Predicting China’s 2018 Economic Priorities

The priorities of the world’s second-largest economy are quite likely to shift in 2018, as those in charge of overseeing the Chinese economy seem to prefer a more cautious approach focused on protecting against the threat of a potential financial crisis. As a result, stimulating economic growth is no longer the chief concern of Chinese officials. According to several economic analysts familiar with the new priorities of the government, China’s 2018 economic growth target will remain somewhere around 6.5 percent, unchanged from the target set for the previous year.

Over the past year or so, China has sharpened its focus on limiting capital outflows and tracking down any potential “gray rhinos” — the unaddressed and eminently solvable threats that left unchecked might undermine the country’s manufacturing-driven economy. After capital outflows reached an unprecedented $725 billion in 2016, China instituted several policies designed to limit capital outflow. Those policies, as evidenced by the continued improvement in the nation’s foreign reserve funds, are rightly viewed as successful in achieving the government’s desired outcome.

This risk-averse approach is not necessarily welcome news for the local government officials with growth targets that still need to be met. In order to carry out its economic agenda, however, the current administration has expressed a clear willingness to part with any government official who disagrees with the economic plan as it currently exists. Given its firm belief in the course it has charted, it’s fair to predict that China will keep its interbank interest rates high while implementing additional policies intended to keep its money supply growth in check (a rate of 7 or 8 percent is a reasonable estimate).

China is also quite likely to reduce the pace of infrastructure growth, with its longstanding debt concerns representing the principal reason for the reduction. It’s also likely that the country will continue to shift its focus from an economy built on manufacturing to a consumer and services-based economy. As a number of other analysts have pointed out, growth stemming from such a shift is unlikely without further effort to promote the change, with tax cuts being the most frequently suggested strategy for realizing the potential gains of the ongoing economic transition.

Although Chinese officials are adopting a risk-averse approach with the goal of preventing a financial crisis, most authorities remain confident in the country’s ability to create a protective barrier around its financial and economic systems. In the view of these officials, such a barrier — along with the cautious economic plan it has outlined for this year — will effectively limit the impact of any internal or external shocks in 2018 and beyond.

The Recovery of the Housing Market Prices

When the United States went through the recession in 2008, not many analysts anticipated such a prolonged period of adverse consequences. The downturn in the economy, that was primarily caused by the housing market bubble, however, is now in the rearview mirror. Or at least, that is what the latest reports created by The Standard & Poor’s Case–Shiller Home Price Indices showcase.

Before diving into the number-heavy data that is the main reason to believe how the housing market is in its “rebirth” stage, defining Case–Shiller Home Price Indices must be done. Basically, Case-Shiller indices are the so-called house price indices for the United States. The numbers are calculated by looking at a minor subset of homes and then generalizing these results on large populations sizes with matching criteria. The ones that are going to be brought up here come from the 20-city composite index as well as the national home price.

With that being said, the latest 20-city index shows a 0.5 percent monthly spike that translates into a 6.2 percent yearly increase in the house prices. The national index, similarly, demonstrated a 0.7 percent increase on a monthly level while the annual rate accumulated to the same 6.2 percent. This is exciting news for the housing industry that has been recovering since 2008 when it faced some of its darkest times.

Even though the aforementioned data clearly presents a reason to be enthusiastic about the future home prices, there is always more to the equation. Case-Shiller’s index is a very prominent tool that millions of people utilize to track real estate prices, but it has its shortcomings. This is why looking at more reports will help minimize the margin of error and facilitate accurate results.

According to Trulia, another outlet that can conduct a market analysis of real estate prices, the nation is still not completely recovered. Ralph McLaughlin, the chief economist for Trulia, indicates that only one-third of all homes have been able to go back to the prices they held before the recession. The other 66 percent can expect to reach those same levels by 2025. If one was to neglect data from an outlet like Trulia and only focus on Case-Shiller’s index, they would expose themselves to wrong interpretations masked by positive numbers.

Regardless of the discrepancies between the levels of optimism shown by Trulia and Case-Shiller’s index, one thing stands – the country is moving in the right direction when it comes to the housing industry. Even if only one in three homes is back at its pre-recession prices, this is a clear sign that the economy is getting better and negative outliers could be neglectable soon. For example, the following data can be treated as a bottom line prediction for where the United States is headed:

  • Number of large cities that have seen positive changes to home prices: 17 out of 20
  • Number of large cities that experienced home price reductions lately: 3 out of 20

Importantly, the aforementioned only applies to monthly levels. When looking at those same 20 cities, every single one of them has seen positive movement in home prices on an annual level. Thus, 100 percent of the sample size analyzed by Case-Shiller’s Index is doing better yearly, while 85 percent is even doing better monthly.

No doubt, Trulia and its chief economist Ralph McLaughlin have a great point when it comes to holding people culpable and not letting anyone get overly excited. Nevertheless, the momentum that the housing market now holds might prove to be just enough to bring back the prices from 2006 or 2007.

Tax Reform Uncertainty Exerting Influence Over Mortgage Rates

Now that the nomination Jerome Powell as the next chair of the Federal Reserve is official, along with the recent release of an encouraging jobs report, mortgage rates have more or less stabilized as analysts await the outcome of the Republican tax reform effort.

With the fluid state of the reforms to be included in the planned overhaul of the tax code — not to mention the uncertainty surrounding the GOP’s ability to unite the fractured groups that exist at both ends of the party’s ideological spectrum — the lack of clarity concerning the legislative efforts on tax reform will continue to exert some level of influence over mortgage rates until the matter is resolved one way or the other.

According to the most recently available information from Freddie Mac, the 30-year fixed-rate average is up by 0.33 points compared to one year ago, with the current rate checking in at 3.9 percent (compared to 3.57 percent at this point in the previous year). The 3.9 percent figure represents a .04 percent decline from the previous week (3.94 percent), while the 15-year fixed-rate experienced a similar week-to-week decline, dropping from 3.27 percent to 3.24 percent. The current rate of 3.24 percent represents an increase of .35 percent (2.88 percent) when compared to the previous year’s rate.

Even with the uncertainty surrounding the GOP’s looming tax reform efforts, most analysts expect mortgage rates to remain stable over the weeks to come. The state of the economy has not been subjected to nearly as much media scrutiny when compared to recent years, as the bulk of coverage has been devoted to foreign policy issues amid growing diplomatic tensions and the possibility of a subsequent military intervention. With less scrutiny, coverage of every minor wax and wane of the economy — which are typical and ought to be largely expected — has not caused the kind of sudden and unnecessary overreaction that so frequently exerts an undue influence over the economy at large.

Of course, the Federal Reserve has not altered its position regarding its plan to increase rates before 2017 comes to a close, and some analysts predict a clash at the onset of 2018, one in which housing prices could drop due to the expected rate increase signaled by the Fed. That being said, the week-to-week fluctuations in the mortgage rate had little effect on the overall level of mortgage rate activity: Refinancing, which made up just under half of the mortgage applications, experienced a minor decline in concert with a slight rise in home purchase applications.

As many analysts have pointed out, the minor fluctuations surrounding mortgage rates are expected to remain stable over the coming weeks thanks to the clarity provided by the strong recent jobs report as well as the confirmation of the Federal Reserve’s next chair. With tax reform representing the only lingering economic uncertainty, analysts are expressing confidence in their current projections due to the existence of just a single variable that remains unknown.

What Japan Can Teach Us About Achieving Economic Growth Despite Rapidly Changing Demographics

The prevailing opinion that Japan’s economic performance since the turn of the century reflects a lack of dynamism is often supported by the paltry 15 percent rise in the country’s real output. While most economists correctly view real output as a key metric concerning economic performance, it can be somewhat misleading if relevant demographic trends are not taken into account as well.

With Japan’s real output checking in at an average of just 1 percent per year over a period of 15 years, it perhaps should come as no surprise that there is substantial disparity between opinion and reality: Accounting for Japan’s demographic factors reveals an economy that is performing exceptionally well under circumstances that are far from optimal.

Instead of solely relying on real output to measure Japan’s economic performance, economists benefit from a much clearer picture by looking at relevant demographic trends and focusing on the growth rate per working-age person. At two percent, the growth rate among Japan’s working-age population rated much better than the United States and Europe, with the US checking in at just one percent in the growth rate per working-age person.

Looking at it in this way, it becomes evident that the American economy’s 35 percent growth since 2000 was driven at least in part by demographic trends that saw substantial growth in the working-age population. It also reveals that these advantageous demographic trends were not leveraged in the most optimal fashion. Given Japan’s economic performance in the face of suboptimal demographics, it is clear that there is much to be gained from a careful study of Japan’s economic approach.

One of the principal factors enabling Japan to achieve growth without inflation lies in its ability to deal with substantial public debt through internal financing. With a countrywide savings surplus, Japan has been able to handle a debt-to-GDP ratio greater than 150 percent. Of course, this is not without its downsides, particularly since a rising debt-to-GDP ratio poses the risk of quickly growing unmanageable in a low-growth economy with large fiscal deficits.

The potential downside of the Japanese economic model might be mitigated through a strategy employed in Europe, where a deficit cap of three percent of GDP is mandated by the Stability and Growth Pact. Economic analyses seem to indicate that the deficit cap has succeeded in ensuring the debt-to-GDP ratio remains stable and does not go beyond the point of control.

Los Angeles Real Estate Market Continues Record-Breaking Surge

The Southern California real estate market is stronger than ever, so much so that the ongoing surge pushed median home prices in the region to $505,000. It has been more than 10 years since the last time the Southern California real estate market achieved such lofty heights, so much so that the previous high actually predate the recession. Fortunately, the economic conditions that crashed the market — and made the median home prices of a decade ago so unsustainable — do not exist today.

Several of the geographic areas comprising the Southern California real estate market are exceptionally healthy, with Los Angeles County and Orange County exceeding the previous peak in median home price by significant margins. In Los Angeles, the median home price of $575,000 represented an increase of 9.5 percent over the previous year and easily outperformed the pre-recession mark of $550,000. Orange County posted an 11 percent increase in the median home price with an average of $710,000, well over the $645,000 the area boasted back in 2007.

With a greater level of economic stability on the both the local and national level, there is far greater confidence in real estate markets across the United States. In 2007, the increase in home prices was a product of the risky lending practices that ultimately sent the economy into a tailspin. More than a decade later, rising home prices can be attributed to a stronger, more sustainable economy committed to learning from and preventing the disastrous mistakes made in the past.

Of course, the rise in the median home price in Southern California has created several complications that must be addressed sooner rather than later. When costs rise, accessibility to affordable housing is sure to become an issue. Given the short supply of homes — not to mention the influx of Californians displaced by the wildfires in the northern part of the state — legislators are already taking action to ensure the availability of affordable housing throughout the Southern California region.

There is also some concern that the strength of the real estate market is discouraging out-of-state workers from accepting job offers that require relocation, and many have noted that job growth has indeed slowed statewide. With the goal of attracting new workers while also encouraging current residents to remain, lawmakers have worked quickly to pass several bills addressing the housing shortage, particularly with regard to the shortage of affordable housing options.

Given the present rate of state and national economic growth, most economists agree that the solutions enacted by state lawmakers should not impede the health of the real estate market in Southern California. As a result, the majority of analysts expect that the Los Angeles region will again be one of the nation’s top real estate investment and development performers in 2018.