Rising rates may decimate many portfolio investors. It’s a perfect storm of potential losses. Rising rates are definitely expected, on the cards for next year.
Background
The bizarre, not to say socially suicidal, steep rising of housing prices has been a very justifiably sore point for Millennials. Houses that used to cost a few years’ wages now cost a few decades. Generation Renter has been a rather tired buzz phrase for well over a decade. Not a single damn thing has been done about it.
Global home ownership is going unequivocally backward. Bear in mind that “ownership” doesn’t necessarily translate into “paid for”, either. You own a mortgage, not a home, in practice. It’s not a very secure-looking range of stats, and it’s getting worse every decade.
(Note: Commercial property isn’t exactly looking fabulous, either; this article deals with the general topic of property ownership in a broad brush context.)
These next generations are in fact being deprived of a critical asset base. Like the idiotic shift from a one-income-viable family to everyone working like maniacs just to pay bills, the social hit has been gigantic. The probability, and it’s appalling, is that these kids will never be able to own their own homes.
The maniacal property prices ideal has also been pointless in so many other ways. Rising prices simply devalue incomes. For example – In Sydney in the 1980s, you could have bought about four decent-ish houses for under a million dollars and done quite nicely. Now, a million buys you about 2/3 of a house in an unfashionable-ish suburb and allows you to live precariously on the margins of values.
Add to this stop/start employment, the gig economy, and the end of many traditional job classes in the near future. Where’s your market? Buried. It’s been a thoughtless process all round. How do you get a mortgage on a CV full of holes and no money? You don’t, that’s how.
Point being – This huge future market has already been blindsided and left with few realistic buying options. Home ownership is likely to be an antique in future. Any kind of property ownership, in fact, is looking pretty iffy for most younger people. This is a true, inexcusable, atrocity.
Meanwhile back in the slaughteryard – Investment? What investment? It was there a minute ago…?
Investment has allegedly driven this dismal scenario. In practice, investment has been cow-prodded by low rates, fuelling rising prices into an untenable, dangerous position. Cost of money rises, margins shrink. All that’s required is a crash in prices, and portfolios will become nooses for some investors. Just about everyone can expect to see some severe scorching of their book values.
This very well-known situation is common enough already, even with low interest rates. A lot of people fall foul of the cutting edge of book values, costs and profit margins as it is. Any rise in interest rates can be easily predicted to progressively bury investors. You can literally set your clock for hundreds if not thousands of crash-and-burns by every .25 points in interest rate rises. Margins really are that tight, and if you’re leveraged high enough, you’re in trouble.
The macro environmental meltdown
This may be obvious enough for professional investors. (To be fair, many sector professionals have been predicting a meltdown for years, based on the ludicrous rises in prices.) Less obvious, and perhaps just as well, but equally lethal, however, is the inevitable asteroid strike on macro investment.
The monster issue here is the sheer scale of capital involved. Book prices are one thing – The global property market, however, was paid for with real money. That real outlay is at very real risk.
To give some idea of the amount of money involved, the current Biden budget wouldn’t dent the US property market at all. There are tens of trillions of dollars of hard money in this market. The property market, in fact, is the bedrock bricks and mortar of capitalism to a large extent.
This almost unthinkable amount of real capital has been settled in nicely and doing well on paper for a very long time. Inevitably, given decades of performance, banks, lenders, brokers, and major property corporations have moved in. They borrow and lend on the basis of these portfolios.
If the portfolios go down either through interest rates or price moves, they’re screwed to the extent of those moves. Enough of a move, and it’s 2008 all over again, but this time with real securities, not just trashy sub-primes.
The sub-primes were a sort of junk bond market for property securities. That’s one of the reasons they folded so completely. These properties, related securities, and debts, however, are bona fide AAA assets. If they’re compromised by real values, they’re in serious trouble.
The stupidity factor – Does anyone know how to be that stupid? Hard to say.
The worst issue here with interest rate rises in “indecent haste”. If rates move too fast, it will crash a lot of things. Central banks know that all too well. The market, however, tends to overkill everything it touches with a murderous predictability.
Panic would be very dumb indeed but may be unavoidable. Moving fast does make sense if you’re at serious risk of default, loss of capital, etc. Moving to viable positions, however, isn’t easy in any stampede environment. People jump overboard fast, and not necessarily with much thought about positioning.
Stupidity, and a lot of it, however, is the defining, lethal, hallmark of this time in history. Bad calls, disinformation, thoughtless dogmas, and worst of all, no forward vision at all, have been trashing this world.
The same people who think breathing toxic waste is a good idea are also calling some of the shots on property markets. The same idiots who think making their kids and grandkids effectively homeless is nice aren’t exactly geniuses.
Political leadership, there is none. Given that some of the “leadership” is heading back to the Middle Ages with social policies, not much insight can be expected from there. Political thinking tends to be by the second, not by generations. Most animals raise their kids with more foresight.
Progressive thinking may at least address some of the critical issues, notably future housing. As usual, not much is being done in any practical sense. Affordable housing for everyone should be a no-brainer; in practice, it’s now one of those misty ideals, not solid equity.
“Abide with Thee?” Maybe, because you’ll need an abode
A good outcome would be a slow rise in rates back to something like normal. The low rates were historically unnatural, anyway. Whether or not the market can do that remains to be seen. Market moves are often knee jerks, the wrong moves at the wrong times for the wrong reasons.
The property market is relatively ponderous, compared to equities, futures, etc. It’s not usually quick. However, when it moves at all, a lot of money moves with it.
The trouble with this situation is that it can push an awful lot of upper-bracket buttons at the same time. There are real large-scale vulnerabilities; there are real uncertainties. That’s “fight or flight” criteria in many investment environments. Rational thinking comes later, not before.
So – Wanna buy a DIY cave?
Like the market, you can dig your own holes. Unlike the market, however, you can survive. All you need is a pick and shovel, and if you’ve got a brain in your head, some modern prepper instincts. Pick a piece of dirt and start digging. You may be a lot safer than this market can be for quite a while.
