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560: Low Oil Prices Boost House Prices

02-10-2016 team


Recession Averted By Low Oil Prices: It’s been eight years since the last Great Recession started and the global economy is certainly due another recession of sorts – using a cycle of around 7 years as is normal. What has probably saved the developed nations and China from recession so far has been the collapse in the oil prices that started Aug 2014 just when the global economy started slowing. The prices dropped from $110/bbl to around $30/bbl as demand dropped and supply increased – mainly from the US oil shale (fracced wells) which put an extra 5 million barrels of oil a day onto the market between 2009 and late 2014.

Transfer of Wealth: The US oil import bill has dropped by around $250 billion a year – a gigantic amount. There has been a massive transfer of wealth from oil exporting nations to oil importing nations in the form of lower oil prices. Big oil producers like Saudi Arabia, Russia, Venezuela, Iraq, Kuwait and UAE have seen their revenues crash. Most countries need $80/bbl to balance the books so they are hurting and Russia has dropped into a fairly severe recession as has Venezuela. There currencies have crashed against the dollar.

Boosting Economies: The low oil prices have the following impact on Western Europe and USA:

·         Lowers general inflation

·         Boosts the currency values

·         Boosts employment and manufacturing

·         Boosts disposal incomes

·         Reduces deficits

·         Reduces borrowing costs

·         Increase house prices

PIIGS: Because of the softening global economy, we have not really seen house prices shooting up – except in places like London and New York. But without these low oil prices, Greece, Ireland, Spain and Italy would be suffering far more than they are at this time. Its saving these economies from recession. It drastically reduces their deficits.

US Energy Sufficiency: As developed nation’s economies have struggled – the US dollar has been boosted because of its safe haven status. Furthermore, the gigantic new oil reserves proven from the oil shale fraccing boom are underpinning the dollar – and have likely saved the currency from what was looking like a massive slide, because deficits have been halved by the lack of requirement to import oil. Furthermore – because the USA is almost self-sufficient in energy requirements (oil/ gas/ coal/ electricity) they have not felt the need to mount so many military incursions – their foreign policy has been relatively passive compared to the period 2000-2010. This is saving the US $100 billions – money that can be invested in other national projects or reducing borrowing instead.

Mighty Dollar: The other handy thing about the US oil production has been – because it strengthens the might dollar – this also means the US are able if they need to – to print more dollars without it effecting the currency value much.

Fed Action: If we roll back a few months, Yellen put up interest rates just before year end. This was a complete joke – in that it was possibly the worse time in the last 7 years the Fed could have acted. They only pout up rates because they had promised the markets they would be year end - they did not want to lose face. It was obvious by Dec 2015 the global economy was getting into choppy waters and the dollar increase with the increase in borrowing rates was enough to spook global markets and we had China and Japan starting to implode by Jan 2016. Oil prices crashed even further to $27/bbl - putting added strain on Russia, Saudi, and all oil exporting nations, destabilizing the global economy.  Around the same time the US let Iran back into the global markets – causing consternation in many Middle Eastern countries.

Property Price Boost: We describe all of this as the back-drop to asset and property prices, particularly in the UK. As we have long mentioned before, if oil prices are low – it creates a huge boost to property prices since the Bank of England have not reason to put up interest rates because inflation is suppressed so much. The effects of the low oil prices will start to wear off in about a year’s time, but until then – there is almost no chance the Bank of England will raise rate.

Depression in West Wales: There is a lot of talk about needing to raise rates to control London property prices, but what people fail to realise is that property prices in vast tracts of the UK are still far below their 2007 peaks. If you go to west Wales, Cumbia, Sunderland, Clydebank, Liverpool or Stoke on Trent – these places have been in a constant recession since 2007 – a great depression. Higher interest rates are the last thing these places need. Just look down the average high street in most UK towns and you will see shops closing, high youth unemployment and stagnant property prices. The kiss of death would be interest rates rising – just as manufacturing is going into recession and the North Sea and NE Scotland has crashed and burnt. It’s just most of the journalists who writing in paper about house prices live in London – maybe they should take the train to Barrow-in-Furness to see what the other side is like!

Property prices in England - are likely to rise in the next 12 months – even further because:

  • Rising immigration
  • Lack of home building – lack of investment
  • Lack of suitable land for resident building – and slow planning process with Nimbyism
  • Pent up demand from renters that could not move 2008-2014 because of low accessibility to finance
  • Lack of good investment alternatives – e.g. risky stock market, bonds
  • Low inflation and hence interest rates and borrowing costs because of:

·         Low oil prices

·         Low wage inflation because of immigration – high labour supply

·         Technology, manufacturing, efficiency and innovation bringing retail prices down

·         Greater competition in the banking sector

·         Bank of England refraining from printing more money at this time


Printing More Money: Its worth flagging if property prices in London start sliding – it will mean the rest of the UK will be in recession and the way the Bank of England will react to this threat is to simply print more money. This will then inflate house prices back up again. It would suppress the value of Sterling and international buyers would then find London property prices far more attractive – like they did 2008-2012. We’d get another boost to West London property prices.  What we are saying is – in England – the Bank of England will not allow massive deflation – they will simply print more money to prop the whole lot up.

Inflation All The Way: Over the years – the average house prices have risen every decade without fail – the UK loves inflation. Its ingrained. Let’s list the average property prices – a West London flat – guess what it will cost in 2030?

1970   £15,000

1980   £30,000

1990   £65,000

2000  £120,000

2010  £300,000

2016  £450,000

….2030 – surely it will be well over £1,000,000

With the UK’s borrowing and economic outlook – deflation is simply not a viable option. We have to be constantly inflating otherwise the economy would implode.  

Asset Rich: This means people with assets get richer and those without assets get poorer. The strategy should be to have as many hard assets like property as possible – without over-extending. This is the only way to survive the gigantic inflation onslaught. Savings get wiped out. Interest rates are zero. Even commodities have crashed, and its almost impossible to back a winner on the stock market. The only realistic place to park and make money is through property, but now with the tax treatment on buy-to-let landlords, it will be a whole lot more difficult. If the government don’t want to create a rental crisis – they will reverse their plan. Expect rents to skyrocket as a massive shortage of rental property starts to hit home mid 2016 onwards as the tax impact starts to take effect – particularly in London.


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