The Rich are Getting Richer
In the last post, we looked at 'The 18 Year Property Cycle' to explain why the UK housing market has not crashed…yet.
In a YouTube video entitled ‘The Future of House Prices’, Gary Stevenson provides an alternative explanation based on the way wealth has been redistributed over the last decade.
Gary Stevenson (www.wealtheconomics.org), known on YouTube as GarysEconomics, is a former interest rate trader and equality campaigner based in London. He is known for becoming Citibank’s most profitable trader in 2011 by predicting there would be an increase in economic inequality.
Government Response to The Pandemic
According to Gary Stevenson, to understand the resilience of the UK housing market in 2024, we must look beyond the traditional metrics of supply and demand and delve into the intricacies of wealth distribution.
The unprecedented fiscal stimulus implemented by the Government in 2020-21 in response to the COVID-21 pandemic aimed at shoring up the economy and mitigating the crisis's worst effects, led to a dramatic influx of cash into the economy. This influx of liquidity led to a significant increase in wealth accumulation among certain segments of the population – The Rich:
“The most important consequence economically of COVID is that rich people accumulated enormous amounts of money. I genuinely mean enormous amounts of money.
We're talking about your average rich individual accumulating £100,000/£200,000/£300,000.
The average billionaire increased their wealth by something like £720 million in the first year of COVID.” (Gary Stevens)
To put it simply, money does not disappear. If the Government debt has grown and for example, people on furlow did not get better off, and people in general have less money because the cost of living has increased, where has the money gone? To The Rich.
This influx of cash had profound implications for assets, including the housing market. As interest rates climbed in response to inflationary pressures and central bank policy decisions, many experts anticipated a housing price crash. However, the anticipated crash failed to materialise.
The missing piece of the puzzle?...The insatiable appetite for assets among the rich, fueled by their newfound wealth and financial resources:
"If you know that's going to happen, It's just totally insane to predict anything other than a massive increase in house prices because what the rich people do with their money, they buy assets, they lend it out to people who want to take out mortgages, they essentially then drive house prices up. If rich people get their money, house prices will go up, stock prices will go up.” (Gary Stevens)
The Redistribution of Wealth
In essence, what we witnessed in 2020 was a redistribution of wealth on a scale rarely seen in modern times. While the pandemic wreaked havoc on the global economy and inflicted untold suffering on millions of people, it also created winners - those fortunate individuals and entities who found themselves in possession of vast sums of money and financial resources.
While conventional wisdom would suggest that rising interest rates should dampen demand for housing, the reality is far more nuanced. Whilst The Rich have undoubtedly gotten richer, the average family has become poorer. The cost of living crisis - high interest rates and inflated prices for products and services, has reduced net incomes and savings significantly, which has dampened the demand for houses from most of the population. However, the accumulation of wealth among affluent individuals and entities created a voracious appetite for assets, including real estate and equity, maintaining high prices despite the headwinds posed by tightening monetary policy.
For these rich individuals, the prospect of rising asset prices presented an opportunity too good to pass up. Armed with unprecedented levels of cash liquidity and financial firepower, they eagerly snapped up assets, including houses, driving prices ever higher and defying the expectations of even the most seasoned market observers.
What Lies Ahead?
As inflation gradually recedes and interest rates follow suit, we stand poised at the threshold of a new phase in the economic landscape. The Rich will move cash out of interest earning accounts, buy more assets and increase lending for mortgages, all of which will drive asset and house prices higher. This transition, characterised by renewed asset price inflation, poses both challenges and opportunities for society at large.
On the one hand, the widening wealth gap looms large, reshaping economic dynamics and amplifying calls for systemic change. It is a clarion call for the Government to confront the looming spectre of inequality and advocate for equitable wealth distribution.
On the other hand, the prospect of rising asset prices presents opportunities for savvy investors to capitalise on emerging trends and position themselves for long-term success.
More Wealth Inequality in The Future?
The conundrum of the UK housing market serves as a microcosm of broader economic trends, highlighting the need for a holistic understanding of wealth distribution and its ramifications.
At the heart of the housing market's resilience lies a simple yet profound truth: The Rich get Richer. As the Government unleashed a torrent of fiscal stimulus measures, wealth flowed disproportionately to those at the top of the economic ladder, exacerbating existing inequalities and reshaping the economic landscape.
For The Rich, rising asset prices present an opportunity to further consolidate their wealth and expand portfolios. Armed with unprecedented levels of cash, they eagerly snap up properties, driving prices higher and defying expectations of a market correction.