I was going to write about my recent building experiences. In fact I've already managed to write four articles on that subject. I had already written an article about how things are going particularly badly in Spain because of the property meltdown. I've also written another article about financial matters, and so I already have a massive backlog of stuff. Perhaps I should send out my newsletters on a daily basis. However, I am not going to push out any of this already written material just now because I am getting rather frightened of what is happening all around me. I will do the article on Spain later in the week because it is rather important, as so many people are involved with that market. Just dont buy anything out there till you've read my article. But what really worries me is what is happening in the U.S. I cant see how this mess isn't going to impact on the rest of us. Basically what has happened in the US as you probably all know, is that interest rates were on the floor for several years encouraging everyone to go out and buy real estate. This pushed up the prices, which encouraged more people to buy, and the increasing spiral went on and on. Then interest rates started rising. Just a quarter of a % here, and then another quarter, and then suddenly the rates were at 6% (up from 1%). Most people were buying houses on low interest starter rates. The idea was simple. Buy now on a low rate, then sell in two years when the price of the house has risen and before the starter rate converts to the true interest rate. This method of making money worked fine while interest rates were low and real estate prices were rising rapidly, and people could flip houses easily. It worked less and less well as interest rates rose. It stopped working altogether as house prices stopped rising. It is now causing panic as prices are falling. All those idiots who bought to flip on low interest rates are finding their mortgages are re-setting to significantly higher rates as the starter rates come to an end. The flipping has stopped as prices are falling and there are not many buyers out there. The result of all this is a contraction of spending, thus leading to a slow down in the economy, which will eventually lead to a recession. This will impact on world trade, and cause a slow-down in all major trading economies. It has already impacted on the financial centres of the world. So many institutions have bought the re-packaged mortgages on the secondary market and are now holding debts based on negative equity so they themselves are going bust. Literally dozens of mortgage companies have already gone bust in the US, and the unwinding of this mortgage backed fiasco has barely started. Most of the mortgages are due to revert to higher rates next year and the year after, so this scenario is going to play out in slow motion for quite some time. This will impact on every country where the home banking system has invested in these dodgey securities. The end is easily foreseeable. America is heading into a very nasty recession. If you hold real estate there you are losing money now, and are likely to lose more in the future, and find yourself in a market that will take at least a decade to recover when it finally hits bottom. In order to help matters the Federal Reserve Bank (The Fed) will likely lower interest rates. This will help the dollar slide further down. Already many foreign governments are stopping their purchase of US government bonds (government debt), and putting their excess dollars into commodities. This will further wreck any attempts the US makes to stop the fall in the dollar (if they even want to). This means anyone who has invested in any currency linked to the US dollar will also find they are starting to lose money. A year ago I suggested that anyone investing in the Caribbean would be likely to lose money on the falling dollar. That loss a year later is about 6% and rising. If you add in inflation that will give your true losses; say 10% over the past year. If property prices aren't rising faster than 15% a year you would do better to have your money in the bank. You would do even better still if you'd invested in various dividend paying companies that crank out anything up to 15% payouts a year. Mind you, if you invested in Santa Margarita, part of Venezuela, you will be down 46% over the past year due to rampant inflation and dire currency falls. I did warn against that in an earlier article. I hope none of you are in that market. If you are: Ouch! Expect values in Venezeula to go down and down. Expect the Caribbean generally to suffer from a falling dollar. Expect fallout everywhere. Basically, expect a tightening of lending criteria throughout the western world. Now is not the time to take on debt. It could well be an excellent time to simply walk away from debt if you can. The sensible person probably gets out of high leveraged property and invests in gold. I was going to suggest all kinds of investment deals, but most of them depend on debt. I cannot suggest anyone get into property supported debt at this time. I am aware of debt positions in Spain being drawn back on a massive scale. I will give some figures later in the week for Spain. You need to know them. I am also aware of two fabulous property deals in Portugal that no-one can get finance for. The times they are a-changing. Wise up before it's too late. Rather a lot of markets are going to follow the US and Spain. So far the UK and Ireland have been immune. I dont see either country being dragged into the mess just yet, but the odds of disaster have shortened. I would suggest property investors start getting very careful. The party's over. See you there! |
© John Clare 2007