Grey nomads and the error of Imperial Spain

Tuesday, 14 September 2021 — Albert Park

[3 min read]

Dear Reader,

Anyone who follows the real estate market knows there are rumblings about ‘macroprudential’ controls being put down on the banks.

These could take the form of limited interest-only loans, lower loan-to-value thresholds, or higher interest rate stress tests.

This is how governments decide to deal with an inflating real estate market. Again, it’s treating symptoms and not causes.

The result, if it happens, will be the market working a way around the rules.

For example, the concept of ‘securitisation’ came from previous attempts to rein in the banking sector. We ended up in the 2008 mess down the line.

There’s an 800-pound gorilla in the room now too.

It’s called the crypto market. This is a way to sidestep the entire traditional financial system.

The Wall Street Journal reports…

‘Michael Anderson mined bitcoin in his dorm room and left a corporate job to invest in cryptocurrency projects.

‘When he bought his first home in San Francisco this year, he didn’t turn to a bank. Instead, he borrowed against his cryptocurrency.

‘Crypto enthusiasts such as Mr. Anderson are tapping their holdings to buy homes, cars and, often, more crypto. They are getting these loans from upstart nonbank lenders and automated, blockchain-based platforms…

‘The business is growing rapidly. One group of crypto lenders has $25 billion in loans outstanding to individual and institutional clients, up from $1.4 billion a year ago, according to the crypto research firm Messari.’

Put some context around this. US$25 billion in the US lending market is nothing. But it is a seed. And seeds become oaks given enough time.

And the more governments press down on the traditional sector, the more incentive-loose capital must go somewhere else.

Don’t forget, it’s the low interest rate policy of the central banks that causes capital to find a yield wherever it can.

It’s blowing a mighty bubble in real estate around the world. Commodities won’t be too far away either.

So, if you’re one to think real estate can’t go higher, keep an eye on the crypto market.

There’s likely a tidal wave of money to gush out of the sector across the property market all over the world in the next five years.

Did I mention crypto coins can be created out of nothing as well? If you think central banks are irresponsible with the privilege, wait ‘til you see what the gamer generation can do.

Goodness me, what a bubble we’re going to see.

The factors are obvious: high house prices, stagnant wages, and a later start because the deposit can take so long to get together now.

This response is the rational thing to do:

‘[A] primary residence is exempt from assets tests while super is not.

‘And then there’s the record low interest rates: consider that with current rates every dollar used to pay down a mortgage is saving less than 3 per cent in interest whereas that same dollar invested in superannuation has potential to return 7 or 8 per cent.’

Another way of looking at this is that the low tax rate in super is another indirect subsidy for the banks.

It allows Australia’s ridiculous housing and tax policies to look like they work and keep the whole wobbly game going.

There is one drawback. Australia will be left with an army of grey nomads living off second-hand clothes and tinned food.

Their remaining capital and puny pension will not allow them a normal — let alone high consumption — lifestyle.

Eventually the house will be sold if they live long enough because they’ll need the money to provide care or cover expenses.

One can imagine a scenario where much of the housing wealth of this generation does not make it to the next.

The corporatisation of the land market will continue as it is trending in the US. Wall Street is on its way to becoming the US’s biggest landlord.

But again, it shows why governments must protect real estate values at all costs — until they can’t. There is too much of the population hitched to the system to break free of it.

Therefore, Australia’s national treasure will continue to be spent propping it up with the same long-term care and vision as the Spanish took with their stolen loot from South America.

They mostly fought wars and the royal/aristocratic class had a riotous time of high living.

The British got on with the business of developing manufacturing.

They do have an awful lot of nice buildings in Spain from the period. But the jobs and capital and the centre of power left. It wasn’t a productive or sustainable use of capital.

In other words, Spain’s imperial economy was not a ‘win win’ scenario. It was based on colonisation, slave labour, and serfdom.

If you do want to know what a true ‘win win’ world looks like, check out the latest — and last — book from our founder Bill Bonner. You can see a way to get a copy here.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia