Monday
There is an interesting situation developing with residential real estate in the U.S. Some corporations are purchasing large blocks of residential housing. It is a deal that is fraught with the potential for going bad.
First, at some point, real estate will have to fall to a value that is affordable to Joe Blow. Even if it has been bought to be rented – i.e., for the return, rather than a capital gain – then the price paid for the house will demand enough rent to make the deal worthwhile – i.e., at the very least do a bit better than cover the cost of the capital. Tens of millions of people are going to be struggling to pay any rent.
The reason behind these purchases is probably the belief that sustained price inflation, even hyperinflation, is in our future. If true, that means that real estate will rise in terms of dollars and the borrowings can be paid off in relative pennies. But that is a huge ‘if’. The U.S. government will be unable to service its debts if interest rates rise. It is only zero interest rates, or close to it, that allows it to continue borrowing. The U.S. will be living with zero interest rates for a while longer* Low and falling interest rates have caused a massive over-supply of goods – all goods, from hamburgers to aircraft. There is a bit of a backlog now because of the WuFlu panic. Temporary shortages have resulted in temporary price rises. Apart from food and energy, they are unsustainable, and even energy cannot stay up long in the face of massive unemployment.
But here is the point, governments will need to increase tax big time to paper over, for as long as possible, the disaster that they have wrought. Residential housing is the biggest capital asset in any country, but it is almost impossible in a democracy to tax as each household will never vote for you again. But, if the houses are commercially owned by a large corporation, then that is a fantastic piece of news for illiquid governments. Talk about easy pickings. Try hiding a house.
One day, when enough suckers have been drawn in, governments will announce a tax on all residential property owned by corporations. I can hear them now: “We are taxing these greedy corporations because they have kept working people out of the housing market by driving up real estate prices”. Boom – Boom.
I have spent seven decades watching political leaders foul up economies and I have yet to see one who could not successfully point the finger elsewhere. They will be the sole cause of suburban parks being full of families living rough, while grandstanding about how only strong government can solve this dreadful, corporation-caused disaster.
* This does not apply to the rest of the world. The U.S. has the reserve currency. Their bond auctions will be the last to fail. Cross your fingers for the rest of the world – including the Au$. Hyperinflation is very possible anywhere outside of the U.S.