Will House Price Boom Collapse With Unemployment

Brett Alegre-Wood
November 16, 2020

Government Stimulus cushions the impact of Pandemic

If we can keep people in their jobs that would be fantastic. So far the unemployment rate is not that high to be able to affect anything.

We are going to look at the second lockdown impact on property. And we will see what that impact could be and what it would likely be.

The UK house price boom will collapse once buyers lose their jobs.

Yeah, it will,  have they presuppose that buyers are losing their jobs. One of the interesting things here is don’t presuppose this, because actually the unemployment rate is still not that high. We still haven’t seen it jump up massively because of the government stimulus. And this is one of the key things, I want to just move on to this with a bit more concept.

If we have a look here this is Federal reserve this is not the UK, but the UK is the same sort of graph but I just want to show you because this is the largest central bank has done this.

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It's a very different market in Scotland, it's a smaller market. There's some fundamental changes namely oil and gas with all the issues there and that I know Aberdeen and a few of those places house prices have dropped considerably. So, it depends on how that's reacted.

This is from 1960s - 2020, currently. Now if you have a look right across the side you’ll see that it basically tracks, tracks and it starts tracking again and it goes zoom. We have gone. The FRED has gone from 4T to 5.5T since CoronaVirus. That is 40% more cash.

So if you imagine you had 100 bucks all of a sudden you just got given an extra 40 bucks to go and spend and play or do what you want. That is an incredible jump, that is unprecedented, it has never happened before. But I actually think its the right thing to do. This is not just the US doing it, this is a lot of economies around the world are printing money and effectively increasing the money supply. And that is the M1 graph. 

M1 is basically its cash. Cash in our wallets, as well as cash in our banks effectively. Bottomline with this is that this has jumped up dramatically but I don’t think this necessarily means we have to see massive inflation and massive things. I think this is what’s required right now. 

If you look back at the great depression,  they did the opposite thing. They actually raised the interest rates to protect the gold standard. Even though the circumstances changed, this is where a lot of people say to you, oh we are in for a great depression. I don’t think so. And the reason why I don’t think so is because in the great depression what they did was they raised the interest rates and that totally, everything just deflated.

It burst the bubble massively and it ruined a decade. Now, what they have done is the total opposite, it looked the same going into it both times but actually what’s happened is the response has been the total opposite. And what have we seen, unemployment has not risen that much. We actually kept jobs, we kept the economy, sure the GDP dropped  but it bounced back up. 

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And if we look at China, they have grown 5% this year. Which is lower than what they would have expected they were probably expecting a 7-10% they were aiming at but it is still bloody good. 

Coming back to jobs and things like that, if we can keep people in jobs that’s fantastic. Because what that means now is that if people lose their jobs  and everyone loses their jobs, it takes about 2 years for the economy to get them back into their jobs and get them productive again and earning.

And that’s what this is about, productivity. Because that is where you see the results from their labour. And that is a two year process. Now, interestingly is that, if you keep them in the job they are already productive, as soon as you switch them back on they are productive straightaway, it means you can have this V shaped recovery. And yes, it is costing a lot, and yes that debt is going to be massive. We’ve gone in June above 100% of GDP to debt. So debt to GDP was above 100% it is probably about 120% now, I don’t know, because the same time we have GDP falling we’ve got debt increasing. It’s hard to look at the numbers now and go this is what they are and actually they haven't released the numbers fully yet.

If you look at that debt, that massive jump up that we’ve seen just there. The reality with that is the governments borrowing this money at near zero. In other words they’ve got a long term to pay it off and it’s very low interest. So they can afford to borrow a lot more. 

If you look back in the 70’s -90’s, when you have 70% interest rates, sorry  90’s I should say 70’s - 80’s we had 17%-12% you know. Double digit interest rates. If governments are borrowing at that maybe a little bit less, if you borrowed or increased your money supply by 40% that was  huge and it will just wipe out everything. That’s not happening. Interestingly, the whole economics of this is changing right now because what we are seeing things like this happen. But then the other side is low interest rates or near zero interest rates to be fair and in fact maybe go into negative, which means they are going to charge people to have the money in the bank which is quite an interesting thing. 

Don’t think for an instance that means we are going to get a negative interest rate on our mortgage and that it’s just not going to happen. It is an interesting time right now, I don’t think, maybe I am an optimist, I don’t think things are as bad as they are being made out to be. There are a number of different things for instance technology is really taking hold and is really starting to have a deflation effect on prices across all industries. So that means actually even though normally we would say if you introduce so much money supply you are going to get the sting on the tail which is an inflation, with things like this. With things like cheap interest rates and things like deflation with technology you are starting to pull them back down. So yes, the debt will still be there,  and yes we are still going to get inflation potentially but not huge. 

Video Transcription

We are going to look at the second lockdown impact on property. And we will see what that impact could be and what it would likely be.

The UK house price boom will collapse once buyers lose their jobs.

Yeah, it will,  have they presuppose that buyers are losing their jobs. One of the interesting things here is don’t presuppose this, because actually the unemployment rate is still not that high. We still haven’t seen it jump up massively because of the government stimulus. And this is one of the key things, I want to just move on to this with a bit more concept. If we have a look here this is Federal reserve this is not the UK, but the UK is the same sort of graph but I just want to show you because this is the largest central bank has done this. This is from 1960s - 2020, currently. Now if you have a look right across the side you’ll see that it basically tracks, tracks and it starts tracking again and it goes zoom. We have gone. The FRED has gone from 4T to 5.5T since CoronaVirus. That is 40% more cash. So if you imagine you had 100 bucks all of a sudden you just got given an extra 40 bucks to go and spend and play or do what you want. That is an incredible jump, that is unprecedented, it has never happened before. But I actually think it's the right thing to do. This is not just the US doing it, this is a lot of economies around the world are printing money and effectively increasing the money supply. And that is the M1 graph.  M1 is basically its cash. Cash in our wallets, as well as cash in our banks effectively. Bottomline with this is that this has jumped up dramatically but I don’t think this necessarily means we have to see massive inflation and massive things. I think this is what’s required right now.  If you look back at the great depression,  they did the opposite thing. They actually raised the interest rates to protect the gold standard. Even though the circumstances changed, this is where a lot of people say to you, oh we are in for a great depression. I don’t think so. And the reason why I don’t think so is because in the great depression what they did was they raised the interest rates and that totally, everything just deflated. It burst the bubble massively and it ruined a decade. Now, what they have done is the total opposite, it looked the same going into it both times but actually what’s happened is the response has been the total opposite. And what have we seen, unemployment has not risen that much. We actually kept jobs, we kept the economy, sure the GDP dropped  but it bounced back up.  And if we look at China, they have grown 5% this year. Which is lower than what they would have expected they were probably expecting a 7-10% they were aiming at but it is still bloody good.  Coming back to jobs and things like that, if we can keep people in jobs that’s fantastic. Because what that means now is that if people lose their jobs  and everyone loses their jobs, it takes about 2 years for the economy to get them back into their jobs and get them productive again and earning. And that’s what this is about, productivity. Because that is where you see the results from their labour. And that is a two year process. Now, interestingly is that, if you keep them in the job they are already productive, as soon as you switch them back on they are productive straightaway, it means you can have this V shaped recovery. And yes, it is costing a lot, and yes that debt is going to be massive. We’ve gone in June above 100% of GDP to debt. So debt to GDP was above 100% it is probably about 120% now, I don’t know, because the same time we have GDP falling we’ve got debt increasing. It’s hard to look at the numbers now and go this is what they are and actually they haven't released the numbers fully yet. If you look at that debt, that massive jump up that we’ve seen just there. The reality with that is the governments borrowing this money at near zero. In other words they’ve got a long term to pay it off and it’s very low interest. So they can afford to borrow a lot more.  If you look back in the 70’s -90’s, when you have 70% interest rates, sorry  90’s I should say 70’s - 80’s we had 17%-12% you know. Double digit interest rates. If governments are borrowing at that maybe a little bit less, if you borrowed or increased your money supply by 40% that was  huge and it will just wipe out everything. That’s not happening. Interestingly, the whole economics of this is changing right now because what we are seeing things like this happen. But then the other side is low interest rates or near zero interest rates to be fair and in fact maybe go into negative, which means they are going to charge people to have the money in the bank which is quite an interesting thing.  Don’t think for an instance that means we are going to get a negative interest rate on our mortgage and that it’s just not going to happen. It is an interesting time right now, I don’t think, maybe I am an optimist, I don’t think things are as bad as they are being made out to be. There are a number of different things for instance technology is really taking hold and is really starting to have a deflation effect on prices across all industries. So that means actually even though normally we would say if you introduce so much money supply you are going to get the sting on the tail which is an inflation, with things like this. With things like cheap interest rates and things like deflation with technology you are starting to pull them back down. So yes, the debt will still be there, and yes we are still going to get inflation potentially but not huge.


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