February 11th 2011
Egypt
Egypt has moved centre stage. What’s it all about, and is
it going to effect the housing markets?
Once again, let’s start with my usual caveat. I dont have
a crystal
ball, and I have no idea what is going to happen, or when. But I can
recognise risk when I see it. I dont like risk.
For about seven years I have been advising people not to
buy real
estate in the Middle East. I was heavily against buying in Dubai. No
doubt some folks made money, but only those who got in right at the
beginning, held for two years, and got out. Those who then got back in
again got their profits wiped out. It was a market for the greedy, not
for the sensible. In one year prices fell by 75%. That’s not just bad,
that is disastrous.
I have also warned against buying in Egypt. On the face
of it the
deals look good, and the market is roaring away. Or rather, it was. The
Middle East is a tinder box. It has to go bang at some stage. It’s not
the place to be stuck with a nice holiday property when there is
fighting in the streets.
I have also noticed that land registrations in Egypt are
not exactly
wonderful. I have no direct knowledge of the following situation, but I
pass it on for what it’s worth. Ten years ago the situation was like
this: “92% of city dwellers and 83% of the rural population live in
homes with no clear legal title. You have to jump through 77
bureaucratic hoops — taking 6-14 years — to gain formal title to desert
land.”
Things may have improved. But with the streets ringing to
the crash
of bombs, I dont think Egypt is the place to invest at the moment, or
for the foreseeable future. But the Egypt effect has far more
ramifications than the local housing market. It may well affect the
housing markets here in Europe.
I have mentioned before that the Middle East is a
tinder-box. A
hundred years ago the tinder box was the description for the Balkans.
That area has settled down somewhat over the past decade, and maybe we
have seen the end of the civil strife in that region. If we have, I
think we have the Internet, or indeed the Easyjet, generation to thank.
Opening up a country to the outside world does wonders for
understanding. It can lead to strife, and less understanding, but
generally it is a good thing.
What is happening in Egypt now is a coming together of
three
separate problems. The first, and the trigger, is steeply dropping
standards of living. Food prices rose by 21% last year. In a country
where food represents 6% of the average family’s budget (the USA) that
is cause for grumbles, but not for revolution. Where 30% of a family
budget goes on food, such a rise is cause for serious alarm. However,
there are countries where more than 50% of the budget goes on food. In
India and parts of China that percentage can be as high as 70%. For
those countries a rise in food prices of 21% is catastrophic.
For Egypt’s urban poor we are approaching catastrophe
levels. There
is no way to increase food production as Egypt is mostly rock and
desert. Only the delta is agriculturally productive. The country
imports 60% of its food. It also imports oil, and so is no longer
energy independent. The country cant afford to pay its way. The urban
poor are getting poorer, and revolution is in the air.
The second problem is that perennial problem: religion.
There are
race tensions which have been festering for millennia. There is a small
clash of ideas between the copts and the muslims. There is a large
clash between the sunni and the shia muslim sects. That clash of
ideologies bedevils the whole of the Middle East. It is a clash that
threatens to erupt at any moment. The main contenders are the Saudis
versus the Iranians, with a very complicated mix spread around the
other countries of the area. This has explosive consequences for the
whole region.
The third problem is that two-thirds of the traded oil
that sloshes
round the world comes from that region. There are two rather nasty
choke points. The first is the Straits of Hormuz. The second is the
Suez Canal. If the latter gets closed, or disrupted in any way by the
strife in Eqypt, then the price of oil is going to rise rather nastily.
If the former gets involved in the religious strife then we have the
whole of the region up in smoke, and oil prices will triple almost
overnight.
The last time that happened was back in 1971. That
brought the whole
world to its economic knees, and a decade of ferocious inflation
followed.
Forty years on the same could easily happen again. This
time it
would come hard on the heels of economic chaos already endemic across
the globe. It would plunge the whole world into a deep depression, and
decimate major currencies. It would be hard on housing, and hard on
those paying mortgages. If you could survive the first couple of years
of much higher interest rates you would end up sitting pretty on assets
that will eventually lurch forward in value to make up for the drop in
the value of the local currency.
Those who dont like risk should buy as interest rates
come back down
again after that period of financial armageddon. Those who just buy one
home while selling another wont have such a problem. The sale price may
be down, but so will the buy price. And of course, both will rise again.
If this Egypt mess gets really nasty, and begins the
religious civil
war that has been bubbling under since the original split in the
islamic faith that stems from the murder of the prophet, then we are in
for a nasty time.
For those concerned with real estate as an investment you
would need
to be invested in areas other than traditional western countries, as
their currencies would be at serious risk, and so would their
economies, dependent as they are on relatively cheap energy prices.
Once again, I think the only safe havens are likely to be countries
with strong currencies which are energy and food independent. It still
looks like South America to me, or South-East Asia. Canada is also a
favoured place in that respect.
On the other hand, how did I start the first article in
this
two-part mini series? Just to reassure myself I have walked up to the
balcony to watch the sunset. The blossom is gorgeous, and if the
blossom is on the bough, can the fruit be far behind? But my best
performing assets are all south of the equator, and I shall be drinking
a superb Chllean wine with my evening meal.
john
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