Housing markets have begun to wobble in many parts of the world as the novel coronavirus pandemic began to make its presence felt. The number of people who lost their jobs surged, as did their mortgage payments. Banks tightened their lending criteria, cutting off some of those at the bottom of the market who relied on rental income to make up the difference.
The Federal Reserve, the European Central Bank, and the Bank of England have all cut interest rates and opened up their balance sheets to provide more liquidity. Much of the world is in a state of shock as unemployment rates surged, and some economists have even begun to forecast a recession.
Why Would You Bet Against A Housing Market?
Although the exact opposite is true in most cases, there is one type of bet that makes complete sense when betting against a housing market: spread betting. With spread betting, you are not placing a bet on the overall outcome of an event. You are, however, placing a bet on the direction that the price of an asset will move in. For example, did you think that house prices in London would rise or fall during the next year? You can take advantage of this by placing a spread bet that prices will rise.
You will typically enter a credit or debit card and choose whether you want to bet on the rise or fall of the financial market index, such as the Dow Jones Industrial Average or the FTSE 100 – or even the price of gold or the US dollar in general. Remember that credit or debit cards work in the same way as cash: you are using an amount of money that the bookmaker has given you and you are adding additional funds to the pot, hence why these kinds of bets are often referred to as “cash bets.”
You may or may not like the results of a cash bet. If you bet on the rise of the dollar, for example, you are essentially placing a “rise” bet because the dollar usually climbs when the stock market is doing well and vice versa. If you believe that the economy will receive a boost from a strong dollar, then you will be happy with the results of your bet. If you think that a falling dollar will result in lower interest rates and a boost to purchasing power, then you have also selected the right side of the market. In most cases, you are likely to win your bet as there is usually a clear relationship between the direction of the financial markets and the price of a country’s currency. In situations where there is no clear-cut relationship, you may have to be content with mediocre results as there is usually a fairly high likelihood of a market reversal.
Is This The New Normal?
The short answer is no. While the overall effect of the COVID-19 pandemic will be most certainly felt for many years to come, the immediate impact on the world’s housing markets has been very modest. While house prices decreased by up to 10% in some markets, they rose by an average of just 2% in others. This is mainly thanks to government assistance in the form of mortgage guarantees and large-scale refurbishment programs aimed at lowering mortgage payments and interest rates for those who could not pay their bills. Even those who had to walk away from their homes were able to do so with much less of a financial pain barrier.
The long-term effect of the pandemic on housing markets will depend on how the world reacts to the disease. If every country takes the same approach as China and acts swiftly to contain the spread of the virus, we may well see a boom in affordable housing as developing countries struggle to find space for those who have been affected by the pandemic.
What About Gold?
The yellow metal has always been considered a safe haven for investors who are fearful that the financial markets may decline. With the financial world in a state of limbo, those who believe that the future will be better than the present may well try and purchase gold as a protection against the dollar’s decline. We have already seen a rise in demand for gold as governments and central banks scrambled to secure hard currency at a time when demand for traditional safe havens, such as real estate and securities, was plummeting. As the economy slowly begins to reopen, investors who fear the dollar’s decline may look to gold as the ultimate safe haven.
This may well prove to be true, although it is somewhat difficult to truly see how. Yes, the dollar has declined in recent years and is now at its lowest value in decades, but the U.S. currency still has a massive amount of worldwide backing. The U.S. government can always print more dollars and make good on any outstanding loans. For now, at least, the U.S. economy remains one of the safest and most secure out there.
We now have a much better idea of the long-term economic impact of the pandemic. According to the United Nations, there were 414 million unemployed people around the world as of mid-June 2020. That is a higher concentration of joblessness than we have seen at any previous point in history. The number of people who have lost their jobs as a result of the pandemic is projected to reach 3.9 billion by next year – more than three times the population of China. Around the world, unemployment rates are now at levels not seen since the end of World War II.
In many countries, governments have implemented stimulus packages to try and cushion the economic blow. In the U.S., the Federal Reserve has followed suit and implemented a $2.2 trillion economic relief package to support small businesses, hard-hit individuals and families, and municipalities. In the near future, all of this may well result in a recovery and, hopefully, a stronger economy and more vibrant markets.
The final outcome of all of this depends on many factors, not least of which is the novel coronavirus. The last thing that anyone wants to see is another pandemic. We are all still learning how to live with the first one, and we will certainly need time to recover before we can have another look at the world of finance.