As far as real estate is concerned, all we know is that the cycles are protracted in both directions. While government and central bank policies have supported housing markets and values, and continue to do so, it would be rash to declare that the downswing in prices is over. There are too many bad mortgage loans that havenāt been written off or restructured, too many banks whose main aim is to shrink assets, too many properties for sale (or hidden in bank ownership), and itās far too early for households to come back from their balance sheet repairs. The UKās chronic under building of housing may offer some protection, but not in the event that the economy should slip back in to recessionāa possibility that becomes increasingly likely in a lot of places in the face of concerted fiscal retrenchment in 2011-2012. In the longer-term, the weaker age structure, especially of younger, first time home buying citizens, will most likely dampen the housing cycle, certainly in real terms.
Losing our Financing Ability
The changes in the young, working age and older cohorts mean that the dependency ratio of growing cohorts of older citizens on the working age population, is going to double. Put another way, today there are between 2.5 and 4 workers per pensioner in advanced nations, but by 2050, there will only be 1 to 2. And that means that the financial task of supporting an aging population is going to become more intense, raising crucial questions about the adequacy of
individual savings, and the affordability of public pensions and healthcare schemes. Individuals generally donāt save enough for their retirement. In a recent UK survey, a quarter of those who could save didnāt, and half of men and more than half of women who did, didnāt save enough. Itās not dissimilar in most other countries, and in the United States, the Fedās latest Survey of Consumer Finances revealed that current or close retirees have roughly $50,000 of retirement savings, excluding the now questionable equity in their homes. Those born before 1945 are a relative class apart, but younger baby boomers save less, and their progeny even less. In a macabre sense, the financial crisis couldnāt have been better timed, if it focuses attention on the need for people to save more for retirement.
The paradox, of course, is that whatās good for the individual goose is not good for the aggregate gander. If we all end up saving more, we impart a strong deflationary bias to the economy thatās bound to unsettle equity and real estate markets, unless governments can use their balance sheets to offset the effects.
The trouble is they canāt. Governments have now become ensnared in the financial crisis, and while Americans and Europeans argue now, as they did in the 1930s, about the balance in policy between economic growth and budgetary austerity, we all face a protracted period of concerted fiscal drag. The austerity impetus may be voluntary and planned, or it may be forced by financial marketsāletās call them more appropriately, creditorsācapitulating in the face of policy inertia or non-credible financial reforms. Whatās worrisome about the current situation is that itās unprecedented in peacetime for so many large economies to be facing the same way, fiscally.
