Wednesday, August 15, 2007

The Story Of Uncle Sam - Part 4

The decades' low borrowing cost, coupled with escalating house prices, gave Americans irresistible incentives to remortgage their residential properties.

Despite the slow-down in economy due to the burst of IT bubble, the households could keep up with the lavish spending - all because of the massive appreciation in houses that propped up the domestic consumption.

Take the case of Uncle Sam - in spite of his dwindling personal income, he could sustain his extravagant life -style by refinancing his big house.

Household consumptions constitute roughly 70% of the United States' GDP. Thanks to the surging house prices - they made it possible for the American households to go on spending to save the weakened economy.

When the consumers salvaged the American economy, they also propelled the whole world to recovery for a very simple reason - the United States is the world's largest export market. In short, it was the world's single engine of growth.

4 comments:

traveller said...

I think houses in America are simply cheap compared to the income of the people. Leaving aside the big cities such as new York and Los Angeles, houses in most cities are very affordable. I heard that it is cheaper to pay for the mortgage and own a house instead of renting one. Apart from that, interest paid are tax deductable.

Tony Hii said...

The rising house prices , coupled with low borrowing cost, in a stretch from 2001-2005 constituted the main cause of the now-surfaced subprime mortgage debacle.

The low mortgage cost prompted a lot of Americans to own and speculate in houses. There was simply a mania over house ownership, thinking it was a lucrative investment.

The house prices in U.S. might still be cheap relative to per capita income, but the fact is that there was a huge increase in the house price index during the above period, and the drop now is pinching the Americans painfully.

The Story Of Uncle Sam attempts to go back to the past to understand the present crisis - yes, precisely , I should call it a crisis in America.

Right now here in Sibu, I feel the chill also when I update on the fall of Dow again last night.

traveller said...

Sibu has very low income among the major towns in Malaysia. Yet the price of the house is so high. Shouldn't we do something to it? I don't understand why we squeeze ourselves in a small piece of sinking land. We should move out of the town centre to establish ourselves else where.

Tony Hii said...

The house prices in Sibu are determined , basically, by market forces. The good demand shows that the cash-rich Sibuians are keen property investors. I have not seen house-price drop in Sibu like what U.S. is experiencing right now. Look at Uncle Sam - he is now freaking out.

Certain areas in Sibu town have very soft land base, resulting in sinking condition like what you described. But Sibuians have strong sentimental ties to this piece of land - they stay on, and invest throughout the world to prosper.

Relative to the cost of living, income in Sibu is not really that low. Where else in Malaysia can you get a plate of kampua (big portion, with meat) at only RM2?