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626: Italy, Brexit and Inflation - for Property Investors

09-29-2018 team

Interesting times. There seems to be a perfect storm brewing for a big crisis in the next six months for the UK and Europe.

Tory Party: The Tory party and Teresa May in particular are muddling their way through the Brexit negotiations nightmare – this was always the most likely outcome. The doubters have been baying for this. The Chequers Plan seems to be widely despised – many fearing its worse than nothing – a poor fudge. Macron – the arch EU Federalist – wants to make the UK’s life as difficult as possible – and steal as much trade from the City of London as possible – so he’s scheming to humiliate the British and trying to get Merkel on his side – partially succeeding it seems.

Slowing Economy: Meanwhile the UK economy has slowed amongst the Brexit uncertainty – in the first quarter it was miserable with the cold-wet weather and improved with the dry-hot weather but the UK economy has slowed also because of less inward migration – plus go slow spending plans based in Brexit.

Labour Want Brexit: Fortunately for the Tories, Jeremy Corbyn recently got wrapped up in the anti-sematic scandal – which detracted against Teresa May’s weakness after the flood of resignations post Chequer’s Plan fall-out. Super timing for May. We’ve just had the Labour Conference – which was a bit of a damp squib. The Tory Conference soon is something that is likely to see further in-fighting over a hard versus soft Brexit. But remember the key thing – 70% of Tory voters want Brexit in some shape or form – so its likely to happen for this reason alone. Add to that Jeremy Corbyn is even more Euro-sceptical than the average Tory – so he won’t want to stay and we don’t believe he’ll want a new full Referendum on staying in or not – its also his chance to “get out” as well. The Labour party are also very worried that they would lose votes if they went against “the will of the people” – the Referendum result June 2016. So let’s just get over it – we will be coming out of the EU by end March 2019 by hook or by crook – we just need to get over it as quickly as possible and move on. Listening to Tony Blair and Vince Cable bleating on just won't help – its soar grapes. 

New Leader: For the Tory party it’s a question of trying to survive until say Q2 2019 next year – when hopefully there will be a new and more popular leader to take the party forward towards the next election in 2-3 years time – plenty of time to recover – which is of course why Teresa May called the snap election in May 2017 – to give the party plenty of time to recover from Brexit.

Election Possibility: Its quite remarkable with Labour’s relative popularity and the Tory party unpopularity – and Brexit poison chalice – how Teresa May and the Tory party have held together with all the in-fighting going on. You have to look at Labour and wander when they really will pounce and try and seize power if ever. It would require a no confidence vote then a new Election. If we went to the polls tomorrow, Labour would probably win handsomely – which would be the biggest economic disaster in half a century in the UK. It would without doubt lead to longer term higher unemployment, UK bankruptcy after a Sterling crash and high inflation, and a humiliating governance of the UK seen around the world as a failure. For all investors and private business – it would be a complete disaster – ultra-high taxes, more regulation and a four year period of vindictive steal and grab away from the upper 70% earners to the lowest 30% earners – a house price crash and recession would be the outcome within a few years.

Italy – Economic Slide: The interesting dynamic at the moment for Europe, is Italy. They have huge debts and deficits – a very slow GDP growth rate, high unemployment and low population growth and fertility rates. Their Nationalistic-Socialist Eurosceptic coalition government has recently passed as expected a high spending budget that goes at odds with what Brussels deems acceptable. They will clash in the next few months. They outcome of this clash could be another Greece style debacle of Brussels bullying the Italians – demanding austerity-prudence and threatening to pull the plug on budgets. Banks might start to run – and an economic collapse and debt default is possible for Italy that could then spread as contagion across the EU zone – just when the UK is exiting the EU. As this point – the British might start to think they have made the right choice – as the Italians are bullies just like the Greeks were – and we want out of the economic disaster. The upside for Brussels is that this developing crisis will be managed well and not seem too bad, but the downside is the fourth biggest EU economy going bankrupt is spectacular style. Watch this space.

Property Hedge: Onto property – you can see from all the uncertainties why the UK housing market has suffered in the last few years, but in a way it's been holding up well compared to most of the doom-mongers predictions. Just to remind you which the house prices tend to hold up better than most people expect:

  • Banks have allowed double incomes of men and women to be included in calculations for mortgages
    Women often buy property on their own – this was very uncommon before the 1990s
  • The population of the UK has been rising at 250,000 to 450,000 people each year for the last 15 years
  • The building of property has been lagging far behind new households created – only 110,000 to 180,000 new homes have been built each year for the last 15 years
  • Peoples desire to own their own home has not abated
  • Councils have been building almost no new properties, instead many councils have been selling their council houses to tenants in the last 20-30 years
  • Nimbies all across the UK in every corner and part of the country are constantly trying to stop any development, building or change – keeping a lid on housing supply
  • Lack of suitable building land that is not designated Greenfield or protected – with brownfield sites being expensive and often requiring excessive environmental analysis before any building starts
    Time consuming, expensive and slow planning processes and procedures that kill most projects before a brick is ever laid
  • Access to mortgages has increase over the years – and higher multiple to income have been offered as interest rates have dropped
  • Interest rates have crashed from 15% in 1990 to 0.5% recently – meaning borrowing costs have dropped from around 18% in 1990 to 3% today – meaning servicing loans has become cheaper and hence prices have rise

Demand: Demand remains strong for most people – it’s a basic desire to “own one’s own home” – a very British tradition and something not likely to change in future years – particularly if the Tory party stay in power.

Play The Inflation Game: The key for all property investors, property owners and aspiring property owners to consider it this important point – the ONLY way for the vast majority of ordinary people to make serious money is to leverage up – that’s borrow money – they play the inflation game – see asset prices rise as the debt declines with inflation. Just try and think how many millionaires you know – the bulk of them will be millionaires only because of the property or properties they own. Many are millionaires almost by mistake – as they bought cheap terraces in London years ago and are now sitting on windfalls.

Investments In Inflation: Many people thing this was a one off – but we disagree. We think that in 20 years time, property prices should be double the price again. It's just called inflation. The Bank of England sets a target of 2% inflation – but they don’t mind it being 3%. It gives the illusion of real growth in the economy. Wages rise, prices rise and property prices rise. This is nothing new. Look back in history at the average property price:

1940   £500
1950   £1500
1960   £3000
1970   £10000
1980   £25000
1990   £50000
2000   £100000
2010   £165000
2018   £240000

Millionaires Through Inflation: There will be many more millionaires in the next few years – but the value of those millions is of course dropping because of its spending power. But its far better to own 4 homes worth a million than none at all – because if your borrowing is say £500,000 – in 20 years time – if you just pay the interest – it will still be £500,000 but the asset value should be £2,000,000  you will have made another million.

Buy As Many Cash Generating Properties As Possible: The trick to making serious money is to buy property – have as many paying tenants as possible – who pay for all the mortgages – and you see the asset prices rise as the rental prices rise also. This is nothing new. You don’t need to be a rocket scientist – you don’t need a college education. You can be from any background – you just need to work hard, be motivated to succeed, make a few good smart investments at the right time – and provide a reasonable service to tenants.

Stock Market Is A Disaster: If you compare property prices and returns on property investment versus the stock market there is no comparison. Since the year 2000 – that’s 18 years – the stock market value in nominal Sterling terms is around the same value today as in 2000 – that’s damming considering inflation has been running at around 2.5% a year. In inflation adjusted terms its halved. Meanwhile the average house price has risen from around £100,000 to £240,000. For investors in London, its been a super period – in 1998 you could buy a one bedroom flat for £60,000 and now a similar flat would be prices at around £350,000.

So in summary, despite Brexit – as long as the Tories stay in power then property investment and purchases should be lucrative in the long term. Okay, draconian taxes have definitely taken the shine out of property investment – but less buy-to-let investors will probably mean lower rental supply and higher rental prices moving forwards – we have started to see this feeding through in 2018. Property investment should only be in areas with strong employment though – in improving areas preferably with major infra-structure upgrades and an international angle to the area – for ongoing inward investment and asset price increases. Hence London, Manchester, Leeds, Bristol and Birmingham probably preferred areas along with high population growth areas in southern England like Cambridge, Oxford, Bath, Reading and Southampton.

We hope this Newsletter has been helpful to frame your property investment decisions and provide some insights into inflation, Brexit and how the economic landscape could change over the next few years. If you have any questions or queries, please contact us on  

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