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House Price Outlook - Looking Ahead to 2008

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So, 2008 is the year it all kicks off. A massive, destructive, fascinating financial threat has evolved, the growth of which has gone unchecked and unrestrained for years. The threat is so magnificent in its simplicity that it amazes me it has escaped the radar screens of the majority for so long. Or perhaps it has merely been ignored.

I talk, of course, about the explosion of credit. Over the last 30 years the supply of money has increased at an exponential rate. As the ballooning supply of money fed into the banking system, banks have been able to re-lend it, creating an exponential increase in the supply of credit. Money has become increasingly easy to borrow and recently, following the carnage of the 2000 stock market crash, it has found its way into the property market, pushing up property prices around the globe.

Rising property prices inevitably lead to investor interest, which in turn lead to public interest, which in turn lead to house price hysteria. Chasing an easy buck, a fast buck, people have allowed hope and greed to triumph over common sense and reality.

The average home buyer has taken on huge loans just to enable themselves to get onto the property ladder. But they have forgotten that it is actually easier to go down a ladder than it is to go up it, and that there are significant risks involved in their decision. These buyers have little or no financial buffer in place to continue making loan repayments if interest rates rise or if they lose their jobs.
Similarly, amateur investors have bought properties at prices which defy any business logic.

But why do people make these decisions when they know that the economy is cyclical and that bad times follow good?

Who knows. What is clear is that the top of the current economic cycle is near, the volatility in the stock markets this past year has alluded to that fact. As the economy starts to turn downwards, corporations and homeowners alike will begin to struggle under the the weight of their huge debt burdens.

Without a doubt, 2008 will be a difficult year. It will be significantly harder to borrow money. Rising market interest rates will cause homeowner mortgages to reset 2-3% higher than the teaser rates seen 2-3 years ago. These rates will rise because the risk of lending money will increase, even as central banks move to cut base rates aggressively in an attempt to stimulate the economy.

As homeowners begin to default on their expensive mortgages, banks will become more conservative, curbing their lending activities. The availability of credit will dry up. Those who wish to buy property cannot, they do not have access to enough money. Those who wish to sell cannot, there is no one to buy their homes from them. House prices will begin their painful 2-3 year correction of 50% or more.

As central banks cut their base rates to stimulate the economy, their currencies will fall in value and inflation will increase dramatically, whether it is reported as doing so or not. Look for the price of oil and other commodities to rise as the value of our hard earned salaries and savings fall.

As currencies fall and inflation rises, the price of gold will start to ascend into the heavens. Buyers, looking for a safe haven for their funds and a hedge against inflation will begin to pile into the metal. The price of silver will accompany that of gold upwards and will most likely exceed the performance of gold, reflecting its scarcity.

Equities will continue to fall well into the year as they begin to price in an increasingly pessimistic economic outlook. Jobs will be lost as corporate profits suffer, increasing the number of mortgage defaults and sending house prices down further still. Consumer sentiment will tank.

Yes, we are in for some tough times in 2008.

So why the warning now?

I have built up a decade of solid financial market knowledge, understanding and experience. I can see trends emerging and can identify risks early, mitigating their impact on my assets. But, in that time I have also built a solid understanding of the human psyche. In fact, the two are much more closely linked than many realise. Human nature has a big impact on financial market hysteria.

When times are good, when property prices and other investments increase in value, we are not receptive to bad news. We simply ignore it or pretend not to notice it. Why should we listen when we are having such a great time?

A number of financial commentators, despite their good intentions, have wasted a lot of energy calling the top of the market before people are ready to listen. They are exactly right but their words are wasted since only a few people will have the common sense and free thinking to acknowledge the possibility that the party is ending.

Which Way Home was conceived at the end of 2006 and created mid-2007. Since that time, this site has sat on the sidelines, patiently awaiting its cue. Recent financial market conditions, however, have dictated that it is now time to step out of the shadows. The inflexion point came during this autumn, as mortgage defaults in the U.S. and a worsening outlook for real estate exposed an oversupply of credit and a lack of risk control in the financial sector. Also, during the last half of the year the stock market suffered a couple of nasty dislocations, hinting that trouble may soon be here.

Now is the time to put all of the cards on the table. People will soon see things starting to turn bad and will have a context for the gloomy yet truthful predictions they have previously ignored. Which Way Home is here to help its readers understand the current situation, to take steps to protect their wealth and to choose the right financial path going forward.

I’ll give my first tip now – don’t buy any property! If you already own a property and have the flexibility to do so – sell it right now!

Keep reading and keep updated.

Which Way Home

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