We are Outsourcing Ourselves
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 there 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, 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 there auto loans but also on there mortgages as well. It is also very probable that many of the banks, GSE,s 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?