Housing crashes. Why it is always faster in countries with variable mortgage rates and deeper in countries with fixed mortgage rates.
Housing crashes happen sometimes. Real estate agents hate hearing it. Banks absolutely do everything they can to destroy all historical record of it and never admit it while it is happening. There is absolutely an economy-wide information conspiracy in support of the idea that housing is a unique asset class that appreciates wildly forever. This is nonsense of the Tinkerbell variety, rather than the Goldilocks variety. If we wish hard enough housing will go up forever like a rocket. Yeah - sure.
However, it is very useful in slow moving illiquid asset class corrections, and housing is such an asset class, to know where the carnage arrives first and where it arrives deepest, with that knowledge tempered by when. In this post i am going to reveal the oracle immediately...
The New Zealand and UK housing markets will be absolute blood baths by the middle of next year. Households in variable mortgage rate markets are directly exposed to the cashflow shock of higher mortgage rates in tightening cycles. This is not the case in fixed mortgage rate markets like the USA and France/Germany.
Serious fast cashflow shocks sink household finances, especially at unreasonable leverage multiples of income. A few short years ago mortgage rates were 1.5% in the uk, and they will be over 6.5% by the end of this year because the uk has an absolutely swinging inflation problem with serious second round progression in a wage price spiral. It was always going to be that way. I knew that when zirb was first put into common use as an acronym way back in 2009. New Zealand is even worse because of the leverage multiple of wages there and the need for an excess country spread over major economies to fund their investment gap as an emerging economy.
The UK and NZ are going to have absolute housing market meltdowns of nightmare proportions. We are talking 50-60% corrections. This is what happens when you run a ponzi scheme for 25 years on the yield curve. When the yield curve reverts, so do house prices. Those markets are canaries in the coal mine because their households carry the change in yield curve effects directly. Sadly you do not get to ask for a 300% wage rise when your mortgage monthly payment goes up that much. I have said the UK and NZ housing markets were un-investable to any rational mind for 20 years - and there it is, right under our noses. It was a ponzi scheme and it has failed. NZ is already down 20% in a year, and we are just getting started, believe me.
The gig is up. The ponzi scheme has fallen under its own weight, and the only thing that lies between housing markets and price disaster in those economies is the lag that housing always presents as an illiquid asset market that fights price discovery hard. We have run such an incredible ponzi scheme in housing that you can expect a very serious risk of entire national banking systems failing. That kind of ponzi - right across the economy. You can expect absolutely desperate political manouvres to save those banking systems.
You may find your private pension accounts simply get paraded into new systems and invested in finding a floor for housing. That is one of the primary reasons i do not like private pension accounts. They are semi-fiscal pots of money and we have serious economic drama ahead. It is always better to be owed an obligation generally than specifically in times of broad crisis. Very much like it being better to owe a failing bank a million than for it to owe you a million..You need to be on the right side of the catastrophe risk, every time. Private pension accounts are going to get grabbed to manage catastrophe risk in my view - grabbed cutely no doubt, but still grabbed.
Fixed mortgage rate markets take longer to crash. It is the macro recession and unemployment that takes them out eventually but when they do capitulate the losses are steeper and deeper. The delayed price discovery process really comes out with a bang. I expect major metros with a bit of bubble action history in the USA to cave by in excess of 60% over the next 5-7 years. I state it plainly for the record. Prices at zirb are simply very different to prices at 7.5% historical average mortgage rates. There is a formula. It is not a matter of opinion. It is a matter of arithmetic i am afraid, and not much more. No amount of glib realtor posing will change that.
Fixed mortgage rate markets, for the same policy rate and 10 year benchmark rate, always price more expensive mortgage rates than variable rate markets. It is formulaic and fundamentally due to the long term fix structure. You pay for the rate insurance basically. That is why fixed rate markets fall further than variable rate markets, once they fall. The mortgages are more expensive, all else equal. The move from zirb to historical average mortgate rates in the USA is absolutely going to be catastrophic. Catastrophic. They played with fire, they doubled down, they got crazy - and then reality caught up with them. It always does. A ponzi scheme is evident in retrospect each time.
For those of you who believe in ponzi schemes and interest rate reversion as a feature of yield curves over time - and you should because we have centuries of evidence confirming both - and have positioned themselves accordingly, short housing, and long cash, there are going to be a few years of bumper investment opportunity in the second half of this decade. Rational patience and wisdom will be rewarded. It has been a long wait and some very very irresponsible governance but those are the breaks. Life is not fair.
One of the realities of contrarian investing when it comes to property market bubbles is that property bubbles imploding are correlated strongly with currency crises. It tends strongly to be the case that holding cash external to bubble markets is a good strategy. For those of you who hold your cash in semi-reserves and waited for property carnage, you are about to be vindicated most profitably on your beliefs and investment wisdom.