Negotiation, Negotiation, Negotiation

UK Property Investment news and comments from Mark Harrison of YourPropertyExpert.com

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)

6 Responses to “Will the pound be worth $2 on Monday? (and why this is scarey for property)”

  1. Simon said

    Mark,

    I totally agree with your comments.

    I think the US economy will come to a grinding halt soon because as the dollar becomes weaker as a currency, dollar assets (e.g. property, equites etc.) will drop in price. Foreign investors investing in the US will start to look elsewhere for their investments, for instance buying commodities (e.g. gold, silver, metals etc.) because these are a safe haven for their investments and are not affected by currency fluctuations.

    This will lead to a scenario of reduced demand and over supply for dollar assets, thus a fall in their prices/value. And as the popular saying goes “When America sneezes the rest catch a cold”, I think this will hold true for the UK property market, and we will see a reduction in prices.

    Kiyosaki says “As one party ends, another begins” and we could see this happening for investors with the UK property market in the next few years…

    A good book I read on the Global economy and how it is driven by the US dollar is the “Dollar Crisis by Richard Duncan”. It’s an economic’s book (not, that’s theres anything wrong with economists!) so if you can shift through the number crunching parts, I think you will find it a good read if you not already read it.

    Keep up the good blogging!

    Kind regards

    Simon

  2. Simon,

    No – not read that one.

    One of the things that brought this on is that I recently read “Empire of Debt” which I found quite poor – an interesting central thesis (though written from a very American perspective with the typical “these foriegn chappies should be grateful we’re there to look after their economies” bias.)

    I’m actually after something more serious, and would rather take the time to read through the numbers than get a dumbed-down set of conclusions from people with a bias I don’t share🙂 (Bias in the technical sense, not intended in the moral sense.)

    Thanks to the marvels of Amazon, now ordered🙂

    Regards,

    Mark

  3. Miles Williams said

    Out of curiosity guys, do you still feel your comments above are on track ? I have to agree with your predictions, I also think the “open skies” agreement between the US and EU will mean cheaper flights to the US, and in turn brits buying over there.

  4. Miles,

    Yeah – at the moment, I stand by the “by the end of 2008 at the latest” prediction.

    However, I would strongly caution you against any investment strategy that relied on my ability to time the market🙂

    Mark

  5. […] course, back in December 2006, I started predicting a US housing crash, and as long ago as May 2005, I started writing about the risks of being a landlord. I massively […]

  6. How considerably do I owe you for all the Outstanding post.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: