Prime London Property |
As you may have noticed, the US debt ceiling has been at the forefront of the news for the last few weeks.
There has been extreme consternation that an agreement wouldn’t be found on increasing the limit.
And yet, an agreement seems to have been reached. I am not sure why this has come as a surprise to so many. After all the debt ceiling has been revised 60 times (not including the times it was also suspended) since 1971.
So, rather like the UK energy bill cap, it is not a ceiling at all, but just a stop on an escalator that travels inexorably higher. This is how the New York Times explains the latest iteration:
“The deal suspends the nation’s $31.4 trillion borrowing limit until Jan. 2025. Suspending the debt limit for a period of time is different than setting it at a new fixed level. It essentially gives the Treasury Department the latitude to borrow as much money as it needs to pay the nation’s bills during that time period, plus a few months after the limit is reached, as the department employs accounting maneuvers to keep up payments.”
I happened to be going through some historic articles I had written and stumbled across this from 23rd July 2019:
“The U.S. Congress voted to raise the debt ceiling.
Now, I admit that this is not a hugely exciting bit of news in and of itself, but then the most important items rarely are. For example, imagine someone in 2006 honestly trying to explain what a mortgage backed security was. No-one was interested, but it turned out to be quite a significant piece of information (if you are not aware it was one of the financial mechanisms that helped cause the U.S. housing bubble and subsequent crash).
The Intricate Relationship between Prime London Property and the U.S. Debt Ceiling
So, why is raising the debt ceiling important? Don’t worry, it doesn’t mean that the U.S. is broke, but it does show that this property cycle is repeating like all the rest over the last 300 years (200 years in the U.S.), because our beloved “leaders” continue to repeat the same old mistakes.
As ever, politicians are taking the path of least resistance and all this does is allow more money into the system which raises asset prices, especially land and property prices. The thing is that this effect does not become obvious immediately.
Indeed, the debt increase is insignificant in itself. But it shows that the political will of both the Democrats and Republicans is to spend, spend, spend – it could be on tax breaks, infrastructure, whatever. The same will happen in the U.K. and Europe.
More and more money will seep into the system and in addition to this also watch for banking regulations to be relaxed. This started last year in the U.S. with the amendments to the Dodd Frank Act, but this is just the tip of the iceberg.
We have the largest capital base the world has ever seen and once the banks are allowed to start lending against it, confidence will grow and the velocity of money will increase – relatively slowly at first, but then it will speed up…”
At the time, people thought I was mad to suggest that prime London property prices would increase. Everyone was convinced that Corbyn was about to become Prime Minister and that Brexit would cause the UK to implode. And here we are today with both house prices and rents considerably higher than they were four years ago.
But my argument has always been that politics is far less important to the property market than money supply. This is based on the simple fact that this has been the case for over three centuries, so why would it change now?
The Long-Term Impact: Prime London Property and the Unfolding Debt Ceiling Dynamics.
Yes, politicians can do some galactically stupid things as Liz Truss was the most recent to demonstrate but look where we are 8 months later. It’s not all roses but the savage recession that was guaranteed by now has failed to materialise.
Because one of the advantages that the UK has over many, many countries is that we have a system that is robust and allows us to get rid of politicians quickly and correct their mistakes. By the way, I am not suggesting that we have the perfect system. It is just less bad than most others. But that is a topic for another day.
Let’s look at the figures:
The U.S. debt ceiling has been suspended at its current level of $31.4 trillion. In other words, the government can spend more so the level is guaranteed to be higher in the coming years. I know that there are alleged limits on what they can spend and they have agreed to reduce spending on certain things. However, after the last suspension in 2017 the debt ceiling was then set $2.18 trillion higher in 2019.
To put all this into perspective, on September 9th 2007 the debt ceiling in the U.S. was $9.82 trillion, on March 15, 2017 it was $19,85 trillion. So, the debt ceiling has increased 320% since 2007 and 58% in the last 6 years.
Would it be unreasonable to suggest that such vast sums of money might continue to affect asset prices, especially prime London property?
As I pointed out in 2019, the effect is not immediate and as debt ceilings, etc. are a decidedly “dry” subject, they tend not to catch the media’s attention in terms of property prices which is why the reporting is relentlessly negative… even when the figures are strong this is always perceived as a precursor to a massive crash.
Conclusion:
Please note that I am not saying there won’t be another property crash. In fact, I can guarantee that there will be another one in both the UK and U.S. – as both countries have a well-documented property cycle of boom and bust – it is just highly unlikely to be now despite interest rate rises.
There is over 300 years of UK property market history which gives us a very good guide as to what will happen next. This is something I will discuss more in my next Prime London Property Trends Letter.
To request the next edition of my Property Trends Letter, simply email [email protected] or call 02034578855 (+442034578855 from outside the UK).
