More housing economics

The Economist has a good post (sadly premium content) on where all the extra money from pricey oil is going: outlandish real estate projects.

But the biggest bucks are flowing into property. Artificial lagoons and landfills, spiked with villas, hotels and appartment towers, are growing all over the Gulf. The world's would-be tallest building is already under construction in Dubai, whose latest fantasty development, City of Arabia, with no fewer than 35 skyscrapers, promises to house the world's largest shopping mall.

This "City of Arabia" is quite close to my old high-school and will increase Dubai's housing stock, alone, by about 50%. Almost all investment in Dubai is controlled by a handful of families who run old-skool conglomerates with big import-export businesses, exlcusive licensee franchises, and property. If any one sector goes up, you see splurges in all the other. As one would expect with family owned conglomerates, the money is not being spent wisely.

But Americans are not spending their "China surplus" liquidity wealth wisely either -- they are squandering it by competitively bidding for real estate. As Angry Bear notes, whether the price reduction will be a pop or a hiss is unknown, but look for slowing sales and higher rental vacancy to mark the top of the market. I call this housing market a bubble because prices/rents is out of historical whack, and I will not beleive the bubble is over until we see market increases in rental prices. Unless you beleive property will continue to appreciate the way it has, rentals are a great deal over purchases right now. When people stop beleiving property will appreciate, these bargains will go away.

I recommend reading the rest of the Angry Bear site. It highlights nicely the difficulties Democrats are in over economics, foreign policy, etc. While the posters there rightly complain about Bush's pork laden spending bills, and the insolvency of the long-term federal budget, they do not mention that is was Democrat intransience that made CAFTA so expensive to pass and blocked social security reform (which would improve long term solvency by cutting benefits to rich people). They correct point out that federal deficits just mean higher taxes in the future, but fail to explain why higher taxes now is better. After all, deficits don't matter, interest rates and marginal taxes do and the US seems to be just fine right now.