filament bulb lying on euro coins

08. 02 .2024

Correlations and real cause-effect relationships of the real estate market – energy and money market cycles, with particular regard to deep causality.

Property price inflation or property bubble or something else?

According to common belief, property prices rise largely in conjunction with general inflation (consumer price index), but changes in property prices are barely taken into account in inflation calculations. See:

My assertion is that changes in property prices are not a function of consumer inflation, but rather the international fluctuation of energy costs largely determines property price changes, with the opposite sign. That is, an increase in energy prices leads to a decrease in property prices, or a decrease in energy prices leads to an increase in property prices.

Property prices are driven by energy cost cycles because:

  • Energy, as a general resource (Peter Thiel - energy is the master resource), is part of every product and service, as everything contains an energy component, thus changes in energy prices fundamentally determine the cost, price index of products and services, thereby determining current inflation.
  • Every central bank, in the framework of its financial stability mission, is obliged to react to inflationary risks arising from economic overheating with interest rate increases and/or reduction of money supply.
  • The supply and demand for oil and gas and electricity, i.e., their pricing, have a decisive impact on transportation, production, and distribution costs.
  • Demand for energy is inelastic, decreasing only in response to significant price changes, so the quantity extracted practically determines prices.
  • The quantity of extraction is determined by a few large international players.

In my opinion, since 1973, PETRO has therefore been the DOLLAR, i.e., first "petrol" and only then dollar, because the US control over the energy market gives strength to the "PETRODOLLAR" issued by the FED. Supply and demand are a function of international deep-water navigation, which is provided by the US NAVY's 13 aircraft carrier fleet.

Since almost every real estate transaction is financed with a loan, the terms of lending have a decisive impact on real estate market demand and prices. In my opinion, property price changes are therefore determined mainly by energy market cycles and the lending they control, rather than by inflation as commonly believed, whatever may cause it, whether it's irresponsible lending-driven household consumption or irresponsible government spending.

Misinterpretation of the causal relationship triggers incorrect institutional reactions. The MNB tries to achieve price stability with interest rate increases and liquidity reduction, which, in the short term, reduces general consumption and investment demand, but rather exacerbates inflation than reduces it, as interest rates, as financing costs, further increase supply chain costs through production-transportation-inventory-and sales financing costs. An increase in the base rate also increases the financing costs of the central budget, leading to tax increases. Tax increases have an inflationary effect again. The tax increase induced by interest rate increases further fuels cost increases, cost inflation, and higher taxes further reduce available income, demand. Decreased incomes lead to decreased demand and savings, which manifests in reduced property demand and price decreases or reduced property loan demand. The decrease in the value of property collateral, bank mortgages, reduces bank lending, the primary cause of which is the decrease in collateral values, which proportionally decreases the sustainable loan portfolio, the secondary cause is the deterioration of capital adequacy due to bank losses, the significance of which is multiplied by the bank's capital leverage.

Thus, energy price increases cause interest inflation first, then cost inflation, and finally tax inflation, which gradually reduces general economic activity, reduces savings, all in a vicious cycle, under the "marked to market" rule, until someone intervenes from outside the system with an "unorthodox new deal." The intervenor could be a foreign investor, IMF loan, unlimited FED petrodollar, but one thing is certain, intervention has a costly price. Thus, the explosion of energy costs (North Stream) leads to the devaluation of family, corporate, national wealth in the affected region or country and to external financial investors and international concentration.

However, the new photovoltaic-electric vehicle-powerwall (PV-EV-PW) technologies rewrite the rules written in 1973 (suspension of the gold standard) after 50 years!

The cost of producing 1 kWh of electricity has decreased from $50 to $0.05. Similar development is underway in the EV and PW industries. This forces a cycle change in energy, and after the inevitable energy price decrease, decreasing inflation and decreasing interest rates will result, which will strengthen consumption, increase investment and lending, and through them lead to real estate market stabilization, normalization of savings and lending.

Based on the above, causality, in my opinion, is reversed. In the formation of property prices, the determining factor is not inflation generated by household consumption or government spending or inflation-following pricing, but rather bank lending determined by energy market cycles and savings.

Therefore, the correct energy strategy:

  • government support for household savings with stable, predictable regulation that provides returns equivalent to government bonds and knowledge transfer supporting this to the PV-EV-PW area,
  • organization of household - family-owned, domestic SME-owned production - storage endpoints and capacities into an intelligent network,
  • the intelligent energy network is built on a capacity capable of serving Central European transit traffic, which makes this investment self-financing,
  • this regional monopoly provides extra fast returns even in periods of high energy prices,
  • this, with interconnectors connecting every neighboring country, makes energy access the safest and cheapest.

If our energy market is in order and provides a competitive advantage, then industrial and agricultural production also has a competitive edge, and the most important domestic real estate market, which carries household savings, is also safe and sound.

The Fed's balance sheet quadrupled from 2005 to 2021, from $5 trillion to $20 trillion. The ECB's balance sheet during this period increased from €3 trillion to €4 trillion, all with approximately 50% cumulative GDP growth. Investments in PV-EV-PW (+ nuclear power plant safety cord) at today's prices fix basic electricity and energy costs against the energy inflationary effect built into the international fiat currency system, controlled externally (FED printing press). These centrally controlled energy investments also provide cover against energy cost inflation caused externally, providing cover even against energy cost inflation caused externally (FED printing press). So once again, if the domestic economy and population can defend themselves against partially energy autonomous production and storage infrastructure against external effects transmitted by the energy market, then the most important form of savings, the domestic real estate market, is also safe, there are no forced bank sales, there is no liquidation of privately or collectively created wealth portfolios over decades. Instead, a stable, predictable, and domestically investor-owned value-retaining real estate market is established.

The above has been translated from Hungarian to English with the use of AI.