Posted Feb 26, 2015 by Martin Armstrong
QUESTION: Hi Martin,
ANSWER: Yes, 2007 was the broad market peak. The 2015 high is the higher-end market that has been driven primarily by capital inflows which people trying to get off the grid. The concern here is that property taxes will now rise and the real net value of property may decline relative to everything else. Parking money in real estate at this time may produce the equivalent of negative interest rates when all is said and done. There are advertisements in Asia and Europe as well as Russia offering real estate in New York City for a little as $10,000. This is speculation once again.
The majority of mortgages are conventional with 20% down so this is not the same type of high as took place in 2007. Banks are transactional now so they will write the mortgage and resell it. With interest rates negative and mortgages at least offer collateral, they are still better to invest in compared to sovereign debt where you will get nothing.
Our problem is what Rome faced. The greater the economic turmoil in government, the more aggressive they become in taxation. In this regard, real estate is not a movable asset and it can cross the bell curve and decline due to taxation and the lack of mobility. Romans just began to walk away from their property. Therefore, property in North America will tend to be the safest only because it is extremely difficult to invade with troops and tanks. Blow it up with a nuke – sure, but then nothing matters anyway. So staying within the realm of reality, the greatest threat will be taxation.
Those interested in real estate, run out now and take the longest possible mortgage at a FIXED rate in the domestic currency of where the property is located and/or you wealth with rates this low. If you use a cross-currency, then you better pay attention to hedging. This is a hedge so if it ever gets that bad, you can just walk away as did the Romans. DO NOT assume real estate is a store of value. That depends on the taxation level of the local government and the location.