The Gloom of Brexit with Ongoing Political Uncertainty in the Property Market
This Newsletter covers one key topic of interest for all property investors:
The Gloom of Brexit with Ongoing Political Uncertainty in the Property Market
Gloom: All is not well with the UK property market. The boom years for London property from 2009 to June 2016 are now over. Its worth giving some analysis of the reasons:
• Brexit business uncertainty
• Gigantic stamp duty rises for more expensive properties
• Additional stamp duty on second homes
• Gigantic tax increase on buy-to-let investors – that hit London the hardest since borrowing levels are higher with the more expensive properties and there are more high tax paying individuals
• Inward migration levels in the UK dropping sharply from around 350,0000 mid 2016 to 250,000 mid 2017 since the Brexit Referendum
• The Tory’s disastrous snap Election and Labour resurgence that has cast a huge shadow over London property as an investment area – because if Corbyn gets into power, then property taxes would go up even further for wealth Londoners
• Brexit negotiations going no-where fast spooking businesses and encouraging some of Europe’s top talent to move to the mainland
• Inflation caused by the drop in Sterling leading the Bank of England to consider increasing base rates despite a slowing economy
Uncertainty: The longer the uncertainty lasts, the worse the situation for London property will become. Frankly - we just don’t see things improving in the next year as the Tory party continue to cling onto power and Labour get more excuses to want to lead a new government – and a disenfranchised electorate.
Threat of Labour: The elephant in the room is a Labour government which would absolutely clubber business, tax the middle classes and wealthy to the extreme and drive talent away from the UK and London. This would in our view precipitate a collapse in the house prices in London in particular – as is probably a design of the Labour party policy. They want to make property more affordable for low wage earners.
Decision Time: For wealthy property owners, it’s worth considering whether to sell up at this time – since the gloom will worsen, or position to ride out the storm with the hope that the Tories somehow cling to power and win the next election in 2022 – which frankly seems rather unlikely at this time but possible.
Socialist Trending: The UK now has so many young voters that are socialists because they have nothing – no assets, huge student debts and many don’t understand the basics of business and finance and have no experience of how devastating a socialist government is – and would be – in the UK economy. One only need to look at Venezuela imploding from the once most wealthy South American nation with the world’s biggest oil reserves – to realise how damaging high taxes, nationalisation and strikes by workers parties can be. It can happen in the UK – in a similar way to what happened in 1974 during the 3-day week – when rubbish was not being collected in the UK and the country became the “sick man of Europe” – we were the laughing stock. Any Labour government realistically in its Corbyn left wing format would tax business so hard that unemployment would rise, prices would rise, inflation would rise and growth would drop – as Sterling crashed far further down off the back of a turbulent Brexit. Corbyn wants Brexit as well – and there seems to be no going back.
SNP Important: The balance of power could be partly dictated by the strength or weakness of the Scottish Nationalist vote – since most of the Scottish socialist leaning voter would probably vote Labour if SNP imploded and that would certainly be enough to get Corbyn into power with a weak and non charismatic Tory leader like Teressa May at the helm. The Tories best hope longer term is to have May lead the Brexit effort, and when we see light at the end of the tunnel and well before the next General Election – she should be replaced by someone who can engage properly with the UK population like Cameron used to – at Town Halls, Factories, villages - out and about with UK citizens. May is far too detached and awkward with the average UK citizen – the Tories needs someone that can really rally the population around a cause or theme, a real leader rather than a fairly effective internal manager type.
Ripple Effect: Over the last three years we have experienced a ripple property price effect out of London as people have gone further afield looking for value – this is always the case in property boom periods. It starts in West London and ends – if it ever gets there – in places like Barrow, Bury, Teeside and Bradford. We can expect this to continue for a while longer – may be another year before fizzling out. The fundamentals of the northern economy are not particularly good – with manufacturing struggling over the last decades and the public sector in decline from spending cuts – but there is enough impetus to create some >10% house price increases in some northern areas like Salford, Bury and Derby. Manchester is the UK’s second city – and the Chinese are investing in Manchester as they see value compared to London. Salford just west of Manchester city centre is a huge boom area – a focus for talent and media after the BBC moved north. Cheap areas close to Salford are probably worth considering although it’s probably quite late in the cycle now. The two super successful football clubs Manchester United and City probably help as well.
London Can Go Either Way: Longer term, prime West London real estate is worth considering as long as you think the Tories will stay in power, but if you think Labour will get into power in the next five years – then our view is it will definitely not be a good investment – it really depends more on the differences in the Tory and Labour policies than Brexit.
So there are two key scenarios:
Dip Then Boom: Tories struggle through Brexit and come out of the uncertainty in power with a more dynamic business environment – possible with a London tax haven status – and a rapidly expanding economy if the Tories stay in power post 2020. People look back on 2017 as the best time to invest since the uncertainty was suppressing London property prices.
Dip The Depression: Tories struggle through Brexit and come out of the uncertainty in losing power to Labour who immediately tax the hell out of business, working individuals and property owners – anyone with assets – leading to a social low growth regulated environment and a house price collapse in London sometime between 2018 and 2021. People look back on 2017 as the best time to sell before the draconian Labour party got into power in conjunction with Brexit that sent the country into a depression and a London house price collapse.
High Risk of Disaster: If anything, the chance of Labour getting into power is over 50% in the next 4½ years – and this is a major – the major - property investment risk in our view – and one of the key reasons why London property prices and demand for London property has gone south – first the Brexit Referendum than an even biggest shock in a way, Labour almost winning the last Election. We think if the General Election has been held around four weeks later, the Tories would not have been able to form a government and Labour would have formed a minority government. Since Vince Cable become Lib-Dem leader – who is more of a socialist than a liberal (he was Labour MP for Hillshead in Glasgow) – the chance of a left wing Coalition has just shot up. A Corbyn-Cable Coalition “CCC” we call it – would be an absolute disaster for the UK economy and employment. Definitely something to watch out for – and frankly worry about. We all know what happens when governments spend way beyond their means - on social projects and social security. The UK is close to bankrupt in any case without spending binges starting again.
Quality Accommodation: Finally, regardless of the political environment, people will always need to live in good quality accommodation. So the message is – make sure in this uncertain environment your properties are making a positive cashflow each month. With increasing taxes, increasing regulation, increasing interest rates, inflation of building and maintenance costs and a slowing economy with less inward migration – it’s a tough environment for making money. Standards of rental property are increasing – properties with nice bathrooms and kitchens and floors are let out quickly, but if you have shoddy unmodernised interiors, you can expect higher void periods and lower rents with less reliable tenants. The balance is not spending too much creating quality rental units whilst having the rental units good enough to avoid getting bad tenants or no tenants, or very low rents.
Sterling Crash With Labour: If Labour get into power, you can expect an economic shock with interest rates rising to defend the Sterling as general inflation rises fast but property prices dropping sharply – or crash in places like London and SE England.
More Pain for Buy-to-let: Property investors need to realise that they are at the whim of the political establishment – even with a Tory government, buy-to-let landlords have been clobbered with waves of new taxes and regulation – layer on layer of added costs, and it’s not the business it used to be. As the UK struggles economically because of its endemic inefficiencies – such as lack of investment in manufacturing-machinery and technology – we low productivity levels and many manual low paid jobs – then property owners will increasing become targets for more taxes and clearly government see property investors as easy targets. The Labour will want to absolutely clobber property investors – make no mistake, even if it leads to a worsening of the housing crisis in the process – it’s worth noting the council build practically no council housing anymore – they do not and never will have any money for this – they rely on private investors – and they keep taxing the hell out of the property investor which worsens the housing crisis – but this will always be lost on them since they live in a political world not an economic-business world. Politicians are all career politicians that have almost zero understanding of private enterprise and job creation. Council workers don’t understand business either since they work in a regulated public sector spending environment. Politicians are just looking for votes and scoring political points regrettably.
X-Factor Certainty: If you want to avoid all political risk, then its best to get into things like the X-Factor, or Reality TV – popular things that will be successful regardless of the government. Regrettably the property investor has no real control over housing policy or the political establishment – we just have to wait to see what the next thing comes out of the woodwork to clubber us.
On a more positive note – always remember that:
Inflation all the way: Governments will always print currency and inflate economies – the currency will be worth less but prices will always rise in the UK in the long term and since there will always be shortages of supply of property because building levels run at around 140,000 a year whilst demand needs to be around 330,000 units. As currency is printed – you need to own hard assets – things you can touch and feel like property (bricks and mortar), gold-silver, oil or artwork. People have known this for centuries – don’t expect to retain any wealth if you don’t buy hard assets.
You need to avoid spending money on holidays, expensive cars that depreciate fast and “stuff” that is worth less as soon as you buy it. Instead, leveraging and buying property – then having a positive cashflow and having the tenants help pay the mortgage – is a good strategy in an inflating world we live in in the UK.
Remember the average property price was:
£1500 in 1950
£5000 in 1965
£15000 in 1975
£60000 in 1990
£150000 in 2000
£300000 in 2017
Assets are King: We think property prices will average around £600000 by 2035 – simply because the Bank of England has a target to create inflation and they will always do this by printing currency if it does not happen naturally through business growth. Hence very long term – even if Labour get into power – as long as the overall economy does not implode long term – then we would expect to see house price inflation. Building costs would rise, all costs and wages would rise – but property prices would have to rise eventually – unless the tax increases were so draconian – in a way like they are in Venezuela – that property prices stayed permanently depressed. But we can’t see the UK population putting up with this for more than 4 years before a Tory government came back into power to clear up the mess again.
We hope you have found this Newsletter insightful – we have tried to be frank and say it how it is – to help property investors guide themselves through this uncertain period. Overall is best to focus on your key business – adding value to your property portfolio – but never take you eye of the big risks that are on the horizon – and if you are close to retirement – you might want to bag the gains at this time, since there is a significant – heightened chance – of a property price crash in the next few years. If you have any comments or queries, please contact us email@example.com