book on bubbles. Personally, I don't think Australia is quite in a bubble situation yet with housing. I tend to agree that as long as there is an under-supply of housing, it's quite unlikely that house prices will crash. On the other hand, the recent history of housing in the United States shows that under-supply in housing can be turned around pretty quickly so there's always reason to be cautious.

China on the other hand, strikes me as being in a real estate bubble. I'm in the Chanos camp there. I've seen the videos of  New South China Mall and Ordos and they are rather scary! Unfortunately, I suspect it will be a very rough ride out of that particular situation, once things start to collapse. I don't think anyone knows exactly when that will be, but more people seem to be of that view: Chanos, Andy Xie, Jack Rodman and others.

Update: Interesting counterpoint on China on Scott Sumner's blog:

I’d say if you are predicting a crash based on construction being 60% of GDP, and it’s actually only about 10%, that’s a big problem.

Hmmm, good point!