495: Self Fulfilling Prophecy - London property prices shift higher
Switch in UK Property Market: In the UK the property market has switched dramatically since March 2013 when the Chancellor announced the Help to Buy schemes – Phase 1 on new builds was started and the planned Phase 2 for used properties was then accelerated from Jan 2014 to Oct 2013 in October. As soon as the scheme was announced in March, large amounts of news and media coverage warning of the threat of house prices rising hit streets. The Help to Buy scheme affects relatively small numbers of people, but it’s almost as if the expectation of price increases has then caused house price increases as all those people that were sitting on the sidelines for the last five years have sudden started to get interested in buying a property before prices rise. This has then help lift prices.
Small Area of Increases: Of course most of the UK market has hardly seen any increases – it’s mainly been confined to London and the prosperous suburbs and towns close to London – mainly to the west, NW and SW. Of course super-rich foreigners have found that London property is good value because the currency has declined, interest rates are very low, in any case most have cash in stronger currencies, purchase costs are low and tax is low. London is seen as a safe haven. A tax haven.
Ripple Effect: Hence property prices in areas close to prime Central London have risen sharply because of the “ripple effect” – with the more prosperous suburbs like Hammersmith, Clapham, Belsize, Battersea and Islington being the first in line for this ripple as wealthy British bankers are priced out of places like Kensington and Chelsea. The ripple is headinthrough places like Streatham and Tooting in south London and Ealing in west London. Hackney-Shoreditch prices have risen sharply – being close to the City and “Tech City”.
Reasons for London Rise: However, the fundamentals of the UK economy haven’t really changed much. The property prices have risen in London because of:
· Record low interest rates
· Wealthy foreigners
· Lack of build supply
· Population boom – more people moving into London, larger families and less people leaving
· Business expansion in the services sector
· Easy money – increasing debt in the public and private sector
· Waves of motivated young global foreign people coming to London to develop business
Manufacturing-Exports Miserable: The UK export performance has been pretty miserable for many years. Manufacturing has been in the doldrums for years. The City financial services sector has been hit by heavy regulation, banker bonus caps and reputational damage from various unethical transactions and transgressions. The rural UK population is aging, with very low productivity as retirees strain the national health service and public sector cuts cause social stresses. Yes, London has been booming for years now, but most of the rest of the UK has been in a depression. It’s not really likely to change much any time soon. Part of the reason is energy prices – whilst the USA has $2.8/mmbtu gas prices, UK industries have to pay $10/mmbtu – a massive disadvantage. Chemical plants and oil refineries have been closing for decades leading to more imports. It seems unlikely the UK population will ever accept any fraccing of wells for gas – hence gas prices will rise further as they drop in the USA.
Property Investors: The reason why this is so important for the property investor is that:
· Northern and rural areas are not likely to see large property price gains like they did in the 2002-2007 period – because of the aging populations, lack of efficient-productive industries in most areas and public sector cut-backs
· Areas within a 50 mile range of 1 hour commute of London are likely to see the London property price ripple effect passing through over the next few years
· London property prices are likely to rise further as business booms and supply dries up – with about 8 people chasing each property by early 2014
Northern Depression: As the public sector employment drops and private sector employment rises, northern areas will be hammered further as Tory policies create more of a market. Wage increase will stay suppressed in all areas because of: 1) weak trade unions; 2) low cost migrant labour; 3) depressions in non-picturesque (non-holiday home) rural areas
Keeping a Lid on Inflation – Cheap Labour: The impact of inward migration of all nationalities to London and the UK has been staggering – in that they: 1) keep a lid on wage increases; 2) don’t belong to unions which keeps a lid on wage increase; 3) work hard-motivated; 4) often have large families; 5) leading to large increases in population and requirement for public and private sector services that then expand the economy; 6) this then leads to higher GDP growth, lower inflation and lower interest rates.
Oil Prices Dropping: The other very important economic benefit driving house prices higher is the lower oil prices experienced in the last six months. A number of things have happened to suppress oil prices:
· US-Iranian tensions have eased for now
· Tensions over Syria are easing somewhat
· The US has experiences an oil technological miracle – combining horizontal drilling with fraccing in shales to produce light oil in vast new quantities – this has meant:
· OPEC have come under pricing pressure
· The US is projected to be energy sufficient by 2022 – meaning their need for pervasive military excursions and interference is likely to curtail – they are likely to become more insular
· Diplomacy and political will is being used more than military attacks to try and keep the peace
This relative stabilisation in the last few months has seen the risk-premium taken out of the oil prices. Oil is still $90/bbl – still high – but the drop from $110 to $90/bbl has boosted the global economy and driven inflation down – thence allowing interest rates to remain low for longer.
Phoney Recovery: As the economy – albeit rather fake and rather flaky – starts to grow more strongly for the first time since 2008, optimism is returning and with it – most people thing property prices are in for a long run of rising prices. It’s a recovery yes, but based on property prices rising – more property construction and more debt. It frankly the only way the Tory Coalition could get the economy moving because the fundamental are so week in all areas apart from London. The whole debt laden economic revival is flawed and will continue for some time, but eventually the debt bomb will go off and the bond markets will collapse. It looks unlikely before end 2014 now, but some time, the whole pack of cards will have to come crashing down and with it there will have to be a “reset” or “reboot”. What the financial and economic landscape will look like after that is difficult to know.
For property investors, if you survive this rough-turbulent period – you might come out the other side after a hyperinflationary period with very little debt and lots of properties.
It seems the government knows that no-one can handle high or higher interest rates. If interest rates (base rates) rose from say 0.5% to 5% - many or most people would go bankrupt very quickly with the size of their debts and miserable earnings growth. Its possible base rates could rise sharply to 5% or more, and mortgage rates to 8-10% but it looks less likely after everyone has been weaned onto low rates for so long and many people – including students – have taken out further large debts.
Fiat Monetary Inflation Scheme: The whole UK and global fiat monetary system relies on expanding money supply and inflation – it cannot survive with prolonged periods of deflation. Our view is the government simply won’t allow deflation – they will simply print more currency. Eventually the balloon will get so big, the money will be hoarded – the velocity of money will drop further – then when the debt bubble pops – the balloon rips – they will try and pump huge quantities of money in – then it will simply get out of hand. People will panic and start trying to unload the currency into assets - leading to a hyper-inflation than a re-set. People holding real assets like gold, silver, land, oil, artwork, commodities, property and stocks and shares in good companies will survive. The people owning fiat currencies, bonds, paper assets and ETFs will find their paper assets worth practically nothing.
Property Switch: For now, you will notice the opposite is happening. Gold, silver, oil and commodities prices have dropped sharply as people have switched into more risky financial assets, currency and real estate. The drop in oil prices has certainly helped property prices in all oil importing nations and stimulated the global economy. The drop should temporarily stabilize the Spanish, Portuguese, Italian, Greek and Irish economies – all big oil importers.
Switch Back: We expect eventually – a switch to gold, silver and oil as these prices head higher again – possibly caused by a war and financial turbulence. But for now – it really looks like London property prices are heading rapidly higher as a mild form of property panic breaks out. People jumping in hoping they don’t miss the boat as the media frenzy works towards a fever pitch.
Fiat Collapse: Recall that all fiat currencies have ended with hyperinflation and collapse. This one started in 1971 when the US dollar came off the gold standard. It’s been going for 44 years – the bond bubble is still expanding exponentially and eventually the UK Sterling and US dollar will be close to worthless. Inflation claims of 2% are absurd – everyone knows is more than double this during a depression that has lasted 5 years in the UK (except for London). Yes, the UK GDP outside London is far lower now than it was in 2008 after 5 years – that’s officially a DEPRESSION – not a recession.
Position for Labour Victory: For the canny property investors, it might be worth assessing – around summer 2014 - the likelihood of a Labour win in May 2015. If it looks likely – it could be a good time to sell. A Labour majority would likely see prime London property prices drop sharply and thence ripple out across the capital. It probably would not affect rural and northern areas markedly either way initially - since a temporary public sector boost and more regulations, minimum wages and higher benefits would support these areas – until tax revenues dried up and the whole economy collapsed likely it did when Gordon Brown spent the UK’s gold (the so-called “Brown’s Bottom”) and oil revenues in the ten year period leading up to the 2007 collapse as he drove the UK into a debt hole which it has never recovered. The UK under a Labour majority government would look like France after a few years. High taxes, high public sector spending and lower tax revenues as business declined and recession became pervasive. It’s likely the credibly of the Tory Coalition’s economic management of the UK will improve through to May 2015, but we don’t think this will be enough for them to be re-elected. There are far too many urban Labour constituency and Scotland holds the key to another Labour win – many Labour seats with small population constituencies.
Summary Looking Forwards: In summary, for now – it looks like London prices will shoot up in 2014. In 2015 it’s anyone guess what might happen. The ripple will spread further from London, but the distant rural places like Barrow-in-Furness, Bury and Barmouth simply won’t see any of this. What the UK bond yields – make sure they stay low. Watch interest rates – make sure they don’t rise sharply. Watch the oil prices – make sure they stay low below $100/bbl. The early 2014 period could see a short goldilocks period for London property prices – further out is more difficult to forecast and depends on the likelihood of a Labour win or not.
We hope this special report has helped frame your property investment strategy and actions. If you have any comments or queries, please contact us on email@example.com