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 havenât 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 itâs far too early for households to come back from their balance sheet repairs. The UKâs chronic under building of housing may offer some protection, but not in the event that the economy should slip back in to recessionâa 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 donât save enough for their retirement. In a recent UK survey, a quarter of those who could save didnât, and half of men and more than half of women who did, didnât save enough. Itâs not dissimilar in most other countries, and in the United States, the Fedâs 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 couldnât have been better timed, if it focuses attention on the need for people to save more for retirement.
The paradox, of course, is that whatâs 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 thatâs bound to unsettle equity and real estate markets, unless governments can use their balance sheets to offset the effects.
The trouble is they canât. 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 marketsâletâs call them more appropriately, creditorsâcapitulating in the face of policy inertia or non-credible financial reforms. Whatâs worrisome about the current situation is that itâs unprecedented in peacetime for so many large economies to be facing the same way, fiscally.
