The Unique Property
Housing Markets, Will They Collapse?
Watch on Youtube: https://youtu.be/WSQeKhl2afE
By the time you read this I hope the end of
lockdowns will be in sight. I don't think it matters where you
are in the world, unless you happen to live on some isolated
island you will no doubt be depressed, knows lots of
other depressed people, and be aware that once bustling cities
are now a shadow of their former self. What has this
done to real estate markets? And what is likely to
happen when (if) things go back to normal?
Let's start with a few obvious observations. The hospitality
sector has been decimated. The travel industry is in ruins.
Shops are shut and therefore not making any money, and
therefore not paying rent, and therefore landlords are in
trouble. We have a domino effect. It only takes one sector to
get into trouble and before you know it, that sector starts to
bring down other sectors.
Maybe some of you have been following the daily reports from
Southern Spain. If so you will know that the place is in deep
trouble. I used to say that one of the big bargaining points
the Brits had when negotiating brexit terms was that a couple
of awkward adjustments could leave Spain in serious financial
trouble because they are so dependent upon the English tourist
trade. Well, it wasn't necessary for the British government to
be awkward, for the pandemic stepped in instead.
I live bang in the middle of a tourist zone (the Algarve), and
the place has been deserted now for more than a year. We
started by thinking that the easter shut-down could be managed
because in all probability the summer season would see us out
of the danger zone. But that was not to be. Then we thought
things would be back to normal by christmas, but instead
things got worse. It was about that time that the penny began
to drop and people started to realise that the country was
seriously in the shit. There was hope that the easter holidays
would see things re-open, but that now looks increasingly
unlikely. That means the hospitality trade has so far had to
cope with a fifteen month shut down, which may still extend
further. For most businesses that is not sustainable. For the
general economy of a country it means a large proportion of
the population is either unemployed, or being paid to do
nothing. In short, the cost of these lockdowns is going to be
Let's go back to Spain for a moment. The country entered
lockdown with somewhere in the region of 60% of those under 25
unemployed. What is the current figure? I dread to think.
Let's take this a stage further. You are unable to run your
own business for more than a year. Most people in that
situation would throw in the towel. What's the domino effect
here? You close your business. You end up sacking all your
workers so they are now on the dole. There aren't any other
jobs to go to because no-one is hiring. That means more and
more people are claiming unemployment benefit. Those people
are now no longer paying taxes, so the tax take is going down,
while the demands on the exchequer are going up, so the
government starts to go bust.
In the EU the individual countries can't print their way out
of this mess, and Brussels cant afford to rescue 27 countries
that are going broke.
Let's continue the domino effect. People dont go to work so
the kiosks in the streets have no customers. The
establishments that sell sandwiches and drinks go out of
business. Office blocks are empty but someone needs to pay the
rent, but cant, so the freeholders start to go bust. Mortgage
companies also start to go bust. And now all of these people
and businesses are unable to pay their taxes just at the time
that calls on the government are at their highest and growing
by the week.
What was probably sustainable for three or four months rapidly
ceases to become sustainable. Certainly when we go into the
second year of this mess rather a lot of life from the olden
times simply will not survive.
In terms of real estate what can we expect?
The first thing to go will be anything that can be digitised.
Banking will become more automated. There will be more and
more high street bank closures. With home working now more
usual we will find office space will be less affordable. Dont
invest in commercial property.
Shopping will go digital as well. Dont invest in shopping
malls. More and more shopping will be delivered by automated
delivery pods and supermarkets will start to become local
storage facilities. Shopping will tend to be confined to the
local corner shop which in itself will operate much like the
fully automated Amazon local shops.
Country living will be the location of choice, and high-rise
apartments will start to lose value. Dont invest in any
residential building with more than four floors. This is going
to cause a serious problem because a lot of office blocks will
be redesigned and turned into apartments, and most office
blocks have a lot more than four floors.
Now let's look further afield. I cant tell whether people will
start to view travel by plane as a health risk, or whether
they will be so relieved to be able to move about the world
again that very few will care. If the former, then tourist
areas are in for serious trouble.
No matter what does happen, I expect a gradual slide in house
prices. With more people out of work, more businesses closed
down, and a general air of uncertainty, few people will either
have to means to chase prices, or the desire to do so. In
fact, the longer this spins out, the worse things will be.
Recovering from this mess is going to take some time.
On top of all that, the EU has the political element to deal
with, and it will be dealing with political uncertainty and
chaos for at least the next two to five years, and that will
be bad for house prices. Indeed, in five years time how many
current member states of the EU will still be members of the
bloc? The number of countries seriously considering leaving is
growing by the month, and the number of people in those
countries who want out is increasing at a steady rate. We are
probably only weeks away from several countries having more
people wanting their sovereignty back than those wishing to
stick with Brussels.
In the previous blog I did highlight one of the problems of
buying a home anywhere in the EU. That problem being, what
happens when a country leaves the EU? If they also leave the
eurozone, which they will probably have to in order to be able
to manage their own currency, interest rates, and exchange
rate, then there are going to be some serious devaluations
which will cause havoc to any house valuations.
My advice to anyone thinking of buying real estate as a hedge
against the coming chaos is to think again. I have said before
that real estate prices are a lagging indicator. Real estate
is not exactly a liquid market, and therefore it takes
time for prices and prejudices to work their way down the
So what is the best strategy?
I intend to stay on the sidelines and wait for various even
worse scenarios across Europe, which will cause pockets of
extremely low prices. I shall be ready to move in when the
time is right. That time is not now.