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Housing Recovery Is Years Away


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#1 VedantaTrader

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Posted 07 December 2008 - 07:30 PM

Guys, I have done a proper analysis for any bulls to read. I would hope, if the bulls have any substance to their arguement, they will be able to try and put up some sort of arguement, rather than the usual posts "BUY BUY BUY". If you bulls cannot provide a proper incisive well reasoned argument to counteract my points, then you would be better leaving the site and come back and try again next year.
Anyway, guys, its taken a bit of typing this one, so I hope you find it thoughtful and insightful, and it will provide a good solid analysis of the economic problems we face, and house prices could be the least of our worries, or at least people worries who aren't prepared. There are so many other things I have't got to say, like the effects of soaring unemployment, how higher taxes are almost a certainty but the main arguement is valid in my opinion. If anyone has other points they would like to add in reply feel free.

Perma-Bull:

One who always sees an investment as having only upward
potential regardless of the economic conditions and fundamentals.

Bubble:

Something insubstantial, groundless, or ephemeral, especially:
a. A fantastic or impracticable idea or belief; an illusion:
b. A speculative scheme that comes to nothing


Property Market is Dead

Recently on this website I m sure it has come to everyone’s attention that there has been the arrival of some perpetual perma-bulls. In every investment class, whether it be the stock market or real estate there are always the ones who it seems, are “married” to their investments. In stocks, we get the investment analyst who holds onto their stock holdings forever, the “buy and hold mentality”, is the stock market equivalent of “property prices only go up.”
These buy and hold, perma-bulls have only worked and been used to investing in a secular bull market in stocks that started in 1982 and lasted until 2000. Every correction was seen as a buying opportunity. This mentality works well in a secular bull market, however, this destroys the buy and hold investor in a secular bear market such as the one we entered in 2000. Looking back at stock prices going back to 1860, these cycles are so long lasting that they destroy the myopic short term thinking of the buy and hold investor, or the person who invests his money as if he is still in the old paradigm. Between 1929-1955, was one such period, between 1907-1921, another, between 1966-1982 was yet another. In 1966 the DOW was 1000 in 1982 it was still 1000. Inflation had been running well into the double digits during the 1970’s and early 1980’s, as the Keynesian “devaluanists” policy’s in the decades before led to a complete departure from the quasi-gold standard in 1971. Sadly the world has learned little, especially the ones who are in power, as the neo-keynesians are still out in force. These long cycles are as prevalent today as ever. The perma-property bulls think that we are in the same economic conditions that existed during the property boom, and that these conditions will be easily re-created by our “splendid governments” In this short term world, where Bloomberg, CNBC and our media networks focus on the daily noise, and want to hear talk of recovery in months not years. Rest assured, these long cycles can take decades to play out, and most are actually ignorant of their very existence. However, there is nothing new in these cycles as Adam Smith alludes to the “invisible hand” in his 1776 magnus opum, The Wealth of Nations.
My point is this before I digress too much. Almost every macro-economic condition that existed before this bubble burst is now gone. For sure, someone can counteract that by saying that economic conditions change day to day, week to week. That is true. However, I am not talking about single monthly unemployment reports, 2 months in-a-row house price surveys or what the CPI tells us over a 3 month stretch. No, I am referring more to the structural changes that have/and will take place over the coming months and years. I define a structural change, as an economic fundamental change, which changes the outlook for a society and economy and which won’t be reversed for a very long time. As an example, the outsourcing of labour to Asia over the last 2 decades was a structural change. Another could be the UK becoming net importer of oil and gas in 2007. These structural changes have long lasting effects. The conditions which enabled this bubble to occur are not there anymore, although, the central banks and governments are trying to re-inflate the credit bubble, but rest assured they won’t be successful. They only thing they will be successful with is creating more mal-investment, prolonging the downturn, weakening the currency, preventing the rebalancing of the economy, and setting up an inflationary nightmare further down the road. In the past, when a bubble has burst such as the Japanese stock market and property bubble 1990
,the NASDAQ bubble in 2000, central banks have always cut rates like mad, hoping to re-inflate the bubbles. However, these actions never have the intended consequences, as the money they spend never flows back into the bubble. Instead it creates mal-investment somewhere else, where the fundamentals are more favourable. Lowering the rate of interest artificially and price fixing the cost of money encourages speculation. Speculative money flows to where the fundamentals suggest there is an opportunity. The money never flows straight back into the bubble that has just burst, at least not for many years, usually a decade, but if the policy actions are bad enough, perhaps decades later if ever. It is my hunch that this new inflation of the money supply will lead to the assets where the supply and demand fundamentals and the opportunity is, that will be commodities and alternative energy, not stocks, bonds or real estate in the western world. Artificial stimulus in the end always leads to mal-investment in other parts of the economy, in the NASDAQ case, the housing bubble(s) and a decade later the Japanese yen carry trade, due to zero percent interest rates didn’t kick start the Japanese bubble, instead, the money printing and stimulus the Japanese tried led to the liquidity and yen carry trade which has been a factor in the UK housing bubble. Printed money always goes somewhere, sooner or later. However, it won’t go to the intended place. Did the Japanese envision, yen ending up in mortgages in Iceland, Bulgaria and Romania. I expect not. Truly the law of unintended consequences.

Below I wish to outline the mostly macro-economic, big picture reasons, this downturn will not lead to any quick recovery in Northern Ireland property prices, far from it, and I expect this downturn to last years, not quarters. And when the recovery does come, it will be a nominal recovery. In order to inflate property prices to anywhere near the 2007 levels, the credit expansion necessary to do this will cause a collapse of the currency, and rampant inflation. Property may rise, but it will rise in sterling terms, and will lose value in real terms. In other words, it won’t feel like the boom we have just had, it will be over shadowed by the cost of your everyday living, and the hand to mouth living you will experience in this situation, due to inflation rearing its ugly head. However, that is further down the road.

1. Solvency Crisis or Liquidity Trap.

The central banks and the governments are treating the banking crisis as if it is a liquidity crisis, and for the stronger institutions, with better balance sheets it may only be a liquidity problem. However, the central banks think that by flooding the market with unlimited amounts of cash, and by cutting interest rates that this should ease the crisis. However, so far it has been ineffective and has only increased volatility to unprecedented levels.
The problem is that it is not a liquidity problem. It is a solvency problem due to far too much poor credit, and high leverage. If a bank has a short term liquidity problem, and its loan book and assets are sound, then short term increases in liquidity will see the bank through the liquidity trap, and the bank should be able to raise money in the LIBOR markets as other banks would be able to accept good assets as collateral for short term loans. However, the banks would not accept the toxic assets from each other in exchange for short term loans. The deterioration in the banks assets combined with the leverage they had meant that a small decrease in the value of these assets would render the bank insolvent. If you have leverage of 12 to 1 then an 8% decrease in the value of these assets means your liabilities are greater than your deposits. Trying to prevent the writing down of these illiquid assets, will prolong the crisis. It will take many years for the banks to repair their balance sheets, perhaps more than a decade. Any hopes of 2007 level lending is pie in the sky dreaming, and it should not be encouraged. For me this is one of the prime reasons, why banks can’t lend and won’t lend. They are insolvent not illiquid.
The government, analysts and the media sold the 500 billion bailout to the sheeple, by purporting that it has all our interests at heart. Sentences like, “we need to stop the banking crisis spilling over to the real economy” was a favourite. However, they have it the wrong way round. The problem is in the real economy. The reason the banks loan books are turning sour is not because the real economy is doing well, and solvent. People can’t afford to pay their mortgage; people can’t stay on top of their credit card debt. This is the reason the banks are having problems. These bailouts do nothing to reduce personal levels of debt, they do nothing to create new jobs and they increase moral hazard. We need to let everyone who has over-extended lose their home, and rent somewhere they can afford, interest rates should be increased to increase savings and encourage the liquidation of these illiquid assets and bad debt. Then higher rates will encourage a true savings base and deposits in the banks to help them recapitalise. By this process, a clean balance sheet and a deposit base will lead to increased lending in the future again. Unless personal levels of debt are brought down and savings increase dramatically, their will be no return to easy credit and a recovery in house prices. This is not achieved in months, like the nave perma-bulls believe, but it takes years. Instead what we have is a socialisation of the losses. It is immoral that the people who produce and have been prudent and wise pay for the incompetent.

2. The Fundamentals

Price-to-Income ratio

House prices in Northern Ireland in July 2007 topped out at the absurd average of 247,000. The historic average in the UK and infact all countries for house prices/average earnings ratio is 3.5 times income. The average wage in Northern Ireland is circa 21,000, so our bubble at its peak gave a number of 12.5 times incomes. How anyone thinks rising house prices are good is beyond me. Another way to look at is like this. Would you be happy, if 3 gallons of petrol increased in price from 1 hours minimum wage to 8 hours minimum wage.

Another point worth noting is that in the period that property prices reached 12.5 times income, personal credit card debt has also increased more than 100%. Credit card debt is now the highest in the world. This reduces affordability all the more.


The Rental Yield


Another way of valuing property historically is by looking at the rental yield annualised. We do this by taking the price of the property, and taking the monthly rent and multiply it by 11 months.(as we take one months rent off for costs) The annual rent return as a percentage of the total property price gives the rental yield.
Historically anything under 4-5% is completely over valued, above 6-9% is fair value, and 10-15% is under valued. At this time, the norm in Northern Ireland is under 3% and in a great many properties the yield is 1% and less. This is a bubble of epic proportions, and it will be years before the yields change to under valued. The perma-bulls who expect these valuations to go from expensive to cheap in a year or so are delusional.

Mortgage Product Market Collapse

What a difference a year makes? Anyone who thinks lower interest rates will miraculously save the day is deeply misinformed. Even if the banks do start lending again, they will be lending into a product range which has shrunk by 80% in the last year. The number of products available now is miniscule compared to what it once was. For a recovery in the mortgage market to take place to anywhere near the levels that once were the products available will need to increase by a few hundred percent. This is not going to happen anytime soon.

Loan-to-Value

During the boom years, interest only mortgages, self-certification, 100% mortgages, 125% mortgages, teaser rates, and But-to-Let mortgages were common place. What we had was an ultra expansionary increase in money and credit, leading to securitisation which I will come to. Credit in itself is not enough to bring about an increase in asset prices. It also depends on the type of vehicles that enable the efficient flow of credit to its speculative home. These mortgage products were the rivers and tributaries that enabled the cheap credit to flow. Due to the nature of these mortgages, they flowed towards the sea the of the un-creditworthy. Thousands of willing eyes glazed over buyers would not have been credit worthy to get a mortgage in a normal lending environment. I m quite sure a large number of arrears and problems occur from the above products. Anyway, the banks have pulled the plug on these, the rivers are now frozen solid and we are in for a long winter. With one of the lowest savings rates in the world, a housing recovery of any note would need the assistance of this type of no payment down mortgage product, and it would need a lot of them. They are not coming back in a world which has turned risk averse.

Money Supply Growth

The ignorance that prevails around what inflation is, even amongst professionals, is alarming. The CPI, the PPI, the RPI are not measures of inflation. They are measures of price. The very fact that house price inflation is not included in the CPI makes it a most useless indicator regards inflation, and the Bank of England policy decisions. That is a political matter and not for this analysis. Inflation literally means in its truest since the “inflation” of the money supply. To increase the supply of each unit of currency in circulation is to devalue each unit of currency in circulation. To say that house prices have risen is true in a “price” sense, but I prefer to look at this bubble in prices as the loss of purchasing power of money, due to growth in money and credit.
Property prices did not double, money, lost half its value.
M4 growth is the UK’s most general measurement of the supply of money and credit growth.
There is a simple mathematical rule dubbed the “doubling effect.” If you want to know how long it takes something to double in price you divide the percentage rate by 70. For example, if we have a stock that pays a 10% dividend, we divide 70/10=7. This means it would take 7 years for the price to double. If you look at the rates of M4 growth, and use this calculation, it is easy to see how it doesn’t take too many years for the amount of credit double in supply, effectively reducing the purchasing power of sterling in half against real assets, and doubling the price of property.
However, the M4 lending has completely collapsed. This chartAttached File  M4_Lending_on_Dwellings.jpg   61.11KB   75 downloads shows a graph I have created from M4 data for lending secured against dwellings from the BOE’s website statistics section.


Like the reasoning above, explained in the doubling effect, the reverse is now true. As regards property such a collapse in lending, will what I coin the “the Halving Effect”. Expect 50% falls and more in real estate over the next few years. As I explained before in the miniscule chance that they manage to re-inflate this bubble, money never flows straight back into that bubble again. Artificially lowering rates, price fixing and denying free market principles will lead to great misallocation of capital and labour somewhere else.
, and propping up an imbalanced economy will deprive credit from flowing to the people who will use it more productively. I’ll say it again, there is no chance of any recovery in house prices or bottom in house prices with this complete unprecedented collapse in M4 credit. Trying to inflate this will be hopless, the demand is not their, and there is complete over capacity in the industry. I emphasise the word unprecedented.

Securitisation Market is Completely Dead

The securitisation market played a major role in the expansion and recycling of mortgage loans. Just like the reduction in all types of mortgage products means that there are no longer vehicles to deliver the credit, the securitisation markets are dead also.
Securitisation is the Collateralised Debt Obligations, the Asset Backed Securities, the Residential Asset backed Securities, Credit Default Swaps etc etc. Take a look at the this chart showing how this market is now dead.Attached File  global_RBMS_issuance.png   56.66KB   57 downloadsNo amount of liquidity injections will resurrect this market.

Selling ABD, RMBS and CDO’s was a way for the banks to take lets say 150 mortgages and package them up into an asset backed bond, which provide a cash flow from the underlying assets, in this case mortgage payments. It was thought that by creating different maturities, and splicing up the risk into tranches that this would spread the risk. The lower tranches would pay a higher rate of interest as these mortgages were deemed more risky. The top tranches were rated investment grade triple AAA and sold to pension funds as low risk secure investments. However, what the financial alchemists had not taken into account was the credit worthiness of the mortgages. As the number of foreclosures spiked many of these MBS, CDOs etc, lost all of their value, and the market became illiquid. The benefits of this to these financial geniuses and to the banks and investment houses was that they could take the risk of their balance sheets, but in their phoney accounting would include them as profits, this freed up the balance sheet and allowed the banks and instutions to free up more capital to enable to expand lending to a new set of mortgages. Basically, the originating banks were able to sell these pools of mortgages to the bond market, and then could continue lending, as they had “removed” the risk to someone else. Without this recycling effect, the level of credit even if made available won’t be securitised like it once was. Anyone who thinks that a return to the levels of lending that has happened over the last few years will be back soon is extremely deluded. And anyone who thinks that the level of securitisation will be there as vehicles for new credit is even more deluded.

Sources of Liquidity

The Japanese Yen Carry-Trade

I have talked at length about this before. The housing perma-bulls in my experience
never seem to offer any solid reasons why the housing boom should return, even based on economic fundamentals( as basically I have not met too many housing bulls, or estate agents who know the difference between economics and ergonomics, although ergonomics may be something more useful, as they should design a comfy chair to sit in all day) at a local and national level, so I guess it would be too big a stretch of thought to expect the perma-bulls to understand the macro and international reasons why this credit and housing boom is dead for a long time to come. I m sure one would be laughed at, or at the very least a peculiar glance would be beamed towards you for suggesting, that the risk aversion and collapse in the yen carry trade will signal the end of the housing boom in Northern Ireland. Let me explain, Dear Perma-Bulls…

The yen carry trade was a highly leveraged activity which banks, hedge funds and investment banks partook in.
By 2000, interest rates in Japan had reached zero percent. By 2003, rates in the UK were down to 3.75%. In the next 4 years UK interest rates gradually started to rise.
As rates in the UK were rising, the interest rate differential started to increase between Japan and the UK. In other words the interest rate differential carry improved markedly.
What essentially happened was that banks and investment houses started to borrow yen at near 0% rates and then would invest it in sterling assets, whether it be UK Gilts, stocks, real estate at the interest rate differential. Depositing converted yen into sterling at UK institution would mean that if rates were 0.50% in Japan, and rates were 5% in the UK you would earn the carry interest rate differential. Interest rates in he US and the UK had started to rise, where else in the world could you find cheap money at this price?
Let’s have a look at what this high powered money entering the UK banking system had.
Check out this base rate graph of UK interest rates.Attached File  UK_Base_rates_2000_2008.jpg   46.04KB   50 downloads I have marked the bottom in 2003 and the top in 2007 and a trend line.
Now look at this spot chart of GBP/JPY and see the bottom in 2003 and the top in 2007.Attached File  GBPJpy.gif   16.04KB   58 downloads IT is quite clear what happened. As the interest rate differential increased between sterling and JP Yen, more money was borrowed in yen at the low rate, and converted into sterling. Not only were banks, traders and investment banks gaining on the overnight carry interest, but they were also gaining in the GBP/JPY currency exchange rate, as sterling gained in value.

However, the question still remains, where did the carry-trade money flow to once it had entered the UK banking system?

The answer I think can be found by looking at this FTSE chartAttached File  FTSE100.gif   15.54KB   48 downloads in the same time period. Now overlay, or take a look at a house price graph in the same time period. Sometimes, pictures tell a thousand words, or in this case a chart. However, what is even more revealing and downright scary is the chart post July 2007. I knew the carry trade was big, in the 100’s of billions of pounds, but the sheer velocity of the de-leveraging and the fall in the FTSE, the GBP, mortgage approvals as seen in the M4 chart further up, and the fall in house price graphs is huge. The collapse in sterling was liquidation of holdings in the UK, as they had to pay back the borrowed money.
It should be clear to any reasonably minded person, that the carry trade money entering the UK banking system was a massive source of financing of stocks, and credit in the economy.
Mortgages as far away as Iceland, Bulgaria and Romania were financed in yen.
With interest rates in the UK not any higher than in Japan, and with risk aversion at an all time high, the carry trade interest rate differentials have evaporated. I challenge any property bull to show me where the financing and liquidity will come from to finance new mortgages. It certainly will not be the UK’s non-existent pool of savings. The property bulls don’t realise the unintended consequences of low interest rates. Just as the Japanese invested their money abroad, (the Japanese themselves were big players in the yen carry trade) in search of higher yields due to zero interest rates, the mortgage market and housing market never got kicked started again due to lack of interest in a banking system with low returns.
That is why one of the few glimmers of hope that bulls attach to incessantly of low interest rates “will save the day” mentality is totally misguided in the extreme. In order to finance new credit, the banks need deposits. With interest rates at zero, and stagflationary forces seeping in, would anyone put money in savings account which pay a negative rate of return. Real Interest rates will be negative. Money will not flow into the UK banking system with low rates. Unlike Japan, who are a net creditor nation, we are net debtors, and large net debtors. The effects of low interest rates in this economy will be disastrous, as the price of oil, gas and raw materials that we need to import will be very costly. perhaps this chart of Japanese land prices tells a story about a low interest rate economyAttached File  japan_land_prices_update_2008_11_rgb_176_10_10.png   99.02KB   60 downloads





The USA Current Account Deficit and Dollar Liquidity.


The US current account deficit has been growing at an alarming rate over the last 7 years. The US is now the largest debtor nation the world has ever been home to. The US has been going into debt to the rest of the world in exchange for cheap products at the rate of 1 million USD a minute!!!.
Any reasonably minded person will recognise that this cannot go on ad infinitum. The US have been flooding the world with excessive USD liquidity, which has led to asset bubbles and banking crisis all over the globe in the last 30 years. The US is a boomerang economy. The US current account deficit is not only responsible for the Japanese bubble in the 1980/90’s, but the bubbles in Asia, China, Europe, and the US itself. The large creditor nations, such as China and Japan and other Asian states produce goods for the US and Europeans to consume. After the year 2000, the outsourcing of labour to China, India and other Asian nations, created a downward pressure on US interest rates, as the US focus on the CPI and consumption as a measure of inflation, rather than money supply growth. This ultra expansionary monetary policy led to a consumption binge in the US. The industrial and productive capacity to meet this demand for cheaply sourced goods was supplied in Asia.
China’s GDP growth was export driven. The US would finance this gluttony through supplying US treasuries and Freddie and Fannie Mae debt, in exchange for Asian savings. The Chinese, Japanese and the Asean region built up huge USD reserves, and trade surplus. However, they didn’t convert these USD into their own currencies, as that would cause them to rise dramatically, bringing an end to their export led growth. Instead they bought Freddie and Fannie Mae debt, which has led to the extraordinary huge bubble in US housing, as the financing by the Asians, and low interest rate led to ultra expansionary credit growth. The Asians own about 3 Trillion USD in Freddie and Fannie debt. Now that the UK, the US and the West need to stop consuming, this is going to hurt the Asean economies. They have over capacity in production as domestic demand is not enough to pick up the slack in the fall in US consumption.
Some may ask how this affects the housing market in Northern Ireland. Well as the UK, is the USA’s largest trading partner, we need to follow a similar monetary policy to the US, in order to remain competitive in trade. If we didn’t follow a similar monetary policy, there would be potentially dangerous breakdowns in the monetary system, wild gyrations in the currency system etc etc. The US is going to print money like there is no tomorrow. Again, this will not have the intended consequences of supporting house prices. It will lead to mal-investment, and further dislocations, and rampant inflation eventually. With the very real threat of the Asians dumping their holdings of US debt, UK debt, the bond market will collapse, interest rates will soar, inflation will run out of control and the cost of financing any new debt will be a pipe dream. Interest rates may be zero now, but in a few years from now, who knows when, interest rates will be much higher. Buying a house at the signs of any recovery will be very risky. A house can be a good hedge sometimes, against inflation, although it will lag other assets, but with interest rates shooting up, financing that debt will be the problem.

We are Living in A Secular Commodity Bull Market

At the beginning of this analysis I briefly touched on the concepts of long term cycles. I pointed out that we are in a secular bear market in stocks, exhibited by high PE’s, and low yields. The FTSE, the S+P the DAX, the CAC, and the Asian markets have all collapsed. I stated that this started around the year 2000, and will last anywhere between 15-25 years. The way this one is lining up, it could be a very long one. During times of secular bear markets in stocks, there are secular bull markets in commodities, at least this has been the case for 200 years. As the stock market topped out at the climatic heights of the NASDAQ mania at the turn of the century, commodities were in a bottoming out period, in what was the end of a secular commodity bear market that lasted since 1982. 1982 true to the cycle was the very bottom in stocks that had lasted since 1966, and 1982 was the top in gold and other commodities as commodities topped out after their 14 year journey from their 1966 low. The FSTE today is at the same levels it was 11 years ago, without making a new high.

The Outlook Going Forward.

The point of the last paragraph about secular bull and bear markets in commodities and stocks is to give some context to what I think will happen in the coming years.
I have already established the reasons why any re-inflation will be unsuccessful, as governments and central banks have never managed to direct money back into a burst bubble.
I also noted that when central banks print money, speculative flows will go to where the opportunity is, where the fundamentals are favourable. That place is commodities. Commodities are totally under weight in the institutional portfolio. Once the institutions start buying then they will go much higher. Check this chartAttached File  Institutional_Buying_of_Commodities.jpg   38.89KB   42 downloads of commodity representation in global investment. At the height of Yes, commodities have come down in recent months, but that is more to do with de-leveraging, positions are being liquidated across all assets classes as banks, hedge funds and institutions unwind their positions with no regard to the fundamentals. This can be seen in the huge rally in the USD.
The commodity unwind began in the summer, look at this chart of the 30 day FED funds future. In the time that everything has been liquidated, all charts have been heading south, including oil, gas, bank stocks, FTSE index, the DOW, silver, lead, zinc, the Nikkei, The Shanghai composite, and the list goes on. The only asset to rally has been government bonds, in this example US Treasuries, as the chart shows.Attached File  FED_30_Day.gif   12.23KB   30 downloads The fear was tangible over the last few months, and this flight to the short term safety of US government bonds has caused the huge rally in US bonds, which has in turn caused the huge surge in the USD. However, looking at this situation logically no one will hold their money in these Treasuries indefinitely. The USD is being debased, and the deficits that are building mean the only thing the US can do is print money, and devalue the USD, either that or default on their obligations to the Chinese and Japanese. The yield is less than 1%. They pay a negative return, eventually, as the unwind ends, the USD will weaken in a big way, gold will go much higher, stocks will go higher, and commodities will rally. This chart shows central bank holdings of Gold...Attached File  Central_Bank_Gold_Holdings.jpg   41.12KB   43 downloads If you are holding trillions of USD in US treasuries and have 1.8 trillion USD in foreign exchange reserves, and they were being devalued, the logical thing for the Chinese and Japanese would be to convert at least some of them into gold. Look at the chart again of central bank holdings...who holds the least gold...China and Japan. China have talked about increasing their gold holdings. If they do, which I think they will gold will go to the moon...and interest rates will go sky high.

It is important to note that, stocks will not make a new high in all this, and if they do, they will still lag hard assets. This will only be a 6 month rally, or less, a cyclical bull move within a secular bear market.
The reason commodities and are cost of living will go much higher (stagflation) is because, even without the loss of purchasing power of money, the supply side of commodities will mean higher prices anyway. I m not going into the supply problems of individual commodities, but believe me there will be lots of shortages which will only be corrected by higher prices.

What Does this mean for the Northern Ireland Property Market

There will be no recovery in Northern Ireland property for many years. This downturn is taking place in a secular bull market in commodities, where as in the 1990’s, it was a bear market in commodities. The cost of living is going to move much higher for us. Any recovery in the housing market, or any bottoming out will only be accompanied with huge rises in the cost of day to day living. What will prolong the stagnation in the Northern Ireland will be higher long term interest rates, yet we will be paying higher prices for day to day goods we compete for on a global market, due to a very weak sterling. The raw materials that it takes to build a house will be expensive to import, which in my opinion will lead to stagnation.

Let’s look at the past as a guide…between 2002-2007, Northern Ireland house prices increased by a multiple of 2.5. Let’s have a look at how other commodities performed in that time in multiples.

NI Property 2.5
Gold 5
Oats 5
Wheat 5.5
Oil 10

So we can see that in this highly inflationary environment, even though Northern Ireland property increased a multiple of 2.5, it was deflationary in terms gold, oil, oats, wheat, and just about all other commodities. House prices have under performed other hard assets, and this is my central point, any increase in house prices, will mean gold will increase many thousands of USD, oil will go to the moon, commodities will leave soar, interest rates will go rise to double digits. My advice to anyone is protect your money in hard assets. When you are in Starbucks next time, put a few of the sachets of sugar in your pocket, they will be quite valuable some day.
The increase of400% in gold which is the true barometer of inflation of the money supply shows that this illusory wealth we thought was in our houses was phoney.

The other issue is this. The credit default swap market( see chart)Attached File  UKCDS24102008.gif   27.8KB   48 downloads is placing the chance of UK government default higher than McDonalds. The UK is a high risk place, and in this risk adverse environment, foreign inflows to the UK will not be easy come by. The spike in October shows what the market thinks of Browns bailouts and lowering interest rates. You property bulls out there who think a recovery is near must know something the market doesn't know. Otherwise you guys are just so far wrong.


I will tie it with that, as I have hit my thumb many times this afternoon, hammering nail after nail into the Perma-Bulls coffin...

I ll leave the commital to someone else. :lol:

Edited by VedantaTrader, 07 December 2008 - 07:36 PM.


#2 shipbuilder

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Posted 07 December 2008 - 07:56 PM

Fantastic stuff, VT. It will be interesting what the bulls have to say in reply.

#3 sophia

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Posted 07 December 2008 - 08:33 PM

Thank-you so much VT for taking the time and effort to educate me on the wider picture yet again. <_<

I have learned so much from you already and I really appreciate you sharing your knowledge with us all!

Sophia


#4 debt_ridden_ftb

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Posted 07 December 2008 - 08:47 PM

VedantaTrader

Wow! That is some reading, glad to see someone has done some thorough research into this topic area.

I can never understand how people cannot be convinced when the facts and figures are there to back up an argument.

Keep up the good work!!!

#5 VedantaTrader

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Posted 07 December 2008 - 08:49 PM

Hi guys, glad you guys have found it useful. I guess there is worse things you could be up to on a Sunday. It did take a while type. I read once through myself, and I want to lift the phone tomorrow morning and order some silver and gold :D

#6 p.p.

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Posted 07 December 2008 - 09:01 PM

Hi guys, glad you guys have found it useful. I guess there is worse things you could be up to on a Sunday. It did take a while type. I read once through myself, and I want to lift the phone tomorrow morning and order some silver and gold :D


brilliant stuff VT, hpc at it's best - clear, concise, reasoned detailed argument

something has occurred to me recently, that a lot of the bullish argument has come from those seeking property as an investment. Therefore, it is reasonable to counter that argument in terms of investment. If a poster comes here saying, I'm an FTB and I have bought a house to live in and these are my reasons why... then the perspective of the argument is slightly different (even though many of the same points are still valid of course)

oh and here's the latest from the schiffmeister on why IR's look set to increase in the long term (I wont post it in full as I don't want to detract from VT's thread.

http://www.financial.../2008/1205.html
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#7 sophia

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Posted 07 December 2008 - 09:24 PM

'Property prices did not double, money, lost half its value'. VT

I think this sums it up nicely in a concise way! ;)


#8 911-caused-it-all

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Posted 07 December 2008 - 09:37 PM

The bulls will have no answer to that based on any sound economic foundation so lets just wait for the... bullsh*t!

Otherwise great post thanks I am thinking of wading into commodites (Gold) very soon. Very interesting reading on the effects of the de-coupling of the Yen carry trade. In real terms house prices here are unlikely to recover to 2007 levels for at least a decade if ever - apart from the odd one as in a nice house in a nice location which can be all the bulls have left to cling to :lol:

#9 VedantaTrader

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Posted 07 December 2008 - 09:57 PM

hmmm, I can see a big difference, which is spelt out in VT's opening post. As an investment, it's potential is greatly muddied by the longer term risks of inflation and currency devaluation (and of course the obvious 'bottom' of the market not being reached yet argument ). Quite simply put, Houses are one of the last asset classes to make a return from severe recession and in an inflatory environment (which will surely follow this deflationary one), there are far better (historically proven) investments.

From an FTB perspective (or 2nd Time Buyer etc / sole residence), it is partly dependent on personal circumstances, however, and this is the clincher, you may be lucky and find a handfull of good value properties out there now but what's the rush, when there will surely be a bucketful next year and so on.




questioning mods decisions again? - like i said before (and this is point of fact - nothing more, nothing less) you will find the NI sub-forum far more tolerant than other areas of this site, perhaps you should try posting on the main forum :unsure:

edit - hermy I suggest you take a chill pill now and get back on track with this thread



Its great you bought that up actually PP, as I have a genuine passion and interest in the markets, and I tend to look at buying property here in terms of an investment, and I compare it with other investments, bonds, commodities, stocks, other countries etc etc. I genunely don't have a vested interest in property if any of the bulls think that, I do not have bias glasses on. I try to see it objectively, and I have no interest in buying here. I think some posters have heard me saying I would buy in Bangkok, as I like living in South East Asia, and rent here when I need to, although, buying far in the future is not out of the question...

But back to PP's point. As an investment property is a terrible ,invest and will be for at least the next ten years if not much longer. Like I said during this boom, property went up 240%, and gold went up over 400%, oil went up 800%. With sterling collapsing 30% recentely, gold has just made new highs measured against Northern Ireland property terms. Like the article points out, in the next 10-15 years or however long it will be, property might go up in sterling terms, or as Sophia pointed out, sterling will lose value against property, but if that happens, rest assured commodities will go up ten fold over property, and property investors will again have the illusion of wealth.

Hermy, the Zimabanwee stock market went up 600% last year, a great investment. It just went down, many millions of percent in terms of everything else. Rising prices in local currency doesnt mean a thing.

The other point about that 65,000 house in Larne, that is very very funny to mention that as recovery . Ouyr bubble is smaller than the US bubble, and houses in the US can sell for as low as 1 USD...and 1 in 10 mortgages are in arrears and they are about 12 months ahead of us, and it is still getting worse there. Like I said, they cant provide any sound economic arguments...or at least they havent yet.


It will be interesting to hear their views on where new liquidity will come from to fund mortgage...what effect a depleted deposit base will have on bank lending, and higher taxes to name a few.

Edited by VedantaTrader, 07 December 2008 - 09:59 PM.


#10 VedantaTrader

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Posted 07 December 2008 - 10:11 PM

This is a global problem ok we arent very well protected in UK, but the fact everyone else is in this situation together means that a global solution will be reached" Wait till April and the outcome of the G20 meetings. From what I see everyone on this site is saying the 3 to 3.5 times income argument which is exactly what 65k is


To quote Hermy, above...These incompetent fulls are completely clueless about markets...the G7 meeting actually gives me more reason to be scared. Like I said, you must know something the market doesnt know Hermy, as the Markit credit default swap to insure against UK government default has more than doubled since Mr Brown and our wonderful leaders have intervened. These idiots can only make it worse. The free market should be allowed to work and clear out all this bad debt. Browns actions and the G7 actions so far got us into this mess, and no we turn to them to get us out of it. That is quite funny, yet worrying. All these actions are goijg to ensure a complete collapse of the currency..

I will leave the wise words of a man who is much wiser than all of us put together...Ludwig Von Mises...

In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy"



and..


The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved

and finally...

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system

Thank you G7 leaders for leading us all into a complete financial collapse.

#11 Sogy

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Posted 07 December 2008 - 10:15 PM

Like I said, they cant provide any sound economic arguments...or at least they havent yet.


Yes, we can!

1. People have to live somewhere
2. There is a severe housing shortage. People stand in line to get HE housing
3. We have the Peace Dividend
4. We are catching up
5. Moscow, New York and even London are still a bit more expensive
"Duty is the sublimest word in the English language" - Gen. Robert E. Lee

#12 Sogy

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Posted 07 December 2008 - 10:18 PM

Thank you G7 leaders for leading us all into a complete financial collapse.


Ah, it's not just them. The whole planet went nuts in the last 5 years.

But - the fundamentals are sound!
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#13 HERMY

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Posted 07 December 2008 - 10:20 PM

Its great you bought that up actually PP, as I have a genuine passion and interest in the markets, and I tend to look at buying property here in terms of an investment, and I compare it with other investments, bonds, commodities, stocks, other countries etc etc. I genunely don't have a vested interest in property if any of the bulls think that, I do not have bias glasses on. I try to see it objectively, and I have no interest in buying here. I think some posters have heard me saying I would buy in Bangkok, as I like living in South East Asia, and rent here when I need to, although, buying far in the future is not out of the question...

But back to PP's point. As an investment property is a terrible ,invest and will be for at least the next ten years if not much longer. Like I said during this boom, property went up 240%, and gold went up over 400%, oil went up 800%. With sterling collapsing 30% recentely, gold has just made new highs measured against Northern Ireland property terms. Like the article points out, in the next 10-15 years or however long it will be, property might go up in sterling terms, or as Sophia pointed out, sterling will lose value against property, but if that happens, rest assured commodities will go up ten fold over property, and property investors will again have the illusion of wealth.

Hermy, the Zimabanwee stock market went up 600% last year, a great investment. It just went down, many millions of percent in terms of everything else. Rising prices in local currency doesnt mean a thing.

The other point about that 65,000 house in Larne, that is very very funny to mention that as recovery . Ouyr bubble is smaller than the US bubble, and houses in the US can sell for as low as 1 USD...and 1 in 10 mortgages are in arrears and they are about 12 months ahead of us, and it is still getting worse there. Like I said, they cant provide any sound economic arguments...or at least they havent yet.


It will be interesting to hear their views on where new liquidity will come from to fund mortgage...what effect a depleted deposit base will have on bank lending, and higher taxes to name a few.


VT I respect your oppinions and views however I am also aware that sometimes you can look too deep into things Im not dissagreeing with you but if you reckon we are goin this way the site should be changed to Global Financial Meltdown and the extinction of mankind as we know it. If houses go to the level of that in the US I personally will support our economy as i reckon I can buy about 50,000 houses if we are heading for the Dollar Houses. This should work out well if the DHSS will pay about 400 per month this means I can 2,250,000 per month yes 2 and a quarter million per month in Rent. HAPPY DAYS

G20 will sort it out in April....... I have full confidence....... I see our int rates remaining low for some time to allow the banks to recapitalise and allow the ordinary people who bought over-valued houses to recapitalise...........

I dont think extremely high inflation will be a concern for quite a while people are scared of spending money and this will continue for some time.

We will see a return to the median and natural house price increases from there forward....... People will be more cautious and in a few years time I reckon we will look at this whole crisis and think what was all the panic was about.

The Global Risks of the "Economic World" Failing are so great that they are so aware and they have their work cut out to get through it that we can agree upon however....... the world has faced crisis before and recovered.

As some one put it the other day to me the world has a habit of overheating and cooling again its a natural cycle.

So lets not panic

#14 VedantaTrader

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Posted 07 December 2008 - 10:22 PM

Yes, we can!

1. People have to live somewhere
2. There is a severe housing shortage. People stand in line to get HE housing
3. We have the Peace Dividend
4. We are catching up
5. Moscow, New York and even London are still a bit more expensive



lol :lol: i forgot those counter arguments.

#15 Reraise

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Posted 07 December 2008 - 10:25 PM

Great post VT.

What do you think we should be doing with our savings? Buying commodities? Should we be buying physical gold? Where can it be bought in NI?




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