Mon 22 Sep 2008
It is worth making an aside here. When the banks actually run out of money they can?t lend. Asset prices depend critically on the ability to borrow against them (and that includes the price of current mortgages in the secondary market). When the banks can?t lend asset prices can fall to very low ? indeed insanely low levels. At the height of the crisis some 2 bedroom apartments walking distance from the centre of Oslo (one of the richest cities in the world) and with full 180 degree fjord views traded hands for USD15000. You would have easily made 30 times your money buying those properties. Property prices can fall to very low levels without any bank lending. Indeed the ability to borrow to buy assets is often crucial in maintaining their prices?
…from this article on the Norwegian financial crisis. Credit-based inflation…an idea at the same time obvious?(once you are made aware) and profound. The implications of this for the idea of wealth, poverty and the understand of value are bone-chilling. Or am I making too much of it?
September 23rd, 2008 at 12:17 am
I think you’re right on target here… credit expansion is responsible for a lot of the rise in bull markets, so credit contraction weighs in with similar influence on the downside…
In terms of stock markets, overshooting to the downside is just as common as overshooting to the upside… and I doubt that real estate would be any different.
There are a few things we can do in light of such illumination…
* Know that the market can go much lower than we anticipate (hedging strategies work well here)
* Be ready with cash to buy what really interests us — whether it is a condo in downtown Oslo, or a company that makes obscene profit margins
* Keep our own debt and leverage to a minimum so we don’t become one of the forced sellers.
September 23rd, 2008 at 8:25 am
From FT via Paul Kedrosky:
“If i-banks cut leverage ratios from 30 times (or recent levels) to 20 times, this would trigger $6,000bn worth of asset sales.”
That would be 6 Trillion dollars of de-leveraging. As the brokers are going to reorganize as banks, you can pretty much plan for their leverage ratios to come down, whether by buying assets (buying mid-range banks) or selling their current holdings, or some combination of both.