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House Prices in 2013 - Part 3

Here is my third scenario for 2013. This is the cop-out. Politicians rule, and we all live forever after in a surreal world.

Do you really think the crash will come in 2013? I somehow dont think so, but I have this theory that things happen when you've given up all hope that they will. Maybe that means it will suddenly hit in 2016 when we've all long since stopped thinking about it. Meanwhile, read on….

The third scenario is that we continue to live in a sort of no-man's-land where chaos is around every corner, but the magic wand of the politicians keeps that chaos at bay. That means the bailouts will continue. It means there will be half-hearted money printing. It means there will be a fair bit of rioting here and there. Everybody across the continent will be making all kinds of snarling sounds, but it wont amount to much in the end. And this time next year we will all be exactly where we are now. Except that we will all be a lot poorer, and the debt levels will be even scarier.

There is one other element that comes into play at this stage; we are talking politics here so let's have a look at some local politics.

My cultural home is Spain, and my favourite city on the planet has to be Barcelona. I spent a lot of my youth there. You should read my stories about my time there. I will put in a link to the chapters this week. That means I am aware of what is going on in that part of the world. They are seeking independence from Spain. That's nothing new. In fact Catalonia existed long before there was a country called Spain. The Catalunyan parliament dates back to the eleventh century, well before the first modern French and English parliaments, and the Catalunyan state dates back to at least the early nine hundreds.

In short, Catalonia is a real state and has been for centuries. But how about Scotland? Maybe the Scots wont break away from the Union. But maybe they will. There is certainly a groundswell of opinion there, and Scotland has always had its own way of life and it's own form of independence going way back. Heck, it wasn't even part of the Roman Empire, and there isn't much of Europe that you can say that about.

What about Belgium? It's been in a stalemate for over a decade. How long before it disintegrates into Flemish and Walloon? And how old is Belgium? 180 years or so. How about Germany, that country really only dates back to the time of Bismark. Italy? That's barely 150 years old.

Now let's turn things round. Where's Yugoslavia, Czechoslovakia, the USSR, the mighty Hapsburg Empire, and so on?

If you look at a map of Europe dated 1913 you will see a very different state of affairs. Are we about to see another major change?

Never mind the money, what about the politics? And politics is ruling the money at the moment. We are about to be hit from both directions at once. I cant talk about the politics, and the possible break up of states, but it is in the mix. Instead let me return to the money.

So how is this likely to play out? For starters, interest levels have to be kept on the floor, otherwise the whole edifice collapses, so dont worry about your mortgage, it isn't going to get any more expensive. In fact, if the politicians have their way interest rates may stay at minuscule levels for the rest of the decade.

That gives us all some room to breathe. But only if the break up of states doesn't get serious enough to derail just about every other plan on the table.

I'm not a politician, I'm basically a normal guy, so I cant think myself into that mind-set, so I'm probably wrong when I suggest there is a way for juggling this monster.

I dont know what the exact figure is, but at a rough guess I would say that at least 80% of all world trade is dealt with using the following currencies: US Dollar, Canadian Dollar, Aussie Dollar, Euro, Yen, and Sterling. Excuse me, but that covers eight out of the top ten economies of the world. In a shout-out there is no problem, those eight carry the day.

Over next Christmas period they all simultaneously devalue by 75%. End of problem, end of story. Open the champagne and laugh yourselves silly.

That leaves China, Brazil and Russia feeling pretty sick. China will be particularly hard hit. It will cause severe hardship in South-East Asia where a consortium controls the price of rice. Everyone else will have an extra bank holiday.

That will take the UK's debt down to only about £250billion. We should be able to handle that. Chinese toys, telephones, and other things will suddenly cost a fortune, but that's okay, we will now be able to afford to make those things ourselves, and maybe we'll go back to being the factory of the world. The price of oil will do strange things, so solar power and wind power will suddenly become competitive. The price of soya beans will crash doing some serious damage to Brazilian exports. We'll all get one hell of a fright, and the following year could well be pretty scary, but we will come thru rather well. After all we do still have some oil left, and we could start getting that wave power tamed all around us. We'll be energy sufficient in no time, and we'll all live happily ever after.

Will it all be bad? Do note that the USA is now entering a new era where it is beginning to export energy. In two or three year's time we could be starting to import natural gas from the US to make up any power shortfall we have, and so we will be less dependent upon oil from other parts of the world. In any event, oil from Saudi Arabia is still priced in US dollars, so, although prices there will have to go up, they may not more than double. That will be a serious blow, but it's a situation that will cause short term harm, but can be managed.

It's one way for the USA to regain its slipped footage in the world. The country has massive reserves of oil shale, and has a massive heartland growing food for the world, including such staples as wheat and soya. It will suddenly be cheaper; a lot cheaper, but it means there will be plenty of room for price mark-ups that will benefit American farmers, and the IRS. Lost trade, lost jobs, will suddenly return to the USA. And the cost of these basic goods will not rise for those countries using the currencies listed above, they will essentially stay the same.

The biggest loser on the planet will be China, which is, for the USA, a politically intriguing possibility.

There is one very big snag to this scenario, and it is what makes me very nervous for the coming year. The USA is the largest economy on the planet by a very long way. The US dollar is the reserve currency of the planet, with most trade being done using the dollar. But that is a historical view. Things are changing, and they are changing very very fast. In 2006 the US was the number one trading partner for 124 countries in the world. China was in the same position for 70. This year that figure has reversed to China being the number one trading partner for 127 countries, against the US at 76.

In another year or two the USA will have lost its leverage. If it wants to effect a devaluation to reduce its debts and still come out smelling of roses, it has to get a move on. I reckon if it hasn't made the jump I suggest above by the end of 2013 it will be too late to force the situation on the rest of the trading world. By then China will probably be strong enough to step in and effectively push the renmimbi as the currency of choice for international trade, thus side-lining the US dollar, and effectively catching the euro in a squeeze. If that happens then the dollar is headed for a serious fall, which will devalue any values from property/rents in the USA. It will also be the trigger which sends Treasury Bonds crashing, which in turn will bring on the biggest economic crisis the US has ever faced. That's the main reason I would steer well clear of any US investments.

Already we have Australia and New Zealand cuddling up to the Chinese in a new trade partnership that encompasses the Asian and Pacific countries, and explicitly excludes the US.

The announcement about this deal was made during a TPP summit in Cambodia, with none other than President Obama in attendance. Some snub for the US!

"It is symptomatic of the national condition of the United States," David Goldman wrote last week at Asia Times, "that the worst humiliation ever suffered by it as a nation, and by a U.S. president personally, passed almost without comment...

"What does the United States have to offer Asians?" Goldman asks rhetorically... offering the following answers:

    •    It is borrowing $600 billion a year from the rest of the world to finance a $1.2 trillion government debt, most prominently from Japan (China has been a net seller of Treasury securities during the past year)

    •    It is a taker of capital, rather than a provider of capital

    •    It is a major import market, but rapidly diminishing in relative importance as intra-Asian trade expands far more rapidly than trade with the United States

    •    And America's strength as an innovator and incubator of entrepreneurs has diminished drastically since the 2008 crisis, no thanks to the Obama administration, which imposed a steep task on startup businesses in the form of its health care program.

"As 3 billion Asians become prosperous," says Goldman, "interest fades in the prospective contribution of 300 million Americans... America's relative importance is fading."

The situation is clear. You can carry on struggling to make a living in a part of the world that is heading on down, or move to a part of the world that is heading up.

Okay, you now have your three scenarios. Take your pick. I'm beginning to diversify away from Europe. Those of you who have been following my writings for several years will know I have been advocating South-East Asia and Brazil for the past five years or so. I'm now beginning to look at the possibilities in New Zealand and Australia, but so far I have reached no conclusions on those countries. However, what is clear is that the world is divided into two; those countries that are situated where the sun sets, and those where the sun rises. I'm an early morning man.


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