310: UK outlook uncertain
The election is on the horizon, and it’s starting to look more like a hung parliament. The Tories are keeping their policies very close to their chests – they are probably frightened to admit that radical surgery is needed to mend the public finances. The reason? – the Labour party have created (through design) such a massive public sector - who tend to vote Labour and live in marginal Midlands, North and Scottish constituencies – that if the Tories announced big public sector cuts, they’d never get any votes. Immigrants tend to vote Labour as well – and immigration has swelled in the last 13 years which helps Labour votes. We are beginning to think that the Tories are actually not able to get a majority even in a crisis period – also because of boundary changes in the last ten years – there are many facets working against them. Even if the Tories get 39% of the vote, and Labour get 37%, Labour would probably win an election with an outright majority because of boundary changes and voter section across the constituencies. Can you remember when Margaret Thatcher had a parliamentary majority when she only got 33% of the vote – not anymore. The Tories probably need 40% of the vote – and we think the chances of achieving this is 33.3% or less.
Public Sector To Win Election?: It is rather disturbing to think that after the private sector has been reduced in both proportional size and prosperity through increases in regulation, taxation and public sector, that the massive overspending will win the election day because these are the people that will vote Labour so they stand a better chance of keeping their jobs! Simplistic it might be, but this is our view after analysis of events. We now give it a 33.3%/33.3%/33.3% chance of a Labour victory, Hung Parliament and Tory victory – if anything, Labour now have significant momentum so we would not be surprised to see this shift in Labour’s favour in the next eight weeks. If the Tories get into power, it will be particularly good for property investment in the south and London. If Labour get back in, London and the south should still do okay, but the Midlands, North and Scotland will not be as badly affected initially compared to if the Tories get in. However, because Gordon Brown shows little willingness to reign in the public finances (this is not in his personal values set), we would expect Sterling to decline, inflation to increase and interest rates to rise – eventually leading to another recession – a 13% deficit is totally unsustainable and it could worsen – and increases in taxation on the wealthy will drive them out of th
e UK and the overall tax take will eventually drop – it would take a few years, but it would happen. Just like in the 1970s (it needed the Tories to clear up the mess – and it took ten years). All the money has been spent and tax receipts have dry up – this could worsen. London is bracing for a 50% tax from 6th April – and a possible Labour victory come 6th May would probably see this increased further – any doubts should just look at the track record. There could then be a run on Sterling – it may have started last week!
Career Politicians: The political parties used to be run by successful business and military people that – after making serious money - wanted to give something back to the country (they also had large egos to satisfy). Now the politicians are what we describe as “career politicians”. They have made their way through the political party hierarchy after graduating from University. Non as far as we can see (apart from Vince Cable who was an economist for a large oil company) have ever worked in business or as leaders in the military. Our chancellor – the “Head of UK Finance PLC” – a massive economy - is a Lawyer. How does that qualify you to run the finances of a country? Imagine if you applied for the top Finance Director job in a large private company - and said you were a Lawyer – they would laugh at you – show you the door! Most of the politicians haven’t even worked in the Civil Service, never mind the Private Sector. Good job we still have an independent Bank of England Committee. Anyway, the point is, we don’t believe the bulk of politician have any knowledge of business, entrepreneurial skills, enterprise and how wealth is created. They don’t appear to understand that all public sector money comes from the private sector and individuals – through taxes. They only know how to spend! They tax the private enterprise, regulate them, create layers of administration then overspend all the proceeds – much on wasteful projects, administrators, quangos, consultants, bonuses and pensions. All we can do is “hope” for the property investor - that regulation does not worsen, finance becomes easier to attain, and property taxation reduces – but frankly we are not hopeful on any of these key criteria.
Values of the Generations: Ultimately all the regulation and expenses will probably lead to less buy-to-let landlords, less private rented accommodation on the market, reduced rental supply and higher rents. It could actually increase returns for those people that remain in buy-to-let and can handle the regulation. We also think buy-to-let is far more popular with people aged 40 and over, that people 20-40 are either not interested in the hassle, don’t want to take the risk or haven’t got he money to risk. Most of the 40 plus buy-to-let brigade will probable slowly increase their portfolio – but not fast enough to meet demand. Meanwhile many of the 20-40 year olds will want their independence, find troubles getting onto the housing market after racking up gigantic student loans (average £20,000) and wedding bills (average £20,000). The 40+ people will get richer and the 20-40, without investments, will continue to spend as before, invest little and therefore their net worth will not rise. Of course there will be exceptions – but going back to the highly motivated 25 year olds of the late 1980s in the Thatcher years (who bought houses and flats) and compare them with the 25 year olds of 2010 (who go on expensive holidays, have student debt, don’t marry and have kids until they are 40 and don’t own a home until they are 38) – it’s a different generation driven by different values, ideals and finances with a different tax and cost structure. Not better or worse – just different.
Deposits: The average deposit for first time buyers is now £40,000 – up from £15,000 before the credit crunch and banking meltdown. Meanwhile most younger people in their 20s have student and other debits of £15,000-£30,000 – so you can imagine how demoralizing it is to think that one has to save for ten years to get a deposit for a small flat in one of the poorest parts of London. Compare this with the late 1990s, London flats could be purchased for £60,000 and deposits were 5% - that’s a meagre £3,000. Property prices were rising at 15% per annum – in part driven by low oil prices. You had positive equity on your £3,000 after six months! Most students had no debits if they graduated before 1995 since University grants were given. It was a one way train – easy to invest – and many people started by borrowing their first deposit with a credit card (we kid you no, just ask the estate agents). Inflation was dropping as oil prices remained low and globalisation helped reduce import prices. Now we have competition from China, India and other developing nations for oil and energy – and instead of exporting oil and gas as we did in 1997, we import 40% of our needs – and worsening. So if Labour get back in, oil prices rise well above $80/bbl – it will be batten down the hatches again. And don’t be surprised to see taxes rise, inflation rise, growth drop and the deficit to get way out of control.
As we have been doing for the last six years, we have tried to be insightful as possible – as you can see, we are less positive now than we have been at any time in the last ten years.
We hope you have found this Special Report insightful and a good steer with regard to your property investing and portfolio selections. If you have any comments, please contact us on firstname.lastname@example.org . Happy investing in 2010.