[0:00]Welcome back to Gary's Economics. Today we are going to talk about interest rates and house prices.
[0:08]All right, so I want to talk about a very interesting thing that has happened in the last year or two, which is that interest rates have risen very aggressively all over the world, including here in the UK. And everybody has been expecting that that is going to cause a big fall in house prices, which hasn't really happened. So today we're going to explain why that is and talk about what it means for you and what's going to happen from here, and we're going to end up with a nice sort of concept that I use to understand more broadly what is happening in the economy, which I've used for a long time. So I want to start by basically going through the story of house prices since the beginning of COVID, because that is when big dramatic change started to happen. So at the beginning of COVID, there was a ton of predictions that house prices would collapse. And at the same time, I wrote my first article in March 2020, and we made our first video on this channel in June 2020, I predicted we would see a very aggressive increase in house prices, which which we did. So from the beginning of COVID until sort of the end of 2021, there was a super aggressive increase in house prices all over the place. So that that first question is why did everybody make such bad predictions about house prices in the early COVID? I think this is based on a very simple logic which I think a lot of people have kind of built into their brain, which is that when the economy is bad, house prices fall and stock prices fall. And lots of people believe this. I think this is it's almost kind of how we're trained to understand a weak economy is a collapsing the stock market for the house prices. It's a common logic. It's widely believed. It's totally incorrect. And I think the most obvious example of that is if we go back and look at 2008. 2008 is an is an interesting example, because on the initial onset of the 2008 crisis, we saw really massive fall in stock prices, and in a lot of the world, we saw pretty dramatic falls in house prices as well. But if you look at the long-term picture of 2008, 2008 was actually the start of an enormous house price boom and an enormous stock price boom. So immediately there were sharp falls, but over the next sort of 10, 12 years, we saw truly enormous house price rises here in the UK, in the US, basically all over the world. So what you have here is a good example of a case where the economy was actually phenomenally weak for the sort of 10 years after 2008. And yet what we actually had was really aggressive increases in house prices, really aggressive increases in stock prices. So this is the first challenge to this commonly held idea that when the economy is weak, house prices go down. If you look at 2008, what we actually have is a situation where the economy was phenomenally weak, and it caused an enormous boom in house prices. But despite that happening after 2008, this idea still exists in the in the popular consciousness and it exists in the minds of economists, people who write articles in the media about economics, that when the economy is weak, house prices fall. And um, I really clearly remember at the beginning of COVID, when I I wrote for the Guardian, saying house prices are going to go up. At the same time, Larry Elliot, chief economics correspondent of the Guardian, wrote an article, and we'll link it in the description, so you can see, saying house prices are going to collapse later this year. So why was it that I was then able to make this correct prediction when basically everybody else was predicting a house price crash, it didn't happen? Now, the reason for that is essentially because my background as a trader and as an economist is an inequality economist. So at the very beginning of COVID, it was very clear that governments were going to give a ton of money out, and I cannot emphasize how enormous the amounts of money given out by the UK government, the US government, governments all over the world, were during COVID. And this was already pretty obvious, very early in COVID. Sort of March, April, 2020. We knew there's going to be a long lockdown, governments are going to give an absolute ton of money out. So for me, I think most traditional economists are just like, they give him money out because the economy is weak. We economy house prices go down. But for me, as an inequality economist, I wanted to know who is going to end up with that money? If you are focusing on distribution, that's the question you want to ask. So we know the government's going to give out huge amounts of money. We know somebody's going to accumulate huge amounts of money. Who is that going to be? And what that meant was I was able to realize what was then and I think still is now the most important and underappreciated consequence of COVID, which was this enormous amount of money given out by the UK government, also the US government, global governments, will be accumulated by someone. It will be accumulated largely by richer people. And what that means is COVID will lead to a situation where rich individuals and rich families have got absolutely enormous amounts of money. And I think that that was the the big thing which was missed by economists and still is being missed by by economists. And if if you understand that one of the consequences in my opinion, probably the most important consequence economically of COVID, is that rich people will accumulate enormous amounts of money. I genuinely mean enormous amounts of money. We're talking about your average rich individual accumulating 100, 200, 300,000 pounds, you know, the average billionaire increased their wealth by I think something like 720 million pounds in the first year of COVID, right? So enormous accumulations of wealth by the rich. If you know that's going to happen, it's just totally insane to predict anything other than a massive increase in house prices. Because what the rich people do with their money, they buy assets, um, they lend it out to people who want to take out mortgages. They essentially they drive house prices up. Rich people get a ton of money, house prices will go up, stock prices will go up. I made those predictions and that is what happened. But then a really interesting thing started to happen, which was about two years ago, interest rates started to rise. In this country from effectively 0 to just about 5%, similar in the US, similar ish in Europe, that they didn't reach quite the same high levels. And that changed the dynamic basically. So that moved us into this new situation, which is economists and traders have this very strong belief that when interest rates go up, asset prices and house prices should fall. And that is for a very understandable reason, which is in the case of house prices, people can't get a mortgage if if interest rates are super high, and lots of people, lots of you will have witnessed that, that it's much more difficult to get a mortgage when rates go up. And also on the flip side, you know, rich people can now get 5% interest on their cash, so maybe they're not going to buy houses, they'll just they'll keep the cash and they'll they'll get their 5% interest rate, and they'll be happy with that. And everybody started to predict, you know, in many cases, the same people who predicted a house price crash at the beginning of COVID, came back and said, okay, well, now, now we're we're definitely going to get a house price crash now, because not only have we got this terrible economy, but we've also got really high interest rates. But what actually happened was that, you know, basically house prices, they sort of stumbled a little bit, but I think the broad picture of house price depends where you look is. They rose super quickly, sort of 30% also in two years. And then since then, they've kind of maybe stumbled down, 5, 6%ish, um, and it was during this rapid rise in interest rates that I gave my interview, uh, with Aaron Bastani on Navara Media, which which you can find on YouTube. That was when interest rates had just started to rise really quickly, and then everybody was saying house prices are definitely going to fall, and I came out and said, no, I think I think house prices will actually, in the long run, continue to rise. And and I think I've kind of been born out again here. This crash hasn't happened. But the house price growth has definitely slowed. And I think we could already sort of see when when I said that 18 months ago that that house prices were basically stopping and then they they were not going up any longer. So now everybody is saying and they have been saying for the last couple of years, especially the last sort of six months, 12 months, why on earth have house prices not fallen despite these massive rises in interest rates? And people have been saying the same thing about stock prices. Like if stock prices go up very aggressively, all the classic economics says stock prices should fall. But um, I checked the stock markets yesterday, prior to this video, we're filming this in the middle of December. Yesterday, French stock market hit a new all-time high. German stock market, a new all-time high. US stock market is just below the all-time high, which it hit basically before the rates went up. And this is the same in most of the world. Most global stock markets are at or through all-time historic prices. And I think this is First of all, something worth realizing, because I don't I don't think people are aware that in the space we're in now in the economy, where living standards are collapsing, there's a sort of broad consensus we're in an economic crisis. I would think you could justify being called an economic disaster that the vast majority of global stock markets are at or through their all-time high. That's the first thing which I think is first is worth internalizing. And the second thing is why has again, everybody been so wrong? Why is it that despite these massive increases in interest rates, we haven't seen these house prices, we haven't seen these stock markets fall. And me personally, I'm not surprised by what has happened. If you go back and look at my predictions at the beginning of COVID, I said we would have mass increases in inflation and we would have increases in interest rates. So my predictions that house prices would rise and stock prices would rise, which they have, was factoring in an acceptance of the fact that inflation and interest rates would rise. And the reason I was able to do that is because I understood this basic driver, which once again is the big thing everyone is missing, which is that rich people have accumulated an unbelievably enormous amount of money. And I think increasingly, the the big driving factor behind economic incorrectness, I think as a trader, you always want to work out what is the big thing that's being missed. And the big thing that has been missed since the beginning of COVID and still is being missed now, is that the rich have accumulated an unbelievably enormous amount of money. If you understand that, then everything that has happened from the beginning of COVID since the rise of interest rates, makes total sense, right? If the rich accumulate a ton of money, asset prices will rise, but also inflation will rise. They will start buying more stuff, you know, they will increase their consumption of rental housing, they will they will buy more houses, they'll they'll rent bigger houses. That'll push rents up, that'll push prices up. Um, and then that'll push inflation up and that will probably push interest rates up. But if the reason that interest rates have gone up is because rich people have an enormous amount of money, then of course prices are not going to fall. Because the driving force here, the first impetus, the first push is a massive accumulation of cash of richer people. So I think everything is really consistent with that. I think if you understand the first move in this economic crisis as as being an enormous accumulation of cash by wealthy people, then you would expect exactly what we have seen, which is pretty much exactly what I've been predicting throughout, which is massive inflation, big increasing asset prices, big increase in interest rates, but asset prices don't fall. That's basically what I've been saying. But what is interesting now, is I think we're moving into the next stage of this, which is which is what I've been calling for a long time, which is If in my opinion, the inflation is caused by this massive transition of cash, gift of cash essentially, from the governments to the rich, then you would expect that inflation to be kind of one-off and then stop. Because that gift was a massive one-off gift and then it didn't stop essentially, but it it leveled out a lot, which means that the inflation happens once and then basically goes away. Um, and that is, you know, what I predicted in my predictions a year ago, a year and a half going is basically what we see. Inflation is collapsing all across the world. It is still above the 2% target in most countries, including here in the UK, at the moment, but the direction seems to be aggressively down. And now economists are starting to predict that central banks will will start cutting. Um, and I put a few bets on early this year that at that time, early this year, markets were saying that UK interest rates would reach nearly 6%. Whereas in the middle of next year, 2024, this might be 2024, this goes out, actually. So the middle of 2024, interest rates were expected to reach nearly 6% here in the UK. Now they're expected to be only just above 4%. And I think that even that, to be honest, that prediction might be too high. I think rates rates might end up going down even lower than that. And the reason for that is at the same time as the rich have accumulated a ton of money, and this will be very visible and obvious to to anybody watching from an ordinary background, the financial situation of ordinary families has been extremely tight and squeezed. And it is ultimately ordinary families that that drive the economy, and rich families tend to buy assets. So as ordinary families get poorer, inflation will will will start to fall. Now, as those interest rates come down, what those interest rates did, and we can all see that is they they temporarily stopped that aggressive rise in asset prices. So once we know that rich people have a ton of money, asset prices should go through the roof, because the amount of money they accumulated in COVID was truly enormous. But the interest rates do two things. One, they make rich people happy to sit on the cash, taking interest rates, taking interest from the government, because they're making 5% interest on it. And two, it prevents them from doing mortgage lending, because if you go to the bank, you can't get a mortgage because interest rates are too high, so they can't actually lend the money out. Once those rates come down, those two factors will end. Rich people will stop being content to sit on this enormous pile of cash. They'll go back to buying assets again, and they'll start they'll start doing more mortgage lending, which which will drive asset prices and house prices up. So I think we're moving into the next stage of this now, which is another really, really aggressive asset price inflation, including house prices, of course. So I wanted to talk a little bit about this concept of once rates come down, the rich will start using this enormous pile of money again, to buy assets. Because I think there is this concept that exists and I I hear economists on the news suggest this kind of idea a lot, which is that, okay, savings are really high right now. The rich have loads of savings. So they need to spend it down. They'll spend the savings and then the savings will will go away and they'll stop having their effect. And I think this is this is just not how money works. If I have a ton of savings and I buy your house, I don't have the savings anymore, but you do have the savings. Money doesn't work like that. Once the government gives a ton of money out as it has done, somebody has to hold on to that money until the government taxes it back. Money doesn't disappear. You cannot simply disappear your money. You can only give it to somebody else. So what this means is the idea that this massive accumulation of savings by the rich is going to have a one-off temporary effect is just basically wrong. This will have a a massive driving effect for a long period of time, because the rich are going to go around trying to buy all of that assets. But who owns most of the assets? It's the rich. So when the rich try to buy assets, all they do is they they buy the assets from one another, they drive the asset prices up, and the money that this enormous amount of savings simply circulates between the rich people, and then they're effectively unable to, unsuccessful at getting rid of their savings. They simply cannot get rid of their savings. It's impossible because they're buying assets from each other. So how do rich people actually get rid of their savings? Well, the only way rich people can get rid of these enormous savings, which they've accumulated from the government, is to buy assets from somebody who is not rich. But what groups are there in society of people who are not rich, who own assets? There's basically only the sort of property owning middle class. There are still a lot of non-rich people who own property in this country. And the other obvious example is the government. So it creates this massive drive for the rich to buy assets from the middle class. To buy assets from government. The other thing they can do is they can lend that money to the middle class, for example, mortgage lending, to the government, for example, the government will need a lot more money to support the rapidly increasing poverty in the country. But in both cases, they they get the money back, right? If I lend you money from mortgage and you buy a house from a rich person, I get the money back when you buy the house. If I lend the money to government, they use it to pay your rent. I get the money when when it when you pay your rent. So this money creates a force, kind of a vacuum in a sense to suck the wealth away from the middle class, away from the government, to drive the middle class into debt, to drive the government into debt. And and that is the only possible way that the rich can get rid of this enormous accumulated money. So I think that is basically the state of play. That is where we are. I think we're moving into a really interesting next phase of this, which I want to talk about a bit, which is rates, inflation will come down. It's already come down a lot. Thanks Rishi Sunak. He did it, apparently, in every country in the world. Um, interest rates will come down, and asset prices and house prices will increase enormously. And that will happen essentially to the rich, buying assets from each other, but also aggressively buying the assets of the middle class, bankrupting the middle class, buying assets from the government, bankrupting the government. And we are really seeing that. We're seeing decreased financial positions of the middle class, decreased financial positions of the government, and massive increased financial positions of the rich. And I think underneath this, I want I wanted to bring in quickly something which I will probably talk more about in future videos. There's a general concept here, which I I think is useful to understand, which is something that I wrote about when I was at university. Um, and something which I think about a lot, which is that when inequality increases, and it has increased really rapidly, especially in the last few years, it changes the shape of the economy. It means that rich people have more wealth, and ordinary people and governments have less wealth. And what that means is society as a whole starts to demand less goods and services and demand more assets. And that is because ordinary people spend the vast majority of their income in their lives.
[20:04]And rich people save, which means essentially use to buy assets, the vast majority of their income. So as inequality increases, ordinary people's spending power goes down, rich people's spending power goes up, which means society as a whole says, we don't want goods and services anymore. We want assets. Well, who is that good for? People with assets, the rich. Who is that bad for? People who produce goods and services, which is working people. So it creates this kind of centripetal force in society. If the rich are richer, it benefits the rich, because they want the things which the rich have. But it also means you get this interesting disconnect between two kinds of inflation. And I probably will talk about this more in other videos, but when you see inflation spoken about on the news, they are only talking about things like CPI, consumer price inflation, which is inflation in goods and services. It doesn't look at inflation in things like asset prices. But when economies are becoming rapidly more unequal, they don't really want goods and services, because ordinary people are becoming poorer. What they want is assets, because rich people are becoming richer. So you get a natural deflation in goods and services prices and an inflation in assets. But we don't look at the asset inflation. Central banks when they when they consider what interest rate to do, the news that talking about inflation, they only look at goods and services inflation. So we will move into a situation where goods and services inflation and in particular wage inflation is very, very low, maybe even negative, which means central banks cut rates, which I think they will start doing relatively quickly. And then you get this like double whammy impact on asset prices, which is, first of all, the rich are making a ton of money, so assets want to go up. Secondly, interest rates are collapsing, which so assets go up even more. So you get this kind of disconnect, which is the ordinary economy is shit, basically. There's not a lot of inflation, and I think we will move into this world soon. So interest rates come down, whereas asset prices are going massively through the roof. And that's what we saw after 2008 and I think that's what we're going to move into in the next sort of year or two here in the UK and in the rest of the world. And I think we need to have a think about what that means for our society, because if you haven't watched it, I recommend watch the video on this channel called The Asset Economy, because we we I took a lot in that video about what it means for us as a society. And the different groups of people in society if asset prices and house prices go up aggressively, which I think they will do shortly. But I think the most interesting thing about it is, in my opinion, increasing asset prices and increasing house prices will be bad for 90% of of society. And I think some people might be surprised to hear that, because I think a lot of families that own their own property, and a big chunk of families in this country still do own their own property, will feel like they're winning when house prices go up. But the truth of the matter is, the only way to actually benefit personally from rising house prices is to sell your home, basically. And, you know, as more and more young people are seeing, it is becoming increasingly impossible to buy a home if you don't have money from your parents. Which means that if the older generation sells their home to benefit from the increased asset price, then their younger generations, their kids and grandkids will basically become homeless and will basically be stuck in poverty essentially forever. So I think we need to think a lot about what is going to mean for our society when house prices go up even more. I think it will impoverish, you know, 80, 90% of our society. But I think it will also be hugely politically divisive, because there will be a lot of families that own property that will feel like it's a good thing for them, that want to support it, despite the fact that it's long run, impoverishing their family. So I think we need to prepare for this, basically. We need to understand ourselves that rising house prices is part of a mechanism which is impoverishing ordinary families. We need to understand that. We need to share that, especially with people perhaps on the older generation who own property, who think it's good. We need to be able to explain to them and to other people how these rising property prices are going to really impoverish future generations. So my end message on this is, things are going to change relatively quickly. We're going to move into a complicated space where the economy stays terrible, and I think it will get worse. Living standards stay terrible, and I think it will get worse, but asset prices and house prices will start to increase. And that that could be very divisive in our societies. Um, what you need to understand, and what you need to convince your parents and grandparents to understand, if you can, is that this is not society getting richer. This is society getting poorer. Living standards for the masses are getting worse and will continue to get worse. That is a consequence of the massively increasing inequality, immensely increasing wealth of the rich and our societies. The only way to stop that is to tax rich people more aggressively, so the ordinary people can have a fairer share of what we produce in our societies. Um, we can do that. If we tax the rich, we can make life better. I'm going to be pushing that on this channel. So please share this video with your friends and family, support us and um, yeah, help us stop things from being a disaster. Thank you very much.
