The Biggest Interest Rate Crisis in Millennia Could Decimate House Values.

June 8 2023 Monaco 64 home of alternative economics and contrarian views today we're going to look at the UK housing market I I think that them has broken and excuse me for the analogy especially with what's happened in the Ukraine but I think it's a very good analogy and I'm going to tell you why I think the Dem has broken and why you're going to see

a lot of news out there about mortgage companies pulling deals increasing rates and I've been warning about this of course since April last year have a series of videos of which I'm going to put in um in a playlist and they're entitled the party is over for UK house prices there's four of them part one two three and four so before uh we go into the

mean well it means that uh the owner of that security can sell it in the secondary Market is securitized that's all it means so I think the the major lesson here that people are going to be talking for for years about what's going to happen in my opinion is that things never last forever and you've probably heard many times in the last 10 15 even 20

years that house prices always go up and especially in the last 10 years that interest rates are going to stay low for a very long time the bank of England can always cut rates do QE that has been the mindset but unfortunately now things are reversing and as I said good things don't last forever but back back to uh the bond market and why it's important

to to house price values let's say uh Building Society a lends to Mr Smith a hundred thousand pounds through a mortgage at six percent uh that Building Society will be getting six thousand pounds a year from that hundred thousand pound loan uh but let's say that uh the government and the bank of England drive down interest rates artificially like they they had they did from like

2008 uh at the height of the financial crisis up until 2021 they drove it down to zero and some of the market rates were even negative the two-year yields uh in the guilt so what that that does is that um mortgage uh Building Society a instead of getting six percent they're getting one percent so they're gonna increase their their lending because if they don't they go

out of business they won't have enough income to cover their operations and make a profit so they'll start lending 200 300 and even 600 000 once rates get to uh one percent and they'll still be making that six thousand that they used to make on a hundred thousand and that's why house prices have been driven up yes we hear a lot about uh immigration and some

lack of Supply but those arguments are all gonna be negated and are going to be shown to be a fallacy once uh we see uh house prices do what I think they're going to do so this is why house prices house values are going to go down because uh interest rates have gone from almost zero back in 2021 we're now approaching five percent so Building Society

a is almost back to where they can lend at six percent and why would they risk lending at six uh the uh 600 000 or a million at six percent when they can lend a hundred and get the same yes they might lend a bit more because the cost of living has gone up so that's why house values are going to go down and of course

the the government the bank of England are going to do uh the most they can to to stop this to stop this flood uh just like unfortunately the the people of the Ukraine are having to be helped by the authorities there with the flood with the break of that uh Dam uh this is gonna happen am I saying they should help personally [Laughter] it's a it's

a difficult question because they've pushed people into this situation they push people during the lockdowns uh to buy a home they they drove rates down to zero they did massive QE they suspended the stamp Duty and now it's all unraveling so that's why I think things are are not going to be get better yes I see that a lot of people out there are forecasting uh

rates or sorry uh house values to drop by 10 or 15 percent I think that would be a very optimistic um yeah I I think my best skate scenario would be 30 40 my worst case would be 80 or even more it happened in Japan it can happen here and that will truly uh disrupt everything it will disrupt not just people who have been loaded up

on big mortgages uh and bought properties at very high valuations in the last few years that will also disrupt people who withdrew Equity from their homes uh to uh increase their their standard of living because of the rising cost of living in the last couple of years they extracted Equity from their homes they might end up homeless because the amount of equity they extracted might be

more than the value of their homes eventually um thank you it's gonna disrupt a lot of uh people in their 50s and 60s with their plans to sell their London property and then take half of it and buy another property and live off uh the rest I think that's that's going to be something that is going to be just a dream that will not happen anymore

uh what's the positive though there is a positive well the positive is that we're going to go back to reality because prices have been uh really not based on reality for the last 20 years mainly because the central bankers and and the government have trapped try to keep uh house values uh artificially um High they've they've kept interest rates artificially low at zero we have uh

the uh or we had the lowest interest rates in 5 000 years uh from 08 to 2021 according to Edward Chancellor and I just got this book which is the price of time uh the story of Interest by Edward Chancellor I just started reading I highly recommend it you understand a lot of what's going on in the housing market by reading this book I'm nowhere near

finished but I can see it's a good book and I think he uh wrote it last year or it was published last year so as you can see Edward Chancellor puts uh even gives you a little chart of uh interest rates in the last five thousand years and uh we uh are gonna hear for years to come or maybe forever they're gonna talk about this period

where uh the central bankers and and the governments went mad and manipulated interest rates to zero and even negative so what we're getting now is the reversal and uh the fact that this was the lowest uh interest rate environment in 5 000 years is worrying because that means the correction is going to go through the mean uh and uh it's gonna be painful of course uh

it's not going to be painful for those who have been patient or who have been uh careful with their finances and didn't overextend themselves they might be able to buy properties uh at Fair valuations so before we look at the markets just wanted to show you the two-year Guild yield and why um I made that analogy that the dam has been broken and I started warning

back in April 2022 about the UK house prices uh yeah April 2022 and why why that that date well because it was back then that we broke through that line that trend line and uh my background of course is in finance in the city of London and aside from fundamental analysis we did a lot of technical analysis and when I saw that line break I thought

that was very significant and that's why I started warning because the trend that we've had since not the early 90s of lower rates uh has turned the question uh I had at the time is was whether the reversal was going to be gradual or sudden and as you can see by the truck it looks very sudden so that's why I think the dam has broken this

is a weekly chart of course we're breaking out on a weekly basis above uh the close that we had last year during the crisis as you can see here we've got today and tomorrow to come back below that that Weekly Hive from last last year I'm not sure we will so I spoke about this a few weeks ago that I I could see mortgage rates and

double digits by 2025 and it could be even before who knows it seems to think things seem to be getting out of control and why is that why can't the bank of England intervene well because investors are losing faith in the Bank of England they're selling these Securities they see that the inflation rate isn't still near double digits why would they want only a three percent

return on their money if the currency has been debate debased by double digits so that's why those rates are going up this is really going to be uh disastrous not just for the uh real estate market but also commercial real estate and and also for uh credit card loans consumer credit because all these rates are based off the uh Bank of England rate off the uh

guilt rate the guilt rate guilt yields are considered the risk-free rate of return because it's what the government pays and the government of course technically can print just to pay their way around so uh I'm gonna stop right here and uh just wanted to say uh I'm not here to advise you on whether to buy a home sell a home get a mortgage I'm just here

to tell you what I see you should do your own uh due diligence your own homework you should talk to uh mortgage advisors uh financial advisors and uh yeah come to your own conclusion and um all I'm saying is that be careful when people say oh don't worry rates are going to come back down because I don't think they are they will eventually maybe in in

20 30 years but the next few years is going to be uh difficult so it's quarter to nine A.M London time let's quickly look at where the markets are this morning we got spot gold at 1946 it's up just over six dollars uh Heisman 48 low has been 39. uh silver is up over one percent it's at 23.70 it's up 26 Cents we're right near the

high uh the stock market is virtually unchanged so I won't go through it uh the currencies uh as well are virtually unchanged except for the pound is a little stronger here uh it's up 0.2 at 124.50 let's check the uh antipodyian currencies yeah the Aussie dollar is up half a percent just below 67. um let's look at the uh dollar versus the Canadian dollar dollars down

about 0.2 of a percent at 133.47 I saw the Bank of Canada raise rates yesterday they're supposed to have been on a pause so that was a surprise uh the Kiwi dollar is up half a percent at 60 70. let's quickly go through Commodities WTI Crude is up a quarter of a percent 72.80 uh Brent is up a third at 77.10 Platinum is up seven bucks

at a thousand and thirty and copper is up two-thirds of a percent at 378 uh just a quick uh update on live cattle uh while the dollar made an all-time low versus live cattle or live cattle made an all-time high versus the dollar so as you can see here live cattle that's how many cents per pound so that means that with one dollar right now you

can get just over half a pound of cattle I think that's just a reflection of currency debasement there might be some factors related to that market that I don't know but uh I mean the overall pictures that the dollar is becoming weaker I would say let's quickly look at the guilt Market of course well the two-year deal yield is uh continue to test that 460 level

right now at 462. so uh the 475 level will be very important I think in the short term if we can close back below 4.2 tomorrow that would be a result and it doesn't look like we will so that will confirm that Weekly breakout which is a bad bad sign I would say Not Just For Real Estate but for the whole economy uh to the U.S

bond market the the treasury market we got the 10-year uh back above 380 right now and yesterday we saw rates rise yields rise so it looks like uh Bond investors are not comfortable with the central banks and they're going to continue to sell uh bonds and and that's going to make things even worse especially with uh news of this U.S treasuries one trillion borrowing Drive set

to put Banks under strain analysts fear scale of new issuance following that ceiling flight will push up yields and suck cash out of deposits and these International markets yeah these are international markets so this will affect mortgage rates in the UK because the U.S government needs to borrow and I'm sure a lot of investors are gonna think uh twice about lending uh to the UK mortgage

Market before you know they lend to the U.S government at five or five and a half percent that's how this will affect the whole world I would say so with that I'm going to wish you all a very good day take care bye