Those who have been following me for a while know that I love investing in real estate, especially affordable housing projects.
So, it might surprise you that, even though I’m long real estate and expecting the Dollar and Euro to devalue against houses at an ever-increasing pace, right now, I have to warn you.

If you are highly leveraged (60%+ debt to current valuation), I would try to deleverage, if I were you. Sell properties at the absurd valuations we have right now, until you can survive a 30% to 40% crash.

Why do this now?

While central banks will very likely have no choice, but to keep flushing liquidity in the market, many signs signal a shake-out.
One such signal is the US 30-year fixed mortgage rate, which has been really shooting up recently.


What this means is that all investors who need to refinance, need additional mortgages or simply have no long-running mortgage rate agreement need to pay more. Which for many people who invested in the last three years can easily surpass the thin margins and make them go bust.

Another even more worrying signal has just emerged here in Germany. The Sparkasse Banks are a group of local banks, who finance a high percentage of homeowners mortgages.

Over the past 5 years, if you had a high credit score, they would lend you 100% sometimes even up to 125% of a property valuation, with little to no down payment. All the while, interest rates were often below 1%.

This has suddenly changed now.

Many Sparkasse Banks now charge over 2% even for top credit score clients, and are unwilling to accept less than 30% down.
Some even go so far, as slashing the value of properties-as-collaterals to 65% of the market value or less.

This means that these banks are pricing in a significant drop in prices. And their evaluation might very well become a self-fulfilling prophecy.

If banks do not lend as readily and at higher rates, this alone puts pressure on the housing market.
If moreover the banks discount collateral, this can be fatal.
Normally, a change in rates and prices mostly affects people currently buying or selling or whose mortgage rate is not fixed. This is changing now.

Over the past few years, with banks lending 100% and more to the value, they now have relatively little collateral against their loans. This is critical for two reasons:

Number 1:
Central banks here in Europe and around the world had a moratorium on how much collateral banks need to hold, in some cases dropping the requirement to zero. These have expired or will expire soon. So banks need to increase their collateral to liabilities ratios.

Number 2:
When market prices even drop slightly, this gets leveraged by the new collateral requirements and the discount banks apply to the market value.

The potential impact is that not only will it get harder to find buyers solvent and creditworthy enough in the housing market. Even existing loans that get paid diligently can get under pressure.
When banks decide or are forced to decrease property valuations, they need to increase their collateral. And basically every mortgage contract contains a clause that—should the bank need to revaluate your property and securities—they can ask for additional down payment or deposits.

In a normal market, this is not a problem. Most investors in real estate historically purchased with 80% debt or less. Furthermore, housing prices went up most of the time and if down, it was only minor fluctuations.
This time, the macroeconomic situation, the COVID-19 policy fallout and the real estate hype of the past decade, may become a deadly mixture.

If liquidity drops enough to draw prices down even by just 5%, the chain reaction, of banks panicking, central banks doubling down on their errors, etc. can easily exasperate the drop into a 30% to 40% crash.

For liquid investors, this will be a great buying opportunity, but for new and highly leveraged investors, this will be disastrous. Many will be forced to sell their properties at a loss and get stranded with a lot of debt, without any means to pay it off.

Don’t be one of them.

So with China’s real estate sector crumbling, the US housing market looking worse than in 2008 and the historically rock solid German real estate market showing cracks, why am I still bullish long-term?

Simple. We are currently in an unprecedented macroeconomic environment. Collapses of Fiat money have happened many times, but to find the last time a Fiat currency comparably strong as the US dollar, you have to go down all the way back to the third and fourth century Mediterranean.
And even with the collapse of Rome, there are differences that make today’s situation completely unprecedented in my view.

First and foremost, the Roman Denarius always competed against Gold and Silver currencies. A total Fiat world economy like today is historically unique.
Secondly, the fall of Rome was playing out in centuries. The fall of the US empire is playing out in mere decades and accelerating.

So while all of this makes the future less predictable than ever, there are historical patterns that likely apply. One of them is that enemies of the collapsing empire will first resort to hard currencies to drain the struggling foe of resources and capital.
This can already be seen, with Russia de facto coupling the Rouble to Gold and asking for energy deliveries to be paid in Roubles.

Another process that is going on, is the breaking free by the de facto colonies of the United States, which in this case may be called “de-globalisation”. And since the US hegemony is built upon debt and (mostly) not military occupations, the virtual colonies around the globe, will get a relatively easy way to shake off their chains. By means of the rapid devaluation of Fiat currencies, their national deficits are easily paid off, if they own gold or Bitcoin, which I expect to reach astronomical exchange rates vs the Dollar in the next decades.

If history can give any indication for the future, then the most likely scenario (my estimation ~60% likely) is a 6 to 24 month severe draw back in the housing market, followed by a price explosion and potentially hyperinflation.

More about hyperinflation… next time.

*none of this is financial advice. It all depends on your personal situation, so do your own research, make your own decisions.