We’ll all pay the price if our economy bubbles over
TODAY’S explosive house price growth is grabbing all the headlines but property is not the only asset that is soaring in value, as bubbles are now blowing up all over the place. Cryptocurrency bitcoin and electric car maker Tesla have soared and crashed over the last year, while the internet is fuelling extreme investor behaviour. Many now treat investing as a form of gambling, getting hot tips from anonymous strangers on websites such as Reddit or from unregulated Instagram influencers.
The longer this goes on, the bigger the mess when everything bursts.
RACE FOR SPACE
The property market is the biggest concern as prices rise by double digits and buyers risk paying over the odds after getting sucked into desperate bidding wars.
The frenzy has been fuelled by the stamp duty holiday, record low mortgage rates, property shortages and the “race for space”, as people scramble to quit their cramped homes after the misery of lockdown.
While existing homeowners enjoy seeing their biggest asset rise in value, this is a nightmare for first-time buyers, who are borrowing ever larger sums to get on the ladder and risk negative equity if prices crash.
More than six out of 10 first-time buyers fear their house will be worth less than they paid for it when they sell or move, according to research from broker First Mortgage.
Compliance director David
Mcgrail said this is a particular problem for those who have taken out a 95 per cent mortgage: “Just a small drop in house prices could leave them at risk of negative equity.”
That would make it hard or impossible to move home, or remortgage to a competitive rate once their existing deal ends.
Nicky Stevenson, managing director at estate agent Fine & Country, said the market is moving so fast that if you blink, it increases in value: “It normally has a lull in the summer but now that almost all foreign holidays appear to be off, there’s nothing to stop it crashing straight through June, July and August.”
EASY MONEY
There is a simple reason why asset prices are soaring at a time when 3.4 million workers remain on furlough and many fear for their jobs.
Global governments and central bankers have flooded the economy with unprecedented levels of fiscal and monetary stimulus, worth trillions of dollars in total.the US has sent stimulus cheques of $1,400 to about 127 million households.
That is what is helping to fund all the fuss over crazy, unproven investments such as cryptocurrencies, and now non-fungible tokens (NFTS), digital artworks that can trade for millions of pounds.
Investors using online trading apps such as Robinhood have sent US stocks such as Gamestop and AMC Entertainment flying to the moon, even though the underlying businesses are fighting for their lives.
Worse, some traders are borrowing money to invest, leaving them in debt when these over-hyped assets crash.
BE AFRAID OF FOMO
Many have lost their heads having seen others make fortunes after investing in tech giants such as Amazon, Apple, Google-owner Alphabet and Microsoft.
The trend is also being driven by something called FOMO, short for fear of missing out. Stories about someone buying Amazon shares at launch or Bitcoin back in 2009 can make the most level-headed investor envious.
David Kimberley, analyst at Freetrade, said too many now treat the market like betting on a horse race: “You might make a quick buck here and there but, overall, you are likely to have many more losing stocks than winning ones.”
Investors have had a taste of what happens when things reverse, as bitcoin crashed from $63,000 in early April to a recent low of $30,000. Gamestop and AMC crashed, then rose again, then crashed again.
No party lasts forever so what could finish this one? One word. Inflation.
‘If inflation does take off interest rates
will have to rise, and that’s where trouble really begins’
OVERHEATING
The worry now is that all the stimulus, particularly in the US, is going to drive up prices.
Supply chain bottlenecks are not helping, as lockdowns hit output and cause shortages of key materials such as copper and lumber.
Consumer price inflation in the UK recently doubled to 1.5 per cent but last week in the US it jumped to 5 per cent, the highest since 2008.
Unigestion multi-asset investment manager Salman Baig said central bankers are underestimating the strength of the recovery, and underplaying the danger of inflation.
Rupert Thompson, chief investment officer at wealth manager Kingswood warned: “Overheating worries may get worse before they get better.”
BORROWERS BEWARE
If inflation does take off, interest rates will have to rise to control it, and that’s where the trouble really begins. The last thing today’s homebuyers need are higher borrowing costs.
It’s the last thing our over-indebted government needs, as well. Covid bailouts are only affordable because interest rates are so low.
The Bank of England and other central bankers have been playing fast and loose with cheap money for years. If inflation returns, they only have themselves to blame.