Armstrong and Macbeth

A question put to Martin Armstrong 
​Source: ArmstrongEconomics.com February 10, 2016

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​Dear Marty, When talking about negative interest rates and a shift of cash from banks to the stock market from 2017, would that not mean that cash may also shift to property and other assets? Yet I thought that we have seen the high in the property market already? Thanks for your useful insights as ever. SP

ANSWER:
Real estate has peaked in REAL TERMS. The sub-prime market that made the high in 2007 was not exceeded. The secondary rally into 2015 was the high-end, so we now have the IRS targeting NYC and Miami in their hunt for money.

The high-end will now decline. The average home will make the transition, but will not be making new highs. In real terms, the high is in. Real estate varies tremendously based upon location. This is due to capital inflows that drive certain markets like Vancouver and Toronto in Canada or New York and Miami in the States. Washington, D.C., held up in 2007-2009 because politicians did not want to lose their jobs. Taxes will also prevent real estate from reaching new highs in “real terms.”

In nominal terms, some areas will make the transition to new currencies; the movable assets will appreciate the most. Those are the assets that you do not have to make annual payments on to hold them annually.

We also have a collapse in long-term interest rates to the point that banks do not want to write 30-year mortgages anymore. As that long-term view collapses, so does the leverage. That will cause housing to decline in “real terms.”

​Vancouver is the Poster Child
for a Real Estate Bubble
Interview with Hilliard MacBeth - February 9, 2016

The Foundation of Wealth
is the ownership of income generating enterprises.

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The chart at left and quotes below are from Charles Hugh Smith, February 10, 2016. Hat tip to ZeroHedge

The wealthiest households' primary wealth is businesses and shares in businesses. The bottom 90% depend on the family residence as a store of wealth, and on debt as a means of funding asset purchases and consumption.

But now that housing has been financialized and globalized, it is prone to boom and bust cycles like every other risk-on financialized asset.

The key take-away: focus on owning income-producing assets, not a primary residence. The second key take-away: Don't finance your assets with debt; finance your income-producing assets with savings and sweat equity, not borrowed money.

​This is why real estate should be looked at through the lens of fundamental appraisal, not simply price comparison.