Is ‘Brexit’ what the worldwide property bubble has been waiting for (without knowing it)?

Bubble-Cover_web2NEW COLUMN: IN A BOOK I PUBLISHED in the mid 2000s, called The Day the Bubble Bursts, veteran investor Olly Newland explained (among other things) that in his experience, property slumps are usually caused by an “off stage event”.

Although often worried about, expected, and even ‘predicted’, the end of the bubble, a severe downturn – when it actually happens – often catches observers by surprise.

In part, that’s because much of the time, it seems the commentary and market advice of ‘analysts’, economists and market pundits is akin to looking in the rear view mirror – interpreting what just happened, rather than forecasting.

But spare them a thought: The factors, drivers, influencers of the market that the pundits watch incessantly don’t follow neat rules like physics. If only they did. Other factors, like the spurts of greed and panic that characterize any free market, as well as moments of chaos that the pundits don’t/can’t take into account – these make their impact felt.

The other thing is a phenomenon I think of as ‘big picture v. small picture’.

For it seems many of those who focus on the property market fail to recognize is that a ‘property slump’ is usually part of a bigger thing: an economic slowdown or recession – if not depression.

A downturn in the property market is a symptom – not a cause or an end in itself. Experience (and analysis after the fact) teaches us this, but it’s something many market participants, especially newbies, don’t perceive until later. Again, that rear view mirror thing.

Confidence – or a lack of. Look at what it can do.

Confidence – or a lack of. Look at what it can do.

Confidence is the key

Markets, especially markets that run on credit or OPM (other people’s money) rely on confidence. A period of recessionary pressure, even a short one, can shred market confidence by gutting the confidence of those oh-so-crucial market players: the lenders.

It’s no coincidence that one of the chapters of our book The Day the Bubble Bursts was entitled ‘Why the banks are bastards’. The influence of lenders on the fortunes (and misfortunes) of property investors is almost impossible to overstate. Many, many investors have been tipped into bankruptcy by nervous bankers, seeking to reduce the bank’s “exposure” to a sliding property market.

HTSAP_229In a follow-up book called How to Survive and Prosper in a Falling Property Market (still available here) several investors and professionals gave more detailed analysis of how banks behave – and what an investor needs to be aware of to deal with their lenders’ changing appetite for risk. In that book, we used a more neutral description of it than ‘banks are bastards’, and explained that there comes a time in the market cycle when your interests as a borrower, and the bank’s interests as lender ‘diverge’.

At that point, the golden rule applies: “He who has the gold makes the rules”. But (and this was one of the main points of the book): there are steps you can take to insulate yourself from the chill ahead of the snow storm.

But back to the idea of an unexpected “off-stage event” causing a slump. Judging by the turmoil on world money markets in response to the just-announced result of the UK Brexit referendum, the outcome was a surprise to many. It was clearly a ‘factor’ not predicted.

Already, people have tried to predict the effect of a (promised) drop in migrants moving to the UK, and the effect of that ‘change in demand’ (oh boy) for housing on the property market. OK, so that’s interesting – but can you see how that falls into the trap of seeing the property market as a thing in itself, as opposed to a symptom of a greater system?

People focused on a view of the UK’s housing bubble may have seen the statement by the Governor of the Bank of England addressing his ‘extensive contingency plans’ for dealing with the already apparent flight of capital, constrained liquidity, and the severe (albeit temporary) stock market slump triggered by the Brexit result.

Remember what I said about confidence – particularly lenders’ confidence – and the effect of that on an economy and market? Take a look:


Consider that the Bank of England is now in the position of, somehow, making billions of pounds available to head off a crisis of confidence. Governor Mark Carney said he said the bank will take “all necessary steps” to maintain monetary and financial stability in the wake of the Brexit result, citing a barrel of money in reserve worth £250 billion and trying to sound confident:

“The capital requirements of our largest banks are now ten times higher than before the crisis. This substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households, even during challenging times.

“Moreover, as a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities.

“The Bank of England is also able to provide substantial liquidity in foreign currency, if required.”

Ask yourself how that will flow through to international banks, including those that are the parents or major shareholders of banks on this side of the world?

Do you think the events and decisions flowing from the Brexit result in the northern hemisphere will increase or decrease our local banks’ appetite for risk? It’s pretty clear what the answer to that question is. Safety first.

Until you see how quickly a bank can change its “priorities for lending” and alter its “lending criteria” (even for existing lending) you may not realize how horribly, horribly exposed its borrowers are.

So, what to do? Well, there ARE steps you can take to increase your financial resiliency in times of uncertainty and market upset.

But you know that old market saying? ’Buy when everyone else is selling and sell when everyone else is buying’? (Warren Buffett says it as ‘We try to be greedy when others are fearful, and fearful when others are greedy.’) Well, that’s HARD.

To act counter-cyclically takes guts – and preparation. To cite another well known axiom: ‘The time to repair the roof is when the sun is shining.’ I know I say this a lot, but when the market’s booming and money is (relatively) easy to come by, it’s often tempting to let one’s financial ‘leaks’ just keep leaking. Which is a recipe for heartache, believe me.

This column isn’t a sales pitch for our book, but you know what? Come to think of it: I do recommend you read it. Here’s a sample chapter (PDF).

What it’s useful to know is that although there’s no guarantee the future will be like the past, there are patterns and you can learn to (a) recognise them, and (b) take steps to deal with them. Also, certain ‘actors’ in the drama will operate true to type. You can gain a lot by learning about how the game works – before your financial ‘life’ depends on it – and reducing your risk profile before the winds arrive.

If I can venture this sole prediction: I would say the the Brexit result and its associated turmoil will see a longer period of low interest rates. So factor that in to your decisions.

Peter Aranyi

Peter Aranyi

And will ‘the bubble burst’? Yes, eventually. They all do.

Best wishes,

- Peter Aranyi, June 2016

Quoting or reproduction welcome with attribution to

Peter Aranyi is the author of Commercial Real Estate Investor’s Guide and Negotiating Real Estate Deals, and editor of several other property investment books including How to Survive and Prosper in a Falling Property Market, The Rascal’s Guide to Real Estate, Property Tax – A New Zealand Investor’s Guide and Property Law – A New Zealand Investor’s Guide.

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