What has the price of an illiquid asset such as property got to do with the stock markets or currency markets?
Certainly it would be prudent to ask such a question at a time when analysts from major banks and stockbrokers across the Western world are pointing to a potential downturn in demand for property and a significant slump in prices, when property is a physical, illiquid asset yet stocks and currency are liquid and easily bought and sold on an OTC basis in ‘spot’ deals.
Well, the price of property and the buying appetite for it certainly is relevant, as it is a very strong measure of confidence in the overall financial stability of a national economy.
At times during which times are tough financially for a large proportion of a national population, property buying tends to go by the wayside as buyers hold off from either buying their first home, or upgrading to a larger one at a higher value, or relocating. Additionally, commercial property investors tend to concentrate on their existing portfolio or reduce it rather than acquire more.
Over the weekend, there was substantial talk of property markets in Europe and North America being poised for double-digit price declines as consumers face mounting financial pressures.
That is quite some speculation.
This week, Ann Pettifor, Director of the Policy Research In Macroeconomics (Prime) group and author who predicted the 2008 financial crash in her 2006 book ‘The Coming First World Debt Crisis’, has echoed this sentiment and added her expert view to it, by stating that in Ireland, one of the most buoyant regions in the Eurozone for property development, home ownership and construction, there is very much cause for concern.
Ms Pettifor told the Irish Independent this weekend “Liquidity will at some point dry up, and that will have an impact on house prices. How? Think of how it impacted the US in 2007. In the movie The Big Short, the pole dancer suddenly couldn’t pay her mortgage, because in real terms her wages were falling. So it was people like her who brought down the whole financial system.”
“That’s the point. People are taking out mortgages, they think everything is fine. But their mortgage rates are rising” she said.
Yes indeed. Interest rate rises are one of the central points that are creating concern in property buyers.
Just across the sea in the United Kingdom, it has been predicted by a top bank analyst that interest rates could rise from today’s 1.75% to over 7% by January 2023 if the inflation figures continue to increase and hit 18% by that time which is a figure bandied around by many bank economists.
This set of figures is alarming, and combined with the 20-year lows that the British Pound has been plumbing recently, it is clear that a very conservative view is being taken by investors in various asset classes, liquid and static.
The property market in the United States and the United Kingdom was very hot indeed around a year and a half ago, when homes were selling for over the asking price and often very quickly, but now many are languishing on the market for months at a time with little interest.
Whether an actual recession will take place or not is not yet known, but it appears that buyers and investors are making preparations.
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