The Unique Property
2022 is coming. Will it be better than 2021 or worse?
It's time I had another look at the housing market and made a
few stabs at what the new year might have in store for us.
One thing is obvious, and that is, the world is in one hell of a
mess. That is not the best time to buy houses, but what does it
mean? To some extent the world has never been in quite this much
mess since the beginning of the second world war. Let's start by
trying to list where things are in chaos, and then see if we can
see if it is possible for things to get better or to get worse.
And if there is anything we can do about it.
Here are the various areas I will be looking at:
Politics and politicians
Discord and war
Money makes the world go round.
Politicians like the above statement. One of the reasons they
are in government is because they want to make money. The two
members of what is charmingly called The Swamp in US politics
who are pulling the strings that operate Biden are supposedly
socialists. Susan Rice and Ron Klain. Both are
multi-milionnaires, with Rice holding stocks valued at $140
million. She, as a hardened capitalist, is apparently
manipulating a supposedly socialist president. And idiotic
voters actually believe these guys!
There has never been a socialist system that has made people
wealthier or happier. Every single socialist experiment has made
people poorer and closer to desperation, except of course those
at the top.
If we are headed for socialism then expect your standard of
living to deteriorate. That will lead to lower house prices, and
higher prices for everything else.
If money makes the world go round, let's print a lot more of it.
Sounds like a good idea. But there is a slight problem with that
idea. If you increase the money supply more than the goods
within the system that can be bought and sold, then money very
quickly starts to lose its value. If money loses its value then
people owning that money are poorer. It really is that simple.
In other words increasing the money supply without increasing
production leads to inflation. That in one sense is a form of
taxation by stealth. If you operate in the current monetary
environment you will find that bonds pay maybe around 2%,
whereas inflation is about 5%. That means the real return on
money invested in what is supposed to be a safe haven is losing
value to the tune of 3% p.a. In other words, real monetary
inflation is running at 3%. Put that another way: you are
running not just to stand still, but to go backwards. Every
year, after you have pocketed the interest, you are still 3%
worse off. If that situation persists you are gradually but
definitely getting poorer.
If we relate that to the value of real estate, it means that as
time goes on you can afford less to pay for your home, thus
putting pressure on house prices.
I have always maintained that the sensible person buys a house
when interest rates are high but declining. The reason for that
is simple. High interest rates mean that the cost of a mortgage
is higher than when those rates are low. What determines the
price of a house is what it costs month by month. With high
interest rates, the cost goes up, and so the price has to come
down before people can continue to afford to buy.
We currently have very low interest rates. That means the only
direction they can move is up. We also have rising inflation.
The easiest way to deal with that is to raise interest rates
which tends to choke off the effects of money printing.
There is a problem here. How can central banks raise interest
rates without bankrupting governments? You can guarantee that
interest rates are not going to rise in the US particularly soon
because about three trillion dollars of loans become due this
month. Rates have to stay low to allow the government to roll
over those loans at advantageous rates.
The real questions on the money front are: When will interest
rates rise? Will they ever rise? What is likely to happen if
they do rise?
Inflation of itself is going to make folks poorer, that is
clear. If production does not rise, then there is nothing to
offset that inflation. What with lockouts, working from home,
supply chain failures, production is going down. Even the Fed
chairman admits that inflation is here to stay and likely to
rise. His only course of action is to warn that he is about to
act, then start to taper the bond purchases, then to raise
I assume that course of action will start mid january. That will
have a knock-on effect around the world, and interest rates in
general will probably start to rise around easter time. If there
are repeat lockdowns, the situation will get worse as there will
be a double-whammy effect. The reduction in business will
counter any rate increases because it will slow production, and
the gap between spending and earning will widen and the world
will slide rapidly into slump conditions.
It's odd that this year any question about the near future has
no sensible answer at all. Usually you can make an educated
guess as to where certain trends are going over the next 12 to
18 months, but that is not possible at the moment.
An interesting situation is currently playing out in China. It
pays to watch how this situation develops. Unfortunately the
longer these messy economic situation are allowed to continue in
the West, the worse the crash will be when it comes. What we
have at the moment in China is a domino effect. Once one big
conglomerate collapses, the loans dry up, people start to panic,
and a few more dominos come crashing down. That triggers more
panic, and now we have the big companies who are no longer
paying their bills, so the smaller companies which trade with
these big companies start to feel the pinch, and things just
keep compounding down the line.
If that scenario is coming to the West any time soon then all
hell is likely to break loose. I'm not saying it will, but I
can't say things look rosy.
If you now run the debt problems alongside the rising problem of
inflation, you get an even worse situation. You would only have
to raise interest rates by one or two percent to wreck personal
financial planning. Let's assume the average family runs in the
region of £20k in credit card debt, and £250k in mortgage debt,
and maybe another £5k in an overdraft. Just adding 1% to the
base rate will add roughly £230 to the monthly family outgoings.
An increase of 2% is going to cause serious trouble. Now add in
5% inflation on top (or will that be 7% in a year's time?), and
you have a country in turmoil, and that won't do house prices
I'm not saying this is where things are headed, but it is
perfectly feasible. If interest rates start to rise around
easter time, and only creep up by 0.25%, and that happens only
once every three months, by christmas 2022 you will have that 1%
rise, and if inflation does increase only slightly, you have
folks 8% worse off this time next year. For those already having
difficulty, that will push them over the edge.
That sort of problem will impact government debt as well,
together with company debt. In short, the kind of problem that
is currently plaguing China is likely to spread, and China's
industries are going into meltdown. Add in the appalling weather
they have had to put up with, and you have a country with its
main agricultural lands having been under flood waters for most
of the past year. In the Middle Kingdom people are having to put
up with serious power shortages during the winter, also job cuts
because so much industry is lying idle because you need power to
run the machinery, and that power is simply not available. And
then you have empty food shelves because food is having to be
imported, and there is even a problem with being able to pay for
that food since government debt is through the roof.
You already have government run Chinese companies reneging on
foreign debts. Just look at the problems in Myanmar because
exporters are not being paid. That is going to lead to other
countries stopping exports to a country that won't pay for them.
The government debt situation there is going to get worse
because it will no longer be subsidised by land sales and
building taxes, as the construction industry is now also on its
Socialism relies on a constant flow of other people's money, and
that flow is drying up with a vengeance. What is that going to
do to a socialist structure?
I have no idea which way things are heading, but all I can say
is that the outlook for China is bleak. If things get that bad
in the West the same situation will be upon us. Already supply
chains are not functioning. The UK is an island kingdom. It is
vulnerable to supply disruption. That could be a serious problem
over the course of the next few months.
One other problem is beginning to get out of hand. Big
government generally leads to social problems. When big
government gets too big, traditionally civilisations crash.
There are two main causes of the collapse of nations and
civilisations: lack of access to commodities, and a bloated
civil service. We have both those situations on the rise right
now in all the major political regions of the world. So here is
another question which I can't answer: How long before the cause
leads to the effect?
This blog is not turning out to contain much in the way of good
news. Next week's doesn't look as though it will change the
suspected outcome. I shall be asking if discord and war are just
around the corner.