Egypt has moved centre stage. What’s it all about, and is it going to effect the housing markets?

Once again, let’s start with my usual caveat. I dont have a crystal ball, and I have no idea what is going to happen, or when. But I can recognise risk when I see it. I dont like risk.

For about seven years I have been advising people not to buy real estate in the Middle East. I was heavily against buying in Dubai. No doubt some folks made money, but only those who got in right at the beginning, held for two years, and got out. Those who then got back in again got their profits wiped out. It was a market for the greedy, not for the sensible. In one year prices fell by 75%. That’s not just bad, that is disastrous.

I have also warned against buying in Egypt. On the face of it the deals look good, and the market is roaring away. Or rather, it was. The Middle East is a tinder box. It has to go bang at some stage. It’s not the place to be stuck with a nice holiday property when there is fighting in the streets.

I have also noticed that land registrations in Egypt are not exactly wonderful. I have no direct knowledge of the following situation, but I pass it on for what it’s worth. Ten years ago the situation was like this: “92% of city dwellers and 83% of the rural population live in homes with no clear legal title. You have to jump through 77 bureaucratic hoops — taking 6-14 years — to gain formal title to desert land.”

Things may have improved. But with the streets ringing to the crash of bombs, I dont think Egypt is the place to invest at the moment, or for the foreseeable future. But the Egypt effect has far more ramifications than the local housing market. It may well affect the housing markets here in Europe.

I have mentioned before that the Middle East is a tinder-box. A hundred years ago the tinder box was the description for the Balkans. That area has settled down somewhat over the past decade, and maybe we have seen the end of the civil strife in that region. If we have, I think we have the Internet, or indeed the Easyjet, generation to thank. Opening up a country to the outside world does wonders for understanding. It can lead to strife, and less understanding, but generally it is a good thing.

What is happening in Egypt now is a coming together of three separate problems. The first, and the trigger, is steeply dropping standards of living. Food prices rose by 21% last year. In a country where food represents 6% of the average family’s budget (the USA) that is cause for grumbles, but not for revolution. Where 30% of a family budget goes on food, such a rise is cause for serious alarm. However, there are countries where more than 50% of the budget goes on food. In India and parts of China that percentage can be as high as 70%. For those countries a rise in food prices of 21% is catastrophic.

For Egypt’s urban poor we are approaching catastrophe levels. There is no way to increase food production as Egypt is mostly rock and desert. Only the delta is agriculturally productive. The country imports 60% of its food. It also imports oil, and so is no longer energy independent. The country cant afford to pay its way. The urban poor are getting poorer, and revolution is in the air.

The second problem is that perennial problem: religion. There are race tensions which have been festering for millennia. There is a small clash of ideas between the copts and the muslims. There is a large clash between the sunni and the shia muslim sects. That clash of ideologies bedevils the whole of the Middle East. It is a clash that threatens to erupt at any moment. The main contenders are the Saudis versus the Iranians, with a very complicated mix spread around the other countries of the area. This has explosive consequences for the whole region.

The third problem is that two-thirds of the traded oil that sloshes round the world comes from that region. There are two rather nasty choke points. The first is the Straits of Hormuz. The second is the Suez Canal. If the latter gets closed, or disrupted in any way by the strife in Eqypt, then the price of oil is going to rise rather nastily. If the former gets involved in the religious strife then we have the whole of the region up in smoke, and oil prices will triple almost overnight.

The last time that happened was back in 1971. That brought the whole world to its economic knees, and a decade of ferocious inflation followed.

Forty years on the same could easily happen again. This time it would come hard on the heels of economic chaos already endemic across the globe. It would plunge the whole world into a deep depression, and decimate major currencies. It would be hard on housing, and hard on those paying mortgages. If you could survive the first couple of years of much higher interest rates you would end up sitting pretty on assets that will eventually lurch forward in value to make up for the drop in the value of the local currency.

Those who dont like risk should buy as interest rates come back down again after that period of financial armageddon. Those who just buy one home while selling another wont have such a problem. The sale price may be down, but so will the buy price. And of course, both will rise again.

If this Egypt mess gets really nasty, and begins the religious civil war that has been bubbling under since the original split in the islamic faith that stems from the murder of the prophet, then we are in for a nasty time.

For those concerned with real estate as an investment you would need to be invested in areas other than traditional western countries, as their currencies would be at serious risk, and so would their economies, dependent as they are on relatively cheap energy prices. Once again, I think the only safe havens are likely to be countries with strong currencies which are energy and food independent. It still looks like South America to me, or South-East Asia. Canada is also a favoured place in that respect.

On the other hand, how did I start the first article in this two-part mini series? Just to reassure myself I have walked up to the balcony to watch the sunset. The blossom is gorgeous, and if the blossom is on the bough, can the fruit be far behind? But my best performing assets are all south of the equator, and I shall be drinking a superb Chllean wine with my evening meal.