- May 28, 2006 at 12:38 pm #51855
When I read the economist and I see that the change in the broad money supply in the Euro area stands at + 8,6% and for Britain at + 13,1%, I wonder what the effect will be on the property prices. What these numbers are telling us is, in fact, that there is a lot of extra money coming to the market that will be invested in something, whether it is bonds, shares, commodities or properties. I assume that at least a part of that new money is going to find its way into property, if so, wouldn’t that lead to a next round of price increases? Or, alternatively, are we going to inflate our way out of a serious correction in property prices?
- May 28, 2006 at 5:18 pm #62454
We have had a flood of liquidity in Western economies to forestall the deflationary impact of low cost labour in India, China and elsewhere. The inflationary policy has failed because much of the money was channeled into non productive assets such as property from Florida to Spain. Bond markets are pricing in rising interest rates over the next decade. I think that rates may actually fall however in two to three years time; much as they did in Japan in the early 90’s, if the West enters a recession.
The markets are jumpy at present a flight from risk seems on a hair trigger. 😯
- May 28, 2006 at 5:33 pm #62455
I think that the length of the recession in Japan was mainly due to the fact that a big chunk of excess liquidity put in the system by Japanese central bank went straight into American treasury bonds and not into the local economy. I do not see that happening in Europe.
The real underlying reason why I think we are going to enter an inflationary is that many people are way over their head in debt (because of banks giving credit too easy) and the only remedy I see fit is creating inflation, or we are going to have a credit crisis not seen before I am afraid, which central banks will try to avoid by printing money at full speed. I would also like to note that property prices historically have never really gone down in my opnion (once again Japan the exception); although many believe that this time things are different…
- May 28, 2006 at 10:24 pm #62461
‘Never really gone down’
Well it depends Tony, in Florida after the great crash of 1926 property prices didn’t recover even in nominal term until the 1980’s. Hong Kong, Bangkok, Germany have seen prices fall for over a decade. If you believe that Western governments will attempt to inflate their way out of the present impasse, then I would imagine that the Euro Bond and US Treasuries markets would react accordingly driving up yields on long dated debt. No such thing as a free lunch.
- May 29, 2006 at 5:25 pm #62472
Thx Ponzi for your reply,
The following link gives an alternative explanation: central banks are flooding the system with money to keep interest rates low, even though economic activity and inflation indicators would justify an increase; this way we are experimenting low interest rates (to keep mortgage defaults to a minimum) combined with high inflation, because so much new money is being entered into the system. Add to that the fact that inflation indicators underestimate the true level of inflation.
In respect to the examples you state of falling Real Estate prices; correct me if I am wrong, but they are either stand alone cases (Hong Kong, Florida) or they are due to economic meltdown (Japan & Germany). The economy in the European Union hasn’t looked as good as it does today for a very long time, so I wouldn’t be too pessimistic.
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