Posted Jan 13, 2013 by Martin Armstrong
Real Estate is a difficult market to forecast because it is so localized. The primary trend that emerges which we observed through a couple of decades of monitoring on an international scale was essentially the same pattern that takes place with the rise and fall of nations. As I have tried to explain that there is a substantial difference between the CORE economy and the FRINGE economies, the same pattern emerges in real estate. Even in ancient times, interest rates in the provinces were often 5 to 10 times that of Rome. We know that Brutus was with Cato on Cyprus, which had been conquered by Pompey and was finally in annexed in 58BC. We happen to know that Brutus lent money to the town of Salamis, which desperately needed help; with an interest rate of no less than 48%. In 53BC, Brutus was chosen quaestor, the financial magistracy which a Roman politician had to occupy when he started his career. He was responsible for the taxes in a province called Cilicia (where his father-in-law was governor), and used the opportunity (and the army of Cilicia) to settle accounts in Cyprus. The next governor of Cicilicia was Cicero, who actually condemned this behavior. This is just one example of countless illustrating that interest rates rise moving away from the core economy just as we see in Greece, Spain, and Portugal paying higher rates than Germany. This is illustrated here in this chart showing the maximum rates moving away from the core economy.
Real estate functions in the same manner. When a cycle generally begins, it is located in a core area within a region. That real estate begins to rise first. As capital sees money can be made again in real estate, it begins to buy the fringe. The cycle keeps expanding until you then notice that where it began starts to soften in price. That is the key to observing the shift in trend that will filter through the entire region.
- Is the cycle for a 78 year period specific to location, therefore reflecting the transition of the rise and fall of a nation?
- ANS: NO. This is an overall general cycle and the closer you are to the core the shorter the cycle becomes. But this will not be less than 51.6 years.
- Surely national real estate prices are reflective of the national minimum salary, generalized inflation (CPI/ RPI), national economic prosperity, location, financing environment, supply and demand and confidence. If there is a 78 year cycle is this a reflection of the forementioned, and a distinct decline?
- ANS: This is not true. There has always existed the external capital flow factor. Real estate can appear to be overpriced to the local citizen as was the case in the UK going into 1985. However, when the pound fell to $1.03, Americans were buying everything and real estate soared in price. Likewise, there was the South Sea and Mississippi Bubbles of 1720 which were European investors buying land in distant places – namely the Americas. Consequently, this must be filtered from a international value perspective not purely domestic. The Japanese bubble in 1989 burst because in part real estate became so insane, even Australia sold its embassy in Tokyo.
- Real estate prices in the UK Midlands area has risen from 5,000 in 1960 to 110,000 in 2013, this is clearly an example of economic growth and the impact of inflation. When there is deflation can it be so severe that it collapses the price of goods and services and increases the value of cash to that extreme? If so do you have any examples?
- ANS: The government calls this “inflation” they define as the rise in the price of goods and services. Reflected in this is the decline in the purchasing power of the currency. Hence, the pound in 1960 was at $2.40 when the dollar was fixed at $35 an ounce of gold. In part, there has been the increase in real estate values caused by (1) increase in population (demand), and (2) leverage provided by the availability of loans. For example, in the US providing a 30 year mortgage was Roosevelt’s idea to jump-start real estate where farmland fell from $2 to 20 cents an acre. By allowing you to bring forward 30 years of income, the price of real estate rises in proportion to the increase in the available supply of money. Deflation causes real estate to decline when it is LEVERAGED as we witnessed off of the 2007 high. That was caused by the over leveraging of real estate inspired by the investment bankers who then were bailout to be able to do it again to everyone. However, in situations such a the German hyperinflation, real estate not only rose in value, it became the backing of the currency to end the hyperinflation as people accepted land lacking any gold reserves.
- Are there any statistics for real estate during the dark ages? I have only been able to find figures back to the 1700’s.
- ANS: During the Dark Ages following the fall of Rome, private ownership collapsed. There was no rule of law and this resulted in the rise of serfdom and feudalism where people worked for a landlord to gain safety. The title to the land was pure possession and the ability to maintain that possession. There was no “title” to be recognized other than possession so there are no records of values and sales.There were also no wages until the Black Death during the 1300’s that created a shortage in labor. There were countless monasteries formed with communities on the “fringe” that were later confiscated by various kings once land values came back.
- There is clearly going to be a continuation of increase in taxes including property related taxes, this is currently happening in London, as part of this taxation this will surely cause migration to the suburbs of the highly taxed cities. In return do you feel this would cause the velocity of capital flows to push towards the suburbs and either stabilize or increase the property market and potentially prosperity of the suburb?
- ANS: Yes. The trend is always in such situations that the cities are desperate for revenue and chase the rich out and ultimately collapse in their own debt, The City of Mainz followed that pattern after it raised taxes thinking the economic boom from the birth of printing there would last forever. They chased the productive forces out, were left with not much, were issuing new debt to pay the old, and when they could not sell new debt moving into default, they were invaded, sacked, and burnt to the ground. It is always the same pattern – suburbium.
- With the real estate 78 year cycle is there any specific data used to compile the data?
- ANS: Studies conducted on real estate values both from ancient times as well as collecting data from the British Royal Newspaper Library that was north of Marble Arch.
- I feel currently real estate is an asset class to park funds and receive a strong consistent yield outside of the cities, whereas prior to credit crunch it was an equity and capital gain game. However currently major cities such as London, Hong Kong where yields are depressed currently there is certainly still capital gains. Surely destruction of this asset class is a reflection of the economy? Or are my views to architypal?
- ANS: There may still be some capital gains in the cities from a depreciation in the purchasing power of the currency offset by the rise in taxation. However, with the USA attacking its own citizens worldwide and as of 2014 even UK banks will report to the IRS in the US and vice versa, capital left in the banking system is becoming high risk. There is a shift to real estate on a selected local basis worldwide. There are pools of commercial property in Germany being sold with yields 10-15%. Real estate is rising in some areas of California and other areas. Hence, the rise in aggressively trying to confiscate capital in banks worldwide and the risk that Europe may adopt worldwide income following the United States, will only send more capital into selected real estate sectors. Stay away from the slumlords and inner city, and look to high yielding commercial property in secure areas.