Irish Property Market chat II - read mod note post #1 before posting

hometruths · 12-12-2021 9:56pm

https://www.boards.ie/discussion/comment/118311950#Comment_118311950

I said things will get messy if central banks raise rates. If they have to raise rates it will because of non transitory inflation. One of the reasons I think inflation will not be transitory is I think velocity of money will rise.

None of the above is contradictory on the one hand but on the other stuff.

Timing belt · 12-12-2021 10:03pm

https://www.boards.ie/discussion/comment/118311991#Comment_118311991

For velocity of money to increase and reverse its trend it would be because of a strong economy resulting in the GDP growing or because of a reduction in money supply when people pay off debt. As a reduction in money supply would not be inflationary I can only assume you expect GDP to grow strongly Quarter by Quarter to reverse the trend.

hometruths · 12-12-2021 10:12pm

https://www.boards.ie/discussion/comment/118312026#Comment_118312026

For velocity of money to increase and reverse its trend it would be because of a strong economy resulting in the GDP growing

Is that not a bit of a chicken and egg situation - i.e which came first?

Sure velocity can increase because an economy is strong with rising GDP, but are you saying an economy and GDP cannot grow because money velocity increases?

Timing belt · 12-12-2021 10:21pm

https://www.boards.ie/discussion/comment/118312068#Comment_118312068

The only way that the velocity of money can increase without the GDP growing is for the money supply to shrink (which would be caused by people paying off debt) and this would not be inflationary.

The velocity of money is calculated as the GDP divided by the money supply. So you need the GDP to increase or the money supply to shrink to see an increase in velocity of money.

hometruths · 12-12-2021 10:32pm

https://www.boards.ie/discussion/comment/118312136#Comment_118312136

Let me put it another way. Could GDP and an economy grow as a result of increased spending?

Timing belt · 12-12-2021 10:43pm

https://www.boards.ie/discussion/comment/118312194#Comment_118312194

I get what you are saying.... The economy is going to be stronger than it has for the past 10 years for at least a few quarters to reverse the trend. If we will have such a strong economy for a year or two then it would be reasonable to expect house prices to increase and for the economy to be able to withstand a increase in rates without crashing the economy as companies would be making more money. Maybe that is why the markets are valued so high because the world economy is going to enter a period of strong growth. Personally I don't see this scenario playing out as I think the EU economies are more shaky than they were before covid hit but that's just my opinion.... Time will tell

hometruths · 12-12-2021 10:50pm

https://www.boards.ie/discussion/comment/118312246#Comment_118312246

I think markets valued highly since a lot of the money supply over last ten years has gone straight into them, there is no alternative etc etc.

You said earlier that velocity is unlikely to increase significantly because "a lot of the money supply is locked into the banking system and financial markets so is not in circulation in the wider economy".

The money flowed into the markets without much trouble, so I would have thought it could flow out just as easily. What makes you say it is locked in?

Timing belt · 12-12-2021 11:04pm

https://www.boards.ie/discussion/comment/118312277#Comment_118312277

The money I was talking about is the money in M2 supply so it excludes the money that has flown into the stock market.... What I meant by the money supply being locked into the banking system is the liquidity trap that exists due to the low rate environment. The specific element that relates to the financial markets is the cash that has been posted as collateral with the banks.

If the money flowed out of the markets without much trouble then the it would either end up in cash/banks which would lower the velocity of money further or would go into bonds which would lower rates further. (That is unless everyone decided to buy bitcoin or gold)

So which is it we will see the velocity of money reverse its trend or the money will flow out of the markets and lower the velocity of money further?

hometruths · 12-12-2021 11:29pm

https://www.boards.ie/discussion/comment/118312335#Comment_118312335

So which is it we will see the velocity of money reverse its trend or the money will flow out of the markets and lower the velocity of money further?

Trillions worldwide will flow out of the markets and start circulating in the wider economies - it will be spent on goods and services, increasing velocity of money and will be inflationary.

Timing belt · 12-12-2021 11:39pm

https://www.boards.ie/discussion/comment/118312442#Comment_118312442

So you are saying the money supply will increase by trillions and yet the velocity of money will increase and reverse trends.. for the velocity of money to increase by enough to change the velocity of money trend with the money supply increasing by trillions we would need hyper inflation. which means that houses prices are undervalued as they will be worth 1000's times more in a year.

hometruths · 12-12-2021 11:46pm

https://www.boards.ie/discussion/comment/118312479#Comment_118312479

If somebody had 50k in their bank account, used it to buy 50k of Apple shares in their stock broking account, now worth 75k today, then decides tomorrow to sell that 75k in shares and move it back to their bank account, and then spends that 75k on goods and services on Tuesday, how much has these transactions increased the money supply by between today and Tuesday?

Timing belt · 12-12-2021 11:52pm

https://www.boards.ie/discussion/comment/118312514#Comment_118312514

Once they sell the 75k and move it back into their bank account the M2 money supply increases by 75k... if they then use that money to buy good or services the money is still in circulation..... So the money supply has increased by 75k which lowers the velocity of money unless the GDP grows by a greater amount (either via inflation or real growth)

Amadan Dubh · 13-12-2021 12:01am

https://www.boards.ie/discussion/comment/118311991#Comment_118311991

Not only raise rates but also stop supporting assets. The ECB bond buying is phenomenal and has involved creating money from nothing in order to directly purchase the bonds of private entities. The current balance sheet stands at €307 trillion! Our markets are already socialised and reintroducing capitalism is what we need to get proper valuations out of them (housing included). ECB corporate asset purchase programme home page;

https://www.ecb.europa.eu/mopo/implement/app/html/index.en.html

For the first time I decided to actually try to find out specific information on the corporates which the ECB is choosing to prop up, available in this file;

https://www.ecb.europa.eu/mopo/pdf/CSPP_PEPP_corporate_bond_holdings_20211203.csv?1c4bf5668283443a45d103b89ca0323e

Two very disturbing features of the list of bonds which the ECB holds are that there are huge real estate asset managers and employers of tens of thousands of emoyees within the list. There is no orderly unwinding of the capital "S" State from private markets.

hometruths · 13-12-2021 12:03am

https://www.boards.ie/discussion/comment/118312538#Comment_118312538

Ok fair enough, my theory is hampered by the precise calculation of velocity of money. So let’s agree your earlier comment that is not a useful indicator is correct.

if larger amounts of individuals than normal were to withdraw their 75k out of financial markets, and circulate into economy, would that be inflationary?

Timing belt · 13-12-2021 12:19am

https://www.boards.ie/discussion/comment/118312586#Comment_118312586

Yes it would be inflationary but would be highly unlikely that the cash would be spent in the wider economy on goods and services as most people invest in the financial markets so that they will have money later on in life to spend... The chances of all of these people spending all this in one go (or in a short period of time) without those individuals experiencing something like unemployment is very remote. It is for this reason that central banks will try and get cash into the hands of the poorer in society when issuing stimulus checks because they are more likely to spend it on goods and services.

If the stock market crashes then history has told us that investors flee to safety in government bonds, cash or gold.

If it is in government bonds then this will push up the price of the bonds and lower the yield.
If it is in cash or Gold then this is not inflationary.

History also tells us that when the stock market crashes people tend to increase there savings and reduce there spending because they are unsure of what the future holds..... This does not lead to inflation and in most cases leads to deflation.

Timing belt · 13-12-2021 12:37am

https://www.boards.ie/discussion/comment/118312579#Comment_118312579

The majority of QE is government debt (which was used to keep people in employment until such time as the economy reopened) and of the corporate bonds a large chunk of this will be industries that would have suffered during the pandemic and were deemed important to the European economy. (Think National airlines that would have gone bankrupt without the aid)

Europe has not increased its purchase of real estate assets to any significant extend unlike the US that purchased a ton of Mortgage backed securities as part of its QE during the pandemic.

Without this QE we would have seen one of the worst recession in history with mass unemployment.

hometruths · 13-12-2021 12:41am

https://www.boards.ie/discussion/comment/118312652#Comment_118312652

Yes it would be inflationary but would be highly unlikely that the cash would be spent in the wider economy on goods and services as most people invest in the financial markets so that they will have money later on in life to spend...

we definitely agree on something. On the subject of spending later on in life, take a look at global demographics, specifically when bulk of baby boomers are estimated to hit retirement and start drawing down the wealth they have built up in the markets, largely since the late 90s coincidentally.

covid effects also likely to accelerate the retirements of youngest baby boomers, and oldest gen x, so that the cumulative lmpact is likely to be even greater.

The chances of all of these people spending all this in one go (or in a short period of time) without those individuals experiencing something like unemployment is very remote.

Granted, they’re unlikely all to spend everything next week, but if enough of them start spending in a similar time frame the weight of numbers is enough to reverse a few of the trends their generation started.

and as for experiencing life with no job... well that’s kind of the point!

Timing belt · 13-12-2021 12:47am

https://www.boards.ie/discussion/comment/118312734#Comment_118312734

Yes but their spending is the same as before or in a lot of cases less..... As they no longer have a salary coming in.... This does not generate inflation. If anything this would be deflationary as the no of people working has decreased and seeing as you believe that the deflationary impact of technology is likely to level off this would mean a fall in productivity.

hometruths · 13-12-2021 12:55am

https://www.boards.ie/discussion/comment/118312756#Comment_118312756

Maybe this time will be different. Given the performance of their retirement portfolios Im not so sure their spending will be the same or less.

Timing belt · 13-12-2021 1:10am

https://www.boards.ie/discussion/comment/118312780#Comment_118312780

Well if they all pull out of the stock market at the same time like you suggested earlier there performance may take a hit.

They average person retiring would need at least 1 million if they were to have the same cash flow as when they were working and a lot more if you take into account inflation. (1m divide by 20 years = 50k a year)

The one economy that has experienced the situation that you describe is Japan and they have seen no inflation in the past 20 years. But as you say it may be different this time....

Amadan Dubh · 13-12-2021 2:59am

https://www.boards.ie/discussion/comment/118312722#Comment_118312722

You cannot tell me that Nestlé, Heineken, Coca Cola, Unilever, Shell, Merck, SAP, Adidas, ESB, Kerry Group issuing bonds for the ECB to buy is pandemic related. It is a whole bunch of mega corporations struggling to justify their ridiculous valuations and our central bank is effectively artificially propping up all assets and preventing a correction, pandemic or no pandemic. As I said, you can't unwind this in an orderly way and your last line is what happens when the central banks let the free market get back to work.

Villa05 · 13-12-2021 9:39am

https://www.boards.ie/discussion/comment/118312652#Comment_118312652

Would the increasing age demographic of wealthy nations change that dynamic

Edit:Sorry was raised by schmittel before I read the remainder of thread.

What if we have a situation where retirees pension funds are subsequently invested in housing to generate income.

We have people with no housing unable to afford and people with housing buying more.

Does that create the mother of all bubbles?

Rents go through the roof in a completely unsustainable manner and one way or the other they must crash. Are we there already? This is why I've been saying we are in a bubble for some time

Is it a giant ponzi scheme propped up by cental banks and poor government policy

Timing belt · 13-12-2021 9:54am

https://www.boards.ie/discussion/comment/118312957#Comment_118312957

You make it sound like these companies just generated bonds so the ECB could buy them. The majority of the bonds were bought on the secondary market to provide liquidity and stop a massive recession.

Would you prefer 10 years of recession and austerity and mass job losses? Because that is what the alternative was if central banks didn’t step in.

Yes house prices would have been cheaper but for the majority of people it won’t make a difference because their financial circumstances would have drastically changed for the worst.

finally they are not going to unwind QE overnight…it will take years and years to run the book down as bonds mature. This is so that it can be unwound in an orderly fashion.

To think they will come in one day and dump all the bonds they purchased as part of QE onto the market and crash the markets is just stupid…in 10 years time the will still be unwinding the book.

enricoh · 13-12-2021 10:35am

just reading a columnist in the Indo yesterday that shows how much of a one trick pony Ireland really is. Now that our corporation tax rate is no longer our big selling point we really have to regain competitiveness pronto. The first place the government should focus on is the fact that Dublin is the sixth most expensive for rentals in the world. The numbers below fairly show our reliance on MNCs-

Multinationals such as Google accounted for almost half of all income tax, USC and PRSI paid by companies in 2019, as well as more than 40 per cent of VAT

Timing belt · 13-12-2021 10:38am

https://www.boards.ie/discussion/comment/118313194#Comment_118313194

There isn’t enough rental supply on the market so if more people purchased property to rent the supply would increase….if it increases enough rents would fall.

if rental supply goes up but new housing does not keep pace then house prices go up as less supply for people buying.

personally I won’t say we are in a bubble with regards rent and house prices as fundamentals exist to support prices…..however I would say prices are elevated because of the supply shortage and if enough property was built we would see rents fall and more reasonable priced houses.

Amadan Dubh · 13-12-2021 10:39am

https://www.boards.ie/discussion/comment/118313232#Comment_118313232

Sunk cost fallacy but the sooner medicine is taken and we "build back better" the more sustainable and equitable society will be.

Mad_maxx · 13-12-2021 10:49am

https://www.boards.ie/discussion/comment/118308689#Comment_118308689

Apple was undervalued for years after Tim Cook took over ,PE of 10 as recent as 2016

Timing belt · 13-12-2021 10:51am

https://www.boards.ie/discussion/comment/118313361#Comment_118313361

How is it a sunk cost fallacy? They avoided one of the biggest recession In history. Once the economy is strong enough they will start to taper purchases. (I.e. buy less bonds) once they have finished tapering they will let bonds mature. This will take years.

how is it more sustainable and equitable to crash the economy just to lower house prices…. It doesn’t Sounds very sustainable and equitable to create mass unemployment, have higher taxes, pension funds wiped out.

Amadan Dubh · 13-12-2021 1:18pm

https://www.boards.ie/discussion/comment/118313416#Comment_118313416

What you don't grasp is that assets are dislocated from the economy at this point and are the reason that the economy will never get to a level where central bank support can be unwound. You need to ask yourself why you there is no clear guidance on how the State unravels its Nanny State measures for asset valuations; because there is no way for valuations to be justified without State support.

Pension funds needing a certain level of return is just accepted by you as being a reason to continue with State support but you don't seem to question why it is that pension funds need such high returns. And, further, why should we care about pension funds taking large exposure to equities and properties? That is only recommended for new pension subscribers as these are extremely risky investments. There is no price discovery in assets anymore and to accept the current situation as sustainable is to accept that the State needs to prop up all assets. That's frankly ridiculous but like you I think the regulators are wedded to this ridiculous idea that the State should just create free money and prop up assets indefinitely.

JimmyVik · 13-12-2021 1:41pm

https://www.boards.ie/discussion/comment/118312815#Comment_118312815

I know someone who recently retired in their early 50s. They had €900k between them in pension funds.

They sold the house in Ireland and bought a house in Portugal by the beach in a nice tourist area that we've all been to many times over the years, and also bought an apartment in Dublin for whenever they come back to Ireland for a holiday. And are left with €150k in the bank plush cash savings they already had built up.

So far they havent been back yet :)

They havent drawn down the pensions yet, but reckon they will be living on €30k+ a year if they were to draw down today (plus lump sums) and if they ever have cashflow problems then they have the apartment to sell. They would have rented it while they were away, but the legislation ever changing situation put the kibosh on that.

They are coming home for Christmas, so i'll get the lowdown from them on it then.

Irish Property Market chat II - *read mod note post #1 before posting*

Comments

Irish Property Market chat II - read mod note post #1 before posting