Is property a good investment in times of war?
April 21, 2017
The Easter weekend was filled with tensions. It started with Donald Trump using Afghanistan as a testing ground for the Mother Of All Bombs and killed 96 Islamic State militants. This was followed by a failed missile launch by North Korea on Sunday. US Vice-President Mike Pence warned that ‘the era of strategic patience is over’.
Suddenly, everyone is on their toes. A war sounds imminent.
What will happen if there is a war? Are we safe? Will Singapore economy be intact? How are we affected financially? What will happen to the property market?
Wars won’t stop mortgage payments
First of all, there is a big difference between living inside or outside a warzone. If the war happens in our country, all male citizens and PRs between the age of 18 and 40 will be compulsorily enlisted in national service.
When the home owners leave their jobs to serve their country, they are still required by the banks to repay their housing loans every month. Mostly likely, the government will step in, increase taxes or issue war bonds to help the servicemen to temporarily pay their mortgages while they are away. When they come back, they have to continue paying their loans.
Since no home protection or mortgage insurance cover acts of war, even if a house becomes uninhabitable after a bombing raid, the owner is still liable to pay the outstanding housing loan.
That’s why it is wiser to rent than to own properties in wartime.
People will sell their home at whatever price they can fetch if they anticipate that a war is coming. For the rich, they will either leave their country or sell their properties to stay in a hotel.
Land is a far better investment than properties
I just read Barton Biggs’ book Wealth, War and Wisdom.
Biggs is a hedge fund manager famous for correctly predicting the dot.com bust. His book examines how different asset classes performed during World War II and which ones proved to be the winners after the war.
The conventional wisdom told us that properties are safe havens. But it is a different story when countries are at war. Property prices are largely influenced by the performance of the stock market. During World War II, the stock exchange dropped to the lowest in February 1942.
“The listlessness affected real estate. A New York hotel could not be sold at one times its annual earnings, and rents in Wall Street office buildings were as low as a dollar a square foot.”
Compared with real estate, land proved to be a much better investment.
“Estates and buildings were expropriated, converted, depreciated, or destroyed, and getting them back or obtaining compensation after the hostilities were over was problematical at best.”
“On the other hand, the underlying land was always there, and even if the local property records had been destroyed, the locals knew who the owners were.”
“In cities that were bombed, no compensation was ever received for destroyed homes or property, but title to the underlying land was retained.”
“From 1950 to 1990, while nominal income rose 50 times, land prices climbed 330 times … if you owned agricultural land, you were forced by the MacArthur administration to sell your acreage to the government at a deeply distressed pries so farm land didn’t work as a wealth preserver. However commercial, industrial, and residential land especially in Tokyo and Osaka was a different story … and when the post-war boom came you became incredibly rich as property values soared to unimaginable heights.”
There is one exception: If the country falls to communism, “all land and property will be confiscated and distributed to the commissars and the people”, similar to the situation when the Soviet Army occupied Hungary in 1944.
Good and bad assets to own in wartime
To protect your wealth in times of war, the strategy is to diversify your fortune both in asset classes and locations.
Biggs’ book also evaluates the value of other asset classes during World War II.
Paper money is easily eroded by inflation in wartime. And holding piles of cash in a time when people are less law-abiding is likely to attract thieves and robbers.
Say you have bought a property in a country that is in war and you manage to cash out in time. However, transferring large amount of money out of the country is a bad idea. There might be exchange controls and taxes. Above all, you will be accused of being unpatriotic or treasonous.
Countries that have surrendered are forced to switch to a new currency. But that may become completely useless after the war. The banana currency circulated in Singapore and Malaysia during World War II is a good example.
According to Biggs, you can only hide it in your backyard if you own gold because there were 3 problems of selling gold during the war:
1) The seller had to find a real buyer or a black market dealer to sell the gold. It was extremely dangerous to leak the news when informers and treachery were everywhere.
2) The seller had to accept a significant discount from the true value of the gold because there was no open market.
3) The seller had to hide the gold. For instance, the Germans would “borrow” the gold by issuing a promissory note and ship it back to Germany. The promissory notes were not honoured after the war.
However, when inflation soared in the post-war years from 1945 to 1950, gold was a good asset to own.
“In occupied Europe during World War II, all things considered, gold was the best asset to hide in, preserve wealth, and maintain some liquidity. Stocks, land, real estate, and businesses worked only if you had a very long-term horizon.”
3. Stocks and Bonds
Biggs’ research tries to find out whether stock prices are “random, irrational and undecipherable” that “just reflect the foolish consensus of crowds” on a short-term basis, or they are “intuitive and wise in their judgments” in the long-term.
His conclusion is that equities had actually outperformed during the years of war. He recommends families and individuals to have 75 percent of their wealth in stocks. It is also critical to own a diversified portfolio and beware of companies that are no longer relevant.
“Equities are the place to be in the long run because of their proven and virtually unique ability to increase the purchasing power of capital.”
Below is a table from Enterprising Investor's article “What Happens to the Market if America Goes to War?” that shows stocks have outperformed their long-term averages during wars. On the other hand, bonds have disappointed during the same periods of time. This is echoed by Biggs that “the returns for government bonds in France, Germany, Italy and Japan are a calamity” between 1940 and 1949.
Other practical things to own during wars
No matter what investment you choose, you can’t ignore the basic needs of food and clothes when there is a war. Afterall, no one can survive being land-rich or property rich but food-poor.
“However, you couldn’t eat stock certificates, and food was what people had to have to survive. To that extent, stocks didn’t work. Food was the best currency in the latter year of the war.”
“warm clothes and food were the most desirable barter items. People wanted to first cure being cold and hungry before they became greedy for possessions. One European family that lived through the war in Japan found that the exchange rate for clothes was much higher than that for jewelery, and they survived the hungry years by bartering their large inventory of sweaters and overcoats for food.”
Briggs thinks the rich are too complacent because they believe that they will have time to extricate their wealth when the unexpected happens. But in reality, it can happen much faster than anyone expect.
Wars are caused by humans and history often repeats itself. Briggs mentions that “at least once in every century there has been an episode of great wealth destruction”. The trigger event can be a massive terrorist attack, a nuclear attack, a plague, a massive SARS epidemic, or an electronic explosion that disrupts the economy for months or years.
Briggs didn’t live long enough to see that happens. We pray that this day will never come.