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[schong719]

We agree with Mr. Fuller's analysis below, when he replied an email of one of his subscribers.

However, we also would like to add that foreclosures will go up as well, as interest rates go up.

Here is his analysis:

Before I go any further I should say that at 29 years old I have decided not to become a homeowner because I believe the market is overpriced and I will have the opportunity to buy lower in the future. So, one could say that it is in my interests for house prices to decline, but I'll try to be as objective as I can.

If you believe, as we do, that we are in a secular bull market for commodities, this leads to higher inflation pressures as growing demand chases limited supply. If commodity bull markets go hand in hand with inflationary cycles then interest rates will generally follow suit.

The last twenty years have been characterized by a downtrend in government bond yields. This has led to ever decreasing mortgage costs. It became increasingly easy to take out mortgages and this was deemed safe because interest rates were seen as never going up by any great margin. I would argue that government bond yields have bottomed and are at the beginning of a new bull market.

What does this have to do with property? Rising interest rates are like a margin call on leveraged property investors. The degree to which this affects a market should be in direct relation to the number of people not on fixed rate mortgages. Those on interest only or floating rate mortgages feel the pinch as interest rates go up. Rising interest rates also help to dispel speculation in the market because the risk / reward ratio is less in their favour. Prices would have to appreciate more to justify the cost of the trade.

Property has outperformed most other asset classes; which is why so many people adopted the asset class in the first place. I don't believe property can maintain this outperformance in a secular bull market for government bond yields. Nor do I believe we will see a crash because homeowners tend to vote and governments will be forced to act in their interests. It is a possibility that property prices hold up in nominal terms but not in inflation adjusted terms. What is almost a certainty is that other asset classes like energy, industrial resources and selected equity markets will outperform property in general.