The USA’s property market took down the financial system in 2008. Why? All because of exuberant lending and the optimism that the road to riches lies in property. It has the Mida’s touch. Every piece of property turned into gold. There’s little effort involved. Banks are ready to lend even to the borrowers with horrific credit standing. Prices kept going up. It was a no brainer investment opportunity. Until… boom!
The story of property and stock market “road to riches” is all too common. It has been played out in history all over again and again. But fools don’t learn. There is no easy road to riches. There is a fine line between investment and speculative greed. Both stock markets and properties are investment opportunities but are also a fool’s trap to riches.
A distinct difference exists in stock market “investment” vs property. In property, the mortgage loan is heavily leveraged, sometimes to as much as 1:10. For a $10,000 upfront payment, a borrower can loan $100,000. That allowed poor suckers to participate in the Ponzi scheme, trapped in debt for as long as 30 years. Stocks are typically non-leveraged, until the derivative game came was introduced. Now both stocks and property are highly leveraged and is poised for the mother of all collapse.
To the banksters, they have nothing to lose. After the sub-prime bust, the banksters who perpetrated the Ponzi loan schemes did not suffer damage after their irresponsible and reckless lending. The Fed came to their rescue, taking public funds to bail them out. The Fed’s implicit guarantee that banks will be bailed out or bailed in provides further impetus for banksters to continue with merciless lending. Ultimately, the public are the real losers, including those who saved and have not borrowed.
We can take a lesson from Japan’s economic exuberance in the 1980’s and which ended in a spectacular crash that took the Nikkei 225 stock average to nearly 39,000 before collapsing to low of 7000. Savings were wiped out and property prices collapsed. Until now, Japan has barely recovered, even with low-interest rates. The USA 2008 sub-prime debacle did not prevent further reckless monetary policies. Instead, the Fed exacerbated easy money policies. Is the USA following the same path?
The same scenario is being played out in China’s skyrocketing property prices. The policies appear to parallel that of the US. Except that in this case, property developers are being bailed out instead of banksters. The New York Times reported the effective bailout for the developer:
The Chinese leadership is concerned about the health of the country’s property market because it is so deeply interconnected with other parts of the economy. Real estate is an important driver of steel consumption, loan growth and jobs for sales agents and migrant construction workers. A drop in home prices hurts ordinary Chinese because they tend to invest a disproportionate amount of their savings in real estate.
Property prices hitting dizzying heights and out of reach of the common man are now common phenomena in Australia, Canada, Singapore, Hong Kong and many other Asian cities. If Japan is the harbinger of woes to come, the world is in for serious trouble.
Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.