Weimar Hyperinflation - was a HOUSING a big winner?

[drbubb]

Housing/Rents as a Percentage of Household spending

What do you think it was in Weimar Germany ?

WHEN INFLATION goes like this...

Do you think it is good for homeowners and property landlords?

 

To answer that, we need to consider:

What happened to Housing/Rents as a Percentage of Household spending

I heard the figure in a podcast (was it on Financial Sense?) and I could hardly believe it.

The actual figure may be a shocker for some here.

(Note: Those who are thinking of buying a house as hedge for high inflation should make a special note of the result of a Poll I ran on HPC, and then see the actual answer)

This thread was started here first, but I later started a similar thread on HPC,

to ask people what they thought happened to Housing-related spending in Weimar Germany/

The poll results showed that people were WILDLY WRONG about the impact of inflation.

Have they all been brainwashed by the media and idiot EA's who know nothing of history?

Weimar Housing

(Below is a summary of poll results - Check below for the real historical figures, they are shocking!):

Many thought that Housing's share was stable, or even went up !

/see Weimar Hyperinflation Poll: http://www.housepricecrash.co.uk/forum/ind...howtopic=119091

[drbubb]

20 Nov 2008 - Present USA:

Housing is the largest component of household spending, with a 42 percent share

/see: link

 

What do you suppose the percentage was for Weimar, Germany in the early '20's ?

[InternationalRockSuperstar]

before or after the crack-up boom?

[drbubb]

Found it !

Are

you

ready

for

this ???

. .

Okay ...

Housing/Rents as a Percentage of Household spending

 

WEIMAR - Living Costs, Family of Four

Weekly Cost : Total in Marks : - - - - Percentages - - - -

========== . . . . . . . . . . .     : Food / Housing / Clothing

1914 (prewar) : ............ 21.5 : 46.5%/. 25.6% / .. 27.9%
January 1920 : .............. 164 : 52.4%/. 04.9% / .. 42.7%
January 1921 : .............. 218 : 63.8%/. 04.1% / .. 32.1%
January 1922 : .............. 396 : 64.8%/. 02.8% / .. 32.3%
July...... 1922 : ............ 1232 : 56.8%/. 01.1% / .. 42.0%
January 1923 : ......... 25,123 : 52.1%/. 01.2% / .. 46.7%
July...... 1923 : ........ 654,608 : 59.8%/. 00.4% / .. 39.8%
Nov. ..... 1923 : ... 14.408 Bn. : 64.9%/ 00.26% / .. 34.8%
source: Hyperinflation handout

Here it is : 0.26%, in Nov.1923, down from 25.6% in 1914.

That's 1/100th of its original percentage - an enormous collapse !!

. . .

So, you want to BUY PROPERTY as a hedge against hyper-inflation, Do you ?

[InternationalRockSuperstar]

Weekly Cost : Total in Marks : - - - - Percentages - - - -

========== . . . . . . . . . . . : Food / Housing / Clothing

Nov. ..... 1923 : ... 14.408 Bn. : 64.9%/ 00.26% / .. 34.8%

 

so 99.7% just on food and clothes!

[drbubb]

I decided to have some fun with this (amazing?) statistic.

And so I have started a little Weimar Poll over on HPC.

 

Poll: Housing As A Hedge For Hyperinflation - A Poll

Do you suppose it will work? / As % Household spend

http://www.housepricecrash.co.uk/forum/ind...howtopic=119091

 

(I'd love to do the same on SingingPig (Is it down again?),

and then see the faces of those smug BTL speculators over there.

But my account was cancelled again.)

[drbubb]

so 99.7% just on food and clothes!

 

the point is - that spending on housing (rents and mortgages) got squeezed and squeezed,

as people downsized their housing-related spending in order to feed and clothe themselves.

 

Landlords had ZERO pricing power, and had no ability to raise rents to keep pace with inflation.

And that was even when the German industrial production was relatively well maintained.

It only crashed down in the 1928-32 period

 

Anyone who buys property "as a hedge for hyper-inflation" must be a fool, who has done

no historical research at all !

 

[drbubb]

(Following is from the Poll thread on HPC):

 

Grayphil said:

Dr Bubb,

the only reason i added a reply was because of the Rye bread question!!

Im a restaraunt manger on a cruise ship, and although i dont really know nearly enough about economics I do know the Germans love their dark breads!! Rye or pumpernickel!!!

sorry no economic analisis but i think im right about this!!!

You nailed it, Phil.

Actually, I like the taste of German Rye bread, and can imagine with soup,

it provides a reasonably nutritious diet.

 

I suppose it was subsidised by the government.

I wonder how the diet in the UK is changing as a result of the current crisis?

I read somewhere that more Americans are going to McDonalds and other fast food restaurants,

and avoiding the more expensive restaurants

Here's a business idea:

The NEW SOUP KITCHEN restaurant, serving nutritious rye bread and soup,

with decent coffee and tea priced at reasonable prices

[drbubb]

Maybe I should look into this in more detail...

DrBubb said:

Here's a business idea:

The NEW SOUP KITCHEN restaurant, serving nutritious rye bread and soup,

with decent coffee and tea priced at reasonable prices

 

Soup Kitchen International was a well-known soup restaurant at 259-A West 55th Street, near 8th Avenue, in Manhattan, New York City, run by Al Yeganeh.

As of April 2006, the 55th Street location was closed, with the windows soaped over. A statement on Soup Kitchen International's website states that the 55th Street location and the entire building wall next to it are available "for sale or lease" until December of 2019.[1]

Yeganeh was born in Iran [2], and had lived in Khorramshahr, Iran, prior to moving to the US. Ali "Al" Yeganeh was the inspiration for the "Soup Nazi" character in the similarly-named episode of the NBC television sitcom Seinfeld. Yeganeh has stated on numerous occasions that he is very offended by the "Soup Nazi" moniker [3]. It is in this episode where Yeganeh is fictionally portrayed as the tyrannical purveyor of his soups, making all of his customers follow a strict set of rules if they wish to successfully procure a bowl of one of his coveted liquid masterpieces. The real Yeganeh has stated that his rules are simply an attempt to keep the line moving and serve the largest number of people.

In order to provide the most efficient service to his customers, Yeganeh established a set of "rules" for ordering his soup:

+ Pick the soup you want.

+ Have your money ready.

+ Move to the extreme left after ordering. [4]

+ Another added rule, created after the Seinfeld episode, states not to mention "The N Word (Nazi)."

 

Supposedly, if these rules are not followed, the offending patron is denied service and usually sent to the back of the line. However, at the first franchise of Yeganeh's "The Original Soup Man" restaurants (in Princeton, New Jersey), the rules are posted but not enforced in such an extreme manner

Co's Website : http://www.originalsoupman.com/c_rules.aspx

Al's Website : http://www.therealsoupman.com/

(I like the ego-istic @'ole, Jerry Seinfeld, even less after reading about how he treated Al Yeganeh.)

[drbubb]

(HPC-ers do not seem to get it yet):

 

DrBubb said:

Ask yourself :

Is property a good investment in a Hyper-inflationary environment?

Mean Guess - Current Tally

50% : x 10 = 500
42% : x 05 = 210
30% : x 04 = 120
20% : x 02 = 040
10% : x 08 = 080
05% : x 07 = 035
02% : x 08 = 016
01% : x 11 = 011 /

=== : x 07= 107 / average: 15.3%

If that were correct, and Housing-related spending fell from the current 42% to 15%,

what sort of investment do you think housing would be?

[nicejim]

I didn't know when the drop in production came and I guessed at sausage because you can put any old **** in it and people will buy it. I did suspect the spending on housing would fall though. As you point out, landlords have no pricing power, but another factor in the reduction would be in fixed rate mortgage payments. This might not have been such an issue in Germany but could be useful in hedging wealth in the UK.

I'd ask what you are hoping to hedge - is it wealth or income? Getting income of a tiny portion of a household's food bill will obviously not protect your spending power but what about wealth protection if you buy with a fixed rate mortgage? Suppose you buy a property costing 4x average income (AI), with a deposit of 1xAI. You might subsidise your tenant to the tune of 0.1xAI for the first few years (I think these figures are in the right ballpark for the UK at the moment) but pricing power could wipe this out before inflation went hyper. In a few more years you could pay off the capital with an hour's wages and would have an asset with a long term value of about 3xAI (given that the current 4xAI value is overpriced), which would have cost you 1.2xAI.

So it's possible to hedge wealth via property. The big problem I have with this is that UK wages are almost a cert to fall relative to other countries, and living standards decline. If you spend 1.2x UK wages for an asset which will soon be worth 3x Bulgarian wages then you've not properly hedged. It probably won't be that bad but even so, I don't think it's worth the risk of hyperinflation not happening. Depending on your other debts and your job security, the 0.1x subsidy could bring you down if we go Japanese.

I've had this discussion on other forums and also got the response that staying in cash would wipe you out - as though there are only 2 things to store wealth in!

[notanewmember]

Good thread. I will look for a cheap farm.

[aliveandkicking]

Had a look at this.

Bit confused. The article is talking about housing costs. But seems to be refering to cost of renting because it mentions land lords had no pricing power?

Digging deeper from original source

http://www.foothilltech.org/ceulau/honorsw...tionhandout.pdf

 

COSTS begin at 10 food 5.5 housing 6 clothing and end at

9.34 trillion food 38 billion housing and 5 trillion clothing for a low income family.

Meanwhile land must have risen in price? Wages? Materials?

This link also mentioned earlier refers to rent costs of low and middle class households but no obvious ownership costs.

http://www.slideshare.net/ccarter333/weimar02web

 

Other things being equal and of course they never, surely are a person beginning this period with a massive house and massive mortgage would be ending up with a massive house and almost zero mortgage?

[Beartrix]

aliveandkicking said:

Had a look at this.

Bit confused. The article is talking about housing costs. But seems to be refering to cost of renting because it mentions land lords had no pricing power?

Digging deeper from original source

http://www.foothilltech.org/ceulau/honorsw...tionhandout.pdf

costs begin at 10 food 5.5 housing 6 clothing and end at

9.34 trillion food 38 billion housing and 5 trillion clothing for a low income family.

Meanwhile land must have risen in price? Wages? Materials?

This link also mentioned earlier refers to rent costs of low and middle class households but no obvious ownership costs.

http://www.slideshare.net/ccarter333/weimar02web

Other things being equal and of course they never, surely are a person beginning this period with a massive house and massive mortgage would be ending up with a massive house and almost zero mortgage?

 

Exactly. The housing costs only refer to rent. I can see how during a period of hyperinflation the relative cost of housing to food would go down, however, the actual value would still go up considerably and provided you had a fix, you'd be quids in.

A more interesting question is how did they then determine the value of land and property relative to incomes when the new currency was introduced?

[romans holiday]

DrBubb said:

the point is - that spending on housing (rents and mortgages) got squeezed and squeezed,

as people downsized their housing-related spending in order to feed and clothe themselves.

Landlords had ZERO pricing power, and had no ability to raise rents to keep pace with inflation.

And that was even when the German industrial production was relatively well maintained.

It only crashed down in the 1928-32 period

Anyone who buys property "as a hedge for hyper-inflation" must be a fool, who has done

no historical research at all !

How is this for a housing idea.

Say economies first go japanese with deflation across the board. Buy a property [once prices have deflated of course in a couple of years] with only a 50% deposit and keep a reserve. A slightly speculative option with the rationale being that if things did develop later into a high inflationary environment, the mortgage would potentially/ theoretically be easily paid.

If things played out differently and the mortgage did become a real burden, whatever the environment, whether inflationary or deflationary, you would have the further option to use your reserve capital to pay the 50% mortgage off if you so wished.

[drbubb]

cells said:

Of course houses get a lot cheaper in real terms in an economic collapse, be it an inflationary collapse, a deflationary collapse or a neutral collapse.

However that doesn’t mean it is a bad inflation hedge.

There is only one way to benefit from hyperinflation and that is to have debt.

Now the average person can only take on meaningful debt via buying a house with a fixed mortgage.

So a house for the average person is the only and best inflationary hedge.

 

I see your point, but let me qualify that:

+ Having debt in itself, is not a great thing, especially if interest rates rise,

(Remember, deposit-holders and lenders too will want to keep up with inflation.)

+ Having FIXED rate debt (fixed at low rates) is better than floating rate debt

+ The key thing s to USE THE DEBT to buy an asset that rises with inflation,

and as my historical Weimar example illustrates, property* woefully under-performed the

German average inflation - by rising only 1/100 what the average price did (!)

 

+ Maybe owning a warehouse would have been a smart property investment.

You could have filled it with non-perishable food, and then some months later, the

food would have been worth many times what you paid for the warehouse.

You could sell the food, and buy many nice houses

==

*That is: "Property", as represented by the Housing related spending

[burbelly]

Surely in a hyper inflationary environment nothing sizable such as houses will be traded in the inflationary currency but traded/barter for in a more stable currency/gold, if at all!

Cant see any form of financing taking place as rate inflation will be moving too fast

 

Any figures on housing transactions in Weimar Germany?

[drbubb]

Mean Guess on the HPC Poll

- Current Tally -- // Housing as % Household spending

50% : x 10 = 500
42% : x 05 = 210
30% : x 04 = 120
20% : x 02 = 040
10% : x 08 = 080
05% : x 07 = 035
02% : x 08 = 016
01% : x 11 = 011 /

=== : x 55= 1012 / average: 18.4% , that's 71x the actual figure !!

WHY SUCH A HUGE MISS ?

They were right about one thing: Housing-related spending fell during hyperinflation. But it fell far more than people forecast. It fell to about 1/100th of the original percentage. The mean HPC estimate of 18.4%, when compared with the pre-war level of 25.6%, implies a fall of only 28%, not the actual 99% drop.

Have HPC people been brainwashed by Estate Agents, to think that property is a great investment in hyper-inflationary times ??

[drbubb]

Surely in a hyper inflationary environment nothing sizable such as houses will be traded in the inflationary currency but traded/barter for in a more stable currency/gold, if at all!

Cant see any form of financing taking place as rate inflation will be moving too fast

(Good point !)

Any figures on hosuing transactions in Weimar Germany?

I have looked for such figures previously, and never found them.

This is why I was so interested in that "0.26%" figure when I heard it on a weekend podcast.

 

This leaves me wondering if property in Zimbabwe might be a good cheap buy,

if they are now coming out of hyperinflation. Ah, but what huge security and political risk!

[drbubb]

Great find, Enrieb, on the "Goods during hyperinflation" thread

enrieb said:

True, property does maintain some value, but not as much as other asset classes. Owning a home for your family would be beneficial and the mortgage would be wiped out by the inflation, if you can keep up the payments. Owning multiple properties, in the hope of deriving a rental income, would be a mistake...

From / The Great Inflation, William Guttmann and Patricia Meehan

Chapter 4, The Losers, page 131-134

Property in land , by definition, as a Sachwert, a real value, and its ownership should have been the perfect hedge against inflation. In principle it was; and, indeed, the owners of property were, as the experience of the vast majority of them confirms, typical Inflation profiteers. For properties urban and rural, agricultural, industrial and residential, were heavily mortgaged - many, as the saying went, "up to the chimney pots". These mortgage debts were , of course, for a fixed number of paper marks, and, as we have seen, the mortgagee's loss and ruin were the mortgagor's gain and bonanza.

There was one kind of property that was an exception to the rule: the apartment building, the block of flats let out for rent, including tenement houses and slum or semi-slum property. The owners of these buildings, which were usually mortgaged like other property, were on the one hand gaining on the swings of inflation as their debts vanished, but on the other hand losing on the roundabouts of the rent acts and the confusion of the Inflation era. And many of them lost heavily.

The Germans were a nation of flat-dwellers, rather than house-owners. the ownership and occupation of a house or villa was normally the privilege of the rich, and they were exempt from the peculiar tribulations of the owners of property for letting. As the law, with negligible exceptions, did not permit ownership of parts of a building, living in a flat meant, to all intents and purposes, renting it. Blocks of flats were a popular investment, the rents providing the owner with an income.

The size and value of a property naturally varied very much. Some rich people even owned several of them. But a typical case was, perhaps, a four-story building, possibly with a couple of shops on the ground floor and six or eight flats above, one of which might be occupied by the owner himself. Its price in the estate market was perhaps in the 100,000-200,000 marks range and the net income to the owner, dependent of course on the extent of the mortgage charges, would be a few thousand marks a year, in itself sufficient to provide a reasonable living. Bricks and mortar were by definition a safe investment. The rental income was on the whole sound, the law and the usual terms of contract giving the landlord rather stringent (not always fair) rights vis-a-vis the tenant.

The relationship between land lord and tenant and the financial condition of the former were thrown into confusion by the twin legacies of the war: inflation and rent control.

Inflation put paid to the landlord's mortgage liabilities, in both capital and interest, thus presenting him with a huge profit and leaving him with his bricks and mortar, that paragon of a Sachwert, unencumbered by debts. This worked to perfection for the owner of agricultural land or industrial premises, but for the owner of rented residential property it was by no means so simple.

Of course he had a Sachwert in his hands and, if he were able to hold on to it and to survive until currency stability returned, his property operated as a more or less successful hedge against inflation. But that was an enormous IF, and tenacity, foresight and a good deal of willingness to make sacrifices were the essential prerequisites for success. For the almost total shortfall of rents, which was only partially compensated by the cessation of this mortgage liabilities, left him without the income on which he relied. Any chance of getting rid of a tenant and utilizing the latter's premises to some advantage was nullified by the security of tenure which the law granted.

If ever there was an illustration of the principle that inflation is a redistribution of wealth, here is was in the form of the transfer, from the owner to the tenant, of the benefits deriving from property. The tenant's advantage - the enjoyment of virtual freedom from paying rent for his flat - was in its turn partially lost to him. The benefit went to his employer, who used the fact of free rent to keep his wages low. But the landlord's tribulations did not end with his loss of income; he remained basically responsible for the upkeep of the property, and such expenses were only marginally reduced by the Inflation.

The accumulated neglect of the wartime years and the effect of one ugly phenomenon of the Inflation, namely the theft of such Sachwerte as stair carpets, door-handles, metal fixtures of all descriptions, electric light bulbs - in short, anything that could be extracted from a building by a desperate thief - added to the dilapidation of the property and to the landlord's impotence to prevent the property's falling into complete disrepair. To these material factors were the added psychological ones of constant worry and discontent, aggravated by resentment of the tenants, who, in the view of the landlords, became more and more "uppish". Even if the owner were not actually forced to sell out there were understandable motives for getting rid of what had become a burden.

 

So what will happen to all those UK BTL speculators if the UK heads into hyperinflation?

[G0ldfinger]

Weimar: IIRC, many rents were fixed (or got fixed), so they would not keep up with inflation hence ruining landlords who depended on the rental income for living (not for repaying the mortgage, which would be less of a problem since you could simply sell, say, a piece of toilet paper and pay back the mortgage on your house).

 

Houses themselves were of course still houses. I know someone who's German great-grandfather shot himself since he sold his house BEFORE the hyperinflation (and hence lost all his assest since he kept currency).

 

The best durable assets to hold in a hyperinflation are financially liquid ones: gold and silver.

[aliveandkicking]

Weimar: IIRC, many rents were fixed (or got fixed), so they would not keep up with inflation hence ruining landlords who depended on the rental income for living (not for repaying the mortgage, which would be less of a problem since you could simply sell, say, a piece of toilet paper and pay back the mortgage on your house).

 

Houses themselves were of course still houses. I know someone who's German great-grandfather shot himself since he sold his house BEFORE the hyperinflation (and hence lost all his assest since he kept currency).

 

The best durable assets to hold in a hyperinflation are financially liquid ones: gold and silver.

 

Still hard to see the landlords would be so ruined if they were very quickly effectively mortgage free and presumably could easily get new loans sufficient to pay for their living costs.

 

I dont see the logic that one set of assets is better than another in hyperinflation. All prices are going up. Buying assets with debt makes the most sense whatever you buy. According to the data so far presented poor people were able to get income increasing from 10 for food to 9 trillion. Having some kind of massive BTL empire might well work out great. But i am not a housing bull and i dont see hyperinflation.

 

And once you have the kind of wealth where you have say 2 houses carrying around Gold is i think impossible and then you have to leave it some place. I suppose it all depends on how doom and gloom you are about coming events. In Nuclear war for example it makes sense to have gold.

[G0ldfinger]

Still hard to see the landlords would be so ruined if they were very quickly effectively mortgage free and presumably could easily get new loans sufficient to pay for their living costs.

As far as I know that is not how it worked. Otherwise, why was everyone suffering?

 

I dont see the logic that one set of assets is better than another in hyperinflation. All prices are going up. ...

Simple: Some prices go up more than others. In a hyperinflation, the most liquid assets go up the most. Gold is THE most liquid asset.

 

In Nuclear war for example it makes sense to have gold.

Only a nutter would say things like this. However, if you are a rational investor, there are many much better reasons to own gold.

[drbubb]

Still hard to see the landlords would be so ruined if they were very quickly effectively mortgage free and presumably could easily get new loans sufficient to pay for their living costs.

 

I dont see the logic that one set of assets is better than another in hyperinflation. All prices are going up. Buying assets with debt makes the most sense whatever you buy. According to the data so far presented poor people were able to get income increasing from 10 for food to 9 trillion. Having some kind of massive BTL empire might well work out great. But i am not a housing bull and i dont see hyperinflation.

I think people's understanding of the Weimar episode is greatly distorted by the Easy Credit period that we are living in, It was never easy to get high LTV mortgage debt in early 20th century Germany, and once inflation took off, it was all but impossible. I read somewhere that a few privileged industrialists were the only ones with true access to credit. They used it to their advantage and bought up assets (that others could not afford), thanks to their access to credit.

 

Some on HPC are saying "now is the time to buy property", thinking that if they borrow 70-80% and fixed the interest rate for 5-10 years they will somehow glide through the next few years, and watch inflation erode away their debts. I think it is highly likely that the UK would first go through a wrenching period like Iceland. There, CPI prices are up 12-20% over the last year, and property prices are still falling. From what I am reading, it is very tough holding onto jobs there, and still harder to find good tenants. So a property buyer using high leverage may have trouble holding onto the property while they await the arrival of inflation. And then once it does arrive. they had better have a job, and one where wages get pushed up with inflation, or they will have trouble holding onto the property while they await a time to repay the debt. If the property is the main asset, and rents lag far behind inflation, there will be trouble. Tenants may default, or strip the property, while maintenance costs and property-related taxes are rising. Many will find owning the property is a nightmare, even if they have a job, since they may find they are in an unsafe neighborhood with crime and violence. Those areas that gentrified during the long property boom, are likely de-gentrify as the job losses and economic hard times settle in.

 

[drbubb]

(From HPC's "Inflation Question"):

 

Inflation only erodes the debt if wages go up with inflation!

 

That's exactly right.

You need higher income, or the debt burden is unchanged for the borrower.

It only "erodes" in relation to rising income.

 

In fact, you will be worse off than a low inflation situation, if you have no income rise,

because lenders will put up their interest rates to try to recover what they lost to inflation.

 

This is the problem some stupid home buyers are making. They think their debts will

somehow magically erode away. The reality is, the home value will not keep pace with

inflation when rates are rising, unless rents rise as fast/or faster than interest rates.

 

If you gave a quiz on the impact of inflation and hyperinflation on home prices to estate

agents, 90-95% of them would fail it. Mainly because they believe their own flawed soundbites.