MoneyWeek Roundup: London property is about to collapse

Last week was one the French government would rather forget. It started off with a very negative cover story in The Economist.

It only got worse when credit agency Moody’s – with exquisite timing – stepped in and downgraded the country’s government debt from AAA, the top rating.

In practice, this is more of a blow to the ego than anything else. France’s borrowing costs remain low compared to other European countries – so far.

But it’s bad news for President François Hollande. His (very minor) austerity measures have not proved popular. Yet with the ratings agencies on his tail, he can’t start spending more money.

So what, you might say? This is France after all. You might even feel a sneaking sense of schadenfreude given the way the country has tried to deflect attention on to Britain’s poor finances in the past. 

But what’s bad for France is bad for the rest of us too, says Bengt Saelensminde in the most recent issue of his Right Side newsletter. Hollande’s difficulty “highlights a serious problem at the heart of Western democracy”.

To prove his point, Bengt used this colourful chart from CitiGroup.

Popularity ratings of peripheral European leaders

It looks confusing, but it basically shows the popularity rankings for various European leaders. “You’ll notice that new leaders come in on a high”, says Bengt. But then, when the grim economic reality prevents them from fulfilling campaign promises, their popularity plummets.

The problem is, says Bengt, that “everyone wants a slice of the economic pie”.

We’re not just talking about “welfare dependents – business is increasingly dependent on government handouts”. For example, Hollande recently launched his ‘competitiveness pact’. He “aims to lift output by half a percent over five years by granting €20bn a year in corporate tax relief and pruning public spending by 1%”. In other words, robbing Peter to pay Paul.

And it’s not just France. “In the West both industry and vast swathes of the public are hooked on government. But the only way to give to one group without having to take it from the other, is to borrow the extra cash.”

They can’t get away with it forever. Spain and Portugal, who find it hard to sell their government debt at all, prove this point. It’s only a matter of time before France – and the UK – join them.

“Western nations have been gradually bankrupting themselves for decades”, says Bengt. And “neither stimulus (more borrowing), nor austerity have shown any meaningful and sustainable impact on our listless economies.

“Ultimately, wholesale reform is required. And Western democracies are simply not geared up to delivering that. Or is it simply that the politicians aren’t made of the right stuff? Who knows? But one thing’s for sure, things aren’t getting any better.”

In the short term there are still plenty of ways to make money, says Bengt. You can learn more by signing up for The Right Side here.

But in the long run things look grim.

The Zombies are coming

Voters shouldn’t take all the flak though, says John Stepek in Monday’s Money Morning. Central bankers – who are entirely unelected – have a great deal to answer for.

Yes, “it’s easy to understand why the Bank of England acted as it did after the financial crisis”, says John. In the “crazy” autumn of 2008, when banks were collapsing all around us, “you can see why the Bank might have thought that cutting interest rates to zero seemed like a good idea.”

The trouble is, every action has its consequences and Britain is now crawling with ‘zombies’.

“Low rates and quantitative easing (QE) have delayed or prevented the process of creative destruction from taking place. As a result, firms that should have gone out of business are grimly clinging on to a twilight existence, neither bust nor solvent.

“One in ten companies are only paying the interest on their debt, according to the insolvency industry’s trade body, R3. They are unable to repay any of the actual loan. So the firm sits there consuming resources inefficiently, dragging on the economy. And the zombies are spreading. Their numbers have grown by 10% over the last four months.”

Why are the zombies so bad for the economy? “A zombie company doesn’t just take up physical space. It takes up valuable bank lending capacity too. Zombies are only just able to pay the interest on their debts. If the banking system were healthier, they’d be put out of their misery.”

But with the banks in such a weak position, they’re too nervous that writing off these loans would hit their balance sheets and force them to seek more capital. So, for now, they’re content to leave businesses and mortgage holders hanging on.

And that, just drags out the suffering, says John. We explained why the UK economy is in far worse trouble than anyone believes in a recent issue of MoneyWeek magazine (if you’re not already a subscriber, get your first three copies free here).

Bangkok’s JFK moment

With the UK economy weighed down with so much debt, it’s natural that some investors are looking for opportunities abroad in more dynamic economies.

And in this week’s edition of our free New World email, Lars Henriksson outlined one of the most exciting investment stories in Asia.

In 1963 President John F Kennedy went to Berlin and delivered his famous “Ich bin ein Berliner” speech, says Lars.

He was there because Germany “was rebuilding rapidly after the war and joining the rich, free countries of the West [and] America wanted in on that story.”

Now something similar is happening is Southeast Asia. “Barack Obama was re-elected less than two weeks ago”, says Lars. “And what was his first order of business? He jumped on a plane to Southeast Asia – with plans to deliver a speech in Bangkok, and then meet Aung San Suu Kyi in Myanmar.

“A week later, Bangkok welcomed the next most powerful man in the world, the new Chinese president Xi Jinping. Everybody wants to deal with the countries in this region – just like the great powers jostled to get close to Germany in the 1950s and 60s.”

Investing and politics are closely intertwined, says Lars.

“Last year, the US military issued its first new overall strategy document in six years. It called for more focus on Asia to balance the increasing power of the Chinese military, since China could, in the future, threaten global trade routes where Southeast Asia plays a ‘pivotal’ role.

“This courtship is being closely watched by China, whose turn it was to visit the King of Thailand, Bhumibol Adulyadej, just days after Obama.”

The reason they are so interested is that Thailand is the gateway to a massive swathe of Southeast Asia that looks set to enjoy an incredible economic boom. Burma, for example, is making great strides, says Lars.

“The Myanmar government has approved the long-awaited Foreign Investment Law. The law allows foreign investors to own 100% of most businesses, offers tax privileges and security of investment and the rights to lease land for 50 years, extendable for an additional 20.”

Neighbouring Laos is also opening up. “On 26 October, after 15 years of negotiations, Laos agreed to join the World Trade Organisation in early 2013. Laos agreed to cap its tariffs at an average of about 19% and expand market access.

“It has also passed, or is working on legislation to boost protection for intellectual property, improve customs procedures and otherwise bring the country into line with international trade norms. Laos GDP is expected to reach 8.8% in 2012, making it the fastest growing economy in Southeast Asia this year.”

It’s all very well identifying growing economies. But working out how to profit from them is another thing altogether. Lars has some good ideas.

And if you would like free weekly analysis of investment opportunities in Asia and Latin America, sign up to The New World here.

Call that a mansion?

Merryn Somerset Webb took to her blog to rail against the ‘mansion tax’ being proposed by the Liberal Democrats. She starts it off with a game, called ‘Spot the Mansion’.

It’s a bit of tongue-in-cheek fun and I’m not going to ruin it for you now so, to read the piece here and play along: Spot the Mansion.

Without spoiling the game too much, Merryn points out that a lot of the houses that the Lib Dems want to tax aren’t exactly what you’d call ‘mansions’. The whole thing makes “the idea of a mansion tax seem a bit silly”, says Merryn.

Particularly “if you marry the idea of taxing apparently high-end property with whopping rises in stamp duty, as today’s papers suggest is about to happen again with the data emerging from the London market at the moment”, says Merryn.

“In the third quarter of this year, transactions fell by 9% in prime central London to a mere 5,226. But look at Greater London, and in particular at the £2m-£5m sector, and you can see just how the effects of the new tax legislation are beginning to bite (these put stamp duty up to 7% for people and 15% for companies on property valued at over £2m). Transactions are down 53%.”

That’s a huge fall, says Merryn. It’s not that she’s against changes to property tax. Indeed she’d “swap the lot for a location tax or for a capital gains charge on first homes”. But she thinks that the mansion tax proposal is not the way to do it.

Readers were quick to chip in with their views. “I don’t understand why the conservatives are so against a Land Value Tax. Those on low/middle incomes are overtaxed, our savings are taxed – surely it is about time that property was taxed,” said ‘Nick’.

However, ‘GFL’ is completely against the proposal. “Any tax on a house or location or land that has already been purchased post-tax pounds is deeply immoral. Also it also makes the government unpredictable, which is not good for investors. Council tax is a little different, since it’s directly paying for local services (well, in theory anyway).”

If you’ve got a view on the topic, have your say here.

London property is about to collapse

Maybe the mansion tax wouldn’t hit as many properties as the government reckons, though. Because  – as my colleague Matthew Partridge noted in one of the most popular articles of the week – London property could be heading for a big fall.

London has seemed immune to the crash, But with financial firms in the City starting to feel the squeeze, even London prices will start to drop.

“Investment bank UBS recently announced it will cut 10,000 jobs worldwide, many of them in London. And this is only the start.

“The Centre for Economics and Business Research (CEBR) thinks a further 12,476 financial sector jobs will be lost next year, with more to come. The fact is, with investors rattled and paralysed by fear, there’s just not enough work to go around.”

In itself this doesn’t have to be bad news. The UK economy became over reliant on finance so a bit of rebalancing is probably healthy. But, like it or not, it will have an effect on house prices.

Matthew runs through the latest house price indicators in some detail so if you haven’t seen the piece yet, click here.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.

Have a great weekend!

MoneyWeek
Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
Matthew Partridge
David Stevenson

2 Responses

  1. 24/11/2012, JREwing wrote

    “Collapse”? Probably not. Flat prices over many years is a more likely scenario. Also, your prediction would only apply (for the time being) to properties that are not bought by the global jet-set. Those will stay flat. The super-high priced properties could see further upside due to the fact that Europe is likely to blow up before the UK does.

  2. 26/11/2012, charlesdb wrote

    I don’t believe it. Even now, lenders are loosening their criteria and the same old bad habits are creeping back. The housing market is being rigged by the Government and the lenders; and London prices will only fall if the lenders start foreclosing and recognise their losses – which they won’t.

    Wage inflation will feed into house prices, which will bail out those in negative equity.

    The Government and The Bank of England will do everything they can to prevent the market from working properly.

Commenting on this article closed

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