It's different this time...Everyone says so!

Residential Property Market Update May 2019




"WHAT ABOUT BREXIT? SURELY THE PROPERTY CYCLE WON’T REPEAT THIS TIME. THERE IS TOO MUCH UNCERTAINTY AND LONDON IS IN DANGER OF BECOMING OBSOLETE."


RESIDENTIAL PROPERTY MARKET UPDATE MAY 2019 - JEREMY MCGIVERN, MERCURY HOME SEARCH

I invariably hear questions/statements such as this, whenever I give talks on the London property market. During my talks I show people the anatomy of the property cycle, because although some people have heard of the property cycle, they actually have no idea of how it works and often confuse it with the “economic cycle”.


And once I have shown how it repeats like clockwork and has been doing so for over 300 years (the only two exceptions were during the two World Wars), I am invariably bombarded with reasons why it won’t repeat this time. Brexit, Corbyn, prices are already too high, etc, etc.

And these are good reasons, but I have to point out that people have been saying prices are too high since the reign of Queen Elizabeth I (that is not a misprint – the first).

But here is a more recent example.

I was inspecting an apartment a few weeks ago that was on the market for £5.5m and it has recently gone “under offer” for over the asking price. It has been owned by the same family for 72 years. They paid £6,000 for it in 1947.

Now, if you had told them back then that their flat would be worth £5.5m in 70 years on a mid-term lease, they would have assumed that you had either been drinking or were in need of professional help.

And how often in the last 70 years do you think people have told them to sell and take profits because prices were “too high”?

Remember this period includes:
 

  • The collapse of The British Empire – I would suggest that this was a much bigger deal for Britain than Brexit
  • If you are worried about the nuclear threat from North Korea there was the Cold War and the Cuban missile crisis
  • The UK as the “sick man of Europe” in the seventies
  • The oil crisis in the seventies
  • If you are worried about terrorism we had sustained IRA attacks in the ‘70’s and ‘80’s
  • Britain being thrown out of the European ERM in 1992
  • 1998 – The Russian bond default, collapse of LTCM and the crisis in Asia – if you had said you were buying property then, people thought you were mad.
  • Y2K when the world’s computers would stop working and airplanes would fall out of the sky
  • The dotcom crash
  • 9/11 & the terrorist attacks in London

This is far from an exhaustive list of all the issues faced in those 70 years – this article would be about ten times the length if I listed them all (the Suez Crisis is another that springs to mind). Basically, there is almost always something to panic about, which, at the time, seems like the end of the world but actually isn’t.

Ironically, most people only take action when it seems to be “safe”, which is invariably the worst time. Cast your mind back to 2006 and 2007. The press & economists were pretty bearish up until 2005 and then in 2006 the bears capitulated.
    
It was different this time – prices did only go up!
    
We had a new paradigm – we had eradicated boom and bust!
    
I would humbly suggest that if you see the words “new” and “paradigm” together in a newspaper article that you pack your bags and run to the hills.
    
It is never “different this time” because markets are merely a reflection of human nature and human nature hasn’t changed in millenia. Indeed, the remarkable thing about the run up to every crash is that it is almost the only time when people genuinely believe that there are no risks and that nothing can go wrong. Hence Buffett’s warning to be fearful when others are greedy.
    
This has a little to do with economics and everything to do with human nature. It’s called hubris. But we are nowhere near that stage yet because the emotional pendulum is still very much in the arc of fear.
    
This is because we are nearing the end of the first half of the current cycle where everyone is still scarred by the crash of 2008. So, any price falls are seen as proof that a crash is nigh (conversely in the boom phase in the second half of the cycle every price rise is seen as proof that prices can only go higher! Both views are equally mistaken at that stage of the cycle).

The good news is that history has proven two points:
  1. The price falls in the crash at the end of the cycle are dwarfed by the price increases during the cycle
  2. The majority of the price gains come in the second half of the cycle

Now you may well be wondering how prices can go higher from here. Well it is very simple - we will repeat the same old mistakes and find new ways to make the same old mistakes too!

The reason why the numbers get bigger and bigger is because the amount of money in the world is growing at an extraordinary rate. Bain & Co in their report “A World Awash With Money” (2012) estimated that all assets in 2010 were worth $600tn and that this would have risen to $900tn by 2020 in what they described as a “capital superabundance” which will drive asset prices higher for longer while supressing yields.

They have been spot on and have since reviewed their figures to say that there will comfortably be $1 Quadrillion of assets by 2025. This is not an environment in which you want to be short of assets, especially not property.

We now have the largest accumulation of capital that the world has ever seen with more people making more money in more jurisdictions than at any time in history. However, bank lending is currently heavily regulated. This will change as it always does, because policy makers will relax banking regulations to keep economies going (and in some cases to help themselves get re-elected).

This is vitally important and is already happening. Last year Congress voted through Trump’s amendments to the Dodd Frank Act (US banking regulations), which loosened regulations. This was mainly for the smaller regional banks but is just the tip of the iceberg. Watch this happen across the globe as each jurisdiction tries to remain competitive (also don’t be surprised if Trump reaches a deal with China to boost the economy in the run up to the U.S. elections next year).

As I say this is nothing new. Relaxed banking regulations will also be accompanied by new ways to get credit into the system, e.g. crowdfunding, peer to peer lending, longer term mortgages, etc, etc. All of which will send prices into the stratosphere… and then they will crash again – it is a cycle of boom and bust – but prices will be far higher than they are today.

This is just a taster of what is to come and what I have written here barely scratches the surface.

This cycle is repeating like all the others and I have bought another property in London to put my money where my mouth is and the members of Mercury Homesearch are doing the same. I know that it is difficult to be greedy when the masses are fearful, but I strongly recommend that you acquire property now too.

However, you must be selective. Research by Savills has shown that between 2005 and 2013 the top 10% of properties in PCL increased in value by 190% while the bottom 10% only increased by 63%.

You want to ensure that you are in the top 10%. If you would like to discover how to do this, simply request a complimentary copy of my book, The Insider’s Guide To Acquiring Luxury Property in London, which reveals the strategies and techniques I have been using for over 18 years to acquire some of the world’s most successful families and business people, their ideal homes and investment properties for prices they didn’t think possible.  To request your free copy, simply email veronika@mercuryhomesearch.com or call 02034578855 (+442034578855 from outside the UK).

Jeremy McGivern
Founder of Mercury Homesearch
Jeremy can be contacted at jeremy@mercuryhomesearch.com or 02034578855

The views and opinions expressed in this article are those of the author alone and do not necessarily reflect those of Weatherbys Bank Limited.  Responsibility for the information provided lies entirely with the author and is for information purposes only and is not a recommendation to act.  Please seek advice before entering into any financial transaction.

BECOME A WEATHERBYS CLIENT

To find out more about Weatherbys Private Bank and our services, please contact the Private Bank team