How long can this go on?

From a purely anecdotal standpoint, the housing market seems in dire straits.

I only know people who are struggling to fill rooms or flats, or people who have put a house purchase on hold.

Bear in mind, this is among people in their 20s and 30s in London, so a small subset.

But last week, there was a fear that over 200,000 faced eviction if the eviction ban wasn’t extended (and it duly was).

And I’ve heard a few little factoids or stories, saying that this or that part of London has seen average rents fall by 10% or 15%.

The headlines today disagree with this homespun analysis though. This was this morning:

Source: Financial Times

What can explain this divergence?

A few weeks ago, a friend and I were noticing that we had seen more “room for rent” posts on Facebook, by people we knew, in the last month than in any other period we could remember.

Usually you see one every month or two, but I reckon I’ve seen almost ten in the last six-eight weeks.

What’s more, my neighbours really struggled, and my landlord can’t fill a new one-bed flat he’s just completed. Both nice places in great locations in south London.

But house prices in the UK really did rebound to above pre-Covid-19 levels last month, after rising at the strongest pace in a month since 2004.

Source: Financial Times

This is partly due to returning confidence in homebuyers, as the coronavirus second wave hasn’t really appeared, they’ve kept their jobs and want to get the hell out of their inner-city apartments with no outdoor space.

It’s also a function of some government support, like the removal of stamp duty tax on any property up to £500,000, which is set to last until 31 March 2021.

There is certainly a feeling that what people want from a property has changed in the last six months, as cramped conditions and a lack of outdoor space suddenly become much more important. This is driving people to think homes are worth spending that bit more on, as they may be working there more often in the future.

Low interest rates are helping too.

The obvious threats to this resurgence are job losses as the furlough scheme unwinds, the end of the stamp duty holiday in April 2021, and also the possibility that most of this is demand built up over the last six months that’s just going through now, which is masking lower numbers of new deals.

But I still can’t quite add up the fact that hundreds of thousands of people are facing eviction, while over 100,000 job cuts have been announced, while housing breaks records.

In the States, Tavi Costa posted this foreboding chart, showing that the house prices, usually so closely linked with delinquency rates, are teetering on the edge of a cliff.

Source: Tavi Costa on Twitter

That relationship makes sense. If economic woes are causing people to miss rent payments, house prices should reflect falling confidence.

It seems that housing is going into a tight bend with too much speed, or floating over the edge of a cliff.

However, we have been in similar situations before. “When interest rates rise in the next year, then equities will struggle” was the common refrain in 2009. Same for quantitative easing (QE). But those policies lasted far, far longer than people imagined possible at the time. Could it happen again?

Is it possible that while QE inflated asset prices for way longer than we could imagine, the current policies will do the same for housing, and jobs?

We couldn’t imagine the interest rates could stay below 1% for longer than a couple of quarters, but they stayed for years and years and are already back after only a brief uptick.

Most people didn’t see QE2, 3 or 4 coming and what’s happening in 2020 puts them all to shame.

In short, there’s no more permanent thing than a “temporary” government policy.

Is there a way out of the furlough and housing support schemes that doesn’t put evictions and job losses directly at the government’s door?

By taking responsibility for saving jobs, the government may well be given responsibility for when people lose them too.

So will they put an end to it? That’s in many ways, the main question now.

How good do things have to be for the government to look people in the eye and say yes, it’s time for hundreds of thousands of people to get fired, or evicted?

Or if an election is anywhere near, what politician could get elected by saying this scheme must end?

There is already “debate” about “taxes”, but it seems pretty clear that the burden of taxation would be very difficult to bear. Could the government possibly re-coup all that has been spent, through taxation alone?

Modern Monetary Theory (MMT) is promoting the idea that taxes don’t dictate government spending limits, inflation does.

But looking at how much the Japanese central bank has spent without triggering inflation, is there any limit in sight?

I will reiterate that Pandora’s box has been opened and people have seen what’s inside.

And what’s inside is the unlimited distortability of fiat money.

It’s not hard to see why so many people are turning to the hardest forms of money they can find, whether that be physical (gold) or digital (bitcoin).

Housing is floating on a gust of hot air. It seems natural to think it must end sometime. But a decade after saying that about equities, how confident are we that gravity will assert itself soon?

With the threat of a second wave coming in winter, or worsening job losses, the banks that are heavily exposed to the UK mortgage market might be in real trouble.

If you want to find out more about how to protect your investments from banking and housing market crashes, read more here.

All the best,

Kit Winder
Editor, UK Uncensored

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