US house prices have recovering for 3 years, as the chart from the Wall Street Journal confirms. It shows two lines:
- The dark blue line is money of the day: prices rose steadily from 1989, peaking in 2006 at 141% of 1989 value
- The grey line adjusts for inflation: “real prices” were negative until 2000, and peaked 51% higher in 2006
- Both prices then fell until 2012, since when they have staged a modest recovery, but are still below 2006 peaks
- Nominal prices are 8% below their peak, and inflation-adjusted prices are 21% lower
- Overall, the inflation-adjusted price of the average house has risen by just 20% over the 26 years since 1989
These, of course, are national figures, and the picture for individual cities can be different. Equally, other national indices such as those from the National Association of Realtors and the Federal Housing Finance Agency have different methodologies and provide slightly different results.
But this does not mean that today’s US housing market is the same as it was pre-2009:
- One key issue is that starts have virtually halved from their 2.3m peak in January 2006, to 1.2m in June
- A second is that the price data masks the changes that are taking place in the size of single-family homes
- A third is that the S&P index only measures single-family home prices, yet the trend is to multi-home living
SOMETHING QUITE FUNDAMENTAL HAS CHANGED IN US HOUSING MARKETS
These changes have gone largely unremarked by investors and companies supplying the housing industry. Yet they have enormous implications for future demand. They also help to explain the subdued nature of the recovery in US GDP growth since 2008, as housing is such a key part of the economy.
They are another sign of the major paradigm shift now underway in most consumer markets. The middle ground of “affordable luxury” is fast disappearing, as markets return to being segmented between high-cost luxury and and low-cost mass-market.
The size of the median US single-family home today is 20% larger than in 2000, at 2400 square feet (220 square metres), and 10% larger than in 2006. Builders of single-family homes have been responding to changes in demand, where sales of homes priced above $600k have trebled, whilst sales of those priced below $400k are down 16%.
The middle market is thus being squeezed quite hard, as the second chart confirms:
- It shows that a remarkable increase has taken place in the ratio of multi-home starts to single family home starts
- In 1989, this ratio was around 21%, meaning that 4 out of 5 starts were of single family homes
- The ratio then dropped to an all-time low of 9% in 1992, when 9 out 10 starts were single family
- Last month, however the ratio soared to 41% – if this trend continues, half of all starts will soon be multi-home
The future of the US housing market will thus be quite different from the past. Luxury homes are getting larger and more expensive: mass-market homes are more likely to be smaller – quite probably apartments – and less expensive.
And, of course, the new home market itself remains close to all-time lows. 2014′s volume of just 437k equaled 1981 levels, and was just a third of 2005′s peak of 1.283m.
We all know that Europe has an ageing population. Germany and Italy, for example, have median ages of 45 years. And fertility rates have been below replacement levels for 45 years, so the relative number of higher-spending young people is reducing. Instead, there are more and more older people, as life expectancy at age 65 is now around 20 years.
But this is not ‘doom and gloom’. It is a challenge and an opportunity for companies and investors who prefer to deal with reality rather than the wishful thinking of central bank stimulus programmes.
The key is a shift in mindset. As the chart shows, we need to move away from business models based on ‘value-added’ and ‘affordable luxury’. Ageing populations living on fixed incomes can no longer afford them. Instead, as I describe in a new analysis for ICIS Chemical Business, affordability must be our key driver:
“Major change is underway in petrochemicals and plastics. For the first time in decades, the industry is starting to be driven by demand issues, rather than by supply. The reason is that we can no longer reliably forecast future product demand by simply using a multiple of IMF growth forecasts for GDP. In turn, this means business models have to evolve. We need to become more service-based in our approach, and take advantage of the vast pool of expertise in the industry.
“China’s adoption of its ‘New Normal’ economic policy has been the catalyst for this change:
- On the supply side, it has abandoned the ‘growth at any cost’ model that had allowed pollution and corruption to flourish
- On the demand side, it is deflating the lending bubble that had artificially boosted demand by creating property wealth effects
“Business models based on exports to China are backfiring badly as a result. Mining and luxury goods manufacturers are first in the firing-line, as are countries that had taken soft options for growth by exporting commodities to China. Related industries such as shipping are also facing hard times, as are the global real estate markets used for laundering illegally-gained wealth in China.
“Oil markets highlight the depth of the change underway. Now the myth of $100/bbl oil forever has been punctured, it is clear that over-investment has taken place on a massive level in recent years – leaving behind a supply glut in all types of energy – oil, natural gas, coal and renewables. Similarly, the myth of high operating costs has been exposed by the IMF, which has highlighted how only Brazil and the UK need prices above $30/bbl.
“This is good news, of course, as low energy costs will help us to respond successfully to the shift in demand patterns being created by today’s ageing of the global population.”
Please click here to download a full copy of the article.
The New Old 55+ generation is the key demographic for future consumer spending. Their numbers are rising rapidly as global life expectancy has risen by 50% since 1950.
Over the same period, global fertility rates have halved. So there will be fewer younger people joining the wealth-creator generation of 25 – 54 year-olds that has historically driven economic growth.
This is very bad news for anyone trying to sell ‘value-added’, ‘premium’ or ‘affordable luxury’ products and services, as a new study by AllianceBernstein makes clear:
“Vast cohorts of elderly people heading into the sunny uplands of their lives does not necessarily imply a bright future for investors”
The reason is highlighted in their chart above:
- In the developed countries, workers typically reach peak income levels around the age of 45 – 54
- As we note in Boom, Gloom and the New Normal, spending then reduces on joining the New Old 55+ generation
- People already own most of what they need, whilst their incomes reduce quite sharply as they enter retirement
As AllianceBernstein highlight, the rise of the New Old means the outlook for consumer spending is even worse in emerging countries:
- ”In the emerging economies, people over the age of 45 are increasingly losing their jobs and getting pushed back down to the bottom of the pyramid
- “And the older workers who are now losing their jobs typically have little or no savings, so instead of living out their lives comfortably, they are falling through the social classes
- “We believe that this will have a profound impact on the spending power—and preferences — of older people from Chile to China”
Yet until recently, all the experts have tried to persuade us that emerging countries are just about to become ‘middle class’. But this is only because they choose to define ‘middle class’ as meaning someone with as little as $10/day spending power. In reality, anyone with this level of income in the developed world would be below the poverty line.
And the true picture is even worse for many older workers in emerging economies, as AllianceBernstein describe:
“Unlike in the past, a university degree no longer assures middle-aged workers a bright future, because socioeconomic development is creating a generation of younger people with comparable degrees and better English skills, who are often willing to work for less money.
“Since people in emerging markets are likely to face financial insecurity as they grow older, luxury and leisure goods won’t be priorities. That’s why we think successful consumer companies will be those that understand how to grab a growing share of the older demographic by offering quality products at good value and services such as retirement insurance or cheaper healthcare.
For investors, ageing trends serve as a reminder that traditional research into company fundamentals must be complemented by an understanding of the underlying forces that are shaping the evolution of emerging markets.”
This is further evidence to support our analysis that consumer spending in the future will focus on core needs such as water, food, health, shelter and mobility.
The New Old are the growth area in terms of numbers, but they won’t have much spare cash. So affordability and ‘design to cost’ will be the key metrics for success over the next 20 – 30 years.
September wasn’t such a good month for US auto sales, as the chart shows. It was the first time since May 2011 that sales were below those of the same month in the previous year. Was this just a blip, explained by the fact that August was strong due to Labor Day being very early in September? Or was this a sign of a changing trend?
A lot hangs on the answer. Auto sales have powered ahead since 2011, with some analysts suggesting they could regain the 15 – 17m levels seen routinely from 1995 – 2007. This has been great news for the economy, and for suppliers to the industry. But the blog is more cautious.
The reason is that a large part of the strength in new car sales is due to high prices for used cars. Sales of these cars dominate the market, with analysts expecting 41.25m to be sold in 2013 versus 15m new cars. And used car prices have been sky-high recently, encouraging buyers to buy new, as the New York Times reports:
“During the recession, consumers stopped buying new vehicles and automakers trimmed production, eventually creating a shortage of the most sought-after used vehicles – later models with low mileage. Used-car prices surged.”
Only 10.4m new cars were sold in 2009, and just 11.6m in 2010. So until recently there has been a great shortage of reasonably priced used cars available for sale. Average prices today are thus $17926, compared to $14976 in 2009. In turn, as the blog noted last month, auto makers have cleverly offered leasing deals for new cars that often make it possible for a used car buyer to afford a new car instead.
But now the dynamics of the used car market are changing, as the higher volumes of cars sold in 2011 onwards start to hit the dealerships. Thus industry analysts Edmonds.com forecast the market is at a tipping point, where supply/demand for used cars is already starting to rebalance:
“Even though there’s a decline, prices are still high for used cars. It’s definitely a better time to buy than last year, but if you can wait, prices are just going to keep going down.”
Equally important, say dealers, is that buyers have a limited budget when they do go out to buy:
“For the foreseeable future, late-model compact and midsize cars and small sport utility vehicles …are in demand. It’s that $12,000 car that’s the perfect sweet spot, the kind with a $250-a-month payment.”
The clear conclusion is that nobody really knows what may happen next in the US auto market. Any company betting its future on just one outcome may find they have chosen right. But companies that instead test their plans against a variety of possible outcomes will dramatically improve their chances of success.
Apple will report great sales this weekend from its iPhone launch in China. But these cannot disguise its major problem in selling its high-priced iPhones there. Its difficulties highlight the dangers for those who believe that China has now become a ‘middle-class’ country with most of the population having incomes close to Western levels.
Back in 2010, the analysts were forecasting iPhone 4 sales of 4 – 5 million annually in an addressable market of 50 million. And in January this year, current CEO Tim Cook was confidently forecasting that China would become Apple’s biggest market. But since then, the trends have gone in the wrong direction:
- Android phones dominate the market with 88% share: Samsung is the market leader with 18% share
- Apple has just a 5% share and is number 7 in the market
- Apple’s Q2 sales in China and Taiwan were 14% lower than in 2012
The reason is simple – the iPhone is too expensive for the market. Chinese buyers focus on brands selling below $100, with even Xiaomi’s top range new model selling at just Rmb 1999 ($325). Apple’s new ‘low-cost’ 5C iPhone is nearly double this price at $733 on Apple’s China website. And Apple simply can’t afford to cut prices to gain market share, as this would quickly cannibalise global iPhone sales – currently 50% of total revenue.
The chart above from the FT Data blog highlights the key issue. It shows that wealthy developed countries have much higher smartphone revenues per user. Japan and the US both saw revenue around $50/user in Q2, whereas China’s revenues were below $10/user.
Equally important as the FT comments, is that “future growth opportunities lie at the cheaper end of the market“. Smartphones selling for less than $200 are expected have nearly 2/3rds of the global market by 2016. This is quite a turnaround from a few years ago, when the market was dominated by those selling for more than $400.
Apple is selling a profitable niche product. But Samsung’s success in China’s smartphone market provides an excellent example of the reason why affordability has become the critical issue as we transition to the New Normal.
TUESDAY UPDATE. Apple has announced it sold 2m of the new phones in China over the weekend. This is exactly the same number as it sold last December in the first weekend of the new iPhone 5 launch, when it was already number 6 in the market.
Over the past 4 years, major European companies and research organisations have been working to define and demonstrate the factory of the future. Based on the Bayer Technology Services (BTS) site in Leverkusen, Germany, and with €30m ($40m) of European Union and other funding, they have now developed radically new ‘plug and play’ modular technology capable of being implemented widely across the chemical industry. The picture above shows the result, which enables:
- Capex reduction up to 40%
- Opex reduction up to 20%
- Reduction in energy consumption up to 30%
- Solvent reduction up to 100%
- Footprint reduction up to 50%
Even more important than these hard facts is the ability of the new factory concept to increase investment flexibility and deliver faster time to market. One unit can manufacture up to 2kt of product. And the modular design makes it easy to scale this output in multiples of 2kt as required. Equally, if customer needs change, one or more units can simply be moved to another customer’s site.
The work has included a variety of case studies, focused on real market needs:
- Rhodia-Solvay and BASF designed and built a pilot plant for solution polymers
- AstraZeneca developed a proof of principle concept for pharmaceutical development
- Evonik demonstrated flexible continuous production concepts for intermediate chemicals
- Arkema demonstrated the technical/economic viability of producing high volume intermediate chemicals
- Procter & Gamble achieved step-change process intensification for anionic surfactant production
- BTS investigated transferring a multi-step batch process to fully continuous manufacturing
- BASF and BTS developed multi-product, solvent-free, small-to-medium scale production of high viscous polymers
These 7 case studies span a broad range of process industry sectors including pharma, chemical intermediates, specialty polymers and consumer products. And as INVITE director Dr Thomas Bieringer notes, “the project has successfully proved the fast, flexible production concept“.
Any company looking to reduce its capital costs by 40%, and its operating costs by 20%, whilst achieving major environmental benefits, should waste no time in contacting Dr Bieringer by clicking here.