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Housing Markets, Will They Collapse?

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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 vast.

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 line.

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.

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