 We are outsourcing
ourselves
Ceri Shepherd
Trend Investor
4 Apr, 2005
I am British but for this winter
I have been living in the Ukraine, as I own an apartment here.
What has really struck me is just how cheap it is to live here,
for example. My apartment is an old communist boss's apartment
situated in the very centre of Nikolaev which is one of the largest
cities in the Ukraine. It is an old style solid stone building
and very beautiful. It has original Parquet floors, 3.3 metre
high ceilings, ornate original ceiling roses and cornicing, spectacular
views front and rear, This flat in Britain would cost me at least
$240,000 I bought this flat for $12,000 and that was only 4 months
ago. I have now completed refurbishment for a total cost of $5000.
This amount of work would have cost at least $40,000 in Britain
I have monthly bills which
are as follows: property taxes are $2 per month, (that is not
a typing error!). We have a communal heating system for all the
apartments in our block which is superb as it works 24/7 and
costs $5 per month. My water bill is $3.50 per month and my gas
bill is FIXED at $1.50 per month, I get billed this amount whatever
gas I use. Finally electric is 2.5 cents per Kilowatt.
The reason I explain all of
this, is because it is plainly obvious to me, that primarily
because of insane property prices in America and most of Western
Europe WE ARE OUTSOURCING OURSELVES!
Let me elaborate. A westerner
has a very high personal overhead base he needs to earn a great
deal of money just to stand still and to support his largest
single overhead HOUSING. This is making him an uncompetitive
proposition in this world of increasing cross border trade and
easy communications. He not only has high housing costs but also
high taxation and other costs which are also unduly inflated
by high housing costs within the domestic economy. For example,
a government worker needs a house, you have to be taxed accordingly
to provide a suitable salary for the government employee to be
able to afford the mortgage payments on his inflated house. All
of the services you need and buy will also be charged on a scale
that provides a suitable salary so that their employees can also
purchase inflated houses.
I believe that the major cause
of this unfortunate situation is good old fashioned greed. We
love it when our houses increase in value. It feels like free
money, and this money can be tapped by way of a refinance,
the house in effect becomes an ATM machine. Bankers love secured
lending against property as they perceive it as low risk. If
you have credit on a car, the car can always disappear, that
is the risk, but it is difficult to make a house disappear.
However, as is usual in any
mania, what seems so logical always gets pushed to extremes and
that is when the real trouble starts. Mortgages have been granted
on ever-easier terms, if you are warm and breathing today you
can get a mortgage. This avalanche of easy and abundant credit
has the affect of inflating the secured asset which is YOUR HOUSE.
The debtor (he is not a homeowner with a 95% or 100% mortgage,
that is a ridiculous notion!) feels happy as his house inflates
he obtains some free equity. The banks feel happy as the loan
percentage decreases relative to the security that they hold.
The price action encourages further new borrowings, as well as
refinances, and new customers looking to finance "investment
properties." The spiral of greed intensifies which the banks
are only too happy to fuel. The debtors see an endless supply
of free money and the banks see a secure revenue stream. Any
voice of reason is ridiculed and marginalised as it is when any
mania is in full flow!. That is why appraisals have become such
a joke. The debtors and the bankers just want to keep the party
going, as it seems like free money for everyone.
THE ECONOMY BECOMES STRESSED,
AS THE TRANSFER OF WEALTH FROM THE DEBTORS TO THE BANKERS BY
WAY OF MORTGAGE PAYMENTS WHOSE ORIGINATION IS IN THE REAL ECONOMY
BECOMES MORE EXTREME. THE NEED TO SUSTAIN THESE PAYMENTS BY WAY
OF HIGH WAGES EVENTUALLY PRICES THE WEST OUT OF MANY MARKETS.
Your house may be worth $250,000
but have you still got a job? Is the local factory or
office now closed as they relocated to China or India? If you
are still working how secure is your job? Are you being ever
more squeezed as in particular property costs rise but wages
do not? We like to preach about the free market; well this is
the free market at work!
Property prices expand in relation
to the cost and availability of credit which is always the fuel,
the supply is limited by way of building permits. For example:
Two incomes means we can afford
more credit which means prices will rise, but now we are trapped
because two incomes becomes a debt service necessity. Lower interest
rates also mean we can afford more credit which means yet again
that prices rise. Now they have floated the insane idea of 40
year mortgages this will lower payments and therefore just like
lowering interest rates will mean yet further price rises BUT
debt payments over a much greater length of time!. Finally they
know full well that the party will end in tears, which is why
they have changed the bankruptcy laws to keep you on the hook
when it all goes wrong.
It is my belief that many westerners
are going to be given a hard lesson in property deflation which
is the inevitable end game of property inflation, caused by using
large amounts of credit or leverage chasing perceived price gains.
When the market inevitably turns down it quickly becomes a very
illiquid market as the credit and buyers dry up, inflation then
becomes deflation. It will also be interesting to see how many
of the "investment properties" cascade into the market,
at exactly the wrong time when the downturn starts. I suspect
that not only will the "homeowners" be upside down
on their auto loans but also on their mortgages
as well. It is also very probable that many of the banks, GSEs
and holders of securitised mortgage debt will also be upside
down.
Finally, if you were CEO of
a business and paying a worker $40 an hour in wages, taxes and
benefits, and today you were contacted by a relocation company,
who tell you that the same job can be done overseas for $10 an
hour, what would you do?
Food, water and shelter are
the three necessities of human life. We are rapidly ending up
in the situation where shelter is provided if you are willing
to shoulder an excessive debt burden. THIS IS SIMPLY WRONG. Credit
is not helping us to buy a house it is making the house far less
affordable, what is perceived as a solution is the problem. It
is the availability of too much easy credit that is driving a
speculative mania that will enslave you and ultimately cost you
your job, you will have outsourced yourself.
The solution is simple, after
the 1929 crash they identified excessive margin or credit as
the fuel of the speculative excess, they limited the margin.
That is exactly what they must do now in the housing market they
must limit the fuel which is driving the fire. My major concern
is that house price speculation and inflation has already become
the economy, the consumer is 70% of GDP, if you take away the
fuel what else is left?
4 Apr, 2005
Ceri Shepherd
 website:
Trend Investor
email: ceri@trendinvestor.info
Trendinvestor
Capital Management
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Freephone [UK] 0800 321 3205
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