597: Property Investing Trends Post Brexit
Brexit without doubt has shifted the UK into a slightly higher inflationary world. The trends we see are the following:
Sterling: Sterling has cleaned by ~18% and is likely to stage depressed at these levels against the Dollar and Euro for the next few years. Import costs therefore rise and export prices become more competitive. But raw material inputs – imports rise – then this feeds through to inflation. Hence food, goods and services will rise for the next few years at a rate of up to 3.5% (rather than the previous trend 1.8%). We expect inflation to peak at around 3.5% by June 2017.
Earnings: Earnings are likely to stay depressed in large part because of easy access to lower cost labour from inward migration from Europe and the rest of the world. This lack of earnings growth therefore puts a squeeze on disposable income.
GDP Growth: This will likely stay lower than the previous trend – at say 2% rather than 3% per annum for the next few years. It will be an excuse for the Bank of England to keep interest rates low.
Unemployment: The Tory efforts to discourage unemployment, making drawing social security benefits far harder than during the Labour times – is pay dividends by keeping unemployment low – at around 4.8%. We don’t expect much change in the unemployment rate in the next few years.
Employment: With the rising population and rising immigration and net migration – we expect employment levels to rise following a similar pattern than the last few years. However, the type of employment is likely to low earning – lots of low paid semi-skilled jobs. The days of being long term employees with company pensions is almost over. Zero hours contracts, and forms of contracting will become even more common, with workers being asked to provide their own individual pension and health insurance plans.
Building: Uncertainties caused by the Brexit fear mongers as predicted has led to a big slowdown in construction levels. In London, new starts have almost halved. Its now more difficult for builders to get funding to start new comes because of the uncertain market outlook – and their own risk averse strategies having been bitten too many times in history will lead them to build far more slowly in the next few years, particularly in London, where most homes are actually required. There is almost no public sector funds to stimulate building – the government pronounced plans but they all come to nothing because it’s the private sector builders-developers that decides based on the market, costs and planning-regulations. There is far too much Nimbyism, regulations, shortage of land and escalating building materials and labour costs – plus property taxation on top (council tax, payments, second home taxes, stamp duty, buy-to-let taxes, other costs) that simply make most project sub-economic. The sales prices of flats in London have to be well over £500,000 each otherwise developers can’t make a profits after all the costs-taxes they have to pay, and fighting off the Nimbies. Because of this, there will be an increasing housing crisis in London and SE England in particular – cause by low building levels, high taxes and Brexit uncertainties.
Property Prices: Property prices are likely therefore to continue to rise in this inflationary world – as younger people have to pay ever increasing amounts of their disposable income to get on the housing ladder. Those that get on the ladder will of course be handsomely rewarded in future years as they play the inflation game of getting debt, buying bricks and mortar, then selling at a higher price in years to come – and trading up. The UK has always had this type of inflation and in our view its not going to ever go away. To pay of the national debt, we need inflation – or a devaluation of our currency further – then property prices particularly in London will rise as foreign investors jump in, grabbing a bit of trophy real estate in England, considered a safe haven.
Bank of Mum and Dad: You might ask yourself how can people afford such giant house prices and massive deposits, especially since they have normally just left University with sky-high student debts, normally £50,000. Between 25-50% of such students come from fairly well off background – and with inheritance tax so prohibitive, they of course get help from their parents or even grandparents. This money is gifted – and if you survive for more than 7 years – a family won’t have to pay inheritance tax on these gifts. So if you have a £1 mln home in SE England and the inheritance tax threshold is around £650,000 for two people – and you have two kids – its tax efficient to gift £350,000 away – and if you have two kids – they would get a giant £175,000 each to purchase their own property – or at least help with a large deposit and half the value of the property. Of course the cycle goes on and on – as people get old and wealthy – then are encouraged to gift their money away at least 7 years before they think they might die.
Rich Get Richer: You can now see how the rich get richer and the poor get poorer – because the middle class and rich will always make sure their offspring buy property at as young an age as possible and start an investment portfolio, whilst the poor will have not chance to help their kids onto the property ladder, wont be encouraging their kids to buy properties, and the poorer kids outlook will be one of caution, worry and stress t that they might not be able to make the payments – so they will rent instead and lose out on the “inflation game”.
Rich Kids Have It Easy: What we are saying is that it is so much easier for wealthy kids to take the risk – stress free – because if anything goes wrong – their parents will bail them out and/or act as guarantor. This is another rise why house prices rise in wealthy areas and don’t rise very rapidly in the poorer areas – this “rich kids” simply don’t want to live in poor areas like Bury, Barrow and Bradford. Instead they want to live in places like Ealing, Reading, Bath, Harrogate, Winchester, Warwick and Chiswick. If they are really “bo-ho” they will live in Shoreditch – and even edge Whitechapel – but never in Barrow-on-Furness, SW Glasgow or Middlesbrough.
Financial Education: It’s also the case that making serious money is often about financial education – and wealthy parents normally financially educate their kids and motivate them to success – whilst poorer parents who struggled to pay bills probably would not know where to start – they have not experience of making serious money so how can they educate their kids in the tenets. It become nature for wealthy kids to invest in property as their parents did – and totally unnatural for poorer kids that have lived in rented accommodation all their lives. We are pretty sure most of the people reading this article are above average income and wealth – and most probably did not come from deprived backgrounds. That said, property is one of the best ways for people of deprived background to actually make serious money – because it does not matter your background, accent, nationality etc – if you have a good credit check and income, you can borrow money and put offers in for property. Many northern property investors from different deprived backgrounds got into it in the 1970-1990s simply because there was nothing else they could do – they could not get jobs. Its just a lot easier if you have the backing and support of rich parents.
UK Fundamental: The UK has some pretty good fundamentals – we’d like to remind people just in case you are feeling very insecure and stressed about Brexit:
• Third largest military spending in the world (bigger than Russia)
• Island state with tight border controls
• Offshore safe haven status
• Has about the best intelligence services in the world – aiming to keep the population safe
• Top tourist destination for people from all over the world – London in particular a huge draw
• Best Universities and Private Schools in the world when compared to the population
• Excellent climate – no water shortages, cool summers and warm winters (largely protected from climate change being next to the ocean and gulf-stream
• The most beautiful unspoilt countryside in the world
• The most beautiful cliff-beach-scenery in the world (e.g. Cornwall, Western Scotland)
• London is the number one global financial centre in the world (hopefully this is retained post Brexit)
• People speak English – the global business and educational language
• London has only 25% of the population density compared to Paris – it has more parks, leafy gardens and roads than any other major populated city in the world
• The UK has excellent trains, tube, buses, public transport, taxis (just compare it to New York, Cape Town, Rio, Singapore etc).
• The UK manufactures more cars than it did in the 1970s
• The UK still produces the equivalent of 1.6 mln bbls of oil (in oil-gas equivalent terms) helping its balance of payments
• The British people are on the whole very tolerant and respectful – which is a reason why inward migration levels are so high – and people from all around the world love to visit Britain, study and have second homes plus invest in the UK.
• Women work participation levels and women rights very strong
• Crime levels very low – particularly gun crime – compared to most developed nations
• A Tory centre-right government that is more business friendly than socialist governments in most other global countries (at least the Tories are trying to maintain fiscal discipline, rather than spending beyond their means like Labour always do)
Because of some or all of the above, we really can’t see the UK losing its appeal. If you were banker, would you prefer to live in West London or Frankfurt? Easy!
Trends to Improving-Extending Property: Because of punitive stamp duty both on second (or third) homes and properties over £300,000 in value, we expect more and more people with properties in SE England worth over £400,000 getting:
• Extensions – particularly to the back and multi-story
• Loft conversions
• House to flat conversions
• Basement conversions
• Extra floor conversions
• All of the above at once!
In addition, there will be increasing numbers of savvy parents getting their offspring to buy 2-4 bedroom properties then letting 1-3 rooms to lodgers. Of course any lodger income is tax free up to around £11,000 – so if you have 2-3 lodgers, in most areas that’s enough to cover the mortgage. Yet another reason why the rich get richer and the poor stay poor. The owner of such a property again would be able to handle the risk and stress in part because of the support-backing of their rich or middle class parents.
Stamp Duty Skewing The Market: Stamp duty is now so high in London that almost no-one moves, they can’t afford the stamp duty or would rather invest the money in digging a basement. This is of course creating an even worse shortage of supply for mid to top end properties – so prices will start reflecting this in the next few years as the market tightens further. You’ll see less For Sale signs and more Basement Conversion and Loft Conversion signs. Largely because of this tax ridiculous tax distortion that discourages people to move and will lead eventually to a net lower tax revenue.
Key Insight: Any property investor who has kids aged 18 and over really needs to ask themselves why they would buy a property for themselves borrowing money from the bank then paying punitive buy-to-let taxes on their investment even when they make a loss – then paying inheritance tax on the final proceeds – rather than getting their kids on the property ladder – or even gifting them one of their properties – to get their portfolio going. It would be far more tax efficient to help you kids get a good start in their investment lifts rather than being flogged by the Tory’s punitive inheritance tax, buy-to-let tax, second home tax, capital gains tax and income tax! If you try increasing your portfolio size – the final tax bill might be over 65%, but if you gift a property early to your kids, and they get lodgers – their tax bill might only be 10%. Its certainly worth giving this strategy some serious though – calculations – although of course you don’t want to treat your kids like a charity. Instead, you might actually encourage them to become a property entrepreneur buy starting their asset accumulation early. May be that’s part of the Tory strategy – to force buy-to-let landlords to hand over some properties to their kids!
Brexit Negotiations: What we will see is the politician showing their normally bully behaviours from both sides – aiming to collect votes and popularity by playing hard ball. The UK is a net importer of goods and services from the EU so it’s not in their interests to destroy our economy – it would only lead to lower growth in the EU and they have problems enough getting their growth rate up – rather than severely denting the second biggest economy in the area. The UK has a few ace cards that it can play:
• Military might
• Intelligences services
• Around 2 million EU nationals live in the UK
• If all else fails, it can divorce then re-invent itself as a lower cost tax have for the global super-rich and stimulate its economy that way
With the Russians increasing their threat of incursions in eastern Europe, most in the EU will realise that they need the UK as a strong ally and they cannot afford to upset the government and be too vindictive. The eventual deal with probably be packaged up by both sides as a success – to save face and win votes - even though they will both feel they should have got more out of it.
In the longer term, the UK will be far freer to establish its own relationships, alliances and control its own laws, policy and borders. For property – if the UK becomes a tax haven in a “hard Brexit” it’s possible London property prices would rise even higher though it would not help northern England much. A “soft Brexit” could mean London suffering some moderate jobs losses – but it should not be enough to tip the country into recession in our view – though it’s still very early days.
London Metropolis: Overall – the metropolis of London will in future years become an even better place to live – it might even feel a bit more “select” as the UK goes its own way. But with inflation ever present, Sterling weakness and the emerging economies investing in the UK as never before – we expect SE England property prices and particularly central London (inner city) prices rising sharply over the next two decades. It’s likely in 20 years time, a £500,000 flat will be worth £1,140,000 ore more – that’s only a 4% increase compounded each year. If property prices rose 6% a year – as they have done for the last 40 years – then that £500,000 flat will be worth a gigantic £1,700,000. This is the reason why any sensible parent would want their kids to get a property as soon as possible. After a few years of risk, worrying about the possibility of negative equity – it’s normally pretty close to a one way ticket to financial wealth creation on a big scale using leverage of the power of inflation – the government’s money printing strategy. Any politician that resided over a prolonged property price deflation would never get voted back in. Its probably why Gordon Brown of Labour lost the election in 2010 to the Coalition – then Osbourne manufactured a house price boom just before the 2015 General Election that then caused the Tories to out-right win against UKIP, Labour and the Lib-Dems. One thing is almost assured in preparation for the next General Election in May 2020 – that Teresa May will manufacture another property price increase starting around mid 2018 to May 2020. As the uncertainties post Brexit lift by June 2019 – the coast will then be clear according to the Tory strategists for a nice mini house price boom leading up to the elections then the Tories winning an even bigger majority off the back of the Labour implosion, UKIP implosion and Lib-Dem ineffectiveness – along with a strong SNP that will keep Labour out in Scotland.
Scotland: The final word about Scotland – it has 5 million people, 8% of the UK’s population but only 4-5% of the GDP – so economically its small and not very relevant. Its debt is so giant in can’t really afford independence, but if they really want it – then its likely to boost the finances of the rest of the UK, especially considering the gigantic oil and gas abandonment liabilities forecast in the next 20 years and negative income from the North Sea after abandonment cost-tax subsidies embedded within the licence agreements that cannot be renegade on for fear of even less new investment. For property investors south of the border, Scotland is not worth worrying about despite Nicola Sturgeon’s daily rhetoric. For those north of the border – regrettably expect another three years or more of turbulence as the country decides which direction it wants to go in. All the threats are certainly not encouraging Scottish investment and the tax regime is shifting to a socialist model of low growth – which is the last think Scotland needs with an aging population of almost no growth.
In summary, whilst everyone else is worrying about Brexit, the best strategy is to go full on with your property investment wealth creation using tax efficient methods to avoid punitive taxes and increase equity-wealth-value – for yourself and your family-offspring.
We hope this Special Report has been insightful and given you some good ideas for investment opportunities. If you have any queries – please contact us on firstname.lastname@example.org.