Since the 2008 stock market crash, banks have been supported by governments through Quantitative easing. Quantitative easing, or QE, is the introduction of new money to the market through the central bank (in the US, that central bank is the Federal Reserve) and by keeping interest rates artificially low. Despite QE’s success at preventing more dire consequences from the 2008 crisis, signs in the market indicate that things might be changing soon and for the worse.
The Brexit vote caused some turmoil in the market and banks like Credit Suisse, Deutsche Bank and the Royal Bank of Scotland (RBS) saw their stock prices tumble and recover over the past 3 months.
The Guardian’s Larry Elliott points out: “Markets have been supported for some time by low-interest rates, stimulus measures from central banks including quantitative easing, and hopes of economic recovery. But with the Federal Reserve raising rates and the Bank of England expected to follow suit, that prop is being removed.” According to a source from a major investment bank that CNBC spoke with, these market changes mean that banks are preparing for the worst. “This could mean triggering Article 50, referendum in other European nations leading to a break-up of the euro or sterling hitting below $1.20 or lower. The banks are ready for anything now,” the source said.
With uncertain times ahead, the Royal Bank of Scotland urged its investors towards bonds, writing in January: Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.
These dire predictions are not without founding. Economist Andy Xie warned in an interview with MarketWatch the following:
“China’s trajectory…resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.”
With all of this financial uncertainty, it is possible that we will feel the effects in the US even if most of the unrest is contained overseas. Banks are preparing for an “economic nuclear winter” in Europe and if the economy plummets as much as anticipated, we believe that this will affect the US economy which may impact New York City’s real estate market.
It is likely that banks in the US will tighten their lending practices which would make buying a home and securing a mortgage more challenging.
If you are considering buying a home, it would be a smart financial move to make that purchase sooner rather than later. In doing so, you would be able to cash in on the very low interest rates and a reasonable process to get a mortgage. If the financial “nuclear winter” does affect the US, banks will tighten lending and we may witness an increase of foreign investment in the US as European and other investors will move their money to the US. If this plays out, the influx of foreign money may potentially lead to the purchasing of properties in NYC. This will mostly likely make it more difficult to buy a home. Yet, there is a third possibility for New Yorkers wanting to buy a home. A nuclear winter here in the US could lead to a recession and job loss, which can turn into a situation where many homeowners will default on their mortgages. Keep in mind it may or may not be at the same levels as in 2008. But, it could add more foreclosed homes to the market where bargains can be found if there are not too many interested buyers driving up the price. No one knows how this will play out, but one thing for sure is that economic instability continues to strongly persist since the 2008 financial crisis and possibly before. Learning to adjust to mitigate loses as a means to create wealth is the key surviving this era of economic uncertainty.