The Unique Property Site Blog

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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
Money
Discord and war
Safety

2 Money

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 interest rates.

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 much good.

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 knees.

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.

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