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421: London property inflates - longer term outlook

04-21-2012 team

London Property Prices Back Over Peak Levels: It’s interesting to note that London property prices are now higher than their peak of mid 2007 – some five years ago - despite the financial crash of 2008 and lack of mortgage funding available. Let’s explore why.

No Surprise: Firstly, this does not surprise us at – indeed, we have been predicting this for years (refer to our year end predictions Special Reports). The key though is to describe whey this is happening, because this will help property investors make up their mind about whether London is a good place to invest in property.

408: 2012 Prediction (and 2011 look-back)

356: 2011 Prediction (and 2010 look-back)

301 2010 Prediction (and 2009 look-back)

245 2009 Prediction (and 2008 look-back)

179 2008 House Price Predictions – Global

102 Property Price and Economic Predictions for 2007

55 Predictions for 2006

20 Predictions for 2005

Booming Population: Back in 2004, authorities predicted that an additional 1 million people would be living in London ten years henceforth – a 12% increase in the city's population. Whilst numbers remain difficult to come by, it seems if anything, more than a million extra people are now living in London because of:

  • Massive immigration from eastern Europe and all other parts of the world – both very wealthy, middle class, workers with their families.
  • Workers are cramming into flats – sometimes five to a one bedroom flat – since the housing shortage is so severe – it really is difficult to assess how many people now live in London - many urban areas are like a “rabbit warren”.
  • House building remains miserably low – not nearly enough to keep up with the increase in population mainly from overseas
  • The London Olympics have bought thousands of builders to the city - though other infra-structure projects are likely to keep these builders in the city in 2013 onwards (e.g. Crossrail)
  • The City of London remains a magnet for well educated bankers and financiers from all parts of the globe
  • The families of people from the Commonwealth countries continue to arrive in London looking for a “better life”

Chronic Shortage: There is very little written in the mainstream press about the desperate housing shortage. Almost zero council housing is being build and very little social housing. Finance for new building projects remains difficult to come by with big barriers to entry and high interest rates when compared to base rates.

Buy-To-Let Cannot Keep Up: The price of property has risen to levels of about 5 times the average wage and hence even quite wealthy young people cannot afford to buy anymore. Buy-to-let landlords are helping fill the gap, but they cannot fill it fast enough because of high tax 9e.g. CGT rise from 18% to 28%) and difficult borrowing - hence rents are rising sharply with the reduced amount of rental property on the market and firm demand. Renters are packing themselves into flats and houses – overcrowding is very common. In addition, the average size of a flat is only half that of a flat in Berlin/Germany and 60% of the size of a flat in Holland – the flat sizes are tiny.

Overcrowding - Boom: One only needs to experience the overcrowding on the tube, rail and buses in Central London to know that there has been a huge increase in London’s population in the last ten years – it struggles to cope. No wander the government has so many rail/tube and infra-structure improvement projects on the go – because these are all desperately needed to try and prevent severe problems occurring on the transport system.

Part of the reason property prices are rising is because of lack of supply (building) and increasing demand  (immigration). Other important factors are:

·         Regional economic growth – with new jobs being created

·         Olympics and other large infra-structure projects

·         New companies setting up in London – a global growth hub

·         Sterling value declining – making London property attractive for rich foreigners

·         Inflation making London property a good hedge against inflation of rich foreign and local investors

·         London remains a safe, lively, tourist and business centre – attractive for foreigners wanting second homes

·         The financial sectors is doing reasonably well despite the financial crash of 2008

·         London is home to many successful international oil, gas and mining companies – these commodities – firms are floated on the London stock market and this contributes substantially to the London economy

Crime Rate: The London murder rate has crashed to half of levels seen ten years ago - mainly because police capture 95% of murderers (few cases are unsolved), surveillance is far better (control state, video cameras), weapons are not common and emergency response and medivac services are much improved. This is another reason why international wealthy investors flock to London - to escape high crime rates in other parts of the world - it is also a safe place to invest. For a large city, London is a very safe location, safer than it has ever been despite the overcrowding.   

No Let Up: We cannot see any of this changing – apart from possibly the financial sector if a crash occurs. The high inflation caused by US and UK printed money is leading to supply shortages – because people fear investing in building properties during these uncertain high inflationary times. This further leads to supply shortages. Even though rents and property prices rise – there is no reaction on the supply side as banks hoard cash and drip-feed builders and mortgages for private individuals. This is not likely to change in the medium term. The government does not seem to either realise or care enough about the housing issue to act decisively on it. Allowing guarantees for first time buyers probably helps a little, but the four banks signed up to the scheme (mainly nationalised banks) are still very reluctant to give the first time buyers finance to buy property. They might still fear another house price crash and further bad debt. But they are certainly currently making serious money from lending at 0.5% from the Bank of England, then giving mortgages out to low risk people at 6% (or businesses at 8%) - a whopping 5.5% uplift (7.5% on business loans). No wander they can give themselves fat bonuses with this easy money opportunity. More evidence regrettably of "rip-off Britain" this time in the banking sector. 

Inflation Impact: It’s little surprise also that inflation has levelled out again at CPI 3% - well above the BoE's target 2%. Real inflation if you consider tax, food and fuel price increases is more like 8% but the inflation numbers are grossly manipulated in our view - this helps keep social security and entitlement costs down of course - another reason why the poor lose out during high inflationary periods.  Also another reason why property prices are rising. It’s partly the UK (and indirectly US) printed money hitting the streets. If you supply money into the system at 0.5% and print on top of it – surely it doesn’t take a rocket scientist to realise prices will increase. But don’t expect to feel wealthy. GDP is bearly rising - actually declining if you consider real inflation rates. The numbers are manipulated of course.  Sterling is being devalued all the time like the US dollar, so people like to buy physical assets that will retain their value rather than hold government debt (Bonds, Treasuries). Please don’t be surprised if that flat you wanted for £300,000 costs £603,000 in five years time – all it will mean is that inflation runs away as we evidentually expect – at about 15% per annum. Even if inflation only ran at 7.5% for five years, property prices for such a flat would be £431,000 by 2017 - demonstrated by the table below:


Property Prices - London Inflation -Model  £'000







Inflation 15%







Inflation 7.5%







Inflation 3.5%








Inflation Spurt: What we are also trying to do is get you warmed up to our view that general prices could rise sharply but you won't necessarily feel a lot more wealthy. The UK economy is showing the classic signs of rich investorsa pre-high inflationary period:

·         Economy seems to be finally moving upwards after the severe recession of 2008 (stock market rebound to FTSE 5800 despite Euro concerns)

·         Prices will not drop and the Bank of England say they are scratching their heads about this – they have no answers – only concerns (but don't believe their cluelessness - they probably know big inflation is just around but aren't telling anyone)

·         Gigantic quantities of printed money have driven up oil and commodities prices making building and construction far more expense and risky

·         Savers are starting to spend their saving because inflation is eating them way – with negative rates of -2.5% below inflation and -5% below mortgage rates who can blame them

·         Inflation expectations are becoming engrained – no-one believes the Bank of England anymore because they have been wrong for five years now regarding inflation – inflation always overshoots by at least 1% - before this in 2007 - despite the housing bubble int he UK, Europe and USA, they seemed to had no idea a crash was about to happen

·         They are now so nervous, they are no longer printing money.

Waves of Dollars Dumped Into The Ether: The other problem is that waves of US dollars are swamping the London streets and soon UK inflation will rise sharply and with it property prices. It’s not through real growth, it’s through printed fiat currency that is being devalued, making import costs far higher. Eventually - things will catch up and interest rates will need to rise to fight off inflation - then there will be a general collapse - most likely in 2013. But at least when inflation takes off, owning London property in a good location will mean owning a real revenue generating real physical asset that cannot be confiscated.  

Stock Market Crash














End of UK Petro-Currency: The UK used to be a petro-currency up until about 2005. However, since the Tory Coalition announced the shock North Sea oil tax hike in March 2011, oil production has crashed 26% and gas production crashed 22% - the number of wells being drilled has halved. It's a production crisis – it’s just that no-one seems to care about this in the UK. In part because of this, the UK is losing its status as a petro-currency and will decline further because it is no longer backed by oil reserves. The UK now imports oil and huge quantities of gas. The production crash is showing no signs of slowing regrettably as the high North Sea taxes take their toll – now the Treasury is getting less tax than it used to before the tax hike was announced – so much for increasing taxes – un-intended consequences all over again. It’s a real pity the government shot itself in the foot again with this third North Sea tax hike in ten years – it was enough to drive investment overseas – Norway and other countries have seen activity levels rise sharply as oil prices have risen. Meanwhile in the UK, activity levels have crashed.

UK Oil Production crash-collapse-crisis

Oil Production UK - crash, collapse, crisis - tax hike

















Annual Net Oil Revenue Deficit - crash-collapse




















Bumping Along A Peak Oil Plateau: As the oil prices rise, more frantic drilling will take place across the world, more oil will be bought on stream at higher finding and producing costs. This will delay the day that oil production (all liquids) starts to go into a significant decline. This is a very important investment model to consider:

·  Economy slows – oil prices drop slightlyKensington London Investor

·  Governments print more money to prop up economies

· Oil prices start to rise sharply whilst economic activity increases

· Oil prices feed through to inflation and economy slows, oil prices drop back

· Governments print more money to prop up economies

· Each time the oil price trough after the mini-crash back gets higher and the oil price spikes get higher – further weakening the economies of all but the largest per capita oil exporters

This is what we mean by our expression "Bumping Along a Peak Oil Production Plateau". Global economic activity is being severely constrained by high energy costs and high inflation - caused by printed money and difficulties finding cheap oil.  Our unique global production model below shows the constraints that have built up as projected consumption out-strips projected supply - meaning higher oil prices. This is compounded by waves of printed money - meaning economic growth in the west well stagnate as inflation takes off by end 2012 - causing some form of crash and recession in 2013.

Oil Production Global All Liquids  - including forecast to 2018 updated June 18 2012 based on latest June 2012 dataset and modelling

 Oil Production Global All Liquids
















Investment Strategy: This brings us finally onto a good investment strategy for these western low growth inflationary times - when the rich get richer and the poor get poorer. The capitalist rich know how to position themselves in such inflationary times through knowledge, motivation and management of risk - they understand inflation and can control their finances accordingly. What they do – and indeed – this is our guidance to make sure you don’t go bankrupt and instead make a reasonable return in such times - is:

· Hold only minimal cashing savings in banks that might go bankrupt (why take the risk if you are earning an inflation adjusted -4% per annum?)

· Avoid Treasuries and Government Bonds that might default

· Avoid high-tech stocks that are probably in a bubble

· Invest in property – with good rental incomes (high yields)

· Buy physical gold and silver

· Buy stocks in commodities companies – oil exploration-production and mining exploration-production

· Buy land

· Buy commodities like food, fertilizer, forestry, water

Summary: Of course, buying London property is a good way of hedging against inflation - it's possible prices could dip in 2013 if there is a general market crash, but longer term, as governments are forced to keep interest rates lower than inflation and keep printing money - which will lead to high inflation - the asset prices will rise along with everything else even though real growth will hardly move higher - the term "stagflation" seems appropriate for this period - punctuated by a crash - most likely in 2013 and in any case before 2016.

We hope this Special Report has helped you frame your investment strategy, assisted you in managing risk and highlighted some opportunities during this projected high inflationary period. If you have any queries, please contact us on

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