Welcome back to Gary's Economics.

Today we're going to talk about interest rates and house prices.

So I want to talk about a very interesting thing

that's happened in the last year or two,

which is that

interest rates have risen

very aggressively

all over the world, including here in the UK.

And everybody has been expecting

that that is going to cause a big fall in house prices,

which hasn't really happened.

So today we're going to explain

why that is and talk about what it means for you

and what's going to happen from here.

And we're going to end up with a nice, sort of,

concept that I use to understand more broadly

what's happening in the economy,

which I used for a long time.

So I want to start by basically going

through the story

of house prices since the beginning of COVID,

because that is when big dramatic change

started to happening.

So at the beginning of COVID,

there was a ton of predictions

that house prices would collapse.

And at the same time,

I wrote my first article in March 2020

and we made our first video on this channel in June 2020.

I predicted we would see a very aggressive

increase in house prices, which we did

so from the beginning of COVID until sort of

the end of 2021

There was a super aggressive

increase in house prices all over the place.

So that first question is why

did everybody make such bad predictions

about house prices in the early COVID?

I think this is based on a very simple logic,

which I think a lot of people

have kind of built into their brain,

which is that when the economy is bad,

house prices fall and stock prices fall.

And lots of people believe this.

I think this is

it's almost kind of

how we're trained to understand the weak

economy is a collapse in the stock

market, fall in house prices.

a common logic. It's widely believed.

It's totally incorrect.

I think the most

obvious example of that is if you go back and look at 2008.

2008 is an interesting example

because of the initial onset of the 2008 crisis,

we saw really massive fall in stock prices

and in a lot of the world

we saw pretty dramatic falls in house prices as well.

But if you look at the long term picture of 2008.

2008 was actually the start of

an enormous house price boom and an enormous

stock price boom. So immediately there were sharp falls.

But over the next sort of 10, 12 years,

we saw truly enormous house price rises

here in the UK, in the US, basically all over the world. So

what you have here is a good example of a case

where the economy was actually phenomenally weak

for the sort of 10 years after 2008.

And yet what we actually had was really aggressive

increases in house prices, really

aggressive increases in stock prices.

So this is the first challenge to this commonly held idea

that when the economy is weak, house prices go down.

If you look at 2008,

what we actually have

is a situation where the economy was

phenomenally weak

and it caused an enormous boom in house prices.

But despite that happening after 2008,

this idea still exists in the popular consciousness,

and it exists in the minds of

economists, people who write

articles in the media about economics

that when the economy is weak, house prices fall.

And I really clearly remember at the beginning of COVID,

when I wrote for The Guardian

saying house prices are going to go up.

At the same time, Larry Elliott, the chief

economics correspondent of The Guardian,

wrote an article, and we’ll link it in the description

so you can see, saying house

prices are going to collapse later this year.

So why was it that I was then able

to make this correct prediction

when basically everybody else was predicting

that house price crash didn't happen?

The reason for that is essentially

because my background as a trader

and as a economist is an inequality economist.

So at the very beginning of COVID,

it was very clear

that governments were going to give a ton of money out.

And I cannot emphasise

how enormous the amounts of money

given out by the UK government,

The US government, governments

all over the world were during COVID,

and this was already pretty obvious very early in COVID.

So of March/April 2020,

we knew there's going to be a long lockdown.

Governments are going to give an absolute ton of money out.

So for me,

I think most traditional economists are like,

they’re giving money out because the economy is weak.

Weak economy, house prices are down.

But for me,

as an inequality economist, I wanted to know

who is going to end up with that money.

If you are focusing on distribution,

that's the question you want to ask.

So we know the government's

going to give out huge amounts of money.

We know somebody is going to accumulate

huge amounts of money.

Who is it going to be?

And what that meant was,

I was able to realise

what was then and I think still is now,

the most important and underappreciated

consequence of COVID,

which was this enormous

amount of money given out by

the UK government,

also the US government, global governments

will be accumulated by someone.

It will be accumulated largely by richer people.

And what that means is

COVID will lead to a situation where

rich individuals and rich families

have got absolutely enormous amounts of money.

And I think that was the big thing

which was missed by economists

and still is being missed by economists.

And if you understand

that one of the consequences, in my opinion,

probably the most important consequence

economically of COVID

is that rich people will accumulate

enormous amounts of money.

I genuinely meaning, enormous amounts of money.

We're talking about your average rich individual

accumulate 100, 200, £300,000.

You know,

the average billionaire increased their wealth by,

I think, something like £720 million

in the first year of COVID. Right.

So enormous accumulation of wealth by the rich.

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.

I made these predictions and that's what happened.

But then a really interesting thing started to happen,

which was about two years ago.

Interest rates started to rise.

In this country from effectively 0% to just above 5%.

Similar in the US, similar issue in Europe.

They didn't reach quite the same high levels.

And that changed the dynamic basically.

So that moved us into this new situation, which is

economists and traders

have this very strong belief

that when interest rates go up,

asset prices and house prices should fall.

And that is for a very understandable reason,

which is in the case of house prices,

if people can't get a mortgage,

if interest rates are super high

and lots of people, lots of you have witnessed that,

that it's much more difficult to get a mortgage

when interest rates go up.

And also on the flipside.

Rich people can now get 5% interest on their cash.

So maybe they're not going to buy houses.

They'll just keep the cash

and they'll get their 5% interest rate

and will be happy with that.

And everybody started to predict,

you know, in many cases, the same thing people

who predicted a house price crash

at the beginning of COVID,

came back and said, okay, well, now

we're definitely going to get house price crash

now because not only have

we got this terrible economy,

but we've also got very high interest rates.

But what actually happened was that,

you know, basically house prices,

they sort of stumbled a little bit.

But I think the broad picture of house

prices, it depends where you look is they rose

super quickly sort of 30% or so in 2 years.

And then since then they've kind of

maybe stumbled down 5/6%.

And it was during this rapid rise

in interest rates that I gave my interview

with Aaron Bastani on Novara Media,

which you can find on YouTube.

That was when interest rates

had just started to rise really quickly

and then everybody was saying

house prices are definitely going to fall.

And I came out and said, no,

I think the house prices will actually,

in the long run, continue to rise.

And

I think

I've kind of been borne out again

here, that this crash hasn't happened.

But the house price growth has definitely slowed.

And I think we could already sort of see

when when I said that 18 months ago

that that house prices were basically stopping,

they were not going up any longer.

So

now everybody is saying and have been saying

for the last couple of years,

especially in the last 6 months, 12 months,

why on earth

have house prices not fallen

despite these massive rises in interest rates?

And people have been saying

the same thing about stock prices.

If stock prices go up

very aggressively, all the classic economics says

stock prices should fall.

But I checked the stock markets yesterday,

before I filmed this video, we’re

filming this in the middle of December.

Yesterday, French stock market hit a new all time high.

German stock market a new all time high.

US stock market is just below the all time high,

which it hit basically before the rates went up.

And this is the same in most of the world.

Most global stock

markets are at or through all time historic highs.

And I think this is,

first of all

something worth realising

because I don't think people are aware

that in the space we

are in now, in the economy

where living standards are collapsing,

there's a sort of broad consensus for an economic crisis.

I would think you can justify the economic disaster,

that the vast majority of global stock

markets are at or through their all time highs.

So that's the first thing, which I think is

first is worth internalising.

And the second thing is

why has again everybody been so wrong?

Why is it that despite these massive increases

in interest rates,

we haven't seen these house price falls,

we haven't seen the stock market falls?

And me personally, I'm not surprised by what's happened.

If you go back

and look at my predictions at the beginning of COVID,

I said we would have massive increases in inflation

and we would have increases in interest rates.

So my predictions that

house prices would rise and stock

prices would rise, which they have

was factoring in an acceptance

of the fact that inflation and interest rates would rise.

And the reason I was able to do that

is because I understood

this basic driver

once again is the big thing everyone is missing,

which is that rich people have accumulated

an unbelievably enormous amount of money.

I think increasingly the big driving factor behind

economic incorrectness.

I think as a trader, you always want to work out

what is the big thing that's being missed?

And the big thing that has been missed

since the beginning of COVID

and still is being missed now,

is that the rich accumulated

an unbelievably enormous amount of money.

If you understand that,

then everything that has happened

from the beginning of COVID

since the rise in interest rates makes total sense, right?

If the rich accumulate a ton of money,

asset prices will rise, but also inflation will rise.

They will start buying more stuff.

You know,

they will increase their consumption of rental housing.

They will buy more houses, they will rent bigger houses.

That with push rents up, they'll push prices up

and then they'll push inflation up

and that will probably push interest rates up.

But if the reason that interest rates have gone up

is because rich people have an enormous amount of money.

Then of course

prices are not going to fall

because the driving force here,

the first impetus, the first push

is a massive accumulation of cash of richer people.

So I think everything is really consistent with that.

If you understand the first move

in this economic crisis

as being an enormous accumulation of cash

by wealthy people,

then you would expect

exactly what we have seen, which is

pretty much exactly what I've been predicting throughout,

which is massive inflation,

big increase in asset prices,

big increase in interest rates,

but asset prices don't fall.

That's basically what I've been saying.

But what is interesting now

is I think we're moving into the next stage of this,

which is which is what I've been calling for a long time,

which is

if, in my opinion,

the inflation is caused

by this massive

transition of cash,

gift of cash essentially from the governments to the rich,

then you would expect that inflation

to be a kind of one off and then stop.

Because that gift was a massive one off gift.

And then it didn't stop, essentially,

but it left without a lot.

Which means that the inflation happens once

and then basically goes away

and that is,

you know, what I predicted in my predictions

a year ago, a year and a half ago

and is basically what we’re seeing.

Inflation is collapsing all across the world.

It is still above the 2% target in most countries,

including here in the UK at the moment.

But the direction seems to be aggressively down. And now

economists are starting to predict

that central banks will all start cutting.

And I put a few bets on early this year that...

At that

time, early this year,

markets were saying that UK

interest rates would reach nearly 6%.

Whereas in the middle of next year, 2024,

this might be 2024 when this goes out actually,

so in the middle of 2024

Interest rates were expected

to reach nearly 6% here in the UK.

Now they're expected to be only just above 4%.

And I think that even that,

to be honest, that prediction might be too high.

I think rates might end up going down even lower than that.

And the reason for that is

at the same time

as the rich have accumulated a ton of money,

and this would be very visible and obvious

to anybody watching from an ordinary background,

the financial situation of ordinary families

is being extremely tightly squeezed.

And it is ultimately ordinary families

that drive the economy.

And rich families tend to buy assets. So

as ordinary families get poorer, inflation

will will start to fall.

Now, once those interest rates come down,

what those interest rates did,

and we can all see, that is they

temporarily stopped that aggressive rise in asset prices.

So once we know that rich people have a ton of money,

asset prices should go through the roof

because the amount of money that accumulated in COVID

was truly enormous.

But the interest rates do two things.

One, they make rich people happy to sit on the cash,

taking interest rate...

taking interest from the government,

because they’re making a 5% interest on it.

And two,

it prevents them from doing mortgage lending

because if you go to the bank,

you can't get a mortgage

because interest rates are too high.

They can’t actually lend the money out.

Once those rates come down, those two factors will end.

Rich people will stop being content

to sit on this enormous pile of cash.

They'll go back to buying assets again.

And they will start,

they will start doing more mortgage

lending again, which will drive asset

prices and house prices up.

So I think

we're moving into the next stage of this now,

which is another really, really aggressive

asset price inflation, including house prices, of course.

So I wanted to talk a little bit about this concept of

once rates come down,

the rich will start using this enormous pile of money again

to buy assets.

Because I think there is this

concept that exists and I hear economists

on the news suggest this kind of idea a lot,

which is that, okay, savings are very high right now.

The rich have a load of savings.

They need to spend it down, and they'll spend the savings

and the savings will go away

and they'll stop having their effect.

And I think this is, this is just not how money works.

If I have a ton of savings and I

buy your house,

I don't have the savings anymore.

But you do have the savings. Money doesn't work like that.

Once the government gives a ton of money

out, as it has done,

somebody has to hold onto that money

until the government taxes it back.

Money doesn't disappear.

You cannot simply disappear your money.

You can only give it to somebody else.

So what this means is

the idea

that this massive accumulation of savings by the rich

is going to have a one off temporary effect,

is just basically wrong.

This will have a massive driving effect

for a long period of time.

Because the rich are going to go around

trying to buy all of the assets.

But who owns most of the assets?

It's the rich.

So when the rich try to buy assets,

all they do is they buy the assets from one another,

they drive the asset prices up.

And the money,

this enormous amount of savings simply circulates

between the rich people and they’re effectively

unable to, unsuccessful at, getting rid of their savings.

They simply cannot get rid of their savings.

It is impossible

because they're buying assets from each other.

So how do rich people actually get rid of their savings?

Well, the only way rich people can get

rid of these enormous savings which they’ve accumulate

from the government is to buy assets from somebody

who is not rich.

But what groups are there in

society of people who are not rich, who own assets?

There's basically only,

the sort of, property only middle class,

and there are still a lot of non

rich people who own property in this country.

And the other obvious example is the government.

So it creates this massive drive for the rich to buy assets

from the middle class, to buy assets from government.

The other thing they can do

is they can lend that money to the middle class.

For example,

mortgage lending to the government, for example,

the government would need a lot more money

to support the rapid increasing poverty in the country.

But in both cases they get the money back.

If I lend you money for a mortgage and you buy a house

from a rich person,

I get the money back when you buy the house.

If I lend the money to government,

they use it to pay your rent, I get the money

when you pay your rent.

So

this money creates a force, it's

kind of a vacuum in a sense,

to suck the wealth away

from middle class, away from the government,

to drive the middle class into debt,

to drive the government into debt.

And that is the only possible way

that the rich can get rid of this

enormous accumulated money.

So I think that is basically the state of play.

That is where we are.

I think we're moving into a really interesting

next phase of this, which I want to talk about a bit,

which is rates. Inflation will come down.

It's already come down a lot. Thanks Rishi Sunak.

He did it apparently. in every country in the world.

Interest rates will come down

and asset prices and house prices will increase enormously

and that will happen

essentially to the rich buying assets from each other,

but also aggressively buying the assets

of the middle class,

bankrupting the middle class, buying assets

from the government, bankrupting the government.

And we've really seeing that.

We're seeing decreased

financial positions of the middle

class, decreased financial decisions

of the government,

and massively increased financial positions of the rich.

And I think

underneath this,

I wanted to bring you quickly something

which I will probably talk more about, the future videos.

There's a general concept here

which I think is useful to understand,

which is something that I wrote about

when I was at university and something I think about a lot.

Which is that

when inequality increases,

and it has increased really rapidly,

especially in the last few years,

it changes the shape of the economy.

It means that rich people have more wealth

and ordinary people and governments have less wealth.

And what that means is society

as a whole starts to demand

less goods and services and demand more assets.

And that is because ordinary

people spend the vast

majority of their income in their lives

and rich people save,

which means essentially used to buy assets

the vast majority of their income.

So as inequality increases,

ordinary people’s

spending power goes down,

rich people’s spending power goes up,

which means society as a whole says

we don't want goods and services anymore. We want assets.

Well, who is that good for?

People with assets, the rich.

Who is that bad for?

People who produce goods and services,

which is working people. So it creates this

kind of centripetal force in society.

If the rich are richer, it benefits the rich

because they want the things which the rich have.

But it also means you get this interesting

disconnect between two kinds of inflation.

And I probably would talk about this more in other videos.

But when you see inflation spoken about on the news,

they are normally talking about things

like CPI, consumer price inflation, which is inflation

in goods and services.

It doesn't look at inflation in things like asset prices,

but when economies are becoming rapidly more unequal,

they don't really want goods and services

because ordinary people are becoming poorer.

What they want is assets, because rich people

obviously richer.

So you get a natural deflation in goods and services prices

and it invests in assets.

But we don't look at the asset inflation.

Central banks

when they consider what interest rate to do, the news

when talking about inflation,

they only look at goods and services inflation.

So we will move into a situation where

goods and services inflation,

and in particular wage

inflation is very, very low, maybe even negative,

which means central banks cut rates.

Which I think they both are doing relatively quickly.

And then you get this like double whammy impact

on asset prices, which is first of all,

the rich are making a ton of money,

so assets want to go up.

Secondly, interest rates are collapsing,

so assets go up even more.

So you get this kind of disconnect.

Which is, the ordinary economy is sh*t basically,

there's not a lot of inflation.

And I think we will move into this world soon.

So interest rates come down,

whereas asset prices are going massively through the roof.

And that's what we saw after 2008.

And I think that's what we're going to move into

in the next year

or two here in the UK and in the rest of the world.

And I think we need to have a think about what that means

for our society, because

if you haven't watched it,

I recommend watch the video on this channel

called the Asset Economy, because

I talk a lot in that video

about what it means for us as a society

and the different groups of people in society

If asset prices and house prices go up aggressively,

which I think they will do shortly.

But I think the most interesting thing about is,

in my opinion, increasing asset prices

and increasing house prices will be bad for 90% of society.

And I think

some people might be surprised to hear that

because I think a lot of families

that own their own property

and a big chunk of families in this country still do own

their own property, will feel like they're winning

when house prices go up.

But the truth of the matter is the only way

to actually benefit personally

from rising house prices is to sell your home, basically.

And,

you know, as more and more young people are seeing,

it's becoming increasingly impossible to buy a home

if you don't have money from your parents.

Which means that

if the older generation sells their home

to benefit from the increased asset prices,

then their younger generations, their kids

and grandkids will basically become homeless

and will basically be stuck in poverty essentially forever.

So I think we need to think a lot

about what it's going to mean for our society

when house prices go up even more.

I think it will impoverish,

you know, 80/90% of our society.

But I think it will also be hugely politically divisive

because there will be a lot of families that own property

that will feel like it's a good thing for them

that want to support it,

despite the fact that it's long run

impoverishing their family.

So I think we need to prepare for this basically.

We need to understand ourselves

that rising house prices

is part of a mechanism

which is impoverishing ordinary families.

We need to understand that, we need to share that,

especially with people perhaps in the older

generation who own property who think it’s good.

We need to be able to explain to them and to other people

how these rising property prices

are going to really impoverish future generations.

So my end message on this is,

things are going to change relatively quickly.

We're going to move into a complicated space where

the economy stays terrible.

And I think it will get worse.

Living standards stay terrible, and I think they will get worse.

But asset prices and house prices will start to increase.

And that could be very divisive in our societies.

What you need to understand,

what you need to convince your parents

and grandparents to understand if you can't,

is that this is not society getting richer,

this is society getting poorer.

Living standards for the masses

all getting worse and will continue to get worse.

That is a consequence

of the massively increasing inequality

and massively increasing wealth

of the rich in our societies.

The only way to stop that

is to tax rich people more aggressively

so that ordinary people

can have a fairer

share of what we're producing in our societies.

We can do that, if we tax the rich,

we can make life better.

I'm going to be pushing that on this channel.

So please

share this video with your friends

and family, support us and help us stop things

from being a disaster. Thank you very much.