London Is Crazier

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“Mortgage rates hit record lows!”

That is not a news headline, but the beginning of an ad that popped up on our computer this morning. Beneath it were rows of smiling, goofy birds carrying the initials of the 50 states. The significance of the birds surpasses our imagination, but the significance of the headline is familiar to us all.

As long as mortgage rates remain low, we are told, everything’s gonna be alright. People will be able to buy…to refinance…to ‘take out’ equity…and to buy more.

Nobody ever lost money underestimating the intelligence of the public. People will believe anything — so long as it is flattering. Americans flatter themselves with the idea that there is something so great about their society — it will make them all rich! It does not worry them that the “wealth” comes in the form of higher house prices. They lose no sleep when they read that 35% of private investment is going into residential housing…and 40% of new jobs in the last two years have been in the housing sector. Their palms do no sweat when they think of how their neighbors financed their houses — and now have no equity in them. It does not concern them that wages are stagnant — while the cost of housing soars. Nothing seems to bother them at all!

The Financial Times reports that wealth in Britain rose to 5.8 trillion pounds last year — equal to about 20% of the total wealth of the United States. That’s how much everything in the nation is worth — houses, offices, roads, companies…everything. The amount went up last year by 404 billion pounds — or more than $10,000 for every man, woman and child in the country. The increase was led there, as in our own fair land, by residential real estate, which rose 12%.

You see, dear reader, Americans are not the only ones who think they can get something for nothing. The illusion is universal, and cyclical. It comes and goes. But it comes in joy…and leaves in sorrow.

The average Brit believes the same fantasy as the average American — as long as his house is rising in price, why should he worry? His statisticians and economists tell him he is getting richer. He sees the evidence of it himself — a guy down the block sold a similar house for a lot more than he paid for his. As long as rates stay low, he can refinance…trade up…sell out… He has real money.

We are looking for a house in London. Next year, the whole family is moving to the city. Yesterday, Elizabeth looked at a nice, but not extravagant, house for rent for 3,000 pounds per week.

“THREE THOUSAND POUNDS PER WEEK?!” exclaimed her shocked husband, in all capital letters. “Why would you look at a place so expensive?” He quickly did the math…that’s about $5,500 per week…about $24,000 per month!

“Well, everything is expensive,” came the reply. “Besides, I wanted to see what you got for that kind of money.”

“Well, what….?”

“Not much…it’s fancy…but not that fancy….”

Of all the mad, mad real estate markets in the world, South Kensington, London, must be among the maddest…as least to a modest scribbler who earns his modest salary in modest dollars.

But, we do not bring it up to whine…or wince…dear reader…we bring it up to warn.

• The popular idea — as long as rates are low and prices are rising, we’re okay — is dangerously wrong. Imagine that all Britain’s property doubled in price. Or, in America, imagine that the house worth $500,000 suddenly became worth a million. Everyone would be twice as rich.

The average new mortgage would double. Property taxes would soar, too. People could take out the additional equity until the weight of additional debt crushed them. What could they do but sell their property? Or declare bankruptcy?

Since 1996, $5 trillion in additional “wealth” has been added to the U.S. economy — from increases in house prices. Now, the burden of the accompanying debt is becoming a drag. Bankruptcy rates are rising. House prices on both coasts may be reaching their apex.

Forbes magazine: “Get out now because house prices on the urban coasts have peaked. That’s the consensus of experts, based on ratios such as house prices to local incomes and mortgage payments to local rent prices. While I’m usually skeptical of expert consensus, this smells right. Rising interest rates have started to put the brakes on house appreciation. The number of ‘for sale’ signs in California is exploding like spring pollen.”

And these headlines from CNN:

“Bankruptcy filings climbing.”
“Workers Raid 401(k)s.”

Soon, we will all be so rich, we’ll go broke.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.

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