Crisis? What crisis?

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Housing Crisis? What crisis?

To paraphrase Mrs Thatcher in one of her parliamentary exchanges in the early years of her premiership, many people feel that there is a housing crisis in Britain.

Of course rising prices generally are indicators of increasing demand – at least that is the classical theory of economics that says that in the normal case, rising demand for a good (a product or a service) will initially lead to higher prices, the rising prices will in the normal course of events lead to rising profits, and rising profits will encourage entrants into the industry, or existing providers to produce more, which should over time lower prices. The invisible hand of the market, as Adam Smith – author of  “The Wealth of Nations” might have put it.

The problem with this view is of course the historical view by many that house prices can only rise over time. Perhaps that is true in most time periods, but that demand will be driven by population movement into and out of localities, and age and income demographics.  As people age, their needs for housing change, and there are times such as recently, when house prices fall, despite increasing demand from a demographic point of view, because of a lack of available finance.

The rise in UK population over the last 30 years has taken population from circa 56 million in the mid nineteen-eighties, to 62 million recently. Of course the changes to EU legislation allowing continent wide migration will inevitably cause problems for governments in the whole of Europe, but especially those countries that have a booming economy.

When people move to a country, the net effect is to increase demand for goods and services, and this stimulates further economic growth, which further encourages migration – it becomes like a fast breeder reactor, feeding on itself, causing house price rises, particularly in population dense countries like Britain.

The resulting crisis is almost inevitable,  booms in lending, and rising house prices, with a bust following in direct proportion to the size of the previous boom.

For the Banks, protected by the underwriting of their loan book, by governments keen not to have the economy collapse on their watch, it is Nirvana.  Over decades the banking sector then grows in importance to the point where we are today.  If you are a bank and you have two people competing for financial resources: One a mortgagee who has a rising asset like a house, and the other a new entrepreneur, who has more than an eighty per-cent chance of folding in the first five years of business – which would you choose?

But the banker’s logic must be tempered by the nation’s need for a robust economy.  Is therefore, legislation the answer? Or should the market be the only arbiter?

The Banks need for profits to meet increasing profit demands by shareholders, must be also tempered by the wider economy’s needs, and politicians who are keen to attempt to meet their voter’s understandable concerns, need to fully appreciate the effect of their legislative actions.

Of course, for the international investor, Britain’s historical legal system, political stability, strong economy and thus the currency, and the widely held view of Britain being a fair and tolerant multi-cultural society – especially in London, make buying property here an investor’s dream – especially at the upper end of the price range.

But pity the modest retail worker, the local street-sweeper, council clerical worker, or market-stall holder… Where do they live, when property and land prices get driven up to unprecedented levels as a result of such speculation? And how does this speculation not increase the start up costs of new businesses fighting for a foothold? Or their operation costs  making them internationally uncompetetive?

And what happens when the money spigot gets turned off, or even down a little, as the Fed’s taper programme begins to take effect, raising interest rates and slowing house price inflation, or worse?

Those naïve ordinary men and women who have been encouraged to buy a new home on the back of a finance scheme, which the government must surely knows will drive up property prices – the taxpayer money backed “Help to Buy” scheme, will suffer the most when the inevitable bust happens, as I believe is coming within the next few years.

As China now struggles with asset bubbles,  and unrest grows around the world as inflation particularly in the basics, leads those on modest incomes into penury,  the world economy teeters on the edge of a financial precipice, and when we fall off it, as we inevitably must, the financial calamity will be a lot wider, and deeper than many anticipate, and governments around the world may lurch into military conflicts as they strive to stop their own economy from spiralling downwards.

Just the conditions that led us into global conflict a hundred years ago, as those who seek power, point the finger of blame at one country, culture or social class.

As this unfolds, those with the only asset class that is not simultaneously a liability of someone else, will have the best insurance.  And the name of this asset? Gold. (& by inference – silver).

And if you haven’t got the message yet?

Click Here! Especially as the last seven months have seen both Gold and silver rise from their interim lows. Silver bottoming out at $18.52/oz, and now just over $21, giving those brave ones who bought an already nice profit of circa 20%.  And Gold, rising from its lows of below $1200, to the current $1320 area.

And for those who take the time to study the price action  in the 1970s, this is quite likely the shape of things to come over the next five years. (See image below) And if you want to read more of how we arrived here, the free e-book – “The Coming Battle” is still available.

Gold-Price, The charts never lie...
Look at the price action between 1968-1976, and compare it with the price between 2001 and today? Then look forward five years to 1980…