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119: A new game – what’s changed?

02-23-2007  team


In the UK and most other European and North American countries, property prices have been rising strongly for 5-10 years, uninterrupted. Many doomungers have forecast a property price crash and economists have warned of the end of a 7 year growth cycle. Investors have become skeptical about whether asset prices can continue rising whilst inflation stays subdued. If things have changed, exactly what is it that has changed?


Globalisation and China

Borders have opened up in the last ten years – trade between nations has boomed. Cheap imports from China have fueled a consumer boom – the low prices have kept a lid on inflation, leading to low interest rates, cheap borrowing and a boom in property prices. Low cost labour and migration of international workforces had created competition for labour and kept a lid on wage inflation, and hence inflation, interest rates, borrowing costs – this has further fueled property price rises. Better education, training and knowledge transfer amongst a global workforce has also kept a lid on professional services costs and has improved competition. Meanwhile, companies have become less wasteful – corporate profits have risen strongly in most western countries – this wealth has further stimulated investment in commercial and residential property.



Meanwhile, populations have increased, land shortages have intensified and environmental and planning constraints have worsened, depressing the supply side and property construction. More people have been competing for less property – particularly in countries with land shortages and strong GDP and population growth (e.g. southern England, Spain, Luxembourg, Ireland, lowland Norway, California, New York, India, China).



As China and India have pulled hard on oil, gas, commodities and other physical resources, metal and energy price have risen – however, there has been remarkably little impact on inflation. This is most likely because global competition in manufacturing in conjunction with productivity improvements have meant overall prices have not risen much. China delivers a huge balance of payment surplus that is lent to the USA – this money has fueled the consumer boom and cheap borrowing. Even though oil prices shot up from $20/bbl to $78/bbl by mid 2006, inflation in most western countries only increased to around 2.8%. Now that oil prices have dropped to $60/bbl, the US dollar has dropped in value and UK gas prices have crash from 80p/therm to 15p/them – UK inflation is expected to drop from 2.7% to well under 2% by the end of 2007. This means that despite raw material increases – the use of technology, low price global labour and productivity improvements in manufacturing and services mean that high inflation is becoming a distant memory. However, a key risk for any property investor not investing in oil dominated economies is the oil price – in summary:



Property Manufacturing Techniques

Meanwhile, the construction of property has remained a relatively inefficient process – from land acquisition through planning to construction, marketing and sales. Construction costs have risen, supporting high property prices. Environmental constraints and land shortage have been a strait-jacket that has lead to housing shortages in many area - London being a classic example. There seems little evidence this will change in the next 5 years.





The outlook

Although Governments and National Banks express concern about inflationary pressures building, if there had been any, we probably would have seen then by now. Hence, it’s likely that, as long as oil prices stay in the $60/bbl range, global growth will continue to motor on at around 4-5% per annum. The faster growing countries are likely to be China (10%), India (8%) with Brazil (5%) following behind. USA should stay at 3%, Spain 3.8%, UK at 3% for a few years and European mainland at 2.3% or thereabouts. The population increase in India, China, USA and countries like Ireland and Luxembourg will lead to higher overall GDP growth – this should feed through to property price increases.


In summary, does not see any crash occurring, and we believe the benign inflationary picture should continue unless there is a war or major tensions (possibly in the Middle East, which lead to sky-rocketing oil prices). Don’t expect any boom in most markets – but expect price to keep edging higher. Areas of financial/services sector booms with limited land such as London, Luxembourg, Bangalore, Shanghai, Singapore, Sydney, Perth and KL will likely do particularly well – with property price increasing ahead of global trend.  

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