December 2008
Time for an end of year update on the property market and other things.
Let's look at the short term first.
For those of you who want to buy property there are no doubt a lot of
reasons why you shouldn't. We have entered a period of deflation. That
means real goods are decreasing in price, and will continue to do so.
Things will be cheaper in the future. Cash is king, and gold is the
king of kings. Owning property right now is not good.
For those of you who want to sell I guess patience is required. If you
really HAVE TO sell, then so be it. If you dont have to, then sit
tight, maybe for 3/4 years.
For those who need to move I would suggest selling up, then renting
until the market stabilizes. You should be able to buy back in at a
lower level.
For those of you who are investors, you have a golden time coming, but
not in property. You will be offered all kinds of wonderful deals.
There will be better deals in six months time. Now is the time to
invest for the short term. Property is for the long term. You will make
more money gambling on currencies. You will make more money buying
company bonds. You will make more money collecting dividends.
Just stick with the great companies of the world, and they will see you
through.
For the stock markets, expect a rally (it's already happening). It's a
suckers' rally. It will peter out, and the market will drop like a
stone again. It always does in times like this.
Commodities have hit the downside seriously. Wow, look at oil. Up from
60 to 147, and then down to 35, all within a year. Krikey!!
How long will this last? As long as that piece of string you've heard
about. A year; two years; three years? I dont know.
The real problem with the real estate market is quite simply the lack
of lending. With constipated banks, you cant get loans, so you cant go
out and buy, so the market stays depressed. When the banks start
lending again things will start to improve, but not before.
What about the long term?
Longer term we have a major problem developing. The $ is the world's
trading currency. It is headed for serious trouble. You cant have all
these bailouts in the US without someone creating the money to do the
bailout. The amount of money created is so vast it is hair-raising.
Nothing on this scale has ever happened before. The USA is headed for
serious inflation at some stage down the line.
Last week someone did some maths and worked out that back in September
the value of the USA equalled its debts ($56 trillion). It's debts have
spiralled since then, and valuations have gone down. The USA is
technically bankrupt. Only it cant go bankrupt because, as the dollar
is the currency of last resort, they can print as much of it as they
like (or should I say, dare?). This will debase the value of the
currency. At some stage China and Japan will want their money back and
will start selling Treasury Bonds. I'm sure there will be an orderly
retreat if at all possible. But will that retreat turn into a rout? I
dont know. We will either have stagnation because everyone will be
scared to break and run from the dollar, or those holding dollars will
start to see a serious deterioration in the value of their holdings,
and cash them in before their value goes down any further. Either way
we are looking at long term disruption to world trade. We are also
looking at future US inflation big time.
I cant see how things will pan out. If the US imports inflation it
could be okay for the rest of us. On the other hand inflation is kind
to those holding solid assets, which includes real estate.
My gut reaction is that the US will import inflation leaving the east
with deflation. It will also mean a rise in the euro as reserve
currency, which will inflate the value of the euro, which will harm
euro business plans just when things need to be easier. This will have
to drive down interest rates in euroland. Since everyone else has sunk
their rates almost to nil we will be in a very strange world where no
banks will want to lend you money because there will be no profit in
it, and the value of any security on such loans will be likely to go
down.
Does that mean lending will have to be put in the hands of the
government? It's getting that way in USA already. It may be the only
way to re-start the system: the various reserve banks printing money
and lending it out to businesses to get things back on track.
If that happens, every country involved will be creating a major
inflationary scenario. That will be the time to buy real estate.
There are so many variables I cant do a computer model of this. And
there are no previous examples of anything remotely like this to guide
us. If the above scenario does occur, my guess is that the inflated
currencies will win in the short term. Long term, god knows what will
happen. The options in the near term (2/3 years) appear to vary from
bad to armageddon.
What this means is that we have no alternative but to hedge our bets. I
guess the best bet for the dont knows is 15% real estate, 30% cash, 30%
high dividend income producing company bonds, 25% gold. Adjust those
percentages according to your preference. For the frightened I guess
50% cash, 50% gold.
My own preference because of my age and my personal needs is for income
derived from company bonds, and various cash based deals, while for my
real estate, I am just keeping my head down.
Expect buying and selling of real estate to be real slow. Avoid tourist
spots like the plague, unless it is long term for your private use.. If
you buy property abroad always and only go for deals in large
commercial cities where the job prospects are good. I know Detroit is
super cheap, but the place is quiet. We haven't yet got blood in the
streets, but we will have sometime soon. I want to buy after that, not
before. Tourist areas may well be slightly empty in the near term.
The mantra for buying real estate used to be: Location, Location,
Location, but now it should be: Patience, Patience, Patience. As an
investor you should never, never, ever buy into a falling market
because you dont know how far it will fall. I can tell you with almost
100% certainty that almost all real estate markets will fall further
than they already have. No matter how good the current deal, a better
one will be along shortly. I know; I've been here before. Read my books!
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