319: Hung Parliament and Debt contagion - update for property investors
Not a Good Few Days: What a depressing day Friday 7th was. Firstly on Thursday afternoon we had someone in New York with a fat finger pressing the wrong button (billions rather than millions sell order on Procter & Gamble stock) and triggering the biggest one day Dow Jones rout for years down -7% in an hour –as electronic trading triggered bandwagon selling. Then we had more stock market declines Friday from fear of Sovereign debt contagion triggered by the Greek infection. And we had the UK election where everyone was claiming a win all night.
Everyone Lost:Then everyone woke up and discovered everyone had lost. Labour lost. The Liberal Democrats Lost. The Tories failed to win. Talking around - everyone was miserable – did anyone win? Then of course – the markets plunged – Sterling and the stock market. Immediately after David Cameron’s speech proposal at about 2pm, the FT100 market dropped another 2%.
AAA Rating Threat: This could be an early sign of things to come. Everyone has been warning that without a decisive government that will tackle the government debt and deficit, the markets will tank. We agree of course. The ratings agencies put out a subtle threat that they would not downgrade the UK’s AAA rating until it was clear what the plans to reduce the deficit were – this means, if they do not see concrete plans in the next few weeks, they will downgrade – that’s our interpretation.
Good News: Anyway, the good news is that we are likely to see:
· Home Information Packs discontinued
· Reduced burdensome regulation
· The budget deficit being tackled this year – reduced inefficiencies and administration costs
· “Mansion Tax” or VAT on new homes dropped – despite Lib Dem proposals
Debt Contagion: Most likely outcome appears to be a Conservative minority government with Lib Dem input, or a full alliance, with say three middle level ministerial positions being offered to the Lib Dems. How long the alliance would last is most uncertain, but at least we can discard the baggage of 13 years of overspending that has lead to the 13% budget deficit – this is the key issue especially when considering the Greek debt contagion crisis breaking out and urgency to tackle such deficits. This deficit is staggering considering we hardly import any oil or gas and have 80% tax on petrol that delivers $100 Billion in taxes to the Treasury. It shows the extent of the bloated public sector administration and the issues that need to be tackled. The good news is at least the bank of England can set its own rates and print money to try and re-inflate the economy.
Investing Now:For property investors – during this period of uncertainty, we would not advise buying unless you get a highly motivated seller with excellent below market value offer accepted. Prices will likely drop in the next eight months. We think the stock market and property mini-boom from April 2009 to March 2010 has come to an end. Inflation will rise, interest rates will rise, lower-end property will be put on the market as the lower half of population feel the pinch. Upper end prime property may benefit from low Sterling and safe haven foreign investors flooding in. Middle level property in the south could hold up, with middle level property in northern areas feeling the strain. Things are likely to get far worse before they get better – and the key will be a solid Tory government with input from Lib Dem in a united front on the deficit – we’d give it a 50% chance of success only at this stage.
Risks in PIGS countries: Anyone thinking of investing in property in Portugal, Italy, Greece or Spain at the moment – our advice is – don’t – even if you see a massive (what looks like) bargain - the debt contagion will spread and may start to affect the UK, France, Holland and Germany in the next few months. Western Europe has been borrowing beyond its means and Peak Oil costs (that’s 3.5% of GDP for Greece on oil imports alone at $80/bbl, similar amount for Spain) will be prohibitive to strong growth moving forwards. The only really safe place in Europe to invest in property at this time is Norway (budget surplus of 15% with oil and gas prices likely to rising further, massive exporter of oil/gas with small expanding indigenous population). London could also benefit from mining/energy sector investment as would Aberdeen – but apart from these, it’s difficult to get excited with the debt contagion slowly spreading off the back of the failed Euro experiment and indecision by mainland European politicians and the European Central Bank almost powerless to act to stop the rot.
Euro Break Up:The European leaders may well eventually get together and expel certain countries – thence their currencies will decouple and asset prices crash in Sterling terms. So don’t buy Euro denominated property in peripheral Euro countries at this time (that includes Ireland) using Sterling or Dollars – otherwise you might get a rude shock in a few months time when the investment drops in value to half in your local currency terms. As the Euro drops, this will put further pressure on UK manufacturing – so the UK north will start feeling the effects of this along with public sector jobs losses by year end.
Alliance Needs to be Strong and Concerted:We wish we could be a bit more upbeat – at least we seem to have a change in government – but there are many problems that now need to be tackled to get UK finances back into shape – the sooner the better. We would positively encourage any new administration to work together in a concerted team to tackle the deficit issue head on – before a tipping point is reached and bonds/yields rise, interest rates have to rise, credit ratings dropped and things get a whole lot more difficult for everyone.
Portfolio Decisions:If you are close to retirement and have a large property portfolio, consider selling down at least part of it now. For younger investors – after a period of debt reduction and slow growth if the new administration works – one could envisage a UK recovery in a few years time if Peak Oil - oil prices – stay below $110/bbl. Longer term, there is still a chronic undersupply of property in the south of England – particularly houses, so if the UK can just improve its deficit (reduce public sector) and encourage business (surpluses) then things could get back into shape longer term.
We hope this Special Report has given some insights and prospective for your property investment decisions. If you have any comments, please contact us on firstname.lastname@example.org