142 years at the top takes some beating. Since overtaking the UK in 1872, the US’s status as the world’s largest economy has rarely been challenged.
However, if recent speculation is to believed, after nearly one and a half centuries the US is finally set to surrender its title to China.
While many will be using this handover to signal the sun setting on the American Century, history reminds us that headline numbers aren’t always a true indication of where an economy is heading. Indeed, ‘il surpasso’, Italy’s own overtaking of the UK’s economy in the early 1990s was heralded as a sign of the country’s bright future. Need I say more?
Here are five reasons why the US’s economic demotion shouldn’t spoil investors’ appetite for American real estate.
1. China’s shaky foundations
A closer look at the Chinese miracle of the past 25 years reveals monetary expansion to have been one of the key drivers. M2 (one of the most widely used measures of money supply) tripled in the six years to 2014, the largest expansion of its kind in history and four times greater than that of the US over the equivalent period.
China/US money supply growth:
Rampant credit growth has left Chinese business and consumer with a chronic debt overhang which the government is only now starting to address.
2. Obama’s solid base
While China now finds itself built on a platform of loose money, the Obama administration has been slowly restructuring the American economy to provide a more stable foundation for long-term growth. As I’ll come to explain, the US must now rank as one of the safest global locations for real estate investment.
Obama’s first priority has been taming the profligacy of the Bush era. The Congressional Budget Office (CBO)forecasting a deficit of $492 billion for FY2014. At 2.8% of GDP, this represents the narrowest gap recorded since 2008.
3. US self-sufficiency
America is now beginning to enjoy the economic self-sufficiency which China once prided itself on.
Arguably Obama’s most impressive achievement in his time in office have been the steps taken to wean the US off its crippling dependence on energy imports. Having peaked at 60% of total supply in 2005 US crude oil imports currently account for just 40% of total domestic consumption and are still falling.
The US shale gas ‘revolution’ has been key not only to the long-term stability of the wider economy, but has also been having a dramatic impact at a ground level. Investment in new shale projects have helped revitalise some of America’s poorest communities, bringing jobs and prosperity to far-flung states such as North Dakota
Increased job security combined with rising income levels has breathed new life into the housing market with annual new homes sales reaching a five-year high in 2013.
4. Made in America
While exports have traditionally held a relatively low weighting within the US economy, America has the potential to challenge China as the world’s leading exporter.
Much has been made recently of America’s potential to usurp Russia as the major natural gas supplier to Europe. As tensions over the Ukraine escalate, the Obama administration is rushing through legislation to allow LNG exports to the continent, with a sixth LNG terminal, located in Louisiana, approved in February.
But why stop there? While Europe represents a lucrative market for shale gas (and potentially oil), US producers should ultimately be looking east rather than west. The US already has significant export infrastructure in place to begin exporting from the West Coast as well as free trade agreements in place with South Korea and Australia.
Adding China and India to the list of potential export markets for US gas and oil should be a primary long-term objective.
5. A fresh start for real estate
Following the collapse of 2008-2009, the US housing market has undergone a complete re-boot over the past few years. With the economic factors described above driving demand, local authorities have taken measures to restore intrinsic value back to local property markets by removing excess supply and razing much of the vacant housing stock in cities such as Detroit.
Despite US house prices having grown by 13% during 2013, price: income ratios for US property remain at sustainable levels. The same cannot be said for the UK where price: income ratios are currently trending more than 25% their historical averages, nor China where a credit-fuelled property boom has driven affordability through the roof in many cities.
It might well be another 142 years before the US regains its position at the top of the leaderboard, but frankly who’s counting?
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