The different types of solutions, and what will solve them . . .
My role here at YPC Group has changed gradually over the last five years from one of property investor that likes to rant and rave about building a portfolio to one of social, political and economic commentator. I see the transition as inevitable since I now have too much invested in the economies of three separate countries to ignore what's going on.
I remember sitting back in 2006, feeling glad I was “just” a property investor, so I didn't have to “get involved” with all that other stuff. Then 2007 and the credit crunch hit and despite wanting to stay out of the hysteria I realised that clients wanted to understand in simplistic terms what was happening and what they needed to do about it.
So I happily began writing about society, politics, economics and the current market.
I have to admit that I have spent a lot of time reading up on the topic of recessions over the past two years and in particular how we got into and when (and how) we can get out of them, so it's naturally become an easy topic to chat about.
Largely speaking then, there are only two types of recessions that affect property investment:
1. Business Cycle
This type forms a part of a normal business cycle. This is where business inventories are built up over time, but eventually exceed the real demand. This happens across the economy as a whole since businesses are quite interlinked. The excess inventory in one business triggers a false demand in another who in turn excessively stocks their business, and it follows right along the supply chain.
Consumers who work for these companies also perceive things are good and spend more which turns the whole wheel again. Eventually, businesses stop spending until the inventory drops, and this works its way down the supply chain and out to consumers.
The answer to this is the type of recession is for the central banks and governments to do little and allow the economy to self-correct. Any overreaction will fuel inflation that will have a negative effect.
This is when demand itself collapses a much more serious one. These types of a recession are normally much more deeply rooted in systemic problems. It may be a whole economy has been overheated for far too long.
The result is that a whole link in the supply chain is taken out, demand dropping at every level and things grinding to a halt. Businesses start building to order rather than risking inventory; growth plans stop, and everyone goes into survival mode.
So how do we get out of a Demand-Collapse recession?
The answer is always to take big bold steps as early as possible because the longer you leave it, the worse it becomes.
Speaking in terms of the recent 2008/2009 recession, the financial system had a massive systemic problem and demand crashed (making it a demand collapse ). This time it also happened on a worldwide basis which made it even more painful.
In this instance, the Bank of England aggressively dropped interest rates to prop up the consumer and use Quantitative Easing to increase the money supply. This was the correct move.
So who's to blame?
Don't for a minute think that the cause are any different in this case (or ANY case). Our old friend, human nature is always to blame.
If you have any questions or maybe just want to know what you can do right now with your current property portfolio, give the team a call on 0207 812 1255.
Live with passion,