US defense expenditures have been soaring since the 2001 9/11 terrorist attacks. In 2008, the US spent $711B accounting for 48% of the world’s defense expenditures as the chart shows below. Russia, the former superpower spent just $70B. Europe accounted for 20% of global defense spending. The US defense spending was more than the combined total of the next 45 countries.

Last month, President Obama approved a $636B defense budget for 2010. This includes $128B for the wars in Afghanistan and Iraq. By one estimate the 2010 budget is a 0.20% increase from the 2009 budget.

The chart below shows select U.S. defense-related expenditures since 1960 from the Balance of Payments data published by the BEA.

Click to Enlarge

Source: U.S. Bureau of Economic Analysis (BEA)

Note: The 1991 figure includes $42.5B received from coalition partners for the Persian Gulf war.

The three defense-related items shown in the chart are: Transfers under U.S. military agency sales contracts, Direct defense expenditure and U.S. government grants. These three expenses appear in the current account section of Balance of Payments data and represent the amount the US spends to police the world. From under $20B prior to 1980 this amount increased to $95B in 2008.

For spending this amount of money, the overall U.S. economy benefits much less. A recent study by Global Insight, the respected economics research firm, shows that increased defense spending leads to job losses.

From the article titled “Massive Defense Spending Leads to Job Loss” by Dean Baker of the Center for Economic and Policy Research:

“For example, defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low.

The impact of higher spending will not be directly proportionate in these economic models. In fact, it should be somewhat more than proportionate, but if we just multiple the Global Insight projections by 3, we would see that the long-term impact of our increased defense spending will be a reduction in GDP of 1.8 percentage points. This would correspond to roughly $250 billion in the current economy, or about $800 in lost output for every person in the country.

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.”

For a given amount of spending, the number of jobs created by the defense sector is actually less than the number of jobs created by other sectors of the economy. An article in Naked Capitalism references a study titled “The U.S. Employment Effects of Military and Domestic Spending Priorities” by the economist Robert Pollin at The Political Economy Research Institute at the University of Massachusetts, Amherst. The following chart and table are from the updated version of this study:

Employment Effects of Spending $1B on various sectors:

Spending $1 billion on the military creates just 7,100 jobs whereas spending the same on educational services creates 16,900 jobs and on health care creates 10,400 jobs.

Clearly military spending does not help the economy like other sectors do. Sure some might argue that many cool technological advancements have come out of military research such as the Internet, GPS, etc. But those are just by-products of military research that benefited the growth of civilian economy. Civilian sectors can produce much more inventions and help provide jobs stimulating the economy if the same amount of funds are invested in civilian projects. Even Nobel Laureate Paul Krugman recently agreed that defense spending creates a short-term boost to the economy. In the long-run military spending is wasteful. Most of the defense funding is allocated to pork belly projects of politicians to keep their constituents employed and the defense industry reap huge profits. Another example of wasteful spending by the Pentagon came to light today with this news item: $400 per gallon gas to drive debate over cost of war in Afghanistan.

“The Pentagon pays an average of $400 to put a gallon of fuel into a combat vehicle or aircraft in Afghanistan.

Pentagon officials have told the House Appropriations Defense Subcommittee a gallon of fuel costs the military about $400 by the time it arrives in the remote locations in Afghanistan where U.S. troops operate.”

Last month there was another case of wasteful spending when the Senate was set to fund $2.5 B for C-17 cargo plane production which were unwanted by the Pentagon.

This $400 a gallon, $2.5B for unwanted planes are just the tip of the iceberg. Billions of tax-payer dollars are skimmed off from the military by others such as the private military contractors, consultants that have enjoyed tremendous growth in recent years.

Why does it take $600+ billion to run the military?

According to the latest figures available, as of 2007 “Pentagon is today one of the biggest land owners in the world. The 737 military bases it possesses worldwide (in addition to the bases located in US territory) occupy a total area of 2.2 million hectares. They include 32,327 buildings and employ nearly 500,000 people, including 400,000 American military and civilian personnel. In Germany only, there are 25 American bases, employing 75,600 military people. In Italy, the most important American bases
(Aviano, Camp Ederle in Vicenza, Ghedi, Camp Darby at Pisa, Napoli, Verona, Sigonella in Sicily, La Maddalena in Sardinia) occupy an area of more than one million square kms and employ 15,500 military people and 4,500 civilians.

The historian Chalmer Johnson (*The Last Days of the American Republic*, 2007), who was a CIA consultant between 1967 and 1973, has recently stressed that these figures do not include the 106 American garrisons installed since May 2005 in Iraq and Afghanistan, nor the ones built in Israel, in Qatar, in Central Asia, in Kyrgyzstan and in
Uzbekistan, nor the enormous base of Camp Bondsteel, built in 1999 in Kosovo by a subsidiary of Halliburton company, nor of course the multiple NSA installations (like the Echelon net) devoted to the illegal espionage and ‘hearing’ of personal communications throughout the world (including yours and mine).”

In addition to the two unpopular wars, the Pentagon needs billions of dollars each year just to maintain the facilities mentioned above. Some 1.4 million military personnel serving the country also cost a significant amount of funds in terms of benefits, payroll, etc. In the current economy, military is one industry that is actively recruiting people and in some ways is helping to keep the unemployment numbers low.

In summary, though defense spending is beneficial to the economy in the short-term, in the long-term it is not. In most countries military spending is much lower than US defense expenditures and those countries are able to allocate those funds for other productive investments. Since the Cold War is long over and the Berlin Wall no longer exists, isn’t it time for the US to wind down its global empire and concentrate on domestic issues?

Mergent created The International Dividend Achievers Index to track the performance of solid companies with increasing dividend payments. The components of this index have the following characteristics:

• Incorporated outside the United States
• Trade on the NYSE, NASDAQ or AMEX
• Increased annual regular dividend payments for the last five or more consecutive years
• Average daily cash volume exceed $500,000 per day in November and December before index reconstitution in January

13 British ADRs from The International Dividend Achievers Index are:

The utility National Grid plc (NGG) has the highest dividend yield at 6.63%. The British oil giant has a dividend yield exceeding 5%. Among the large banks only HSBC Holdings (HBC) made it to the list. HSBC survived the financial crisis more easily than others. Unilever, British American Tobacco and Cadburys have significant presence in emerging markets.

In order to identify some of the high dividend growth Canadian stocks we shall use the Canadian High Yield Dividend Growth 30 Portfolio Index created by Mergent, the creator of the Dividend Achievers family of indices.

Description of the Index:

“The Canadian High Yield Dividend Growth 30 Portfolio is comprised of Canadian companies that trade on a major Canadian exchange and have five or more years of equal or increasing regular annual dividend payments. Companies must have a minimum average daily cash volume of US $3,000,000 and a current dividend yield of 1% prior to each Annual Reconstitution Date.”

The National Bank of Canada and all Canadian companies that are income trusts or REITs are excluded in this index.

The Top 10 Holdings in the Canadian High Yield Dividend Growth 30 Portfolio are:

Note: Current dividend yield is noted if the stock trades on the US exchanges

The average return of equity for the index constituents is 11.65% and the dividend yield is 3.91%. As of September30, 2009 the total return for the index is about 47%. The average 5-year dividend growth rate is 7.43%.

Note: All index calculations are in Canadian dollars

Growth of C$10,000 from 1999 thru the end of 2008:

To download the full listing of the Canadian High Yield Dividend Growth 30 Portfolio, click here.

To download the latest factsheet, click here.

Hutchison Telecommunications International (HTX) is holding company that provides fixed and mobile telcom services i Hong Kong and many other countries in Asia. YTD the stock is down 25%.

Source: BankScope

The largest Canadian bank based on assets is the Royal Bank of Canada (RY), which is also the most profitable among the big five banks. The second and third largest banks are TD Bank(TD) and Bank of Nova Scotia(BNS) respectively.

Canada Mortgage and Housing Corp(CMHC) is Canada’s housing agency that provides mortgage loan insurance, mortgage-backed securities, housing policy and programs, and housing research. Montreal-based  National Bank of Canada trades on the TSX with the ticker NA. Desjardins Group is the country’s largest financial cooperative group.

According to the “Direct Investment Positions for 2008″ report from the Bureau of Economic Analysis (BEA):

“IN 2008, both the U.S. direct investment abroad and foreign direct investment in the United States positions, valued at historical-cost, grew 8 percent. This marked a slowdown in growth for both positions compared with 2007, when the U.S. direct investment abroad—or “outward”—position rose 18 percent and the foreign direct investment in the United States—or “inward”—position rose 15 percent.”

Hence last year as the global financial crisis worsened, not only U.S. companies reduced their overseas investments foreigners also decreased their direct investments in the US.

Some of the highlights from U.S. direct investment abroad include:

• The outward investment position in 2008 was not only less than the figure in 2007, but also the smallest since 2005.
• Reinvested earnings by US companies was the largest contributor to the 8% increase in 2008. This clearly shows that profit made by US companies are not fully repatriated back to the US and also shows that US firms help foreign countries’ economic growth by reinvesting their earnings there which produces more jobs, tax revenues, etc. in those countries. This could also be another reason why jobs are so scarce in the U.S. at this time.
• Though net equity investments increased in 2008 they were less than the previous year mainly due to the lack of available credit that reduced acquisitions.

Some of the highlights from Foreign Direct Investment(FDI) in the US include:

• The turbulent financial markets in 2008 kept foreign investments away. The 8% growth in 2008 lagged the 12% average during 1996-2006.
• Net equity investment was the largest contributor accounting for 61% to all the inward investment increase in 2008. This shows that foreigners took advantage of cheap equity prices and scooped up many of them.
• Despite the decline in earnings in 2008, reinvested earnings by foreign companies in the U.S. grew substantially

#1) US Direct Investment Abroad:

At the end of 2008, the U.S. direct investment position abroad was valued at $3,162.0 billion. This includes the book value of U.S. direct investors’ equity in, and net outstanding loans to, their foreign affiliates.

Which country received the most U.S. investment in 2008?

Canada, The Netherlands and the UK accounted for one-third of US investment positions in 2008. Canada is one of the major US investment destinations since it is a neighbor and is also the largest trade partner. However it is surprising to see The UK and The Netherlands as major recipients of US investment capital.

Historical inward and outward direct investment positions

Historically outward investment positions have been higher than inward investment. The gap between the two widened in the late 90s as more and more manufacturing and other operations were moved offshore to cut costs.

#2) Foreign Direct Investment in the U.S.

At the end of 2008, the foreign direct investment position in the US was valued at $2,278.0 billion. The UK was the largest investor accounting for 20% of the total followed by the Netherlands and Japan. Canada and Germany also have large investment positions in the US.

The BEA report added:

“Capital inflows for foreign direct investment in the United States were $316.1 billion in 2008, up from $271.2 billion in 2007. Capital flows in 2008 consisted of $250.2 billion in net equity capital investment, $51.0 billion in reinvested earnings, and $15.0 billion in net intercompany debt investment.”

Europe accounted for 68% of all foreign direct investments in the US last year with the UK and Netherlands as the major investors. There were also an increase in Swiss, Hungarian and Spanish direct investments in the US. More than half of the foreign direct investments (54%) went into the manufacturing sector. This is ironic in the sense that foreigners are investing in US manufacturing now while US companies decimated the sector in the past couple of decades by moving them offshore. Obviously European companies are able to invest in manufacturing here and earn a profit while US companies say that they have to move manufacturing overseas in order to be profitable.

To answer my title question, U.S. direct investments abroad is much higher than FDI into the US for many years now.

Today’s journal has a story on new rules on bank overdraft programs. In Fed Curtails Banks’ Scope To Charge for Overdrafts, the article states:

“The Federal Reserve imposed rules Thursday making it harder for banks to hit customers with fees for overdrawing their accounts, in the latest government crackdown that could curtail a major revenue stream for financial firms.

The Fed’s policy requires customers to opt in to “overdraft protection” programs, meaning they would have to agree to pay a fee any time they overdraw their accounts at automated-teller machines or using a debit card. If they don’t agree, any effort to withdraw money would likely be rejected if it overdrew the account. Currently, banks can honor a withdrawal and levy a fee on the customer for becoming overdrawn.”

This new rule is too little too late for many consumers since many of the other strict regulations proposed were watered down or ignored completely. An example is how many times a consumer can be charged overdraft fees when they over-withdraw their account in a single day. According to the Fed, banks rake in between $25 billion and $38 billion in overdraft fees each year. For many banks, overdraft programs and service charges are huge money generators quarter after quarter. For the big four - Bank of America (BAC), Citibank (C), Wells Fargo (WFC) and JPMorgan Chase(JPM) - overdraft program fees are a significant portion of their non-interest income.

Last month the Center for Responsible Lending released a report titled Overdraft Explosion: Bank fees for overdrafts increase 35% in two years.The following are some of the key takeaways from this report:

“Finding 1: Over 50 million Americans overdrew their checking account at least once over a 12-month period, with 27 million account holders incurring five or more overdraft
or non-sufficient funds (NSF) fees.

Finding 2: Banks and credit unions collected nearly $24 billion in overdraft fees in 2008.

Finding 3: Overdraft fee income for banks and credit unions rose 35 percent from
2006 to 2008. ”

For U.S. banks, overdraft fee income is projected to increase this year as the chart shows below:

Source: Overdraft Explosion: Bank fees for overdrafts increase 35% in two years, Center for Responsible Lending

The study found that in 2008 consumers borrowed $21.3 B in short-term credit via overdrafts and were obligated to repay $45B.

India’s 10 Most Profitable Banks/Financial Institutions based on Net Income in 2008:

Source: BankScope

State-owned banking giant State Bank of India is the most profitable bank followed by ICICI Bank (IBN). State Bank of India generates more than three times the profits of ICICI.

It is interesting to see Citibank(C) in this list. While the Citibank in the U.S. has to be bailed out by US taxpayers from collapse, Citibank subsidiaries in other countries have been performing well such as the Citibank division in India. The other foreign bank in the list is the British-based Standard Chartered Bank. The presence of these two foreign banks in the ranking shows the success of their Indian operations in the difficult environment last year.

The Top 10 Indian Banks based on Assets

Source: BankScope

The largest bank in India is the state-owned State Bank of India, which stood at 113 in world ranking of banks by assets. The two highly successful private sector banks in the list are ICICI Bank (IBN) and HDFC Bank (HDB). ICICI ranked second based on assets at the end of 2008. None of the other banks in the list trade in the US markets.

India-focused ETFs and ETNs:

Powershares India Portfolio (PIN)
WisdomTree India Earnings Fund (EPI)
iPath MSCI India Index ETN (INP)

An interesting article in the Der Spiegel titled Reluctant Partners - Global Crisis Makes US More Dependent on China than Ever discusses the trade relationship between the USA and China and the rising power of China.

From the article:

When US President Barack Obama visits China this weekend, he will encounter a rival that sees the financial crisis as more of an opportunity than a threat. America, on the other hand, has been fundamentally weakened by the global crunch — and is more dependent on the goodwill of the rising superpower than ever.

The scientists at the National University of Defense Technology in Changsha, China, had plenty to celebrate: They had developed a supercomputer that could perform more than a quadrillion calculations per second.

The announcement, released just in time for US President Barack Obama’s visit to China this weekend, had symbolic value: With their new computer, dubbed “Tianhe” (”Milky Way”), the Chinese claim they will be the first country to become a direct rival to the superpower.

China is bursting with self-confidence. The new world power sees itself as a winner in the financial crisis, with its economy growing by an impressive 9 percent in the third quarter, while the economies of the West struggle to recover from a deep recession. And while the Americans are focused on their own problems, China is expanding its influence, both in Asia and among resource-rich African countries.”

Writing about the American consumption of Chinese goods the authors write:

“Suddenly the crisis hit China, whose economy had been oriented almost completely toward the United States. In Dongguan, home to one low-wage factory after the next, entire neighborhoods have died out. “We have lost a third of our orders,” says Li Zhaoyuan, who owns Dongguan Singyan, a company that makes metal parts. He has laid off 40 percent of his workforce.

The remaining workers sit at outdated machines on the two floors of the plant, punching and pressing pieces of metal into objects like fishhooks and housings for Motorola mobile phones. “We used to work 24 hours a day,” says Li, “but now one eight-hour shift is enough.” He doesn’t believe that American consumers will soon be buying Chinese products as enthusiastically as they did before the crisis. He prefers to follow the advice of the strategists in Beijing, namely to focus on new markets in Asia, the Middle East and Africa.”

I agree with Mr.Li 100%. The once free-spending American consumer will not be going back to old ways any time soon with real wages in the private sector going down and rising unemployment levels. The American consumer is in belt-tightening mode now. Most of the Chinese made cheap goods were bought with credit. As consumer shop less credit growth has slowed for many months consecutively. China’s strategists have clearly understood that they need to rely less on America as the main export destination and focus more on emerging markets.

Chart - Key Economic Figures Comparison between China and USA

Click to Expand

Chart - China and USA GDP Growth

Source: Der Spiegel

While China’s economic growth since 1990 is astonishing, China has a long way to go before it can beat or overtake the US economy. Despite the strong growth the Chinese economy still is relatively small compared to the US economy. So in that sense it may be premature to call China as the rising superpower.

Emerging markets in Asia, Africa, etc. may not be able consume as much of the Chinese goods as the US did simple because consumers in those markets do not have the purchasing power as Americans do. For example, it would be wrong to assume that many Asians such as Indonesians, Indians, Vietnamese, etc. would spend as frivolously as Americans did in buying Chinese products. So the answer to my title question is that is too early to tell whether China will be able to successfully replace USA with new markets in Asia, Africa and the Middle East as its main exports destination.

The weighting is based on the dividend yield and is capped at 15%. This inception date of this index was 3/4/2008. Last year the index was down 46%.

In backtesting the index performed as follows:
2003 = 2.06%
2004 = 8.91%
2005 = 31.94%
2006 = 18.83%
2007 = 5.30%

The Components of the AEX High Dividend Index are:

1. Aegon (AEG)
Current Dividend Yield = No regular dividends paid

2. Air France - KLM (OTC: AFLYY)
Current Dividend Yield = 5.19%

3. BAM Groep KON
4. Corio
5. DSM KON

6. ING Groep (ING)
Current Dividend Yield = No regular dividends paid
7. KPN KON
8. Randstad

9. Royal Dutch Shell A (RDS.A)
Current Dividend Yield = 5.40%

10. TNT (OTC: TNTTY)
Current Dividend Yield = 1.76%

1. Unibail - Rodamco
12. Wereldhave

Many of the above stocks do not trade in the US markets. Some of them have suspended or reduced dividends due to the global economic downturn and government bailouts last year.

China’s 10 Most Profitable Banks based on Net Income in 2008:

Source: BankScope

Industrial & Commercial Bank of China (ICBC) is the most profitable bank in China based on Net Income in 2008. ICBC is a state-owned AAA-rated bank. ICBC is also the world’s most profitable bank according to The Banker magazine.

As the name implies, Agricultural Bank of China mainly lends to farmers and rural businesses.

China Construction Bank, Bank of China Limited, Agricultural Bank of China
and Bank of Communications also appear in the The Banker magazine’s 25 most profitable global banks based on 2008 earnings.

The Top 10 Chinese Banks based on Assets held as of Dec 31,2008 are listed below:

Source: BankScope

The top three banks are Industrial & Commercial Bank of China,China Construction Bank Corp and Agricultural Bank of China. Industrial & Commercial Bank of China (ICBC) is the top ranked bank in the country. In the world ranking of banks, it comes in at number 17.  It trades on the OTC market with ticker IDCBY. Currently ICBC offers a 2.90% dividend yield.

China Construction Bank Corp (OTC:CICHY) has a $20B market cap and has a 1.415 yield. In 3rd quarter, net profit totaled 30.31 billion yuan ($4.4 billion), compared to 25.27 billion yuan a year earlier. Since the start of the year its loan book grew by 24%. Bank of America (BAC) owns 10% of CCB.

The post office run China Postal Savings Bank is ranked number seven in this list which is very good.  In many countries such as Japan, India, etc. post offices offer savings banking facilities.

Related links:

Top Ten Banks of China 2007

China’s banks hit new heights: Top 50 Chinese Banks

The Dow Jones EURO STOXX® Select Dividend 30 Index offers exposure to the highest dividend-paying European stocks relative to their home markets. “Set up in advance of the launch of the Euro currency, the index covers stocks from Eurozone countries and stocks are screened by defined historical non-negative dividend-per-share growth rates and dividend to earnings-per-shares ratios. The benchmark is a yield weighted index.” The iShares DJ Euro STOXX Select Dividend ETF (IDVY) which trades on the London Stock Exchange tracks the above index. The fund has a 4.31% (Euros) dividend yield.

The Top 10 components  from the iShares DJ Euro STOXX Select Dividend ETF are listed below with their current dividend yields if they trade in the US markets:

1.Company: Banco Santander(STD)
Country: Spain
Current Dividend Yield: 4.18%

2.Company: Erste Bank Group(OTC: EBKDY)
Country: Austria
Current Dividend Yield: 2.02%

3.Company: Banco Popular (OTC: BPESF)
Country: Spain
Current Dividend Yield: No regular dividends paid

4.Company: Vallourec
Country:France

5.Company: Metso OYJ(OTC: MXYCY)
Country: Finland
Current Dividend Yield: 3.03%

6.Company: Enel Spa (OTC: ENLAY)
Country: Italy
Current Dividend Yield: 4.87%

7.Company: Wereldhave NV
Country: The Netherlands

8.Company: Bilfinger Berger AG (OTC: BFLBY)
Country: Germany
Current Dividend Yield: No regular dividends paid

9.Company: RWE AG (OTC: RWEOY)
Country: Germany
Current Dividend Yield: 6.65%

10.Company: Thyssenkrupp AG (OTC: TYEKF)
Country: Germany
Current Dividend Yield:No regular dividends paid

RWE of Germany and Enel Spa of Italy are stable long-term utility stocks. Erste Bank of Austria which had high exposure to the emerging European markets received one of the best financial aid packages from the Austrian government.

The Unemployment rate in the U.S. rose to 10.2% in October as per the latest data from U.S. Bureau of Labor Statistics. The sectors which had the largest job losses were construction, manufacturing, and retail trade. Another 558,000 persons joined the unemployed which now stands at 15.7 million in this country.

Source: U.S. Bureau of Labor Statistics

The Health Care industry added 29,000 new jobs in October. Health care is one of the bright spots in the economy for job growth since the recession that started about 23 months ago. The industry has added a total of 597,000 jobs since the start of recession. Healthcare sector employs nearly 13.7 million people in the U.S.

The BLS states:

“Before 1960, about 3 percent of private-sector workers were employed in heath care establishments. In recent years, the proportion of workers employed in private-sector health services has exceeded 11 percent.”

As America’s 78.2 million baby boomers retire in the next few years they will require more health care services.  In addition to the baby boomers, the general increase in population, technological advances in the medical field, increased stress levels among the general population, new diseases, etc. are going to create the need for additional health care services as well. Though health care is a highly regulated field, there will be plenty of potential for anyone interested in making a career in this field.

In recent months, in addition to the spectacular run up in equity markets, Asian real estate market has also heated up. In most countries this rise is not warranted based on fundamentals. While its true that traditionally most Asians bought residential real estate as a place to live lifelong as opposed to make a killing via flipping in recent years that attitude is changing. Due to the availability of cheap credit, more Asians have become real estate speculators.

1. Singapore
In the tiny city state of Singapore most of the residents live in apartments due to lack of land. While the Singaporean economy has rebounded slightly this year, prices in the property market are back to pre-crisis levels. As the domestic economy is mainly based on global trade and services-based, if the global economy goes into a tailspin like last year, then the economy of Singapore will be negatively impacted.

On Nov 3rd, Asia Times reported on the property bubble in Singapore in a piece titled New heights for Singapore property. The article stated:

“Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month. Over 43% of the transactions that took place in July fell under the middle- to high-end tier, with prices anywhere between S$1,000 (US$715) and S$1,999 per square foot depending on location.”

From the Journal’s Fears of a New Bubble as Cash Pours In:

“Over the summer, a Singapore condominium developer raised prices 5% the day before units went on sale. After dozens of would-be buyers lined up on a steamy night, the developer — a joint venture of Hong Leong Group and Japan’s Mitsui Fudosan — held a lottery for a chance to bid on the units. Singapore home prices rose 15.8% in the third quarter, the fastest rate in 28 years.”

Despite the promotion of Singapore as a major financial and tourism destination, high property prices may not be sustainable. The usually effective and prudent Singaporean government does very little to curb the growth of bubble in the property market.

2. India
The real estate market in India is a huge bubble and continues to show no sign of slowing down. Property prices in especially the major cities have shot up many fold over the years and are beyond the reach of ordinary middle class folks. The Euphoria of the India Growth story and the availability of cheap credit has propelled property prices to astronomical levels. Working with their highly powerful political friends, developers in India maintain artificially high prices defying the logic of supply and demand. During the last few years when the Indian economy took off, property prices soared and in the credit crunch last year prices barely fell. This home prices in many cities are reaching or exceeding pre-crisis levels.

The supply side of the equation is fairly high now since in addition to local money, foreign investors are pouring money in the market via private equity deals. Astonishing profits in real estate has lured all types of investors into the market leading to speculation in many local markets. The growth in real estate also poses a huge risk to the Indian banking industry since they lent huge loans to developers and buyers alike.Prices in most cities are expensive with an average looking 2 BR apartment costing a $150K or more. In many projects, basic infrastructure such as drinking water, sewage systems, roads, etc. are not developed to match global standards. Despite these issues, home prices have increased in double digit percentages in some cities just in the first half of this year.

3.Hong Kong
Housing demand has always been high in Hong Kong. With the limited availability of land builders usually built huge projects where residential towers reached many floors. However due to the strong performance of the China’s economy, many of the wealthy mainland Chinese are now investing heavily in the property market in Hong Kong creating a bubble. A couple of examples from The Wall Street Journal article:

“In Hong Kong, high-end real-estate prices are soaring. A luxury flat in the tony Midlevels district is expected to sell for US$55.6 million, or $9,200 a square foot, said developer Henderson Land Development Co. Elsewhere, a bidder at a city-run auction to operate food stands at February’s Lunar New Year celebration recently paid a record US$63,225 for the right to occupy a 400-square-foot stall to sell fish balls and other snacks. Prices in the auction of 180 stalls were up 33% from 2008.”

In order to curb this bubble in the high-end property market, Hong Kong’s Monetary Authority has raised the minimum down payment required on luxury homes from 30% to 40% late last month.

From In Hong Kong, a $56.6 Million Apartment in the New York Times:

“Donald Tsang, the city’s chief executive, cautioned in his annual policy address Wednesday that the boom might not last.

“The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in purchasing a home and the possibility of a property bubble,” Mr. Tsang said. ”

4. China
Residential prices in mainland China started increasing again early this year after a lull in 2008. The demand for housing exceeds the supply in most of China. However prices at the current levels cannot be sustained in the future. The rising real estate bubble in China was underscored earlier this year when a house in Shanghai sold for a whopping £25m.

The rising property market is also causing concern among the rating agencies. In China property market a sovereign rating concern - Fitch Reuters wrote:

“Chinese property and stock prices have surged this year, helped by very loose monetary policy and aggressive bank lending.

“The China property issue raises some concerns with respect to asset quality in the banks. The banking system is a sovereign rating weakness. Clearly banks in any country with a property bubble would be affected, but banks in China are, as noted, already a weakness.”

Chinese banks extended a total of 8.67 trillion yuan ($1.2 trillion) in new loans in the first nine months, 75 percent more than all of 2008, triggering concern about potential new bad loans ahead.”

Flexible government policies this year is causing the rise in real estate prices. The Chinese government has a strong incentive to keep the party going since the property sector is one of the biggest drivers of China’s domestic consumption, accounting for one-tenth of China’s GDP. China is following the example set by our Uncle Sam that created the largest real estate bubble in this country. The US government’s policies in the decades since WW II considered homeownership to be a right as opposed to a privilege. This misconstrued policy led millions of people to buy homes which they could never afford in the first place.

5. Australia
Residential home prices are rising in Australia. A recent Marketwatch article stated “Defying the global real-estate shakeout, Australian house prices surged to a record in the third quarter, lifted by a strong economy and rising demand from a fast-growing population.”

It added:

“A gauge of prices in the eight regional capitals rose 6.2% in the third quarter from a year earlier, and 4.2% above the previous quarter, the Statistic Bureau said Monday. The Australian government has cited a shortage of available homes among reasons for the rapid price gains. Also commonly cited among economists are population gains as the nation’s resilient economy, which avoided the recession triggered by the global economic maelstrom, attracts a steady flow of immigrants looking for jobs.”

However it must be noted that the Australian government triggered the rise in home sales due to liberal incentives offered to first-time home buyers. For a long time the first-time home-buyer grant was A$7,000. In October 2008, the government increased it to A$14,000 for the purchase of established homes and A$21,000 for the purchase of newly-built homes. Many immigrants and locals took advantage of this great deal giving a boost to home sales.

From the Journal piece: “After a Melbourne property-research firm recently predicted that average home prices will double over the next 12 years, a news report in Australia’s Herald Sun said: “The staggering prediction shows the importance of buying a home as soon as you can afford it because the longer buyers delay, the more chance there is that their dream will slip out of their reach.”"

In summary, the real estate market in many of the Asian countries is indeed a massive bubble now and is being maintained that way by governments. The rise in property property prices in emerging markets such as India, China are do not support the fundamentals and are bound to pop in the future. For international investors caution is warranted before jumping into real estate investments in Asia.

Related ETFs:
SPDR DJ International Real Estate ETF (RWX)
iShares FTSE EPRA/NAREIT Asia (IFAS)
WisdomTree International Real Estate (DRW)
Claymore/AlphaShares China Real Estate (TAO)