My son had a few friends over at our place to celebrate his 11th birthday the other day. The father of one of these kids stopped by, and we had a talk that turned out to be a little more frank than I had expected.
It turns out that the recent increase in interest rates has hit him and his family hard, and I got the impression that he's looking to sell his house, even if he didn't say so directly to us. The bills are just too much of a drain on their economy, and they have to cut down on something.
This fits well with other news. House prices in the US are going down. The same is happening in Norway, and I guess this is also going to happen in Portugal, if it isn't already happening. The driving mechanism behind this is the rise in interest rates.
Meanwhile, the price of gold is holding up well despite the increase in interest rates. This is because most people who own gold don't have much debt. They aren't pressured to sell. Gold is also a good alternative to other assets when times are tough and bankruptcies become widespread. It's a safe haven both in times of inflation and times of deflation.
This means that the price of real-estate is likely to go down relative to gold over the next twelve months or so. The price of a comfortable but somewhat old three bedroom apartment in Porto, which hit 2.2 kg of gold back in 2014, and is currently at 4.4 kg is likely to go back down. It may even be on its way to desperation and despair, which would be somewhere in the one kilogram region.
From earlier analysis I got the following numbers for our apartment:
- 2005 - 12.7 kg
- 2014 - 2.2 kg
- 2017 - 3.3 kg
- 2022 - 4.4 kg
- 2024 - 4.1 kg (estimate added in 2024)
My guess is that we'll be back below 2.5 kg by 2025; maybe earlier if the market crashes.
The same analysis has the following numbers for comparable real-estate in Norway:
- 2004 - 20 kg
- 2017 - 16 kg
- 2022 - 14 kg
- 2023 - 10 kg (datapoint added 2023)
- 2024 - 6 kg (datapoint added 2024)
This too may be on its way down below 2.5 kg. That would be an insane drop from current levels. But such a drop happened back in 1986, and may well happen again.
It isn't inconceivable that comparable real-estate everywhere is going to go down below 2.5 kg, because the increase in interest rates currently taking place are global in nature. When the FED increases their base rate, all other central banks have to do the same in order to support their local currencies. The alternative would be currency collapse with associated hyperinflation.
We can even argue that a drop below 2.5 kg is more likely than not, because the only way to avoid it would be for the FED to find some sweet-spot for their interest rate that tempers price inflation while still encouraging borrowing, and that sweet-spot is extremely hard to find, if it even exists.
The more likely outcomes of FED policy is either deflationary collapse or hyperinflationary collapse. Either way, gold goes up against everything, including real-estate.
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| Reflection in a soap bubble |
By Brocken Inaglory. The image was edited by user:Alvesgaspar - Own work, CC BY-SA 3.0, Link
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