Latest / Stephanomics / The Housing Slowdown Could Become a Global Meltdown

Transcript

The Housing Slowdown Could Become a Global Meltdown · Stephanomics

0:07
Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
0:09
Speaker 1: global economy to you. And in this last episode of
0:13
Speaker 1: the series, we have to talk about housing. Where we
0:16
Speaker 1: live is often a big part of who we are.
0:18
Speaker 1: If we're lucky, it's also our main source of wealth,
0:21
Speaker 1: quite possibly our retirement plan. But for many many others,
0:26
Speaker 1: finding and keeping a home it's what keeps them living
0:29
Speaker 1: on the edge, a constant financial burden and source of stress.
0:33
Speaker 1: And because it does play such a big role in
0:35
Speaker 1: all our lives, property as also historically played an outsized
0:40
Speaker 1: role in the ups and downs of the economy. In
0:42
Speaker 1: a little while, I'll be taking a quick tour of
0:44
Speaker 1: the world's property markets with Bloomberg economist near Our Shah,
0:48
Speaker 1: warming up for an expansive, even philosophical conversation with Bloomberg
0:53
Speaker 1: Star columnist John Authors, asking why it is that real
0:56
Speaker 1: estate causes us so much trouble and which of theollowing
1:00
Speaker 1: are most likely to blow up the global economy, this
1:03
Speaker 1: time around bankrupt property developers in New York or China.
1:08
Speaker 1: But first, US economy reporter Maria Paula Micharris Doris has
1:12
Speaker 1: this ground level view of the increasingly cutthroat market for
1:17
Speaker 1: US rentals, where suppliers tight and costs for even long
1:21
Speaker 1: time renters are soaring despite whether the rents go up
1:37
Speaker 1: or not. I can't afford anything until I get some
1:41
Speaker 1: help from the government with disability from solving secured so
1:45
Speaker 1: that the story is, yes, we have higher rent and
1:47
Speaker 1: now the higher rents are now backering in my ability
1:50
Speaker 1: to rent an apartment in my busical condition because the
1:55
Speaker 1: rents are higher. Deny Keiner had a plan to deal
1:59
Speaker 1: with the big increase in the monthly rent for his
2:01
Speaker 1: as big as apartment to spring. You figure he would
2:05
Speaker 1: just take extra ships at his pretending job on the strip.
2:09
Speaker 1: Then life intervened a diagnosis of pancreatic cancer and made
2:14
Speaker 1: it hard for him to move, let alone work, and
2:17
Speaker 1: he lost his job. Now he's facing eviction. I don't
2:22
Speaker 1: have enough strength. I'm physically able to walk around like
2:27
Speaker 1: a regular person. I can walk maybe a quarter mile
2:30
Speaker 1: and then I'm done physically. So the question at some
2:34
Speaker 1: point in my life, this terminal disease will kick in
2:38
Speaker 1: to where I can't do anything like even work from
2:42
Speaker 1: a laptop. Cannery is among the eight point four million
2:47
Speaker 1: Americans who are laid on rent payments as prices continue
2:50
Speaker 1: to increase. According to data by the U S and
2:53
Speaker 1: SIS Bureau, that is of o U S renters. As
2:59
Speaker 1: rental cut sore across the country, Americans are struggling to
3:03
Speaker 1: keep up. Single family rents grows by a record of
3:07
Speaker 1: fourteen percent nationally over the past year, according to core Logic,
3:12
Speaker 1: a real state data firm, But the increases were even
3:16
Speaker 1: more dramatic in cities that became popular living destinations during
3:19
Speaker 1: the pandemic, including a four one percent increase in Miami,
3:24
Speaker 1: a twenties six percent rise in Orlando, and an eighteen
3:28
Speaker 1: percent jump in Phoenix. Some tenants are seeing their mostly
3:32
Speaker 1: rent bills rise by several hundred dollars even after years
3:36
Speaker 1: of living in the same apartment. The government block landlords
3:40
Speaker 1: from a big tim many people during the pandemic, but
3:43
Speaker 1: those moratoriums are ending, so too are many emergency rental
3:48
Speaker 1: assistance programs. Now there's a very real chance many Americans
3:53
Speaker 1: could be forced out of their homes. It's pretty much
3:56
Speaker 1: the perfect storm for renters right now. That was Kate Reynolds,
4:01
Speaker 1: principal policy associated at the Washington based Urban Institute. So
4:05
Speaker 1: emergency rental release was authorized as a response to the
4:08
Speaker 1: pandemic a total of forty seven billion dollars. And these
4:12
Speaker 1: were authorized back at the beginning of What we're seeing
4:16
Speaker 1: now is that a lot of that funding has been
4:18
Speaker 1: spent down and those renters and and their landlords are
4:22
Speaker 1: you know, don't have a place to turn if they're
4:24
Speaker 1: unable to pay the rent. She says that for the
4:27
Speaker 1: first time since the pandemic began, an increasing number of
4:30
Speaker 1: Americans are on their own to COVID strowing housing costs
4:35
Speaker 1: during the pandemic. Combination of national, state and local moratoriums
4:40
Speaker 1: you have a lifeline to millions of Americans thrown out
4:43
Speaker 1: of work or forced to stay home to care for children.
4:48
Speaker 1: Starting in March, the Federal Cares Act put in the
4:52
Speaker 1: initial one d twenty day ban on evictions that covered
4:56
Speaker 1: as many as forty five percent of U S renters
5:00
Speaker 1: according to Urban Insitute estimates. That was followed up by
5:04
Speaker 1: a sweeping moratorium imposed by the Federal Centers for the
5:09
Speaker 1: c Control and Prevention, which covered millions more American throughout
5:14
Speaker 1: parts of However, by August of last year, the US
5:21
Speaker 1: Supreme Court struck down the federal moratorium and in art
5:24
Speaker 1: evictions to RACEUME. So for the first time ever UM
5:29
Speaker 1: in June, we saw median rant prices go above two
5:34
Speaker 1: thousand dollars a month, and you have inflation on essentials
5:38
Speaker 1: like gas, food and groceries as well as energy costs.
5:42
Speaker 1: And then on top of all of that, eviction moratoria
5:45
Speaker 1: were also extended during the pandemic, both by Congress and
5:51
Speaker 1: by UM. The Centers for Disease Control and Prevention, and
5:56
Speaker 1: some local places also had policies and eas. All of
6:01
Speaker 1: those have expired. There's a few local exceptions. But what
6:06
Speaker 1: we did see is that UM, during the time that
6:09
Speaker 1: those eviction moratory were in place, that eviction filings really
6:13
Speaker 1: did stay below average levels. And so all of these
6:17
Speaker 1: things are sort of happening at the same time, which
6:22
Speaker 1: is really difficult for a lot of friends or households.
6:25
Speaker 1: There is a great research study out of California that
6:30
Speaker 1: came out, you know, mid in mid crisis UM, that
6:35
Speaker 1: basically showed that a lot of renter households had what
6:38
Speaker 1: we call shadow debts UM, so renters were taking on
6:43
Speaker 1: debt in order to pay their rent because you know,
6:46
Speaker 1: folks worry about UM, you know, in eviction filing or
6:50
Speaker 1: losing their housing and so a lot of times we've
6:53
Speaker 1: seen that. UM. What we say sometimes is that the
6:56
Speaker 1: rent eats first, UM. And what that means is that folks, uh,
7:01
Speaker 1: you know, put money their money towards rents, even if
7:04
Speaker 1: it means that they can't, you know, buy groceries, even
7:08
Speaker 1: when someone isn't facing eviction. A shortage of available housing
7:12
Speaker 1: and a search of people moving to warmer climates has
7:15
Speaker 1: given landlords an advantage over their tenants. In many cases,
7:19
Speaker 1: then there's are boosting rents by hundreds of dollars and
7:23
Speaker 1: renters have those choice but to pay for it. Last Yanuary,
7:28
Speaker 1: Carlia Kelly was unable to renew the lease of the
7:30
Speaker 1: two bedroom apartment where she has lived since the thousand
7:34
Speaker 1: nine in the Atlanta suburb of Duluth, Georgia. People from
7:38
Speaker 1: the northeastern California were higher than here. They think george
7:42
Speaker 1: is less expensive and where people can work remotely from
7:46
Speaker 1: a number of jobs. Now they don't necessarily have to
7:48
Speaker 1: be where their company is headquartered. So we do have
7:52
Speaker 1: a big influx of people from the Northeast and from
7:55
Speaker 1: California moving to Georgia. So there was that thing shortage
7:59
Speaker 1: of a part the company that owned the building decided
8:03
Speaker 1: to the renovations that could accommodate new residents who moved
8:06
Speaker 1: from more expensive cities and are willing to pay more
8:09
Speaker 1: for rent. The landlord offered her a space in another
8:12
Speaker 1: of its buildings, bosting her rent by almost six hundred
8:15
Speaker 1: dollars a month. And the night I got the keys,
8:18
Speaker 1: there were cockroaches running all around the apartment. That was like,
8:22
Speaker 1: pictures were rusted. Light coaches didn't work. Carpeting in the
8:27
Speaker 1: bedrooms was old, um thoughts that didn't work. I mean,
8:31
Speaker 1: there was just a whole list of stuff. The parments
8:34
Speaker 1: builder hadn't been changed. Um, it was just it was horrible.
8:40
Speaker 1: Back in Las Vegas, Keener's rent went from seven hundred
8:43
Speaker 1: fifty to one thousand dollars for our one bedroom, one
8:46
Speaker 1: bathroom apartment. That might sound cheap for New Yorkers and Californians,
8:51
Speaker 1: but very expensive for people in Las Vegas. Unable to
8:55
Speaker 1: work and facing possible eviction. He's hoping to win financial
9:00
Speaker 1: assistance from a government program that helps low income Americans
9:04
Speaker 1: with housing costs. However, his application has been tied up
9:09
Speaker 1: for months. The money is they opened the federal government
9:13
Speaker 1: and needs to corps, to these very i agencies. But
9:16
Speaker 1: there's so many people applying for this, but they've called
9:19
Speaker 1: created a weights so I can even apply for the
9:22
Speaker 1: month with the help of a lawyer. He's doing an
9:25
Speaker 1: eviction appeal to buy more time before he has nowhere
9:28
Speaker 1: else to go. As we speak, he's backing his belongings
9:32
Speaker 1: into storage to be pretty moved to a homeless shelter
9:35
Speaker 1: whenever he gets evicted. For Bloomberg News, this is Mariab Stories.
9:46
Speaker 1: I wanted to start with that piece because conversations about
9:49
Speaker 1: property so often revolve around what's going to happen to
9:52
Speaker 1: house prices and mortgage rates. We talked less about the
9:55
Speaker 1: consequences of those things for a renter just looking for
9:58
Speaker 1: somewhere affordable to live. But super low mortgage rates are
10:02
Speaker 1: one reason why property prices and rents have been going
10:05
Speaker 1: up and up around the world in recent years, and
10:08
Speaker 1: especially if you live in the US or the UK.
10:11
Speaker 1: You'll know that the property boom didn't let up during
10:13
Speaker 1: the pandemic. If anything, it accelerated. So now mortgage rates
10:18
Speaker 1: are finally heading up in many countries. You have to
10:21
Speaker 1: wonder which property market will pop first, and what the
10:25
Speaker 1: collateral damage will be our UK economists. Near Our Shah
10:28
Speaker 1: has been looking at a series of indicators for nineteen
10:31
Speaker 1: property markets around the world. Has some answers to that question.
10:35
Speaker 1: Near Ash, thank you very much for doing this, Thank
10:37
Speaker 1: you for having me on, Stephanie. So we should cut
10:39
Speaker 1: to the chase. Everyone wants to know whether they're sitting
10:42
Speaker 1: in a place that's about to blow up. So which
10:44
Speaker 1: countries came top in our in our rankings as places
10:48
Speaker 1: to watch? So New Zealand camp top, but Australian Cannedy
10:51
Speaker 1: were up there as well, and all of those countries
10:54
Speaker 1: are showing now signs of cooling. The more striking thing
10:58
Speaker 1: is Toronto, where as you've seen quite dramatic price falls,
11:02
Speaker 1: and so that's something to watch out having had big
11:04
Speaker 1: house price rises for a long indeed exactly exactly. But
11:08
Speaker 1: the other places a Czech Republic is well up there
11:12
Speaker 1: from the European Union, but also Portugal within the UR Area.
11:16
Speaker 1: Now both those are not actually sharing signs of cooling
11:19
Speaker 1: as yet, and so but something to want to look
11:21
Speaker 1: out for, especially as the ECB starts raising rates from
11:25
Speaker 1: this month and possibly by fifty basis points in September.
11:29
Speaker 1: It's interesting because a lot of the countries that we mentioned,
11:32
Speaker 1: certainly Australia and Canada, are actually countries that kind of
11:35
Speaker 1: didn't have a housing market crash in the global financial crisis.
11:39
Speaker 1: They sort of dodged that bullet. But it also meant
11:41
Speaker 1: that prizes were able to just keep going up and
11:43
Speaker 1: up and up and up, and they get even less affordable.
11:46
Speaker 1: There is a lot of focus on America, given that
11:49
Speaker 1: it was the U s sub prime market that played
11:51
Speaker 1: such a big role in triggering that global financial crisis
11:54
Speaker 1: in two thousand and eight. Actually, there was a fascinating
11:56
Speaker 1: statistic that the Deputy Governor of the Bank of England
11:59
Speaker 1: then broad been calculated at the time. I remember he
12:02
Speaker 1: calculated that UK banks had lost a lot more money
12:05
Speaker 1: on US subprime assets going into that crisis than they
12:10
Speaker 1: ever did on the UK housing market. So people are
12:14
Speaker 1: looking again at the US and saying, could this now
12:17
Speaker 1: cause another global problem? Is it in a stronger position
12:21
Speaker 1: now than it was then? Well, you absolutely right to
12:23
Speaker 1: focus on the US. It is actually up there within
12:26
Speaker 1: what the country to look out for, um, But it
12:29
Speaker 1: is actually in a much stronger position than in two
12:32
Speaker 1: thousand and eight, and I think it's not only just
12:35
Speaker 1: tight lending standards than they were during the subprime crisis,
12:40
Speaker 1: it's also the quality of buyer and what I mean
12:42
Speaker 1: by that the last cycle, anyone could practically by get
12:46
Speaker 1: a mortgage. This time, it's been quite difficult for those
12:49
Speaker 1: on more wonderable incomes and so on to get a mortgage.
12:52
Speaker 1: So we already on a stronger platform in that sense.
12:55
Speaker 1: Sean Donald, who is often on this program, he had
12:57
Speaker 1: done some fascinating analysis of nicely that point. On the
13:01
Speaker 1: other from the other direction, that actually that it was
13:04
Speaker 1: many African American households who weren't particularly poor we're being
13:06
Speaker 1: shut out of the lending boom and the sort of
13:08
Speaker 1: mortgages that you've seen over the last few years in
13:11
Speaker 1: the US. I mean more broadly, households do seem to
13:15
Speaker 1: be in stronger shape. You know, we talk about the
13:17
Speaker 1: cash that's built up in different countries in the US
13:20
Speaker 1: and the UK from the COVID crisis. People still have
13:24
Speaker 1: a bit of extra cash in their bank accounts. Um
13:26
Speaker 1: in most cases you also have a fixed rate mortgage.
13:30
Speaker 1: So when the European Central Bank or the Bank of
13:32
Speaker 1: England raises interest rates or the FED, that doesn't immediately
13:36
Speaker 1: affect your the cost of your of your mortgage right then, absolutely.
13:41
Speaker 1: But when you talk about fixed rates, and the US
13:44
Speaker 1: has always been one of those countries where you used
13:46
Speaker 1: to have ten thirty years do make the average the
13:48
Speaker 1: normal to get a thirty year fixed rate, which I
13:50
Speaker 1: thought was incredible when I lived at the stakes, But
13:53
Speaker 1: globally now that has been going and so the UK
13:56
Speaker 1: you have eight actually over eighty percent of people on
14:00
Speaker 1: fixed rates, and significant of those are not going to
14:03
Speaker 1: be renewing them until two years time in the line,
14:06
Speaker 1: so they've got that breathing space to adjust and doubt
14:08
Speaker 1: you point out, and in the piece that you've written,
14:10
Speaker 1: you point out the house prices are record high globally.
14:13
Speaker 1: There's an International Monetary Fund Global House Price Index which
14:17
Speaker 1: is higher now even than it was before the last
14:20
Speaker 1: the last crash. And we know in the US and
14:23
Speaker 1: in UK and Europe it's a constant source of discussion
14:26
Speaker 1: how difficult it is for young people to get on
14:29
Speaker 1: the housing ladder to buy houses. Um. Yet you know,
14:33
Speaker 1: when government's tried to address this, the last thing that
14:37
Speaker 1: they would appeal to is the idea of actually a
14:39
Speaker 1: fall in house prices that would be the most direct
14:41
Speaker 1: way of making houses more affordable um and instead they
14:45
Speaker 1: have ways to coax people into buying houses and having
14:48
Speaker 1: less and needing less and less money to buy a house.
14:51
Speaker 1: We won't go into our respective ages, but you will
14:54
Speaker 1: have I'm sure lots of friends who have faced this issue,
14:57
Speaker 1: even with quite well paid jobs in in the UK
15:00
Speaker 1: and in London. Is it just that the people who
15:03
Speaker 1: have all the houses sit on now all this housing
15:06
Speaker 1: value and vote a lot more regularly than the young
15:10
Speaker 1: people that are struggling to get at home. It's quite
15:13
Speaker 1: an interesting thing, isn't it, Where the people who are
15:15
Speaker 1: on the housing ladder and so on are the ones
15:17
Speaker 1: who tend to vote the most. And the other sort
15:20
Speaker 1: of interesting thing on this is going back to how
15:24
Speaker 1: most the first time the UK in many decades, you've
15:28
Speaker 1: got more people who own their home outright then have mortgages.
15:32
Speaker 1: The government is quite aware of all this so sort
15:36
Speaker 1: of gives these trinkets of little things that we're doing
15:38
Speaker 1: something to get to you on the ladder. But home
15:40
Speaker 1: ownership has gone significantly down for those on the lowest
15:45
Speaker 1: income groups and young age people. Basically it's halved of
15:50
Speaker 1: the last I think fifteen years. And that's you know,
15:54
Speaker 1: that's quite a shocking really with you and your friends
15:57
Speaker 1: sort of you know, more or less starting out in
15:59
Speaker 1: the in the working force, or quite early in your careers.
16:02
Speaker 1: If you opened, if you if you turn on the
16:04
Speaker 1: TV tonight and they said house prices early on a
16:06
Speaker 1: four by ten percent or trying to strip out the
16:10
Speaker 1: fact that you're an economist, and you would worry about
16:12
Speaker 1: all the consequences. But just among your friends, I think
16:14
Speaker 1: they would think it was good news. I can definitely
16:16
Speaker 1: match for a few of my friends, they would be
16:17
Speaker 1: absolutely celebrating. They do wish there's their house and crash.
16:21
Speaker 1: I s this is about time, and they do resent
16:25
Speaker 1: all the enormous blenks that governments try and go to
16:28
Speaker 1: to prevent one. But again, this is the thing governments.
16:32
Speaker 1: If if there is a housing crash, there would be
16:35
Speaker 1: financial stability would be quite profound. You could have a
16:38
Speaker 1: far deeper recession and so on. So would actould be
16:40
Speaker 1: worsel for everyone. Sure that's what you say to your
16:43
Speaker 1: friends when they say, what a great thing it would be.
16:46
Speaker 1: Thank you very much, thank you very much. I'm delighted
16:57
Speaker 1: now to be drawing all the strands together with one
17:00
Speaker 1: of the stars in the world of financial journalism, John Authors,
17:04
Speaker 1: for many, many years one of the most read columnists
17:06
Speaker 1: for the Financial Times. In fact, we overlapped a little
17:08
Speaker 1: bit at the Ft and now definitely the most read
17:12
Speaker 1: columnists on finance and markets for Bloomberg. And John thank
17:16
Speaker 1: you so much for taking time to be part of
17:18
Speaker 1: our season finale. Well, thank you very much for that
17:22
Speaker 1: very kind introduction. Yes, it's good to be working together again,
17:27
Speaker 1: and appropriately given what we're going to talk about, your
17:29
Speaker 1: sitting and you're talking to us from from New York,
17:32
Speaker 1: and I wanted to focus on property in this episode,
17:35
Speaker 1: not only because the cost of housing affects all of
17:38
Speaker 1: us in one way or another, or because the ups
17:40
Speaker 1: and downs in the value of real estate has historically
17:43
Speaker 1: played such a role in amplifying the booms and busts
17:47
Speaker 1: in the broader economy, but also it occurred to me
17:51
Speaker 1: in a slightly more philosophical way that it seemed to
17:53
Speaker 1: embody the tensions the contradictions we're seeing playing out in
17:58
Speaker 1: this chapter of global capitalism. When you look at any
18:02
Speaker 1: given country where governments and those who have prospered in
18:06
Speaker 1: these years of rising asset prices they're all doing all
18:09
Speaker 1: they can to prop up property markets, But then you
18:12
Speaker 1: have a big chunk of the population, including lower income
18:15
Speaker 1: households and young people. We heard some of them at
18:17
Speaker 1: the beginning of the show who'd like nothing better than
18:20
Speaker 1: to see house prices fall and for housing finally to
18:23
Speaker 1: become more affordable. So, before we get into some of
18:26
Speaker 1: the sort of market dynamics, where you stand on this
18:28
Speaker 1: particular issue very much depends on where you live or
18:32
Speaker 1: don't live, doesn't it. Well, certainly where I live in Manhattan,
18:38
Speaker 1: the issue of affordability is about as acute as it's
18:42
Speaker 1: possible to imagine. One of the critical problems you always
18:45
Speaker 1: faced with their property is that even though people treated
18:49
Speaker 1: as an investment, it's something you truly need. Shelter is
18:54
Speaker 1: a very basic human need. You could argue it's almost
18:59
Speaker 1: an urged it's it's um goes back to John Locke
19:05
Speaker 1: and the whole idea of property rights, that you cannot
19:08
Speaker 1: really be a full fledged citizen or a full fledged
19:13
Speaker 1: participants in the economy without some property. So yes, it's
19:18
Speaker 1: this is always more difficult for governments and more dangerous
19:24
Speaker 1: for the economy than stocks. You could, let you know,
19:29
Speaker 1: in two thousands, um the dot com boom blew up,
19:33
Speaker 1: and there was a mild procession thereafter. In two thousand
19:36
Speaker 1: and seven, the housing bubble blew up and all hell
19:40
Speaker 1: broke loose, And there's a there's a reason for that.
19:42
Speaker 1: You people can bear the notion of losing money on
19:46
Speaker 1: other assets. Losing money on property is a fundamentally different proposition.
19:53
Speaker 1: And that's why I would say you should always in
19:57
Speaker 1: any kind of financial you know, tour of the horizon,
20:02
Speaker 1: you should always be on the lookout for whether real
20:05
Speaker 1: estate is in danger. That's what can tip a financial
20:09
Speaker 1: event into something more serious. There's a lot of economic
20:13
Speaker 1: evidence now that when you look back and you say, well,
20:17
Speaker 1: why wasn't you know, for example, the you know, the
20:20
Speaker 1: market crash of barely remembered now, and indeed the stock
20:26
Speaker 1: market was more or less back where it was by
20:28
Speaker 1: the end of that year. They didn't have that knock
20:31
Speaker 1: on effect for the broader economy that you did see
20:33
Speaker 1: for example before the global financial crisis when the U s.
20:36
Speaker 1: US housing obviously triggered all these things. So it definitely
20:38
Speaker 1: does seem to make the difference between the sort of
20:40
Speaker 1: minor market correction and a broader economic recession. So I
20:44
Speaker 1: guess that the big question we have to ask is
20:46
Speaker 1: do you see that transition happening today? Do you see
20:49
Speaker 1: enough problems in the housing market that what we've seen
20:52
Speaker 1: in the financial markets in the last few months possibly
20:54
Speaker 1: a bear market now that's going to turn into something
20:59
Speaker 1: much worse. I do see the real possibility of that.
21:04
Speaker 1: I don't. I wouldn't say it was yet an inevitability.
21:07
Speaker 1: If you start with the States, then yes, house prices
21:11
Speaker 1: are now even in real terms, higher than they were
21:13
Speaker 1: at the top in two thousand and six. Uh. And
21:17
Speaker 1: demand has been very aggressive and there is now clear
21:21
Speaker 1: sign of a turn. You've seen new house sales falling
21:26
Speaker 1: from a high level each month for several months now.
21:30
Speaker 1: Measures of housing sentiments have got very much weaker. Uh.
21:35
Speaker 1: And that's also you've got to throw in the very
21:40
Speaker 1: serious displacements caused by the pandemic. Lots of areas are
21:45
Speaker 1: much more appealing than they were three years ago, very suddenly,
21:48
Speaker 1: and others are much less appealing. It's those sudden breaks
21:52
Speaker 1: that markets can have a difficulty dealing with across the world. Um,
22:00
Speaker 1: the UK has long had I don't need to tell
22:03
Speaker 1: you that's a bad habit of when in doubt inflates
22:08
Speaker 1: the stock market, and that leads to always the risk
22:13
Speaker 1: of in Britain, of that a housing market can bring
22:19
Speaker 1: the rest of the economy down. It's a it's a
22:22
Speaker 1: very housing sensitive economy. Um. The great imponderable UH is China.
22:31
Speaker 1: We know for years now that the Chinese authorities are
22:36
Speaker 1: scared of a Minsky moment or a Lehman moment. You
22:39
Speaker 1: know Minsky for those uninitiated, is the idea is that
22:44
Speaker 1: the economist who came up with the idea that at
22:46
Speaker 1: a certain point confidence in debt can be lost, and
22:51
Speaker 1: that's when you have a crisis. For scale of what's
22:54
Speaker 1: happened after Lehman Brothers in twoth has and eight um,
22:58
Speaker 1: there is an an imaginably large amount of money that
23:02
Speaker 1: has been borrowed for the state in China. There are
23:06
Speaker 1: many property developers in very serious trouble UM and the
23:13
Speaker 1: investment is falling there even as fixed assets in other
23:17
Speaker 1: fictity investment is improving. It's plainly very much of an
23:21
Speaker 1: Achilles heel for the Chinese property sector. For sorry, for
23:26
Speaker 1: the Chinese economy. My best guess is that China is
23:30
Speaker 1: still in enough control that it can manage a very
23:34
Speaker 1: slow period of growth, possibly even a recession without a
23:40
Speaker 1: blow up, without a major crisis for the rest of
23:44
Speaker 1: the world having become as dependent as we have on
23:48
Speaker 1: Chinese growth, that's still quite an alarming prospect. I mean,
23:52
Speaker 1: there's probably a few things so that we should pick
23:53
Speaker 1: up on. But just going back to going back to
23:55
Speaker 1: the US, I mean, and it came up earlier in
23:58
Speaker 1: the program as well, that you know, we had the
24:00
Speaker 1: economy go south during COVID in a kind of dramatic way,
24:03
Speaker 1: and then we've had the sort of interesting mixed up
24:06
Speaker 1: pattern of the recovery, a different kind of recovery than
24:09
Speaker 1: we've had before UM and that has caused its own
24:11
Speaker 1: problems with supply chains and everything else that we've talked
24:13
Speaker 1: a lot about in stephonomics. But actually house prices had
24:17
Speaker 1: just carried on defying gravity for quite for most of
24:21
Speaker 1: that period. Talk us through you know a little bit
24:23
Speaker 1: of you know why that happened, where you think there's
24:27
Speaker 1: most vulnerability with all real estates. Critical thing about real
24:31
Speaker 1: estate is that it's leveraged, which is another reason why
24:34
Speaker 1: we should really care about it from the point of
24:36
Speaker 1: view of financial crises. So it's based based on borrow money. Yes,
24:41
Speaker 1: exactly if if if if rich people use their money
24:44
Speaker 1: to to bet on stocks that go up and then
24:47
Speaker 1: come down again. Yeah, there are some wealth effects. But
24:50
Speaker 1: so what if lots of people borrow money and their
24:56
Speaker 1: house price goes down and they can't support repay the loan.
24:59
Speaker 1: That's very e series. That's a different question altogether. UM,
25:03
Speaker 1: you do still see prices is rising very sharply in
25:08
Speaker 1: the US. That's partly because supply was actually somewhat limited
25:12
Speaker 1: during the earlier stages of COVID, and because UM finance
25:18
Speaker 1: became exceptionally cheap thanks to the thanks to the Fed's
25:23
Speaker 1: monetary policy, which I think everybody now agrees stayed too
25:28
Speaker 1: easy for too long with the benefit of hindsight, and
25:33
Speaker 1: that did mean that a lot of people started looking
25:36
Speaker 1: for for housing. The fact that the supply was relatively limited,
25:41
Speaker 1: and that there was also the desire of some who
25:44
Speaker 1: were living in cities to find somewhere else to move
25:48
Speaker 1: meant that you really did have a perfect positive storm
25:52
Speaker 1: from the point of view people who wanted to sell houses. UM.
25:57
Speaker 1: You could make the argument in terms of how day
26:00
Speaker 1: injurious that is now UM mortgage rates are you know,
26:06
Speaker 1: have have had probably the biggest upward shock they've ever had,
26:11
Speaker 1: bearing in mind how low they started. Yes, it's true.
26:15
Speaker 1: Americans tend to have long term fixed mortgages. Many of
26:21
Speaker 1: them were hoping to use their house as an a
26:24
Speaker 1: t M, however, which isn't going to happen for a
26:27
Speaker 1: long time at this point. And many were probably hoping
26:31
Speaker 1: to refinance lower, which isn't going to happen. So there
26:36
Speaker 1: are still very great concerns there. And actually we should
26:40
Speaker 1: just say, I mean roughly how much. I mean they're
26:42
Speaker 1: now back thirty year rates back to what around six
26:47
Speaker 1: percent or something, So the change at the start from
26:50
Speaker 1: the start of the year is pretty dramatic. Its Fortunately,
26:55
Speaker 1: you know that the actual interest rates cost you need
26:58
Speaker 1: to pay now compared taking out a mortgage six months
27:01
Speaker 1: ago has multiplied several times over, so for people who
27:05
Speaker 1: are thinking about their kind of monthly costs, even though
27:08
Speaker 1: even though the sort of six percent doesn't seem that
27:11
Speaker 1: much historically, it's a huge difference in your monthly payment
27:14
Speaker 1: if you were rather over extending yourself potentially, yes, and
27:18
Speaker 1: and and if a year ago you were doing the
27:20
Speaker 1: math and thought that you were going to be paying two.
27:24
Speaker 1: Then the whole proposition is transformed. And that is a
27:30
Speaker 1: bigger shock, um than you know, there was ever he
27:34
Speaker 1: suffered at any point during the seventies that kind of
27:37
Speaker 1: speed of increase in in debt debt costs from a
27:41
Speaker 1: low base. I mean. Moving on to commercial property, I
27:45
Speaker 1: think that's where there is the really great concern because
27:49
Speaker 1: two things. One supply is extreme. Um. I don't know
27:57
Speaker 1: when you were started in Manhattan, but there are now
27:59
Speaker 1: something like half a dozen buildings taller than the Empire State.
28:03
Speaker 1: There's forests of new skyscrapers going up. Very beautiful views
28:09
Speaker 1: from the higher floors of the Bloomberg Building. UM, very
28:13
Speaker 1: hard to imagine. It strike me as optimistic even before
28:18
Speaker 1: the pandemic. At this point, you know, I go to
28:22
Speaker 1: work in the morning and I actually sit down in
28:24
Speaker 1: the subway because so many fewer people are actually going
28:28
Speaker 1: to work in an office, which is which, which is nice,
28:31
Speaker 1: but you know, the and I then move into you know,
28:35
Speaker 1: a central business district with vastly more capacity than had
28:39
Speaker 1: before that that is really terrifying. Putting those things together.
28:43
Speaker 1: The you know, your average real estate developer in this city.
28:48
Speaker 1: These are guys who probably don't have thirty year financing.
28:51
Speaker 1: They're probably they probably are trying to to borrow over
28:56
Speaker 1: shorter terms and needing to roll over um. So the
29:01
Speaker 1: one positive, the one reason we're not needn't be too
29:05
Speaker 1: concerned about it, is that a lot of the money
29:08
Speaker 1: for these guys ultimately comes from pension funds and endowments
29:12
Speaker 1: and the kind of people who can afford to wait
29:15
Speaker 1: out a storm that they've got a long term time horizon.
29:21
Speaker 1: But not all of it does. And you know, we'd
29:23
Speaker 1: rather not all of us sacrifice a bit of our
29:27
Speaker 1: pension to deal with real estate. So cook from for
29:32
Speaker 1: my money, commercial real estate is probably the single greatest
29:36
Speaker 1: cause for concern. What I'm taking from from what you're
29:40
Speaker 1: saying is that if we do see property triggering something
29:44
Speaker 1: really significant for the economy, it's going to look and
29:49
Speaker 1: feel very different from what we saw before the global
29:52
Speaker 1: financial crisis, which was very much tied up into what
29:54
Speaker 1: had happened to those to the to the lower end
29:58
Speaker 1: housing market, with the assets attached to that sort of
30:02
Speaker 1: subprime market having somehow infiltrated not just the US financial
30:06
Speaker 1: system but the global financial system. This seems like the
30:09
Speaker 1: sort of the complete opposite that you've got. It's actually
30:12
Speaker 1: it's the it's a bit of real estate that probably
30:14
Speaker 1: affects people least in their day to day um and
30:19
Speaker 1: that's potentially the biggest trigger point. And indeed it could
30:22
Speaker 1: be the other side of the world's property market that
30:25
Speaker 1: this time is going to affect us. So let's just
30:27
Speaker 1: maybe come back to what you said about China. You know,
30:30
Speaker 1: famously US subprime kind of set off this global sort
30:36
Speaker 1: of financial explosion in the two thousand and seven eight?
30:42
Speaker 1: Are we about to see China's property market now do
30:45
Speaker 1: the same to the rest of the world. I mean,
30:47
Speaker 1: how how serious do you see that threat? I do
30:50
Speaker 1: see it as serious? Um uh. I mean, as ever,
30:54
Speaker 1: when you're making comparisons to two thousands and seven, it's
30:57
Speaker 1: like making comparisons to Hitler when you're talking about politics.
31:00
Speaker 1: Um do I am I predicting that it's going to
31:03
Speaker 1: be as bad as that? No, not necessarily. Is it
31:07
Speaker 1: conceptually something similar that could be very bad? Yes, you
31:12
Speaker 1: do have which you didn't have in the States. You
31:15
Speaker 1: have had several years of the Chinese authorities trying to
31:22
Speaker 1: deal with the issue. The reason the big property developers
31:25
Speaker 1: got into trouble last year is because China was trying
31:29
Speaker 1: to rain them in um. But yes, that that has
31:35
Speaker 1: been an important engine of China's growth. In China's growth
31:38
Speaker 1: has been vital to the rest of the world. So
31:42
Speaker 1: it's it's a difference, it's it's rooted in the same
31:46
Speaker 1: ultimate problem that everybody needs property, that it tends to
31:51
Speaker 1: be a leveraged investment, and that when it goes, when
31:55
Speaker 1: things go wrong, it's a really serious issue. But you're right, then,
32:00
Speaker 1: I don't think they're going to make the same mistakes
32:03
Speaker 1: as the US. Did you know seven? The US hasn't
32:05
Speaker 1: made the same mistakes as in No. Seven or eight.
32:08
Speaker 1: They have at least made new mistakes. But the theories
32:12
Speaker 1: whether how big, how serious the new mistake will be,
32:15
Speaker 1: And as we heard earlier, actually it's not been it's
32:17
Speaker 1: been the lower income people that have actually been locked
32:19
Speaker 1: out of many of the new mortgages. But that also
32:22
Speaker 1: suggests that maybe there's a bit more tolerance in the
32:24
Speaker 1: property market, the sort of residential property market, because it's
32:28
Speaker 1: not people who are right on living hand to mouth
32:31
Speaker 1: who are who are dealing with these higher rates. You
32:33
Speaker 1: and I, who have spent so long looking at the
32:35
Speaker 1: global economy and the global nacial system in various ways.
32:38
Speaker 1: You look at property and it just seems of all
32:41
Speaker 1: the assets that we have uniquely divisive between generations, between
32:48
Speaker 1: lower and higher income, that it sets up these problems
32:52
Speaker 1: for young people not being able to afford to get
32:54
Speaker 1: in the housing ladder. It's very lumpy as an asset,
32:57
Speaker 1: it's extremely passy to buy and sell, how very prone
33:01
Speaker 1: to booms and bust, and it's not a productive place
33:05
Speaker 1: to invest when you think about the broader economy. Much
33:07
Speaker 1: better to have money invested in a in in creating
33:11
Speaker 1: jobs and a going concern a company, rather than just
33:15
Speaker 1: tied up in a in a lump of bricks and mortar.
33:19
Speaker 1: So why have we ended up having so much of
33:21
Speaker 1: the world's wealth tied up in such a bad place.
33:25
Speaker 1: It's very good, very profound question. I would say partly
33:31
Speaker 1: it's because you can borrow easily to do it, and
33:35
Speaker 1: people will always that you've if you've got a house
33:39
Speaker 1: as security for a loan, you can borrow much more
33:42
Speaker 1: easily and much more cheaply than in many other ways.
33:43
Speaker 1: So that's a big part of it. I think you're
33:48
Speaker 1: right that the sense of status that comes with it
33:51
Speaker 1: the sense that's not necessarily economically rational that you want
33:56
Speaker 1: to have a house, that you want to have your
33:59
Speaker 1: parts on housing ladder. That's a phrase that the British
34:03
Speaker 1: use all the time. Is very is very central. UM.
34:10
Speaker 1: What worries me most in terms of what you were
34:13
Speaker 1: just saying, is that there is a there is indeed
34:15
Speaker 1: a very serious generational issue to this. UM. Younger people
34:23
Speaker 1: like in their twenties and early thirties, in my experience,
34:26
Speaker 1: really wants to own real estate because in part they
34:31
Speaker 1: can't and they feel they're missing out, and you know
34:36
Speaker 1: they are. I've got plenty of friends in their early
34:39
Speaker 1: thirties starting families still renting UM, and that doesn't that
34:44
Speaker 1: feels at a psychological level, that doesn't feel comfortable. UM.
34:49
Speaker 1: The way the housing market has developed, certainly the two
34:54
Speaker 1: countries I know best, the UK and the US, there
34:56
Speaker 1: is really a very nasty, sharp generational evidem which intensifies
35:06
Speaker 1: the sense of inequality, of the sense of injustice that
35:08
Speaker 1: we all know is poisoning much of the developed West
35:13
Speaker 1: at present. UM. So I suppose, coming back to your question,
35:18
Speaker 1: that's that's how I would answered it. Partly, it's what
35:21
Speaker 1: we can all borrow for and it's always easier to
35:24
Speaker 1: buy something if you can borrow, but it's also that
35:29
Speaker 1: you do need it, and that it comes with this
35:32
Speaker 1: immense psychologically important sense of status. And it matters to
35:38
Speaker 1: people that if you if you, if you are renting
35:41
Speaker 1: in your thirties, you feel somewhat more of a of
35:47
Speaker 1: a rootless person, less of a stake somehow or other
35:51
Speaker 1: than if you've already got a house and a mortgage. UM.
35:55
Speaker 1: Whether that's sensible, whether that's economically rational, is probably a
36:02
Speaker 1: topic you could spend another entire podcast on, But there's
36:06
Speaker 1: no question people feel uncomfortable not having having property by
36:12
Speaker 1: a certain age, and in the current situation where they
36:16
Speaker 1: can't UM that leads to very serious tensions. And whether
36:21
Speaker 1: or not we see a big boom and bust in
36:23
Speaker 1: the property market in the next year or so, it
36:26
Speaker 1: certainly feels like something we're setting up problems for the future.
36:30
Speaker 1: John Author's thank you very much, thank you. Well, that's
36:42
Speaker 1: it for this episode of Stephonomics. We'll be back in
36:44
Speaker 1: the autumn. They look out for bonus episodes if I
36:47
Speaker 1: meet anyone exciting on my travels, and do be sure
36:50
Speaker 1: to check out the Bloomberg news website Bloomberg UK in Britain.
36:54
Speaker 1: For more economic news and views on the global economy,
36:57
Speaker 1: you should also follow at economics on Twitter. So This
37:01
Speaker 1: episode was produced by Magnus Hendrickson and Sammer Sadi. Special
37:05
Speaker 1: thanks also to Maria Paulo, Michelis Dorris, John Lle Marte,
37:09
Speaker 1: Gilda de Carli Blake, Maple's, John Author's and Nera Sharp.
37:14
Speaker 1: Mike Sasso is the executive producer of Stephanomics. M