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After the global and dramatic correction in the equity and bond markets, we can now also expect a decline in the housing markets. That's according to historian and financial-economic analyst Eric Mecking from Geotrendlines, in conversation with Holland Gold. He expects rising interest rates, geopolitical turmoil and failing central bank monetary policy to cause an economic depression. In that scenario, the money supply will shrink and a lot of people will get into financial trouble due to excessive debt.
According to Mecking, we are now at a tipping point in the Dutch housing market, because interest rates have bottomed out after a decades-long downward trend and have started an upward trend again. As a result, people are already able to borrow less money for a house, which is already a disadvantage effect will have an impact on Dutch house prices. And in the event of a price drop, the people who bought last will be the first to see their homes flooded, because the value of their collateral will no longer cover their mortgage debt.
The historian sees a parallel with the great stock market crash of 1929, when people used stocks as collateral to borrow money to buy even more stocks. At one point, when the stock market was so gigantic and saturated with debt, prices started to fall. The value of the collateral fell and investors got margin calls of the bank. Those who could not contribute money had to sell shares, which caused prices to fall further and more people to get into trouble.
The same could happen with the housing market, Mecking argues. Because of low interest rates, people have piled credit on credit to buy more homes. Because often they bought a new home and kept the old house to rent out. As a result, fewer and fewer owner-occupied homes became available.
The ever-falling interest rates and the expectation that they could only fall further also led to prices being pushed up to unprecedented heights. Mecking cites the extreme overbidding for fear of missing the boat as an example. As a result, selling prices have risen extra sharply in recent quarters, characteristic of the last upward phase, the fifth and final wave of the Elliott Wave model that Mecking uses for his analysis. But the sharp rise in mortgage rates threw a spanner in the works. And that caused a tipping point.
The historian also wants to nuance and debunk the idea that there is a great shortage of housing. He notes that the demand for housing has been stimulated in all sorts of ways. Not only because of the low interest rates, but also because rental income is untaxed and first-time buyers can receive a hundred thousand euros tax-free from their parents for the purchase of a house. Together with an exceptionally large borrowing capacity, this creates a lot of speculation and a high demand for housing. The demand for housing is therefore strongly related to the financing space.
The dominant narrative is that central banks set interest rates, but in practice market interest rates are leading. "Based on those interest rates, you can already see what the central bank is going to do. You can just follow the 3- and 6-month interest rates and that gives more information than what the Federal Reserve communicates.", according to Mecking. The only tool they can use is the trust that people have in the power of central banks. So central banks manipulate the market more with what they say than with what they actually do. This analysis is also discussed in detail in the book of Gold to Bitcoin!
Central banks now have to raise interest rates to remain credible, because inflation is far too high. The only problem is that the current inflation is not so much a monetary phenomenon, but much more a logistical and geopolitical problem due to the corona measures and the war in Ukraine. Central banks have no influence on this.
With an inflation rate of ten percent, central banks will have to do something if they want to remain credible. So they will have to raise interest rates while the global economy is heading for an economic recession. That will burst the global and largest bubble, that of the housing market, and cause it to plummet, according to Mecking. The historian therefore shares the analysis by credit analyst Zoltan Pozsar that central banks will cause an economic depression with this policy.
