When Cash Flow Stops, The System Stops
The property market is currently in the brink of a massive collapse, or if you want let's call it a correction, that has been exacerbated by the Wuhan virus and global lockdown. If we take the United States as an example, there's about 23 million people, the last time I checked, who have applied for unemployment in the last 3 weeks. Moody's, the global bond credit rating company, has predicted that up to 30% of all mortgages will default in the near future. The same is happening across the world, as everything is a very delicate game of Jenga, and the system has grown so big and tall the slightest bump could make the entire thing come tumbling down.
Remember the Jenga blocks scene from The Big Short, which is what happened to the property market back in 2008, which was caused by the big banks for artificially inflating the bond market. The reason was, banks don't want to hold on the residential mortgages, so what they do is package them into tranches of securities and sell them to bonds all over the world as AAA rated instruments. The thing is none of those securities were actually AAA rated and because government was 100% backing all home loans, the banks where handing them out for next to nothing. Many homeowners didn't realize these very affordable rates would reset in three to five years. Homeowners were hit with payments they couldn't afford, that's when people started to default on the loans. When the banks realized that they had been asleep at the wheel, and they would have to absorb the losses they started to panic.
"The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." - Thomas Sowell
What happened in 2008 is nowhere close to to where we find the current housing market right now, and the real scary part is that the banks never stopped over inflating those bonds, they just renamed it and carried on. The problem now is, that it's not just the property market, it's literally everything. But I'm focusing on the housing market, so let me give you another example of what currently happening.
Due to the Wuhan virus and global lockdown, AirBnb has almost completely stopped all operations, and it has been reported that more than 50% of the rental markets has now been flooded by those previous listings on Airbnb. When there's abundance, it drives the price down of the current rental market, which in turn drives the value of the property down. So when the value of the property you bought in the last 2 years drops, people will start selling. Then you add the fact that people are loosing their jobs to the mix and have to sell their homes because to that or can't pay rent. All of a sudden that market gets flooded by with everyone trying to save their life savings and get out of the falling market, it's going to be a blood bath.
The property and rental market in Cape Town where I live is the most expensive in in the whole of Africa, the city has about 19,000 Airbnb listings, and basically none of them are currently occupied. And it's probably going to stay like that for the next 6 months or more, and many folks have bought homes and apartments because business is just so good, and the prices they paid are unfathomable. The chances they find long term occupants is not good and then becomes a domino effect, because either they sell or they default. At the end of the day they property market is going to come tumbling down really fast.
"Helping those who have been struck by unforeseeable misfortunes is fundamentally different from making dependency a way of life." - Thomas Sowell
Thanks for popping in, hope you liked the post. Please leave me your thoughts and or opinions in the comments below, have a beautiful day.
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