Will the pound be worth $2 on Monday? (and why this is scarey for property)
Posted by markharrison on December 3, 2006
I am getting worried, very worried, about the US economy.
Sterling finished last week at what I’m fairly sure is a 15-year high against the dollar – though the data I was looking at only goes back 10 years (ft.com)
It may be, on Monday, that £1 is finally worth $2 again. It may be, of course, that the dollar rallies, and goes back up, but overall, I see lots of downward pressure.
The basic problem, as I see things, is that the US (as a whole) has been living on increased borrowings for too long – firstly the national (federal) government has been spending far more than it takes in taxes, and assuming that it can either sort things out in the next economic boom, or simply print more dollars. (OK – it doesn’t actually print them as such, but the Fed can easily put more into circulation.) Secondly, US consumers have been “spending their house increases” in quite scarey numbers. It is not exactly common, but not exactly unusual in some parts of the States to re-finance your house every year or two, not to invest, but to spend the money on cars, bigger televisions, and all other the other things that Kiyosaki charmingly christened “doodads”.
As a UK resident, this scares me. People normally only do things like increase their borrowings on assets when they are convinced that asset prices are going to go up substantially, and to me the US housing market looks seriously overvalued. This inability to recognise an asset bubble when you’re in the middle of one is not uncommon, nor is it a US-specific myopia. Normally, crashes are preceeded by massive speculative bubbles.
And, though I don’t normally do this, I am going to go out in a limb today – I think that the US market is heading towards a crash in 2007 (2008 at the latest.) By a crash I mean a general decline in nominal prices by at least 5%, and a decline in real prices by at least 10%. (ie – inflation will go up faster than the last few years, but not as fast as house prices come down.)
I’ve been relatively sanguine about the UK property market for a while, but if there is a US asset crash, then it would not surprise me if this were followed by a similar one in linked economies – Canada might escape because their property market hasn’t shot up in the same way, but the UK strikes me as a bit of a domino.
Now for the contrarian bit 🙂
Most people get worried by crashing markets – but ask yourself the following question “If I want to buy more of X (a thing) in the next few years, do I want the price of X to go up or down”?
I am looking forward to a property crash in North America. If we get (as I feel we will in 2007) the double-whammy of the £ buying more $, and fewer dollars being required for each house, we should see a “buying opportunity”. I’m not talking about going out to New York to buy Prada, I’m talking about going out to New York to, well, buy bits of New York (or Chicago, or Houston, or Florida, or wherever, really)