Weekly Digest: The Property Market Is Approaching a Seismic Shift

Plus, How Do You Solve a Problem Like Italy (If You’re the ECB)?

Welcome to your Sunday digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world.

First up this week… a massive shift in how and where we live is about to pick up steam.

In America, the real estate sector is entering a difficult period. Demand is now falling as rising interest rates push the cost of mortgages higher and higher.

This is reflected in the sentiment among homebuilders.

In June, the National Association of Home Builders/Wells Fargo Housing Market Index fell 2 points to 67, its lowest level in two years. (Anything above 50 is considered positive.) The index stood at 90 in June 2020.

Meanwhile, buyer traffic, one of the index’s three components, fell back into negative territory. It was down 5 points to just 48.

Clearly, high inflation and spiraling mortgage costs are starting to have a big impact. And this trend is likely to continue as the economy weakens and interest rates rise further.

But this situation doesn’t hold true in every market…and it certainly doesn’t hold true overseas.

In certain markets abroad such as Cabo on Mexico’s Pacific coast, and Playa del Carmen and Tulum on the country’s Caribbean coast, the real estate markets remain very strong.

The reason: Americans, and particularly Californians, are moving to these markets for more affordable, relaxing lives.

According to CNBC, more than 360,000 Californians left the state last year due to inflation and spiral housing costs. And Mexico was the destination of choice for many.

This is a trend that looks set to accelerate.

Even if housing prices come off in the U.S., rents are likely to remain high, and unaffordable for many, in big markets like Los Angeles and San Francisco.

Which means that, in this new Zoom Boom age when many professionals can work from anywhere, demand for certain kinds of real estate (think: condos in attractive destinations) is going to remain very strong.

It’s a seismic, generational shift in real estate.

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Next up, the eurozone has a big problem…and that problem is called Italy.

On Wednesday, the European Central Bank had to call an emergency meeting to address an emerging issue in its bond market.

You see, the 19 members of the eurozone each use a single currency, the euro. But they are all individual countries that sell their own government bonds, or debt.

That poses significant financial challenges…especially in an era of high inflation.

Next month, the ECB plans to scale back its bond-buying program and raise interest rates to tackle inflation, just like numerous other central banks around the world have done.

However, raising interest rates increases the cost of borrowing for governments as well as ordinary businesses and consumers.

For rich, northern European countries like Germany, this is not a critical issue. But for heavily indebted southern European states like Italy, Spain, and Greece, it’s a very different story.

Earlier this week, the gap between yields on 10-year German and Italian government bonds was at its widest since March 2020, with Italian bond yields rising well above 4%.

There’s a reason that the gap with Italy is the most widely watched.

For years, Italy has struggled with weak economic growth and swelling debt. It’s also susceptible to something economists call a “doom loop.”

Italian banks own a lot of the Italian government bonds. The value of those bonds fall as interest rates rise, which impacts the banks’ ability to lend to customers…and potentially even threatens their solvency. If they fail, Italy’s economy fails.

The ECB cannot allow that to happen.

So, in the emergency meeting on Wednesday, it signaled that it would continue buying bonds from weaker eurozone governments like Italy. It also announced that it would step up efforts to design a new instrument to decrease borrowing costs across the region.

What this new instrument will look like remains unclear.

The ECB has always resisted integrating eurozone debt, only issuing common eurozone bonds to deal with special funding requirements such as COVID recovery.

Longer term, it may have to be more realistic and look to this model. Ultimately, a common currency with a common interest rate policy needs a common approach to debt issuance.

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Finally this week, a note about the metaverse.

In Thursday’s column (which you can read here), I offered an intro to the metaverse and why I believe it is the greatest wealth-creation opportunity of our lifetime.

This week, McKinsey & Co. provided further evidence of this.

In a new report, the well-known consulting firm predicted that global metaverse spending could top $5 trillion per year by 2030. And e-commerce spending in the metaverse could reach as high as $2.6 trillion per year within the same time frame.

By way of comparison, $5 trillion is roughly the size of Japan’s economy…the third-largest in the world today.

That’s a statistic to remember the next time someone tries to dismiss the metaverse.

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website.

Enjoy the rest of your Sunday.