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The London property collapse | Archive News:2013

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The London property collapse

Inflation’s soaring path and generational pain

Rather like Macbeth, methought I heard a voice cry ‘Sleep no more!”. Having not murdered anyone, I analyzed the lack of sleep and found 6 issues keeping me awake: the collapse of the London property market, soaring interest rates, accelerating global inflation, pensioner pain, the agony of the younger generation and the Middle East bloodshed.

1. Imminent Collapse of the London property market
Over the last years, an unanswerable question has been what Black Swan event would lead to a fall in central London prices. We all scrabbled away for an answer in our innermost recesses, came up with zilch and the market kept on rising.

The fall is now starting to happen in an important price segment. There is price weakness in the central London family house market at between £6-£15million, with very few trades over the last twelve months, according to property agents Strutt & Parker.

No Black Swan has made an appearance. Instead, a series of factors are chipping away at the market’s resilience. There is the new tax on high-value residential properties owned by companies, known as ATED. Meanwhile, City and banker bashing by the government and the press, allied to a low-growth environment in the developed world, means UBS and other global banks are making large cuts to staff and only creating new jobs in other countries.

The ever-increasing prospects of a Labour/Liberal Democrat coalition government after the next election looks very likely to lead to a so-called “mansion tax” (in fact, a tax on capital, a tax on Londoners). This will be applied to houses over £2 million, not a large sum for a property in central London, and thus the price weakness could also cover the segment from £2-£6 million.

2. Soaring Interest Rates
Surely Conservative members of Parliament should have something better to do than tear their own party apart on the back of one issue, the European Union? These disloyal time-wasters need to focus on the fact that David Cameron remains much more popular than the party. To state the obvious, without him, they would not be in power.

In truth, the prime minister and Chancellor George Osborne deserve applause. The UK is still paying peanuts to borrow money. The 10-year gilt is only yielding 1.83% at the time of writing, which was the day the Chancellor announced a halving of the 2013 official GDP forecasts to 0.6%. Considering the state of the economy, it is a miraculous feat.

The concern is over how long this state of affairs can last. The closer we get to a Labour/Liberal Democrat win in the 2015 election, with their attendant big spending policies, the higher the rates will go.

3. Accelerating Global Inflation
With all the arrogance of a 13-year old, I dismissed my mother’s complaints about ever-rising costs with the phrase, “Inflation is normal.” We lived in Spain. The consumer price index was 16% at the time.

This wasn’t just in second world economies, which Spain was at the time. Under Jimmy Carter’s presidency, the inflation rate in the US rose from 4.8% in 1976 to around 12% in 1980. (And for the record, the deficit continued to rise – it more than doubled in his last year to $59 billion).

Governments from Japan to the UK are toying with a monster in their desperate bid for growth. Much wiser heads than mine are saying beware inflation. Take a look at the LSE’s Professor Charles Goodhart and others at The Money Trap.

4. Pensioner Pain
It is supremely irritating to hear the conventional wisdom that the retiring generation has the advantage over the working one. It is true that many of the former have enjoyed post-war expansion, be it in Europe or the US. However, their state pensions are not enough to support them, while their savings in blue-chip stocks like Citibank and Lloyds Banking Group have plummeted in value. Additionally, the money they have invested in their local government debt, be it gilts, bonds or T-bills, is receiving joke yields which are not even keeping up with current inflation.

When you remove the debt burden through inflationary means, you eliminate someone’s assets. Whose? Pensioners who cannot bring home a salary from a full-time job. In the UK you add to the equation the very real possibility of the “mansion” tax, and the older generation are truly stuffed.

5. Generational Agony
Having said that, the younger generation’s future looks rather difficult too. My son may well go to one of the best schools in the world but that won’t make a difference when he is competing against his mega-bright Indian and Chinese peers for a job.

My attempts at being a Dragon Mother have foundered on the rocks of his charm and intransigence. Plus my deeply held belief that a boy covered in mud from a game of rugby is a joy to behold, while pale-faced cleanliness and neatly lined up musical instruments are an abomination.

Perhaps in time for his generation’s university studies, the Indian University of Technology in Mumbai and Peking University will introduce positive discrimination for bright Western children.

6. Middle East Collapse
The complexity of the decisions that need to be taken on whether to send arms to the rebels and how to react to the use of chemical weapons is but the beginning of the imbroglio. Syria, according to experts, will finally break up, with the Alawites of President Bashir Assad setting up an independent state in their relatively small portion of the country.

This could spell the start of the breakup of those roughly drawn Middle East colonial borders. Unfair and illogical they undoubtedly are, but the redrawing of new ones will be a bloody affair. Arms trafficking will increase, jihadists will find it easier to arm themselves and the unsatisfactory stalemate between Israel and the rest of the region could well be something we look back on as a time of peace.

Having possibly murdered your sleep with this sorry list, dear reader, I promise you a lighter column next month.

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