Looking Ahead to 2018
I have been loathe to take any stance on real estate for the
past two or three years for the (to me) obvious reason that we
are on the edge of a great catastrophe. I did not think anything
ghastly would happen much before the spring of this year (2017),
but I was prepared for some kind of economic implosion any time
after that. A lot of the commentators I take seriously are
forecasting that some kind of crash is likely within the next 12
to 15 months.
Clearly, no-one knows when the financial house of cards will
start to collapse, but collapse it must. What are the problems?
There comes a time when you simply cant keep rolling over your
debt. That has been what has happened for the best part of this
century. After the 2008 crash there were talks about reducing
debt. That hasnít happened. In fact, there is at least twice as
much debt now as there was then. Most of the debt (or do I mean
all of it?) is unlikely ever to be repaid. Governments are maxed
out, companies are maxed out, individuals are maxed out. The way
out of this was supposed to be a return to increased spending.
That cant happen because there is so much debt, money is now
being spent on servicing that debt and is therefore not
available to be spent on the purchase of goods.
Interest rates are starting to rise. At the moment folks are
forced into risky investments because the cost of money
(interest rates) is either close to zero or even negative. That
distorts all other markets. But you donít spend when interest
rates are going up, especially when you are already
over-leveraged, because the cost of any borrowing is going to
Long term readers of my notes will know that I have an
unchangeable mantra: Buy when interest rates are high but
beginning to fall. Never buy when they are low and can only go
up. The reason for that should be obvious. If you can afford
high interest rates, then you wonít be troubled by lower rates,
and as rates come down real estate will appreciate. The opposite
is true when interest rates are low. As rates move higher, house
prices judder, and start to fall, so you slide into negative
equity at the same time as money becomes more expensive. You get
squeezed from both ends.
Because the situation has reached hostile territory, there is no
sensible way out. This has led many to talk about debt jubilee,
or the great financial re-set. What this really means is that
governments are going to start reneging on their obligations,
and many companies are simply going to go bust. That will be
messy. Banks cant be bailed out, there is no mechanism that can
cope with the size of the problem. The only way out would seem
to be a massive world-wide devaluation, which is set to beggar
the lot of us.
I may have studied economics at college all those years ago, but
that did not prepare me for this kind of scenario. I donít know
how this would work, or what the fallout is likely to be, but
one thing is sure, it will not be pleasant.
Okay, the bolt has not fallen from the dark sky just yet. I
still cant make any useful suggestion about housing market
conditions under such circumstances, except that if interest
rates are about to rise, then you should not take on any further
debt. If you do, you will regret it.
Next week I will try and analyse the situation as best I can
with direct reference to particular countries. Such an analysis
will come heavily cloaked in caveats, but might at the very
least make interesting reading.