The Vital Fact You Must Know About Debt & London Property Prices

Mountainous debts are irrelevant to London property prices.

This sounds like a ridiculous thing to say, but it’s true… for now.

I will show you a present day example later. But first:

As you are probably aware the financial meltdown of 2008 was due to there being far too much debt in the world; banks had lent with wanton abandon and borrowers just kept refinancing or borrowing ever greater multiples of their earnings.

As Chuck Prince famously said:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”.

Meanwhile Greenspan was convinced that the sub-prime crisis was easily containable:

………………………

Of course the bubble went pop.

So what about now? Well individuals are still massively indebted: according to an Office for Budgetary Responsibility (OBR) forecast household debt in 2019 will be at 182 per cent of disposable income, exceeding its 2008 peak of 169 per cent.

This leads many people to believe we are on the verge of another crash similar to 2008. Indeed several experts are convinced that we should see a wave of repossessions as not enough people went bankrupt or defaulted on their mortgages.

Add to that the fact that governments are now even more indebted than they were in 2008 due to Quantitative Easing and other bits of financial chicanery and it would seem to be common sense that 2008 was merely a taster of what was to come as the inevitable has merely been delayed by QE.

Indeed in January last year “RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.” (Source The Telegraph)

There is always a reason to panic. Unfortunately those that do rarely fare well.

The banks, especially in the US and to a certain extent the UK, are on very solid ground. And this has been the great trick: banks have been recapitalised by the tax payer and savers who have been hammered by low interest rates.

They have also been able to offload much of the bad debt as noted in the New York Times:

“In the last four years, Goldman Sachs, Cerberus Capital Management, Lone Star Funds, Blackstone Group and others from America have bought more than 223 billion euros’ worth of troubled real estate loans around Europe, nearly 80 percent of the total sold” (emphasis mine).

So the banks have been able to offload the debt and various funds with the means and sense to buy the debt at pennies in the pound have done rather well as prices have rebounded. This is nothing new. It happens after every crash.

Now I am not here to make moral judgements. I am just showing you how the system and the cycle works. The banks are now in a position where they are rather keen to start lending again. Indeed the regulations slapped on them after the crash (they are always too late) are now proving to be a massive hindrance.

Expect there to be intense lobbying behind the scenes and favourable articles for greater lending to appear in the newspapers over the coming years. This in turn will lead to a loosening of the rules/the banks finding new ways to circumvent the restrictions.

And it’s not just their fault. Politicians and voters will demand more credit as the perpetual hunt for growth continues. This won’t happen immediately but it will happen bit by bit (unless Trump completely dismantles Dodd Frank). And as confidence grows more and more credit will be demanded and created until we see a repeat of 2008.

But that is years away and there will be massive gains to be had in that time. If you don’t believe me then simply go back and study history. The facts are all there. Just as one final example:

In the 70’s and early eighties, the UK was the sick man of Europe. There was low growth and the economy was plagued by strikes culminating in the Winter of Discontent in 1979. Despite that property prices went up massively from 1970 to 1989.

If you read last week’s article and saw the documentary on a house in Clapham you will have seen that the house in 1976 sold for £14,000. Ten years later it sold for £140,000 and it is now valued at £1.3m.

Throughout this period there was too much debt and reasons to panic. But what about today?

Well you will have read various scare stories in the press about massive house price falls (although I noticed today’s headline in The Daily Mail is “House Prices Soar”). These are woefully inaccurate and are ultimately irrelevant to you as a buyer. Why?

Because you are only interested in finding that one fantastic opportunity that works for you – be it a home or investment. As an example, in April 2014 I acquired an apartment in Marylebone for £1,412,500 for a family. It required a lot of work which my clients then decided they didn’t have time to undertake so we sold it in December for £1.52m – a gain of 7.6%.

This is by no means a huge gain but it does mean that they covered their costs. But this is in the face of a market that has supposedly dropped over 10% in that time (or worse depending on how hysterical the journalist is feeling…). So not a bad return.

The point is that if you undertake your due diligence to find good opportunities then you will do well if you understand how the market really works. However, if you rely on newspapers and all the other noise for your facts, then you will make a dreadful mistake, either by delaying your purchase for too long or making an uninformed decision when you do.

So if you are serious about acquiring a property in London and would like to discover how we can remove all the wasted money, time and stress most buyers suffer, while helping you acquire your ideal home or investment on the best terms possible, please email jeremy@mercuryhomesearch.com or call 0800 389 4280 (+448003894280).

Best Regards,

Jeremy