What Will Happen to Real Estate in
2014? Part 1
(Please note there is a podcast of
this blog should you prefer to have it read for you. Look to your
right, and click the link.
Here is my annual real estate analysis for the coming year, plus a look
back at how well I did with forecasting the current year.
If you remember I ran through three different scenarios last year
because things had become so entangled with politics that any sensible
view of the markets had to be presented with so many caveats. No
problem, that's the way things are, and I am not going to make
predictions in the face of the obvious interference with markets that
we have been experiencing.
Let's recap on what I suggested was going to happen over the course of
First, I noted that half the planet was broke. Well, half the planet is
still broke. The banking systems in the UK and the USA are progressing
slowly back to some sense of normality. The debts are still way over
limit, but at least something is being done to re-structure. That cant
be said of the banks in the Eurozone, where they are still in serious
trouble. That does not bode well for economic progress in the Eurozone,
or for any recovery in their housing markets.
Just take one simple fact. Mortgage lending is down across the whole of
the continent. It's down by as much as 45% in some countries. You dont
get a recovery under those circumstances, so forget any hope of an
improvement in house prices across much of Europe in the near future.
I predicted that any rise in house prices across France would be
short-lived, and that the general outlook for the short term was poor.
That has proved to be correct. There have been pockets where gains have
taken place, but the general outlook is for the market to continue to
sag. For the record, prices were down more than 1% over all at the last
count. I'll deal with price variations in part two of this analysis. In
short, my prediction for France was spot on.
I predicted that the bottom in Spain was still a long way off and we
could look forward to more declines. I predicted the same for Portugal.
Both countries have indeed seen those declines.
I also warned against buying for rental returns anywhere in Southern
Europe, and the rental markets have continued to be soft to very soft.
Many pundits predicted that Spain had at last hit bottom. What I said
was "Property prices can only go down. If foolish foreigners weigh in
thinking we have hit bottom, that's not my fault. The lift may have hit
the ground floor, but dont forget the basements. We're heading there
Spanish prices are down between 10% and 15% from last year, and, as of
august 2013, mortgage lending is down 42% on the previous august. The
Spanish market is dead. Prices should now start heading down below
intrinsic value. The general view is that prices overshoot on the
underside by roughly the same amount that they overshot to the upside.
I'll come back to this in part 2.
I suggested Italian prices would scarcely move. That was a correct
prediction as well.
As for the UK, I said that because wages were sagging, and the economy
on the floor "the downwards pressure is not that great, hence my
prediction of more of the same". In fact, there has been a slight
improvement in the economy over the past few months, but not enough to
get us excited. I further said "To sum up: UK House prices down again,
but not by much."
That last prediction has not been confirmed. But I did hedge my bets
last year for a very good reason. I presented not one, but three
possible scenarios. Scenario two was that the floor collapsed. We can
ignore this one as it didn't. However, it would pay to revisit my
analysis this year.
I started with the obvious truth that the whole Eurozone is flat broke.
It still is. In short, the fixes are in and they have prevented a
complete collapse, but the real problem is that none of the holes have
been plugged. Ireland is still broke, so is Spain, Greece, Portugal,
and Italy. We can also add in Cyprus, which I warned about last
January. I had listed the problems there in a previous blog about nine
Cyprus, however, is a special case. I will deal with that in more
detail in part 2.
One further situation which is being exacerbated by the current low
interest scenario is the flight to hard assets, creating more asset
bubbles. There is also the flight to derivatives. Did you know that the
global derivative markets are now worth $700 trillion. That is insane.
Derivatives are synthetic instruments. There is nothing underpinning
them except concepts. They are supposedly worth more than the whole
planet's real economies put together by several magnitudes. We are
surrounded by funny money.
One of the problems I highlighted in this second scenario was the one
of overpopulation and how it affects the labour force. Heck, it's
obvious, the labour force swells, and muck about as much as you choose,
you cant validly find work for people when there is no work. You can
find something to occupy them, but it wont be productive or help the
economy produce more.
Two things are happening. First, populations are shrinking in Southern
Europe. That is good news. However, they are shrinking very slowly.
This is happening in Spain, Italy and Portugal.
In the opposite direction, more people are about to be put out of work.
Technology is about to bring slavery back into our lives. It is
estimated that in ten to twenty years we will have a plethora of robots
working for us. They will be working in the house, in more factories,
and (horror of horrors for the work force) in the service industries.
May I remind you that during the twentieth century the work force in
agriculture dropped in the UK from 95% to 3%. Even if the work force in
the service sector merely halves over the next ninety-odd years that
is going to put the majority of the population out of work. Quite
simply, the rich societies are going to be the ones with small
If you think I am being silly, just look at the facts. It is not the
case that other work will magically appear for people to do, and so
help the economy become more productive. Other work may well appear,
but it will increasingly be done by machines.
If you look at the figures you will see that countries with small
populations thrive, whereas those with large populations are generally
poor. This is why I think a country with a shrinking population is
better placed to cope with the coming avalanche of robots than
countries with burgeoning populations.
There is a caveat to that statement. Japan's population is set to drop
by about 30% over the next thirty years. That is not what I call a
shrinking population, that is a catastrophic collapse. However, it is
interesting to note why that collapse appears to be taking place. Those
of you who missed a program called No
might like to look it up on YouTube.
It's worth a watch to have a peak into where the future might be taking
This time last year I bombarded you with unemployment figures for
several European countries. Those figures have not improved. In some
instances they have worsened. Here is what I said last year: "Italy has
a youth unemployment level of 35%. If you have a third of the younger
generation growing up unable to
support itself that is serious indeed, yet in Spain, it's more than
half a generation, and in Greece it's nearly two-thirds. You have to
ask yourself where these countries will be in ten or twenty years time."
My thesis is that this situation has not improved one jot over the past
year, but has gotten worse.
The second problem I talked about in this second scenario was debt.
Well, what can I say? It hasn't gone away, but has in fact increased.
The UK's debt level surges on upward. France's is doing likewise. The
US debt situation is, like Japan's, well into the realms of fantasy. I
shall come back to this, as I see this as a very important situation.
If we look at Europe, the debt problem has been swept under the carpet.
There is a fix, but it is like the emperor's clothes. Anyone who cares
to look, can see right through it.
The second way out of this fix is to go bust. No-one has done that
except Cyprus, and that is a special case.
One of the ways to deal with too much debt is to print more money. That
is going to be the next move of the ECB, so expect even more problems
in Europe in the medium term. That raises the spectre of future
Currently, there is a general feeling that deflation is here for some
time, although if you look at the underlying prices of commodities,
inflation is here already at the core of the world economy. At the
moment it is not feeding through the system in the normal way. There
are all sorts of reasons for this, and I cant produce a text book
analysis of the world economy in a blog.
One thing I have noted, and that is the sudden hike in interest rates a
little while ago in the USA. On the other hand, Bill Gross, the bond
king, is on record saying that low interest rates may well be with us
for decades. I will come back to this point as well. Meanwhile, let's
go back and look at my third scenario.
This scenario made the assumption that politics would rule the day, and
interfere with everything. This has been precisely what happened.
In the UK the government stepped in with some idiotic deal to help
first time buyers who couldn't afford to buy a house. I wasn't the only
one to slag off the idea. How does it help anyone or anything to help
people who cant afford something to go out and buy it? It's bankrupt
economics. It has artificially helped to push up house prices in the
UK. It is unsustainable.
I put forward an interesting idea, that there would soon be a sustained
move to a break up of states. It is true that the smaller the state the
more effective it can operate. If you look at the most successful
states in the world they are Qatar, Luxembourg, Singapore, Norway, Hong
Kong, Brunei, USA, UAE, Switzerland, Kuwait.
Okay, the USA is scarcely small, but the rest certainly are. And Norway
and Singapore are even wealthier, and look how small they are.
States become too large, and burdened with bureaucracy, and they cease
to be competitive, and the state machine eats up the wealth, and
eventually the behemoth breaks up.
That is what we are seeing with a vengeance in the USA and in Europe.
Both regions will come apart at the seams at some stage due to this
situation. There has never been an example in recorded history where a
country survived a bloated beaurocracy.
Interestingly, I have only recently come across a couple of publishers
pushing precisely this view of political economies.
I ended by warning about the rise of China, and the fall of the USA. I
will return to that subject in Part 3.
At the moment, I look back on my three scenarios and find they hold up
well twelve months down the line. I will take the above scenarios
further in the next instalment of this annual review, which I will
publish next week.