Oct 25

Progressive Collapse

There is a term in the construction industry that is called, Progressive Collapse. It’s not widely known but was brought back to my attention by the wisest man I know, my Dad!

In the UK, in the late 60’s, a building called Ronan Point in the South of London suffered “Progressive Collapse, and before everyone’s eyes sank down to the ground taking many people with it.

The horrific 9/11 attacks caused two incidents of progressive collapse, namely towers one and two of the World Trade Centre.

The concept is very simple as a high or middle floor of a building collapses the entire weight of the building above that point drops immediately onto the floor below, its supporting walls are not built to withstand such an impact and they also collapse, producing a progressive collapse, with each drop being heavier and causing the effect to even speed up. Quite simply it cannot be stopped. The building drops as far as it can possibly go, basically ground zero!

As my old man related this analogy, to the current world stock markets and property prices, it was clear to me that he had again hit the nail on the head and as a member of the RICS (Royal Institute of Chartered Surveyors) he had managed to describe an effect which CNBC, Bloomberg and many others had failed to equate to the public clearly.

As markets begin to fall many products and financial instruments such as, Hedge Funds, Futures, Options and other heavily geared (over borrowed!) positions begin to unravel. The fact is actually that the creator and or owner, is forced to unravel them. They need to sell before they are wiped out simply because the falling market is not just impacting on them by the % it is falling, but by the weight of the multiplication they have geared themselves, be that; 5, 10, 50 or over 100 times! That’s a whole lot of financial floors hitting the next floor at the same time!

So they dump, or unwind their position as it is more politely known. Bang off we go again down to the next floor!

This applies to property, shares, bonds, cash, you have now all seen just how any currency can also be sold, or dumped and also how quickly banks can simply evaporate.
Property also had too many speculators, people buying to rent, or speculating on spec built houses and they were over geared (borrowed) against these progressively less popular and valuable assets. So they also off load and cause progressive collapse!

Banks, as is their usual intellect, also panic. They repossess homes and sell them on mass through auction houses, which are also doing their hardest to talk the market down, to get a quick buck through auctioning the repossessions. In so doing the banks wipe out 50 – 60% of the previous value of the property and therefore establish new lower values for a particular area or road. This now puts those other residents and neighbors into negative equity and stress  progressive collapse!

REMAIN CALM Progressive Collapse always finds a floor, even if it’s only when it’s the reception area of a falling office block. A base line is found eventually on all asset classes, shares, property, cash, bonds – even art! You should not panic, you should not jump from one asset class to another and you should not “catch a falling knife! Stay with your medium to long term plan and avoid the doom merchants or solution salesmen, no gold will not go to $20,000 and in these most turbulent markets. It has in fact just flat lined. Stay with your plan and get qualified quality advice.
After all Progressive Collapse comes a rebirth and growth, new buildings will grow out of the area forever known as ground zero and our own more modest investments will regain a sense of normality or if you were in New York “normalcy”. It just shows, we are still two nations separated by a common language!

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