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428: Safe Haven London - for now anyway

05-28-2012 team

London Property Prices? Ever wondered why the house prices continue to rise in London?  It’s pretty simple – just a few points:

·         Greeks bailing out of Greece – shifting Greek Euros into Sterling before they exit

·         Spanish bailing out of Spain – after the property crash and run on the banks as rates and debt payments rise

·         French bailing out of France – after the new socialist government came to power – promising 80% tax for the wealthy, more debt, regulation and a bigger government and public spending – with attacks on business

·         Middle Eastern – investors and private wealthy families bailing out of unstable countries or hedging their bets by purchasing property in London

·         Iran – wealthy Iranians bailing out of an increasingly unstable country

·         China – wealthy Chinese buying London property because of the culture, shopping and lack of pollution for such a large city

·         Americans – seeing the writing on the wall for the US dollar as Obama looks likely to get re-elected – and the tax and regulatory net widens on all US citizen – bailing out before it gets bad

Being British - it’s sometimes hard to understand why people would want to come from abroad to live in London. Many of the things people complain about are actually world class. Examples are:

·         Trains

·         Tube train network

·         Airports

·         Road network

·         Taxis

Cape Town:  For example, Cape Town in South Africa has one or two trains, and you would never in your wildest dreams use them because they are so dangerous – crime. Everyone is a target. If you travel on the tube, it's almost unheard of to be attacked or shot – it really is a very safe way for people of all ages to get around London.

·         The taxis are efficient, fairly low cost and safe.

·         There are 4-5 airports within 30 mins train ride from London.

·         There are world class Universities and public (private) schools.

Excellent Food:  Twenty years ago, people complained about the standard of restaurants in London. But now, some of the best restaurants in the world are in London – standards have been transformed – probably because there are so many foreign people working in catering – French chefs and Italian waiters – food from every enclave of the world is served in London.

Cultural Activities: Then there is the Theatre, Cinemas, Museums, Art Galleries, Exhibitions, Nightlife, Shops, Parks, tourist attractions. The list goes on. You could keep yourself busy in London seeing all these places for years. You can imagine if you are a Saudi woman living in a desert city how amazing all these places are to visit – all the shops, cafes, restaurants, theatre etc.

Tolerant-Respectful: One of the best things about London is the tolerance of all nationalities. Every national in the world is represented in London – a massive mix of different cultures all accepted – an equal society. This attracts wealthy foreigners in huge numbers – all these things drive up the property prices in London.

Cool in Summer: Funny the Londoners complain about the weather, but many people from the Middle East come to London for the cool weather in the summer – escape the intense heat and get out of the sun! Who cares anyway if you take taxis and spend most of the time inside shopping, home, school, cafes, college etc.

Debt Laden: One of the key issues for the UK is its massive debt that is unsustainable in the long run. The Tory Coalition is only making slow progress on this – the level f debt is not declining – it continues to rise. The deficit is also disturbing. But when you compare the UK with other countries like Spain, France, Japan and the USA – who do not have credible spending reduction plans, it actually starts looking like a safe haven.

Non Dom Tax:  The tax regime for non domiciled wealth foreigners is extremely attractive. Most wealthy people around the world know this – and if they want to benefit from outstanding cultural, educational and tourist aspects in a safe country, then London is normally preferred over rather boring places like Geneva, Monaco and Luxemburg. Yes, these cities are clean and wealthy, but they don’t have the same attractions as London.

Investing Centre: This is one of the reasons why London’s financial district has become so successful in the last 30 years – because once these wealthy people settle in London, they use the City to invest their millions or billions. They know investments made in London have good legal and regulatory regime – and corruption (or being blatantly ripped-off – is uncommon.

National Picture:  When you compare London with the rest of the country, the UK picture changes dramatically. Firstly there are far fewer public sector jobs in London as a percentage than any other region in the UK. This means that the public sector cuts will cause less hardship in London. In fact, there is a shortage of skilled labour in London, so any public sector employees would probably be picked up fairly quickly in the private sector and start contributing to adding value and taxes (rather than spending).

Weak Provinces: In the far off provinces, most jobs are public sector and the private sector is so weak it cannot absorb these redundant workers. So the economy takes a big hit. During the Labour period from 1997 to 2008, there was a massive shift in spending to provincial and northern areas where the public sector was expanded. But this has stopped, reversed. The giant increase in London’s populations mean the only large infra-structure projects left in the budget are actually in London – further fuelling its growth. London continues to move further away in economic efficiency and value creation compared with rural and northern areas. This is accentuated during when Tory governments are in power because less money goes into the public sector. During Labour periods of power when the public sector is expanded, the provinces pull back a bit. But the trend continues over decades. The main threat to the continuation of this trend is a financial meltdown in the UK that could adversely affect the City of London's financial district, but even the crash of 2008 did not seem to stop London's growth - London's unemployment rate hardly changed.

People have always said London property prices will crash one day - that they are too high compared with other parts of the UK and the world. A few pointers:

So Many Rich People In The World: There are simply so many rich people in the 7 billion global population that want to purchase safe West London property - and there is no new supply - that its easy to see why prices can keep rising. Every time another country starts to look turbulent, its quite probable that a lot of this money will head towards London as a safe haven. These inflows will strengthen Sterling and keep interest rates low, further increasing property prices as borrowing remains low cost.    


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