Fears of inflation are accelerating trends which were already putting home ownership beyond the reach of millennials- and America might well be headed towards the Housing Crisis already seen in the UK.
Most analysts might have noted the shift from service consumption to physical goods caused by COVID restriction, but what many fail to realise is there are key capacity issues which are holding up global supply chains. Chief amongst these factors is the physical supply of 40ft container which carry physical goods around the world. Simply put, containers are continuing to flow across the seas and oceans from Asia, but often these containers stack up on the other side of the Pacific or in Europe, leading to increased costs for transported goods.
Fears of shortages and delays in supply have only made the situation worse, as goods which are in particularly high demand find themselves warehoused within the distribution chain, with many suppliers moving from ‘just in time’ to a ‘just in case’ mentality. You may have noticed some of the shortages yourself, if you’ve ordered high-end processors or graphic cards, and then found yourself waiting for months- even though the card or processor has been out for months.
The problem is many investors and much of Wall Street itself has been misreading this as the start of a hyperinflationary cycle and have been shifting their money into assets that hold their value against inflation. Don’t get me wrong, I’m no fan of money printing or Modern Monetary Theory, even though in theory of the latter should work. The world we are living has excess capacity embedded in the system in virtually every area of the economy, just waiting for demand to rise.
The problem comes with the behavioural economics of Government debt. Modern Monetary Theory works fine whilst Government debt is below 90% of GDP, because every dollar spent generates added money in stimulus (through the multiplier effect) which can later be recouped through taxing a fundamentally healthier economy. Unfortunately, once the 90% threshold is breached the returns fall below one dollar generated per dollar spent.
The main reason for this is what is happening now. Capital which might otherwise be deployed in productive profit generating businesses gets shifted into assets like gold or the purchase of properties to rent, and this second trend is vital to the average Joe, because it generally involves rent rises or increased house prices. It’s also not capitalism- because it raises prices without creating value. The far more popular term is rentier, or rent-seeking, economics.
Pay particular attention to this sentence, because I will come back to it:
“We’ll come back to the point about housing scarcity made by former L.A. Times Architecture Critic Christopher Hawthorne above, but the pre-pandemic housing affordability crisis and the Great Recession it followed offer a litany of evidence about the negative consequences of a shift from private home ownership to corporate land ownership.”
So, I think two things are happening here. First there is a sudden rush towards asset-holding driven by a misreading of the American and Global economies, particularly in relation to hyperinflation. These fears will recede as service sectors across the West begin to reopen and it becomes clear that the vaccines prevent hospitalisation and death, regardless of case numbers.
Second, it’s accelerated an underlying trend which is a terrible development for anyone who is trying to get their first foot on the housing ladder. Millennials moan a lot about all manner of social issues, but there are two things they have every right to complain about- the price of higher education and the cost of housing in the parts of the country where the jobs are. In many ways, their generation has been cheated of all the building blocks needed to settle down into a long-term relationship, get married and have kids.
It’s a tragedy for America as population replacement figures flatline, and parents eager to have grandkids will find their hopes frustrated, for the most part. To be fair, America’s pending Housing Crisis has a lot to do with Government. Local Government in particular can impose insane regulatory restrictions and costs which add considerably to the problem, increasing both the base cost of new housing and increasing price through exacerbated demand. We can see this clearly by contrasting State-by-State housing supply and pricing- with places like San Francisco failing miserably and causing homelessness, and cities like Houston fairing better through a libertarian approach to land use.
But there is a deeper problem. Recently, I’ve been reading Liam Halligan’s Home Truths- a searing expose on how the UK Housing Crisis was created and how successive governments on both the Left and the Right have failed to fix it. I haven’t finished it yet, but from what I have read so far, it would appear that scarce or expensive building land lends itself automatically to oligopoly, or Crony Capitalism, as smaller home builders are forced out of the market, because they can’t afford to buy building plots on which to build.
This leads to a shrinking number of competitors, most of whom build in bulk, and who can collectively artificially ensure that supply never reaches demand. This in turn leads to ever increasing house prices, allowing them to maximise their profits through price gouging. In the UK we have six major building firms, with new housing substantially supplied by the top three. It’s an investors wet dream, because they can simply buy land and sit back and watch it appreciate in value- which is pretty much guaranteed, given the scarcity of supply. Most of the current American problem seems to be concentrated further back in the pipeline, with an increase in the corporate control of desirable building land, but it is only a matter of time before SME builders will be forced out of the market by the artificial inflation of scarcity costs.
In the South of the UK an acre of building land can cost in excess of £1 million, which is a lot if you consider that this only fits 4 to 6 detached homes without much in the way of gardens. In the North the figure is £300,000, which is still substantial if you consider this is a cost which is passed onto the buyer before the foundations are even laid down.
My concern is that America’s housing may be headed in the same direction as the UK’s. Don’t let it happen to your country. It’s already apparent in the 20 American cities which have experienced 50% of all American economic growth, and it’s making its way out to suburbia as we speak. Here in the UK we have over 300,000 homeless, that’s roughly 1 in every 200 citizens in a country of around 65 million. And almost all of it is caused by over 30 years of government failure to ensure that there is ample cheap building land for small firms to build upon.
And don’t let your government fob you off with Help to Buy schemes which help young people get a foot on the housing ladder- that only makes the situation worse by stoking demand, because it’s a supply side problem. The reason I’m posting this to r/WallStreetBets is partly because I want to increase the readership of my substack (which is free to view and comment), but I’m also hoping that some of the boffins might see a way out of this dystopian nightmare.
In the UK, Liam Halligan’s book almost caused major reforms. The then Chancellor of Exchequer Sajid Javid wanted to adopt many of the proposals. It also received a great deal of support from leading figures in the House of Lords. Think about that for a second- conservatives aren’t generally known for wanting government to intervene in the market. But that was sort of the point- the UK housing market is no longer a free market. American housing might be headed the same way.
Unfortunately, Sajid Javid was subsequently forced to resign from office at the eleventh hour because he was restricted from setting his own economic agenda- which is generally more normal for the UK, with the notable exception of Chancellors who served under Margaret Thatcher. It is highly likely that housing played a key role in this decision. UK housing operates under an Iron Triangle of Interest, which is by no means restricted to this side of the Atlantic.
The other thing which many who worry about hyperinflation have not taken into consideration, is the general weakness of the US dollar relative to other major global currencies. In particular, the dollar is trading down against the yuan, due largely to the fact that China stands almost alone amongst the advanced economies of the world in pursuing more orthodox monetarist policies. But it’s not just the yuan, generally the dollar is trading poorly against most of world’s major currencies, and higher costs for physical goods through import channels caused by currency exchange rates, has done little to allay the fears of those who worry about hyperinflation- ft source, wsj opinion.
Appreciate your writing. Joined Quillete but always found comments left by you and others (tersitus, Isiah to name a few) better than the articles. Just found you here. Best of luck.
Enjoyed the article. Which way the economy ? Are we exiting an inflationary period caused by a one time covid hiccup? Or is inflation creating more inflation creating more inflation creating more inflation eventually to be the dealt with by very high interest rates? And as a dollar holder, should I long the British Pound? Nice to see your writings!
Thank you for the excellent article. As a Canadian we are unfortunately falling into a similar trap you mention. One of our factors also include Chinese(not a slur but fact) purchasers of homes, which drive up the costs for honest homeowner actors. Does this play out in the UK to the extent that it is a troubling concern or is it still mainly a corporate factor you outline?
Appreciate your writing. Joined Quillete but always found comments left by you and others (tersitus, Isiah to name a few) better than the articles. Just found you here. Best of luck.
Excellent stuff again man. What the heck's a boffin?
Thanks Geary, thoughtful as always.
Enjoyed the article. Which way the economy ? Are we exiting an inflationary period caused by a one time covid hiccup? Or is inflation creating more inflation creating more inflation creating more inflation eventually to be the dealt with by very high interest rates? And as a dollar holder, should I long the British Pound? Nice to see your writings!
Thank you for the excellent article. As a Canadian we are unfortunately falling into a similar trap you mention. One of our factors also include Chinese(not a slur but fact) purchasers of homes, which drive up the costs for honest homeowner actors. Does this play out in the UK to the extent that it is a troubling concern or is it still mainly a corporate factor you outline?