It’s weird – the whole world is on the same boom train…
One of the interesting things about what’s going on in the economy right now is that there are pretty similar dynamics playing out the world over.
And that’s because Covid affected most countries in the same way – a pandemic driven lock-down, followed by super cheap money and massive fiscal spending.
In scale and scope, it almost looks like it’s coordinated.
(I’m really talking about the developed world here. Countries that aren’t monetarily sovereign – they don’t have floating exchange rates, don’t issue debts in their own currency, and/or don’t print their own money – these countries are facing a different set of challenges.)
But because we’ve had a pretty coordinated set of economic conditions, we’re getting a pretty coordinated response.
It’s one of the reasons why I’m following the US with an even-greater degree of interest right now.
If you look at the projections for the recovery in GDP, you’ve got the same V-shape you’ve got here. Things get back to normal, and beyond, incredibly quickly by historical standards.
Under the hood, you have similar dynamics playing out too. Reduced interest rates (which reduces households interest burdens), booming asset prices and free money from the government have triggered a boom in Household Net Worth.
With net worth booming, and income levels holding fairly constant, household net worth as a percent of disposable income is through the roof.
But households are looking at their newfound wealth and thinking, I reckon I’ve got a use for that. So equity withdrawals are on the rise, as households look to take advantage of the boom in wealth.
And obviously, one of the most productive things you can do with the equity in your house, after blowing it on jet-skis and glitter, is to use it as a deposit for a house.
As a result, and in combination with super-low interest rates, house prices are accelerating quickly. You’re also seeing the same regional dynamics we’ve got playing out here. Urban markets are falling, but rural markets are hot and suburban markets are through the roof.
People don’t expect the boom to wind up anytime soon, with house prices expected to grow as quick as they have ever done in recent history.
It’s all so predictable.
Super-cheap money causes asset prices, and housing prices in particular, to boom. It was always going to be the way.
It’s what I’ve been talking about for twelve months now.
True, I’ve been surprised at how shallow the Covid downturn was. I hadn’t really clocked how willing global governments were to throw the kitchen sink at it.
But that’s what they did.
And now the downturn is behind us, we’ve only got the boom ahead – along with a vague threat of inflation.
But if there was ever any doubt, there’s none now.
Super cheap money causes house prices to boom.
And this is where we’re at.