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521: Interest Rates To Stay Low - Slowdown and Turmoil

11-08-2014 team

Interest Rates: Don’t expect interest rates to rise any time soon. The main reasons for this are:

·        Oil prices have dropped sharply from $110/bbl to $82/bbl in the last two months that will start to feed strongly into the UK inflation figures in the next four months causing a strong deflationary effect

·        Huge numbers of foreign workers are flooding into the UK to work on building projects, property services and in the retail and services industries that make up 78% of the UK GDP. This is putting downward pressure on wages largely because the foreign workers will work longer hours for lower pay and hence wage deflationary pressures are ever present. If any additional tightening of supply-demand did take place, the market would fill it with foreign workers. This is something the BoE never describe since it is rather sensitive.

·        The mainland European economy is sick – particularly in France. The economy is stalling out and the ECB has been forced to print money through the back door in the form of asset purchases. Deflationary pressures are building as oil prices drop and the Euro economy slows. This means the UK economy is starting to feel the effects of the European slowdown since they are the UK’s largest trading block.

·        The housing market has slowed significantly – in all areas of the UK. It started in West London and is now working its way out – as confidence dips since the London property prices have stalled. This means the BoE has more leeway to delay any rise in interest rates.

·        The UK economy is slowing somewhat also related to fears that Labour might win the next General Election and introduce a Mansion Tax. This policy would send the UK economy the way of the French economy – high taxes, lower revenues , higher unemployment and recession. This is what mainstream private sector business people and wealthy people believe – though they are not keen to acknowledge it publicly.














Uncertainty and Fear of Labour Victory: Hence for the next 7 months before the next General Election in May 2015, we expect property prices to soften further and the economy to slow further – as people pull away from investing for fear of a Labour win. Regardless of how hapless Ed Milliband is along with Ed Balls – it’s a real fear for any investor that an anti-business government with no business knowledge gets into power and starts taxing the death out of the private sector.

Scotland, Labour and SNP: The only positive to come out in recent weeks is the realisation that Labour are a spent force in Scotland after the Referendum because of the massive swing from Labour to SNP. If Labour lose their Scottish heartlands, which seems to have happened, they might also lose the General Election. It seems the Scottish voters cannot identify with the posh Grammar/Public School and Oxford educated Southern's Ed M and Ed B. There must also be a realisation that if there was a hung parliament, then the Tories could do a deal with UKIP on the right to form a government. Despite this, we still maintain Labour are most likely to win either a majority or a hung parliament because of boundaries and large migrant vote, but its too close to call and chances are pretty evenly spread across Labour and Tory as we stand at this time.

Taxes: For property investors, particularly those operating in the Midlands and Southern England/London – its very important Labour and Lib Dems high taxation don’t come win the day in May – since this could destroy equity and increase indebtedness with higher unemployment and more defaulting tenants.

Construction Slowdown: As we thought, the construction industry is starting to slow down and housing starts with it – because of the uncertainty in the new government. If Labour get into power, we expect home building to drop sharply and Sterling to decline – with higher property taxes, licences for Landlords, more regulation, bigger government, bigger councils and more wasted money. The next effect will be a more chronic housing shortage as supply dries up and demand remains strong. Higher next immigration levels could also cause a bigger demand for rentals and hence a more severe rental property shortage.   

Global Picture

Saudi: All is not good at this time. Even though oil prices have come down, this is likely to be fairly short lived as the Saudi want to make everyone realise how important they are by attempting the flood the market with oil. The only problem is – there isn’t enough oil out there to flood the market, so when the market realises this, it could shoot up and over the other side.

Security Concerns: Yes, the US shale oil boom is impressive and US oil production continues to increase, but in the last few days a number of disturbing things have happened:

·         US production has slowed – this is probably because North Dakota is starting its severe winter phase

·         Al Qaeda blew up a UK citizen and his car in Rhyhad – targeting westerners in the heart of the oil country

·         ISIS continue to cause mayhem in northern Iraq and NE Syria

·         Kurdistan looks to be breaking away from Iraq

·         Saudi and Iranian relations move to an all time low with nuclear arms a constant threat

·         Islamist rebels attached the biggest oil field in Libya on 5 November shutting down 200,000 bbls production   

·         Palestinian and Israeli tensions continue to mount

·         Nigeria Islamic insurgents are running the north of the country

·         Massive bombs are ging off weekly in Iraq and Yemen

·         The US continue to bomb parts of north Iraq and northern Syria

It’s all so depressing, the different factions killing each other. 

Broader War: The bottom line is – a broader war between factions is gaining momentum and oil production is most countries is being hit or disrupted. As this war broadens out, we expect production to drop. If the short sharp oil price drop delays capital spending for 2015, we expect supply shortages by the end of 2015 and prices to rise sharply thereafter. Too many countries have aging oil production capabilities and oil extraction costs and capital intensity is high - investment and capacity will be delayed or deferred leading to an oil price spike down the road. So watch the oil prices. Oil stocks are incredibly cheap at this time – they have been driven down and could still go down further, but eventually they will rise sharply as oil prices shoot up again. For property investors in the UK, any war that sends oil prices higher would likely either lead to high inflation, low growth or both together. Hence a peaceful world with plentiful low cost oil is what is desired – and incredible 4 million extra barrels per day the US has put on the oil market may not be enough to offset the 4 million bbls decline from Africa and the Middle East caused by security disruptions and civil in-fighting in almost all North African and Middle Eastern small to medium oil producers. As the Autocratic family run regimes have toppled and been replaced by other normally sectarian rulers – more fighting has broken out and region’s security has deteriorated. The British and French bombing of Libya left a mess that is worsening through time as rival group fight for control over land and assets.  

Aberdeen – Crash On The Cards

The final part of the Special Report describes the Aberdeen property market. From 1998 when oil prices were $10/bbl through to 2008 when oil prices hit $147/bbl – Aberdeen property prices performed strongly. After a brief dip 2008-2010, they motored onwards and upwards as oil prices averaged $100/bbl from 2010-2014 as the Arab Spring swept through and OPEC maintained their control on the market. However, now oil prices have dropped to $82/bbl, masses are jobs are being lost in Aberdeen from August through to present  so we predict an Aberdeen property price crash if oil stays at $80/bbl. Conversely, if it goes to $110-$120/bbl – we would expect a boom. We are now in crash territory, so be careful anyone with property in Aberdeen – there is normally a four month delay as people lose jobs and it feeds through to the property market. If the oil price turns, they could recover, but for now, the Aberdeen market should turn very bleak very quickly since it is so exposed to oil prices. Its whole economy revolves around oil prices.  The Scottish Referendum certainly did not help and just as it was recovering from this threat – the oil prices started to crash – along with North Sea oil production and investment.

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