The Future of House Prices

welcome back to Gary's economics today we're going to talk about interest rates and house prices all right so I want to talk about a very interesting thing that happened in the last year or two which is that interest rates have risen very aggressively all over the world including here in the UK and everybody has been expecting that that is going to cause a big fall in house prices which hasn't really happened so today we're going to explain why that is and talk about what it means for you and what's going to happen from here and we're going to end up with a nice sort of concept that I use to understand more broadly what is happening in the economy which I've used for a long time so I want to start by basically going through the story of house prices since the beginning of covid because that is when big dramatic changes started to happen so at the beginning of covid there was a ton of predictions that house prices would collapse and at the same time I wrote my first article in March 2020 and we made our first video on this channel in June 2020 I predicted we would see a very aggressive increase in house prices which which we did so from the beginning of covid until sort of the end of 2021 there was a super aggressive increase in house prices all over the place so that that first question is why did everybody make such bad predictions about house prices in the ear Co I think this is based on a very simple logic which I think a lot of people have kind of built into their brain which is that when the economy is bad house price is full and stock price is full and lots of people believe this I think this is it's almost kind of how we're trained to understand the weak economy is a collapsing the stock market falling house prices it's a common logic it's widely believed it's totally Incorrect and I think the most most obvious example of that is if we go back and look at 2008 2008 is is an interesting example because on the initial onset of the 2008 crisis we saw really massive fall in stock prices and in a lot of the world we saw pretty dramatic Falls in house prices as well but if you look at the long-term picture of 2008 2008 was actually the start of an enormous house price boom and an enormous stock price boom so immediately there were shock Falls but over the next sort of 10 12 years we saw truly enormous house price Rises here in the UK in the US basically all over the world so what you have here is a good example of a case where the economy was actually phenomenally weak for the sort of 10 years after 2008 and yet what we actually had was really aggressive increases in house prices really aggressive increases in stock prices so this is the first challenge to this commonly held idea that when the econom is Rec house prices go down if you look at 2008 what we actually have is a situation where the economy was phenomenally weak and it caused an enormous boom in house prices but despite that happening after 2008 this idea still exists in the in the popular Consciousness and it exists in the minds of economists people who write articles in the media about economics that when the economy is weak house price is full and um I really clearly remember at the beginning of Co when I I wrote for the guardian saying house prices are going to go up at the same time Larry Elliott Chief economics correspondent of the Guardian wrote an article and we'll link it in the description so you can see saying house prices are going to collapse later this year so why was it that I was then able to make this correct prediction when basically everybody else was predicting a house bu crash didn't happen now the reason for that is essentially because my background as a Trader and as an economist is an inequality Economist so at the the very beginning of covid it was very clear that governments were going to give a ton of money out and and I cannot emphasize how enormous the amounts of money given out by the UK government the US government governments all over the world were during Co and this was already pretty obvious very early in covid sort of March April 2020 we knew there's going to be a long lockdown governments are going to give an absolute ton of money out so for me I I think most traditional economists are just like they giving money out because the economy is weak weak economy house prices go down but for me as an inequality Economist I wanted to know who is going to end up with that money if you are focusing on distribution that's the question you want to ask so we know the government's going to give out huge amounts of money we know somebody's going to accumulate huge amounts of money who is that going to be and what that meant was I was able to realize what was then and I think still is now the most important and underappreciated consequence of covid which was this enormous amount of money given out by the UK government also the US government Global governments will be accumulated by someone it will be accumulated largely by richer people and what that means is co will lead to a situation where rich individuals and Rich families have got absolutely enormous amounts of of money and I think that that was the the big thing which was missed by economists and still is being missed by by economists and if if you understand that one of the consequences in my opinion probably the most important consequence economically of covid is that rich people will accumulate enormous amounts of money and I genuinely mean enormous amounts of money we're talking about your average Rich individual accumulating 1002 200 300,000 you know the average billionaire increased their wealth by I think something like 700 million bounds in the first year of Co right so enormous accumulations of wealth by the rich if you know that's going to happen it's just totally insane to predict anything other than a massive increase in house prices because what the rich people do with their money they buy assets um they lend it out to people who want to take out mortgages they essentially they drive house prices up rich people get a ton of money house prices will go up stock prices will go up I made those predictions and that is what happened but then a really interesting thing started to happen which was about 2 years ago interest rates started to rise in this country from effectively zero to just about 5% similar in the US similarish in Europe they didn't reach quite the same high levels and that changed the dynamic basically so that moved us into this new situation which is economists and Traders have this very strong belief that when interest rates go up asset prices and house prices should fall and that is for a very understandable reason which is in the case of house prices you people can't get a mortgage if if interest rates are super high and lots of people lots of you will have witnessed that that it's much more difficult to get a mortgage when interest rates go up and also on the flip side you know rich people can now get 5% interest on their cash so maybe they're not going to buy houses they'll just they'll keep the cash and they'll they'll get their 5% interest rate and they'll be happy with that and everybody started to predict you know in many cases the same people who predicted a house price crash at the beginning of Co came back and said okay well now now we we definitely going to get house price crash now because not only have we got this terrible economy but we've also got really high interest rates but what actually happened was that you know basically house prices they sort of stumbled a little bit but I think the broad picture of house price depends where you look is they Rose super quickly sort of 30% or so in two years and then since then they've kind of maybe stumbled down five six percenti um and it it was during this rapid riseing interest rates that I gave my interview uh with Aron bastani on Nar media which you can find on YouTube that was when interest rates had just started to rise really quickly and then everybody was saying house price are definitely going to fall and I came out and said no I think I think house prices will actually in the long run continue to rise and and I think I've kind of been born out again here this crash hasn't happened but the house price growth has definitely slowed and I think we could already sort of see when when I said that 18 months ago that that house prices were basically stopping and they were not going up any longer so now everybody's saying and they have been saying for the last couple of years especially the last sort of 6 months 12 months why on Earth have house prices not Fallen despite these massive rises in interest rates and people have been saying the same thing about stock prices like if stock prices go up very aggressively all the classic e economics says stock prices should fall but um I checked the stock markets yesterday before I filmed this video we're filming this in the middle of December yesterday French stock market hit a new alltime high German stock market a new all-time high US Stock Market is just below the all-time high which it hit basically before the rates went up and this is the same in most of the world it most Global stock markets are at or through alltime historic highs and I think this is first of something worth realizing because I I don't think people are aware that in the space we're in now in the economy where living standards are collapsing there's a sort of broad consensus we're in economic crisis I would think you could justify be call an economic disaster that the vast majority of global stock markets are at or through their all-time highs that's the first thing which I think is first is worth internalizing and the second thing is why has again everybody been so wrong why is it that despite these massive increases in interest rates we haven't seen these house price Falls we haven't seen these stock market Falls and me personally I'm not surprised by what has happened if you go back and look at my predictions at the beginning of covid I said we would have massive increases in inflation and we would have increases in in interest rates so my predictions that house prices would rise and stock prices would rise which they have was factoring in an acceptance of the fact that inflation and interest rates would rise and the reason I was able to do that is because I understood this basic driver which once again is the big thing everyone is missing which is that rich people have accumulated an unbelievably enormous amount of money and I think increasingly the big driving Factor behind economic incorrectness I think as a Trader you always want to work out what is the big thing that's being missed and the big thing that has been missed since the beginning of Co and still is being missed now is that the rich have accumulated an unbelievably enormous amount of money if you understand that then everything that has happened from the beginning of covid since the rise in interest rates makes total sense right if the rich accumulate a ton of money asset prices will rise but also inflation will rise they will start buying more stuff you know they will increase their consumption of rental housing they they will buy more houses they will they will rent bigger houses that will push rents up that will push prices up um and then that will push inflation up and that will probably push interest rates up but if the reason that interest rates have gone up is because rich people have an enormous amount of money then of course prices are not going to fall because the driving force here the first impetus the first push is a massive accumulation of cash of richer people so I think everything is really consistent with that I think if you understand the first move in this economic crisis as being an enormous accumulation of cash by wealthy people then you would expect exactly what we have seen which is pretty much exactly what I've been predicting throughout which is massive inflation big increase in asset prices big increase in interest rates but asset prices don't fall that's that's basically what I've been saying but what is interesting now is I think we're moving into the next stage of this which which is which is what I've been calling for a long time which is if in my opinion the inflation is caused by this massive transition of cash gift of cash essentially from the government to the rich then you would expect that inflation to be kind of oneoff and then stop because that gift was a massive oneoff gift and then it didn't stop essentially but it it leveled out a lot which means that the inflation happens once and then basically goes away um and that is you know what I predicted in my predictions a year ago a year and a half again it is basically what what we see inflation is collapsing all across the world it is still above the 2% Target in most countries including here in the UK at the moment but the direction seems to be aggressively down and now economists are starting to predict that central banks will start cutting um and I put a few bets on early this year that at that time early this year markets were saying that UK interest rates would reach nearly 6% whereas in the middle of next year 2024 this might be 2024 and this goes out actually so in the middle of 2024 interest rates were expected to reach nearly 6% here in the UK now they're expected to be only just above 4% and I think that even that to be honest that prediction might be too high I think Rate rates might end up going down even lower than that and the reason for that is at the same time as the rich have accumulate a ton of money and this will be very visible and obvious to to anybody watching from ordinary background the financial situation of ordinary families has been being extremely tightly squeezed and it is ultimately ordinary families that that drive the economy and Rich families tend to buy assets so as ordinary families get poor inflation will will start the fall now as those interest rates come down what those interest rates did and we can all see that is they they temporarily stopped that aggressive rise and asset prices so so once we know that rich people have a ton of money asset prices should go through the roof because the amount of money they accumulated Kobe was truly enormous but the interest rates do two things one they make rich people happy to sit on the cash taking interest rate taking interest from the government because they're making 5% interest on it and two it prevents them from doing mortgage lending because if you go to the bank you can't get a mortgage because interest rates are too high so they can't actually lend the money out once those rates come down those two factors will end rich people will stop being content to sit on this enormous pile of cash they'll go back to buying assets again and they will start they will start doing more mortgage lending again which which will drive asset prices and house prices up so I think we're moving into the next stage of this now which is another really really aggressive asset price inflation including house prices of course so I wanted to talk a little bit about this concept of once rates come down the RIT will start using this enormous pile of money again to buy assets because I think there is this concept that exists and I I hear economists on the news suggest this kind of idea a lot which is that okay savings are really high right now the rich have a load of savings so they need to spend it down they'll spend the savings and the savings will go away and they'll stop having their effect and I think this is this is just not how money works if I have a ton of savings and I buy your house I don't don't have the savings anymore but you do have the savings money doesn't work like that once the government gives a ton of money out as it has done somebody has to hold on to that money until the government taxes it back money doesn't disappear you cannot simply disappear your money you can only give it to somebody else so what this means is the idea that this massive accumulation of savings by the rich is going to have a one-off temporary effect is just basically wrong this will have a massive driving effect for a long period of time because the rich are going to go around trying to buy all of the assets but who owns most of the assets it's the rich so so when the rich try to buy assets all they do is they they buy the assets from one another they drive the asset prices up and the money this enormous amount of savings simply circulates between the rich people and that they are effectively unable to unsuccessful at getting rid of their savings they simply cannot get rid of their savings it's impossible because they're buying the assets from each other so how do rich people actually get rid of their savings well the only way rich people can get rid of these enormous savings which they've accumulated from the government is to buy assets from somebody who is not rich but what groups are there in society of people who are not rich who own assets there's basically only the sort of property owning middle class there are still a lot of non-rich people who own property in this country and the other obvious example is the government so it creates this massive drive for the rich to buy assets from the middle class to buy assets from government the other thing they can do is they can lend that money to the middle class for example mortgage lending to the government for example the government will need a lot more money to support the rapidly increasing poverty in the country but in both cases they they get the money back right if I lend you money from mortgage and you buy a house from a rich person I get the money back when you buy the house if I lend the money to government they use it to pay your rent I get the money when when it when you pay your rent so this money creates a force it's kind of a vacuum in a sense to suck the wealth away from the middle class away from the government to drive the middle class into debt to drive the government into debt and and that is the only possible way that the rich can get rid of this enormous accumulated money so I think that is basically the state of play that is where we are I think we're moving into a really interesting next phase of this which I want to talk about a bit which is rates inflation will come down it's already come down a lot thanks for he did it apparently in every country in the world um interest rates will come down and asset prices and house prices will increase enormously and that will happen essentially to the rich buying assets from each other but also aggressively buying the assets of the middle class bankrupting the middle class buying assets from the government bankrupt in the government and we're really seeing that we're seeing decreased Financial positions of the middle class decreased Financial positions of the government and massively increased Financial positions of the Rich and I think underneath this I want wanted to bring in quickly something which I will probably talk more about in future videos there's a general concept here which I think is useful to understand which is something that I wrote about when I was at University um and something which I think about a lot which is that when inequality increases and it has increased really rapidly especially in the last few years it changes the shape of the economy means that rich people have more wealth and Ordinary People and governments have less wealth and what that means is society as a whole starts to demand less goods and services and demand more assets and that is because ordinary people spend the vast majority of their income in their lives and rich people save which means essentially use to buy assets the vast majority of their income so as inequality increases Ordinary People spending power goes down rich people spending power goes up which means society as a whole says we don't want goods and services anymore we want assets well who is that good for people with assets the rich who is that bad for people who produce goods and services which is working people so it it creates this kind of centripedal force into if the rich are richer it benefits the rich because they want the things which the rich have but it also means you get this interesting disconnect between two kinds of inflation and I probably will talk about this more in other videos but when you see inflation spoken about on the news they are normally talking about things like CPI Consumer Price inflation which is inflation in goods and services it doesn't look at inflation in things like asset prices but when economies are becoming rapidly more unequal they don't really want goods and services because Ordinary People are becoming poorer what they want is assets because rich people are becoming richer so you get a natural deflation in goods and services prices and inflation in assets but we don't look at the asset inflation central banks when they when they consider what interest rate to do the news when they're talking about inflation they only look at goods and services inflation so we will move into a situation where goods and service inflation and in particular wage inflation is very very low maybe even negative which means Central bank's cut rates which I think they will start doing relatively quickly and then you get this like double whammy impact on asset prices which is first of all the rich are making a ton of money so assets want to go up secondly interest rates are collapsing which so assets go up even more so you get this kind of Disconnect which is the ordinary economy is basically there's not a lot of inflation and I think we will move into this world soon so interest rates come down whereas asset prices are going massively through the roof and that's what we saw after 20 8 and I think that's what we're going to move into in the next sort of year or two here in the UK in the rest of the world and I think we need to have a think about what that means for our society because you if you haven't watched it I recommend watch the video on this channel called the asset economy because we we I talk a lot in that video about what it means for us as a society and the different groups of people in society if asset prices and house prices go up progressively which I think they will do shortly but I think the most interesting thing about it is in my opinion increasing asset prices and increasing house prices will be bad for 90% of of society and I think some people might be surprised to hear that because I think a lot of families that own their own property and a big chunk of families in this country still do own their own property will feel like they're winning when house prices go up but the truth of the matter is the only way to actually benefit personally from rising house prices is to sell your home basically and you know as more and more young people are seeing it is becom increasingly impossible to buy a home if you don't have money from your parents which means that if the older generation sells their home to benefit from The increased asset prices then their younger Generations their kids and grandkids will basically become homeless and will basically be stuck in poverty essentially forever so I think we need to think a a lot about what going to mean for our society when house prices go up even more I think it will impoverish you know 80 90% of our society but I think it would also be hugely politically divisive because there will be a lot of families that own property that will feel like it's a good thing for them that will want to support it despite the fact that it's long run impoverishing their family so I think we need to prepare for this basically we need to understand ourselves that Rising house prices is part of a mechanism which is impoverishing ordinary families we need to understand that we need to share that especially with people perhaps on the older generation who own property who think it's good we need to be able to explain to them and to other people how these Rising property prices are going to really impoverish future Generations so my end message on this is things are going to change relatively quickly we're going to move into a complicated space where the economy stays terrible and I think it will get worse living standards stay terrible I think they will get worse but asset prices and house prices will start to increase and that that could be very divisive in our societies um what you need to understand what you need to convince your parents and grandparents to understand if you can is that this is not Society getting richer this is society getting poorer living standards for the masses are getting worse and will continue to get worse that is a consequence of the mass massively increasing inequality and massively increasing wealth of the rich in our societies the only way to stop that is to tax rich people more aggressively so the ordinary people can have a fairer share of what we produce in our societies um we can do that if we tax the rich we can make life better I'm going to be pushing that on this channel so please share this video with your friends and family support us and um yeah help us stop things from being a disaster thank you very much

Channel: Garys Economics

Views: 501,809

Keywords: Wealth Inequality, Enough is Enough, Tax Wealth Not Work, Economics of Covid, Rich get Richer, Poor get Poorer, Economics Explained, Tax the Rich, End Austerity, Billionaire, Poverty

Id: kNUNR2NZvFM

Length: 25min 28sec (1528 seconds)

Published: Sun Jan 07 2024