68% and 60%


In response to yesterday’s contention that “Insofar as [Chinese real estate] prices soared 68 period in one year, 60 percent decline doesn’t sound like much of a worst-case scenario” commenters both here and at Marginal Revolution seem to think I’ve made some kind of mathematical error. Their point is that if you start at $100 then soar to $168 and then decline 60 percent you get all the way to about $68.

That’s quite true, but I don’t think it undermines the point at all. The point is that if prices can swing 68 percent in one direction they can also swing 68 percent in the other direction. The secondary point is that a stress test is supposed to examine not just the most likely case but some kind of plausible version of a worst-case scenario. And again, the existence of 68 percent increases in some markets indicates that Chinese real estate prices are extremely volatile. Is it crazy to think they could be equally volatile on the downside? I don’t see why. I’m not going to hazard a prediction about the Chinese economy or dispense foreign real estate investment advice, but I think it’s common sense that if you’ve seen huge price swings in the recent past you need to consider the possibility that future swings will get even bigger, not simply assume they’ll be smaller.