20121219 為何法定貨幣計價名義增長是誤導？

【下文為早前同題文章由信報中譯之版本，原文可於本網誌查閱】

2012年12月19日 王震宇 宇論

為何法定貨幣計價名義增長是誤導？

你是否知道，2010年英國普通工人每年收入23000鎊，較2007年危機前的收入增加了6%？基於英國經濟在此期間經歷了全球金融危機，這看來是個很好的成績。但若我們以實質角度觀察，工人的收入實際較前惡化了約2%。

英國收入過去一世紀增了330番
回顧更久遠的時間，例如十年、二十年、五十年，甚至一百年，收入增加得更多，分別是42%、120%、4200%，甚至是33000%。但與2000年、1990年、1960年，或1910年比較，英國工人在財政上是否真的更好？

回答這個問題的其中一個方法，是以實質角度觀察，那分別是8%、25%、140%和316%的升幅，顯示人們的收入在這些時段確有改善。然而，按年率計算，這些收益會分別大幅縮減至0.8%、1.1%、1.8%及1.1%，而增長的速度在過去五十年亦已放緩。

過去多個世紀的增長
在有收入數據可查的期間（1209至2010年）有七個可識別的趨勢，可以用不同的社會、政治及經濟因素以作解釋。

1. 直至十四世紀初葉的增長持續下降—原因是中世紀的人口過剩、土地短缺和土質貧化。

2. 在1310年至1380年間的快速增長—很可能是因為1315年的大饑荒和1348年的鼠疫導致大量人口死亡，令工資被推高。

3. 1380年至1509年間的緩慢增長—似受議會限制工資及物價上升壓力的努力，以及中世紀後期經濟復蘇開始發揮作用的影響。

4. 1500年至1600年的收入下跌—極像十四世紀期間人口大幅下降因而導致工人短缺及推高薪酬的情況，十六世紀的人口急升意味工資下跌，並因世紀中期的急速通脹而更加惡化。

5. 1600年至1800年的重新回復增長—正值英國殖民帝國及東印度公司的發展初期，二者均帶來更多的經濟活動和財富返國。

6. 1800年至1945年的高增長率「後工業」趨勢—似乎源於通過《聯合憲法》後政治更趨穩定，經濟從工業革命中獲益，以及國際貿易得到擴展。

7. 最後是自二次世界大戰結束以來（1945年起），我們獲得史上最快速的收入增長趨勢—我們會在下邊討論這個時期。

正如【圖1】所示，英國的實質平均收入停留在指數式增長路徑內，特別自1800年代開始加快速度（圖1中綠色虛線）。但除非有無限的資源（以及無限的新市場以賺取更多的收入），否則增長必將放緩。自2008年以來的實質收入下降不是短暫現象，而是較大趨勢的一部份（查看【圖2】的趨勢線），那是否意味標誌英國過去數世紀繁榮的高速增長路徑正開始改變航向？

名義增長屬心理改善
上圖顯示實質收入趨勢。然而，收入（或生活水平）的實質下跌被名義數字所掩蓋。反映這個情況的近期最佳例子是第一和第二次世界大戰。在一戰期間，實質收入從5957跌至5047（截至1919年 下跌15%），在同一時期，名義收入則從80上升了67%至133【圖3】。名義與實質數字之間的割斷亦可在二戰期間見到，當時的實質收入從8214跌至 7195（截至1945年下跌12%），與此同時，名義收入則從170上升了26%至214。

政府稀釋其貨幣價值的嘗試一直存在，而隨着落實政策承諾遭遇困難，有關嘗試只會變得更加強烈。當紙幣在國際交易中變更普遍時，完全貶值的嘗試亦發展至高峰。

雖然英國1931年脫離金本位是基於多重原因，例如英國出口競爭力下降、失業率上升壓力，以及1929年全球衰退的餘震，但這個轉變肯定有助推高名義收入增長，從0.46%的長期平均增長率（圖3中的藍色虛線）升至5.66%的新「範式」（圖3中的綠色虛線）。

雖然年復年地交出名義增長或者曾令人感覺良好，但各國政府卻可能於脫離金本位時才初嘗增長藥劑，並一食上癮—1931年的行動讓我們首次決定性地脫離數百年來的趨勢。（【圖4】中，由藍色虛線移向更陡斜的綠色虛線）

按實際貨幣量度收入
更令人憂慮的是，若當時沒有格林斯平ZIRP（零利率政策）刺激的最嚴重過剩，把全球資產泡沫推向頂峰，1988年英國樓市爆破的威力本會更深（但長遠來 說，較健康）。英國於1990年代及2000年代初再享受了幾年較高增長，但隨之而來的「殘留物」卻要更長時間治癒，很可能的結果是收入需要一段長時間由基本因素、而非信貸/流動資金/槓桿推動的增長。就算假設英國收入增長能以數百年來的0.46%平均增長率（圖4中的紫線）於1931年後趨勢區間內谷底回升，亦將要直至2013年（走向趨勢中點），以至更差的2027年（走向趨勢底部），現時的調整才可完成。

英國脫離金本位、迎來「法定貨幣新時代」前，收入無論以黃金抑或以政府支撐的紙幣計算，均有幾乎相同的購買力（【圖5】中兩條近乎平衡的虛線）。不過，這個關係在20世紀期間破碎。

雖然黃金的購買力踏入20世紀時仍能跟隨它的長期趨勢，以法定貨幣計算的「增長」卻達到拋物線般起飛。這是否可代表英國（就經濟活動而言）的創造力、發明才能、生產力本質上沒有改變（以黃金計算）？

英鎊購買力自脫離金本位後加速貶值，其實亦可見於它在我們的研究中其實過了近700年才失去首90%的購買力。相較下，接着兩次購買下跌90%時均發生在1950年後，而且每次只需要短得多的30年左右【圖6】。

 註：上圖之'9%'應作'90%'

上述的討論顯示，如果世界各地政府成功維持這種名義經濟快速增長的表面狀況，人們的福祉或生活水準未必真的會提升。另一方面，由名義增長推動的經濟策略的風險，伴隨着政府介入愈來愈多資產類別，將令全球經濟更不平衡。

To earn one’s keep – why is fiat currency deonominated nominal growth misleading?

UK earnings have grown 330-fold over the past century

Did you know that in 2010 the average UK worker earned £23,000 a year, 6% above pre-crisis 2007 earnings? This may seem a good outcome given that the country’s economy weathered through a global financial crisis during that period. But, if we look at this in real terms, workers are actually worse off by around 2%.

Looking back further, over 10, 20, 50, even 100 years, earnings are up even higher – 42%, 120%, 4,200%, and even 33,000% respectively. But are British workers genuinely better off financially compared to the years 2000, 1990, 1960, or 1910? One way to answer this question is to look at earnings in real terms, which at 8%, 25%, 140%, and 316% respectively indicate some genuine improvements in people’s income over these periods. However, on an annualised basis, these gains become much reduced at 0.8%, 1.1%, 1.8%, and 1.1% respectively, with the pace of growth also having slowed over the past 50 years.

Explaining growth over the centuries

During the period for which earnings[1] data is available (1209-2010) there are seven identifiable sub-trends, which can be explained by various social, political, and economic factors [heading numbers below correspond to arrow labels in Figure 1].

1)   Growth declined up until around the turn of the 14^th century – due to medieval over-population, land shortages and depleted soils

2)   A fast growth period between 1310 and 1380 – possibly due to the large loss of lives from the Great Famine of 1315 and the Black Death of 1348, driving up wages

3)  Slowing growth between 1380 and 1509 – likely due to the efforts of parliament to curtail upward pressures on wages and prices, as well as the effects of the late medieval economic recovery coming into play

4) Falling earnings between 1500 and 1600 – Much like how the large drops in population and subsequent shortages of workers had pushed up wages during the 14^th century, the rapid rise of population in 16^th century meant that wages fell. This was worsened by rapid inflation around the middle of the century.

5) Growth resumed between 1600 and 1800 – coinciding with the early beginnings of the English colonial empire and the East India Company – both of which brought about greater economic activities and wealth repatriation

6)  Post-industrial trend with elevated growth rates between 1800 and 1945 – likely caused by greater political stability following the Acts of Union, the economic benefits of the Industrial Revolution as well as expanded international trade

7)  Finally we have the fastest earnings growth trend in history since the end of WW2 (1945 onwards) – we will discuss this period below

Figure 1 – Average Annual Real Earnings (in 2010 £s)

 

As shown by the chart above, the UK’s average real earnings have remained on an exponential growth path, with an especially accelerated pace since 1800s [green dotted lines in Figure 1]. But unless there are unlimited resources (and unlimited new markets to earn ever bigger incomes), this growth will have to slow down. If the drops in real earnings since 2008 were not a blip but part of a larger trend [see trend line in Figure 2], could the stellar growth path that has marked the UK’s prosperity over the past few centuries be beginning to change course?

Figure 2 – Real Earnings Growth since 1950 (Entering negative territory?)

Nominal growth provides only a psychological sense of improvement

The above charts showed real earnings trends. However, real drops in earnings (or living standards) are masked by nominal figures. The best recent examples of this are the First and Second World Wars. During WWI, real earnings fell from 5,957 to 5,047 (down 15% by 1918) [Figure 1] whereas over the same period, nominal earnings went up 67% from 80 to 133 [Figure 3]. The same disconnect between nominal and real figures can also be seen during WWII, during which real earnings fell from 8,214 to 7,195 (down 12% by 1945) [Figure 1]. Meanwhile, nominal earnings went up 26% from 170 to 214 [Figure 3].

The temptation has always existed for governments to dilute the values of their currencies, and with difficulties in delivering all policy promises, this temptation only ever grows stronger. As paper currency became more widespread in international transactions, the temptation to depreciate competitively has also grown to its highest.

While the UK’s departure from the Gold Standard in 1931 was due to multiple factors such as a fall in the competitiveness of British exports, the pressures of growing unemployment, as well as aftershocks from the global recession of 1929, the change certainly helped boost nominal earnings growth from a long term average growth rate of 0.46% [blue dotted in in Figure 3] to a new ‘paradigm’ of 5.66% [green dotted line in Figure 3].

Figure 3 – Average Annual Nominal Earnings

Towards the slow end of the S-growth curve

Though it may have felt good to keep delivering nominal growth year in year out, the departure from the Gold Standard might have become the first injection of the growth drug that gets governments hooked – the 1931 move gave us the first decisive departure from the centuries-old trend [a move from the blue dotted line to the steeper green dotted line in Figure 4]. 

Figure 4 – Average Annual Real Earnings (in 2010 £s)

In 1971, the USA also joined in the wild party of ‘currency depreciation and global credit expansion’. This helped the UK achieve a second burst of even more rapid nominal growth [orange dotted line in Figure 4] that lasted until the UK property bubble finally burst in 1988 [black dotted line in Figure 4].

What is more worrying is that the 1988 popping of the UK property market could have been deeper (but in the longer term, healthier) if the biggest excesses, driven by Mr Greenspan’s ZIRP (Zero Interest Rate Policy) had not pushed the global asset bubble to its peak. The UK enjoyed a few more years of higher growth in the 90s and early 2000s, but the hangover that followed will take much longer to heal, with a likely consequence that a prolonged period of fundamentals driven, rather than credit/liquidity/leverage propelled growth will be needed. Even assuming UK earnings growth bottoms out within the post-1931 trend channel, at the centuries long 0.46% growth rate [purple line in Figure 4] it will be 2013 (to trend mid-point) or worse, 2027 (to the bottom of the trend channel) before the current correction is complete [see Nominal growth chart in Figure 3].

Measuring earnings with real money

Before the ‘new era of fiat money’, marked by the UK’s departure from the Gold Standard, earnings as measured by gold and by government-backed paper money had almost identical purchasing powers [see the two near-parallel dotted lines in Figure 5]. However, this relationship broke down during the 20^th century.

Whereas the purchasing power of gold has continued along its long term trend even into the 20^th century [purple dotted line, which is parallel to the prior blue dotted line, Figure 5], the ‘growth’ as measured by flat money has grown to parabolic heights. Could this signify that British ingenuity, inventiveness and productivity (as far as economic activities are concerned) has not fundamentally changed (as measured by gold), but that the boom represented by the nominal line [as measured by fiat currency, orange dotted line, Figure 5] had created a far more positive picture than reality? Is it possible to draw the conclusion that the invention of the internet had no more powerful an impact on the British earnings power than the discovery of the new world?

Figure 5 – Earnings index (in ounces of gold) vs. Earnings index (in nominal £s)

The accelerated erosion of the Pound’s purchasing power since the departure from Gold Standard is also illustrated by the fact that it took nearly 700 years for the currency’s purchasing power to fall by its first 90% in the period under our study. In comparison, the next two 90% drops in purchasing power both took place after 1950 and only took drastically shorter periods of around 30 years each! [Figure 6]

Figure 6 – Drops in GBP purchasing power (Indexed currency depreciation)

Conclusion and outlook

What the above discussion shows is that if the world’s governments succeed in maintaining this façade of fast nominal economic growth, people may not enjoy real increases in their welfare or standards of living. On the other hand, the risks of such a nominal growth driven economic strategy, with ever greater government intervention in increasing number of asset classes, imbalances in the global economy will only increase.

It might be that we will not only succeed in avoiding nominal economic growth slowdown as governments planned [blue arrow in Figure 7], but overshoot wildly beyond what is already a near vertical growth path, leading people to lose confidence in the currency altogether. So instead of the more painful red line (at the previously discussed historic level of 0.46% growth), we might see breakdowns in the status quo of economic policy making.

One of the possible consequences of a complete loss in confidence would be Zimbabwe-style hyperinflation [green arrow in Figure 7]. The line between deflation (which governments are fighting in the Western world) and hyperinflation (should their policies fail) could be very thin indeed.

Figure 7 – Nominal Earnings growth entered an exponential path in 20^th century

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[1] ‘Average earnings’ has a broader meaning than just wages, and includes other forms of compensation (from payments, bonuses and commissions to overtime supplements). ‘Real earnings’ are adjusted for inflation in 2010 pound term).

This article was researched and written with significant input from Charles Appleton, whose contribution is greatly appreciated.

20121106 HK Government plays God in residential market – 8 questions and 8 answers

HK Government plays God in residential market – 8 questions and 8 answers

The Government will amend the Stamp Duty Ordinance (the Ordinance) to adjust the duty rates and extend the coverage period in respect of the existing Special Stamp Duty (SSD), and introduce a Buyer's Stamp Duty (BSD) on residential properties acquired by any person except a Hong Kong Permanent Resident (HKPR).

The adjusted SSD will have three levels of regressive rates for different holding periods –

(i) 20 per cent if the property has been held for six months or less;
(ii) 15 per cent if the property has been held for more than six months but for 12 months or less; and
(iii) 10 per cent if the property has been held for more than 12 months but for 36 months or less.

The BSD will be charged at a flat rate of 15 per cent for all residential properties, on top of the existing stamp duty and SSD, if applicable, acquired by any person or entity, except a HKPR. Exemptions will be provided to certain transactions including, for example, those involving a HKPR and his or her close relatives who are not HKPR.

Table 1: summary of changes in new stamp duties on residential property

	Before	After	Change
SSD – reselling:
Within 6 months	15%	20%	5ppts
In 6-12 months	10%	15%	5ppts
In 12-24 months	5%	10%	5ppts
In 24-36 months	0%	10%	10ppts
BSD	n/a	15%	Only HK permanent ID holders buying in personal names exempted

Source: http://www.ird.gov.hk/eng/faq/index.htm

We address this new policy in a series of Q&As:

1) Will speculator fleeing cause prices to tank?  

2) Can you quantify how many foreign home buyers/investors are affected?

3) How will local end user reaction affect the housing market?

4) What will happen to developers and their pipelines and profits?

5) Will this lead to lower government land sales?

6) Which property segment benefit from this new policy?

7) Will the govt come after my hard earned cash wherever I go

8) What are your price expectations going forward?

Q: Will the SSD/BSD cause speculators to flee?

A: “Speculators? What speculators?” is our response. In 2012 YTD, the proportion of residential confirmor sales reached new record low of 0.1% (see Chart 1), a fraction of the 1.8% before the SSD were introduced in October 2010, and much lower than peak speculative years such as 7.1% in 1997. In other words, speculators playing residential property is now an immaterial and miniscule part of the market already, action by this class of players would therefore be next to NIL.

Chart 1: Speculator activity are at record lows in HK

Source: Centaline

Separately according to Centaline data, the proportion of sellers who hold less than six months have fallen from 14% in 1997 to 3.3% in 2011, and then to a new low of 0.2% in 2012 YTD. Even those holding for two years before selling have also come down from 28% of transactions to 22% in 2011, and halving again to 11% in 2012 YTD (Chart 2). It may well be that a good proportion of the 0.2% sellers disposing within six months this year are people who have come into hardship and needed to realise their homes for cash, only to be hit twice by the government’s SSD measures. Ouch!

Chart 2: Proportion of ‘speculators’ probably vastly outnumbered by ‘hard-up sellers’

Source: Centaline

Q: Can you quantify how many foreign buyers/investors are affected?

A: PRC buyers make up the bulk of non-local buyers in Hong Kong, making up some 33% of luxury, 31% of new flats, and a much more moderate 7.4% of existing residential units (Chart 3). 

Chart 3: PRC buyers as proportion of all residential transactions

Source: Centaline

Beside PRC nationals, the combined population of Whites/Indians/Japanese (i.e. the majority of non-domestic help population) make up a mere 1.4% of HK population, with those who have been resident in HK for <7 years an even lower 0.7%. These other nationalities are therefore unlikely to be meaningfully significant in their reduction in buying power in the overall residential market.

The unfair component of the new policy lies in the aspect that professionals living and working in Hong Kong – who are contributing taxes and building the city’s future – are denied the ability to buy their own homes without being hit by the 15% BSD, until they become permanent residents. How do we attract talent to the city when they are not given the chance to own their own homes?

Q: How will local end user reaction affect the housing market?

A: First, local end-users – the segment the government is keen to help – will see further drop in available units on the market, as the policy deters upgraders from moving, in fear that they may be tied down to a new purchase which may be near the top of the market, which if sold before the market turned south three years from now, will be whacked with a punitive tax.

Second, the lack of available offerings on the market caused by the absence of investor participation and upgrader selling means end-users will take even longer to find their homes.

Third, as sellers holding for less than three years fall away under the new policy, this segment, estimated at 20% of total transaction volumes, will be delayed or cancelled – HK residential property market will go from the world’s most dynamic and liquid market to a genuine ‘immovable asset’ market.

Fourth, with the 10% or so buying demand from corporates now disappearing (done under corporate ownership in order to provide staff accommodation or to shield buyer identity) as well as the 15-25ppts delayed local buying adding to the purging of non-local demand, we could be looking at as much as 30-40% drop in market volumes (Table 2).

Table 2: Estimated drop in secondary market residential transactions

Private residential market	Pre-policy transactions*		Proportional drop		Likely post-policy transactions*
	Min	Max	Min	Max	Min	Max
PRC buyers	10%	15%	-80%	-67%	2%	5%
owners who sell <3 yrs	20%	40%	-75%	-63%	5%	15%
company buyers	10%	10%	-80%	-50%	2%	5%
speculators	0.2%	2%	-100%	-50%	0%	1%
'genuine users'	60%	33%	0%	0%	60%	33%
Total	100%	100%	-31%	-41%	69%	59%
* transaction = demand

Source: B&MM

Q: What will happen to developers and their pipelines and profits?

A: As shown in Chart 3 above, PRC buyers make up as much as 30% of primary residential demand, compounding this sizable chunk with withdrawals from corporate and local buyer demand, developers collectively could see 40-50% drop in buying dollar for their projects (this may be 40-50% fewer buyers at the current prices, or 40-50% cut in prices for the same number of buyers, or any combination in between).

Given that the total primary market transactions in the past 18 months (pre-policy) ran at HK$12bn/month or HK$144bn/year, this is equivalent to an annual drop in sales revenue of HK$58-72bn. With profit margins of 30-40%, this translates to HK$17-29bn of lost profits each year for the developers as a whole. And on total market cap for the top eight developers of HK$970bn, two years of lost profit would equate to 3.5-6% of share price losses for the sector.

In other words, the share price drops of Monday (29 October) already largely discount the prospect of this measure being in force for just over two years, if our estimates above fall on the mark.

Q: Will this lead to lower government land sales?

A: Given the likely fall in sales revenue of up to 50% in the next two years or more, it is likely that developers will be scaling back materially their bids in any upcoming government land sales.

Chances are, relevant officials will not re-adjust their reserve price expectations until sufficient hard evidence has emerged that the market price for land has softened. The likely outcome therefore will be more than one site being retracted from sale for failing to ‘attract the bottom price’.

This brings forward the biggest problem characterized by the infrastructural setup of the government – on the one hand to maximise land sale revenue, and on the other hand to clamp down on home prices. We have long argued that when in conflict, the need to provide sufficient supply for the Hong Kong economy (i.e. when necessary, sell land cheap and sell them plenty) should trump the revenue considerations of the Treasury to earn high land revenues.

Q: Which property segments benefit from this new policy?

A: What we have is a global currency depreciation war. All assets will rise relative to paper money, and Hong Kong residential property, despite having these transaction barriers erected, will be under little risk of a big fall. However, with the biggest fire exit blocked, the people in the theatre will all be heading for the alternative exits.

Chart 4: If half of residential buying power (1/2 x 71% = 36%) goes to non-residential (26%)…

Source: Centaline, B&MM

As Chart 4 above shows, even if half of the pre-policy residential demand (35% of total transaction value) goes into the combined shop-office-industrial segment (26%), the newly arriving liquidity will more than swamp existing demand by 1.4 to 1. This is very bullish for the industrial and office sectors, which are our favoured investment subsectors in Hong Kong.

Q: Will the govt come after my hard earned cash wherever I go?

A: Such demand distortions are exactly the reason why government interventions should be kept to a minimum – the more the visible hand meddles in asset markets, the more bubbles it creates, and the more irresponsible behavior it encourages which eventually leads to systemic inefficiencies, if not crises.

The problem is, will the bubbles thus caused by the government lead to further irrational exuberance on the part of the people in power – in the pursuit of formless and fast flowing liquidity, will the government feel so omnipotent to hunt down non-residential property sector, and when money inevitably seeks shelter in the high risk stock market, clamp down on that too? What about the bond market, the IOU fiat scheme where supply is equally limitless? Where does the government’s moral obligation to ‘steady prices’ end and where a full blown communist style planned economy and total price controls start? 

The government needs to think about the moral hazards of driving citizen’s hard earned savings from predictable hard asset markets into often majority controlled security markets where leverages are high, supplies are unlimited (read: minority protection is impossible), and where losses of fortunes can be instant and severe political repercussions can be equally swift (remember the Accumulator saga anyone?).

Q: What are your price expectations going forward?

A: Residential prices may correct initially by 5% or so, followed by gradual recovery in 2013 back towards our target of 116 on the Centa-City Leading Index (CCL Index). We do not expect a big correction due to the fact that this new policy adds friction to new owners of residential property (which even falls to nil if held by local permanent residents who hold for three years) but does not fundamentally alter the intrinsic economics of property ownership – the fact that rental yields are well above deposit rates (Chart 5), and also in excess of market mortgage rates, in an environment of rising rents.

Chart 5: Mass housing yield gap still points to price appreciation

Source: HKMA, RVD, B&MM

As to rents, there may be more upward pressure as increasing numbers of potential buyers turn into renters. The combined rise in rents and small correction in prices should make housing yield more attractive providing support to prices.

Hong Kong residential property under the new policy will have no speculators, few short term investors, only strong holders who could pay a large downpayment, have high income visibility, and generally good holding power. With such a body of owners, price volatility will increasingly trend towards long term nominal GDP growth of 6-8% p.a. In other words, HK residential may become a TIPS like bond for as long as the current suite of policies stay in place.