Banking Crises, Trade Wars & London Property

I was having a conversation about Donald Trump’s “trade war” with a couple of friends – one is a barrister and the other is a tax specialist who is a budding politician. In other words, they both like (arguing) debating.

My point was that Trump’s “attacks” on China were nothing to be overly concerned about because they are merely part of an overarching negotiation strategy. Although many people are quick to label Trump as an idiot – and many of his outbursts would seem to justify that opinion – he should not be underestimated in terms of negotiation.

And these new tariffs by both China and the U.S. are not even the equivalent of a playground scuffle: Trump is suggesting imposing sanctions of $50bn on various Chinese goods ($207 bn of the goods they imported in 2017 were already subject to some form of tariff). In 2016 China exported $2.06 trillion of goods.

So, there is no need for panic or general hysteria, but the story makes for good headlines especially as it is Trump. The same is true for any story that is perceived to threaten the calm, but actually “crises” are rarely as bad as they seem.

I was reading a paper recently entitled, 140 Years of Financial Crises: Old Dog, New Tricks by Moritz Schularick of the Freie Universität Berlin. His study showed that in the 14 countries for which they had data “Before the financial crisis of 2008/9 there had been no less than 71 systemic banking crises in the past 140 years”.

In other words, banking crises are fairly regular events and yet the world continues to thrive and improve (global poverty rates have plummeted while global literacy rates are soaring), despite the fact that they seem like the end of the world at the time.

And this is something that I give talks about for private banks as well as firms of solicitors and tax advisers – the property market climbs a wall of worry in every cycle. Indeed for the majority of the cycle, the press, economists and other “experts” say that prices are too high and predict crashes.

When prices fall slightly during the cycle this is seen as proof that the crash is imminent, but in every cycle, prices continue higher until what I call a “final crack up boom”.

This boom happens at the very end of the cycle and can only happen when all the bears capitulate. So, if you look back at the last cycle, the reports were predominantly pessimistic up until about the autumn of 2005.

Then the mood changed. Apparently, we had “eradicated boom & bust”, prices did only go up and we had a “new paradigm”. There was a scramble to buy property and people genuinely believed that if they didn’t buy then then they would never be able to afford a property in London.

Of course, we didn’t have a new paradigm and things are never different “this time”. The market crashed as it does at the end of every cycle and paves the way for the next cycle. The good news is that this cycle is repeating exactly like all the others – the majority are pessimistic which means that now is actually an opportunity despite all the apparent “bad news”.

My view is that prices will be double where they are today in ten years’ time. I believe this so much that I bought another property in London last year.

But how can prices increase so much?

Well just look at the increase in global money supply. There are vast amounts of capital available just sitting idle in bank accounts. Meanwhile, China, Saudi Arabia and the U.S. to name just a few have massive infrastructure spending plans. These always lead to higher land values.

But more importantly than all of this is that banking regulations are still tight. This will change as it always does. Trump is in the process of dismantling the Dodd Frank rules in the U.S. When this happens it will allow huge amounts of credit to be created. This can only send land prices higher, especially in cities like London, Hong Kong & New York, and you do not want to be late to invest.

“I never buy at the bottom and I always sell too soon” was Baron Rothschild’s response when he was asked how he had become so rich. Meanwhile Buffett’s most quoted line is “Be fearful when others are greedy and greedy when others are fearful”.

Are people fearful at the moment? Yes, which means that people are not fully invested in the market, which means that we are nowhere near the irrational exuberance seen at the peak of any cycle. In fact, we are several years from that, which is why now is an opportunity to buy at favourable prices.

Does that mean you should rush out and buy a property now? Of course not. You must be selective and ensure that you acquire a property that will outperform. This is a statistic I use a lot, but only because it is so important:

Research by Savills showed that between 2005 and 2013 the top decile of prime London property increased by 190% while the bottom decile only increased by 63%.

That is the equivalent of you and a friend investing £2m each and one of you having a property worth £5.8m while the other has one worth £3.26m.

Which would you prefer to be?

If you would like to achieve this outperformance then you need to discover which properties in your target area and price range conform to our “best in breed” principles.

If you would like to know more, simply call 020 3457 8855 or email jeremy@mercuryhomesearch.com to arrange a discussion about the home or investment you wish to buy.

Best Regards,

Jeremy