August 2009 - A Wet Summer..... again!
The world is full of dreamers, and those who want good news. What's
wrong with that one might ask.
It's fine if you are down the pub with your mates, or sitting in a
deckchair with a good book and an iced Pimms, but not much good if you
are thinking about business, or trying to survive in some pretty foul
cross winds.
Dont pay attention to the tip-sheets, in order to stay in business they
have to sell good news. The newspapers are similarly not to be trusted.
They like melodrama, so things have to be bloody awful, or incredibly
rosy. Luckily I dont need the money, so I can tell it like it is.
We have reached a kind of calm. How long that will last is anybody's
guess. But then who wants to guess? I dont. Who wants to predict the
future? I dont. You shouldn't either, it's a mug's game.
All you have to remember about property is that it is always the last
to recover after a slow down or a crash. Remember, people need money,
and they need good news ahead in order to get spending on property.
Forget the crap about people needing somewhere to live. Kids are living
at home. Folks are extending the old house. They are looking at the
attic space. They are out of work. They have just had next year's raise
cancelled. These guys aren't going to buy houses however much they want
them. I'm sorry, but the downwave keeps going down for the moment.
Mortgage lending has to improve greatly before the market can get back
even to a stable situation. The banks aren't going to recover their
balance sheets anytime soon. While asset values are still declining the
balance sheets cant improve. And you dont get back from a lending
situation of 30:1 to 10:1 over the course of 18 months, especially when
so many of your 'assets' are underwater.
Finally, let's be realistic. The world has lost $30 trillion in asset
value. That is roughly 30% of world asset value, simply melted away
over the course of a year. You dont recover from a hit like that
overnight.
The world economy will only rebound when world trade rebounds. That can
only happen when wages start to go up. Have a look at what is happening
in the world's two biggest economies. In the US the jobless numbers are
still rising at a frantic rate. The real unemployment figure is around
17%. That is truly horrific. And what is even worse is that relief in
the States does not last forever. What happens to those with no work
and no benefit? They come off the official unemployed list, and, what
is more to the point, they aren't about to start spending any time soon
as, quite simply, they have no dough.
The figures for those coming off benefit but still without jobs are
really frightening: 35,000 in June. 102,000 in july. The figures will
rise towards the end of the year like this: 141,538 in august; 496,049
in september; 734,217 in october; 902,983 in november; and 1,464,892 in
december.
According to zillow.com, 93 million homes, condos and co-ops have
mortgages that exceed their appraisal value. Home equity loans on those
places are worth less than nothing. And banks call them “assets”? Ha ha!
According to a new report by Deutsche Bank half of U.S.
mortgage-holders will be underwater on their loans by 2011. Those bank
assets dont look as if they will help the balance sheets for the next
few years, and so we may as well forget US lending to get going any
time soon.
Next year, as I have said many times before, the next round of mortgage
resets start to kick in. And those resets go on into 2013. Does anyone
seriously think the American consumer is going to start buying to
kick-start the world economy with that situation kicking him in the
teeth? I think anyone who seriously believes in that is living in
cloud-cookoo-land. Dream on baby!
If you look at Europe the picture is not that much rosier. The housing
market in most of the countries is down so far that people are feeling
rather shell-shocked. Their pensions have taken a buffeting, and they
are feeling financially a bit queasy. They aren't about to go out on a
big spend; not until the money starts coming in again and the wounds
have healed.
In the UK rents are going down. With more people losing their jobs or
getting put on short hours, or having their annual raise put on hold,
they dont have the money to chase rents upwards.
House prices in most of the countries are down. They are down by fierce
amounts in Ireland and Spain. In both those countries unemployment is
close to 20%. Most of the countries in the euro-zone are close to
budget chaos.
The Germans and several other European countries have had numerous
failed bond auctions. The Germans have had four failed bond auctions
since last October. If you cant sell your debt to pay the bills you
have to print money. And this shows the hard times are over? Ha ha!
Banks haven’t cleaned up their books. The toxic assets are still there!
Companies are still paying huge premiums to finance and re-finance. I
have deals in front of me where companies are paying 4% a month for
cash injections, and one company is even paying 6% a month! And
finally, and most importantly, this is the first post World War II
economic expansion that is trying to develop without any significant
credit expansion. If you don’t have bank credit expansion coming out of
the recession, you’re not going to have a sustainable recovery. That’s
the bottom line.
Of course, common sense should tell you that you cant expand credit
until the last credit expansion has been paid down. It hasn't.
It takes no time at all to fall into a hole. It takes time and a bit of
effort to climb out of it. The fact that most countries aren't falling
down the hole quite so fast is heartening but scarcely a time to
rejoice. After all, if you've fallen a long way down that hole, you
have to climb a long way to get out of it before you can get on with
your normal business.
Your average guy in the street knows all this. The 'experts' dont seem
to have got the message. They are dreamers who got it wrong last year
and the year before, so experience should tell us they are getting it
wrong this year as well.
The real unknown is not whether house prices have hit bottom (yawn....
who cares?), it is: what landscape are we entering? Are we entering a
period of high inflation due to all that money printing? Or are we
entering a period of deflation brought about by general loss of assets
and income? I still dont know, but two things I do know.
If we are in for inflation then interest rates will rise and garrot you
if you are too highly leveraged. After all, how can the German
government sell more of its bonds? Only by raising the interest rate.
If we are in for deflation then the value of your property will keep
going down, not because prices drop but because the value of money goes
up in a deflationary environment. In short, you should not be heavily
in debt because that debt, relatively speaking, grows.
If inflation is coming then you need to buy property after that burst.
It wont immediately affect property prices because prices will be
throttled by high interest rates. You buy as the rates come down after
the great inflation.
If deflation is coming you need to be in cash.
Neither scenario is good for property prices. Those who are sitting
pretty are those who bought some time back, are lowly geared, and are
laughing at pathetically small mortgage payments with plenty of cover
in the rent. I wonder how many of those there are out there. Those who
have followed my advice since 2003 will be sitting pretty.
If I had to guess, I would put my money on deflation. This is a balance
sheet recession. (See my previous
article on this and the way the Portuguese banks are dealing with
it.) If I remember my economic history well, such recessions lead to
depressions. The most famous of these was in the last quarter of the
nineteenth century. The world went on quite comfortably, but prices in
Britain dropped over a twenty year period, and housing didn't recover
for another good few years after that. (Sounds like modern Japan.)
I've no doubt there will be differences this time round, but I'm not
about to stand up and try to prove history wrong.
Those of you thinking of buying holiday pads in Spain, or Eastern
Europe, I suggest you hang on for a while. Believe me there is no
hurry. If you make a mistake it will be very costly. The big downer
with property is that it is difficult, if not impossible, to sell at a
half-ways decent price in a deflationary or inflationary environment.
In one, the belief that prices will be lower next year puts people off.
In the other, the interest rate encourages them to make low offers, or
stay out of the market.
There's a lot to be said for forgetting about the market altogether and
buying a good book. Haven't I said that somewhere before?
Wait a minute..... there's that yacht project of mine. That's what you
should be buying. Read all
about it!
best wishes
john
|
