The age of decadence

Citation

French, N. (2013), "The age of decadence", Journal of Property Investment & Finance, Vol. 31 No. 2. https://doi.org/10.1108/jpif.2013.11231baa.001

The age of decadence

Article Type: Editorial From: Journal of Property Investment & Finance, Volume 31, Issue 2

Given that as I write this in mid-December, the world only has a few days left before the cataclysmic events, as predicted by the Mayan Indians, will envelope the world on the 21 December, you as the reader may feel that my comments are slight in comparison to the end of the world. But assuming that you are reading this and that the demise of the human race has been greatly exaggerated in a “Twain-esque” manner, there is still an issue of the world economy and its impact on the property market.

Last week, I was honoured to be a keynote speaker at the “3rd Academic Conference in Property Management, Valuation and Development” held by RICS Hellas and the Regional Development Institute of the Panteion University[1]. Greece is a country that is used to the word “austerity”. It is the word of 2012, all across Europe and, to a lesser extent, the USA. The world economy has decades of growth fuelled by cheap money and financial vehicles that relied more on enthusiasm and belief than fundamentals. Personally, I should not complain. I have benefited from the economic growth overall albeit I, contrary to many of my peers, not so much as an individual. I may be odd in today’s world but, a party from my house mortgage, I have never borrowed. My credit cards are paid off each month and I have never spent more than I had. I say this not to boast but to provide an analogy. Margaret Thatcher, when she was the shadow treasury spokesperson in the UK, once said that running a country is like running a household; the books should always balance with expenditure matching income. It is therefore ironic that she was the catalyst of many of the changes that eventually have led to the austerity of today. She started the deregulation of the financial services sector in the UK that, through her close relationship with Ronald Regan, led to similar initiatives across the Atlantic on Wall Street. She encouraged a generation of home-owners often borrowing at levels way beyond their means and she created a political climate that encouraged monetary growth. These are statements of fact and not a political comment. Indeed, subsequent Prime Ministers of the right (John Major) and the left (Tony Blair and Gordon Brown) have overseen governments that have continued and extended these growth policies. Borrowing and borrowing to feed the ever increasing demand for growth. And the UK was not alone, all of Europe (with the possible exception of Germany), America, Australia and even the more frugal Canada borrowed.

The result? Global financial meltdown. In 2007, there were already commentators, myself amongst them, saying that the markets were overheated and over priced and that a downturn was around the corner. But, nobody foresaw the “double whammy” of the toxicity of sub prime loans and the catastrophic fall out of their consequence with Lehman Brothers’ (and others), demise in 2008. To mix my metaphors, that was the last straw that brought down the house of cards that was the banking system.

And all that impacts on property. Just as values and rents rode the crest of the wave of borrowing, they have now tumbled down to levels (in real terms) not dissimilar to the levels of pre-Thatcher. This is not a cyclical downturn, this is a structural change.

As I proffered in my speech in Athens, we are returning to the days of my father. Prudent lending at a lower level, low loan to value ratios and investors that buy actual cash flows and not the promise of future growth. I still here valuers discussing the “abnormal” market but I think we are looking at it the wrong way round, we are not going through a period of austerity, we are recovering from a period of decadence. This is now normal.

As the RICS (2012) president said:

There is a deeper, unanswered question: “What is the new norm?”. In the boom years of rising property prices, investor confidence and readily available credit, we came to regard each new peak as a new norm – a tide that could never recede. Whatever the new norm turns out to be, it’s unlikely to be clear any time soon. In their highly regarded analysis, After the Fall, Reinhart and Reinhart (2010) conclude that the retrenchment following the global financial crisis will probably endure for as long as the credit surge that preceded it – in other words, until 2017 or so. As such, the current episode of deleveraging is likely to last for a few more years. During this period, the economy is likely to under-perform, with possible negative consequences for the labour market and occupier demand. Given that the 2007 US sub-prime collapse precipitated an almost unprecedented shock to the banking system, and that output and markets fell in so many economies simultaneously, it’s hard to argue with their analysis. In the shorter term, the indicators are discouraging: an easing in occupier demand and a decline in rental and capital value expectations. In the longer term, it remains to be seen whether government intervention or market innovation will lead to a quicker recovery. Our role, as a profession, is to help ensure they do.

It is my belief that even that view is optimistic. I am not a “glass half full or empty person”[2] but I do believe that we need to temper any enthusiasm of a quicker recovery with the belief that this might already be as good as it gets. No one can be certain, but I strongly believe that we are in a new world. The economic, political and social challenges of the next decade will determine the role of property both as a factor of production and, once step removed, as an investment. So whilst I am wary of predictions, sometimes things do come true. I am not convinced that the Mayan Indians have got it right but, just in case, I will not buy any Christmas presents until the 22 December!!

Notes

1. As selection of the papers from this conference will be published in JPIF in 2013.

2. As my brother, a Professor in Decision Theory, says, “it doesn’t matter as the glass will be knocked over anyway”.

Nick French