Britain's Get Out of Debt Card
We now come to the speculative
part of my annual analysis of real estate markets. Please note I am
looking at events in the future, which means beyond the 12 month
period, and the further into the future we look, the less reliable
I shall be looking at three topics, the first is the future path of the
UK economy, and the second will look at the future of the euro, the
third will focus on the renminbi. I may even add a fourth that might
surprise some of you.
Oil in the UK
The UK economy has been mucking about for the past century. Back in
January 1914 the UK was the world's only super power. Sterling was the
world's reserve currency, and the UK economy was the largest on the
planet, but was being threatened by the rise of Germany. Since that
date things have been on the slide.
What helped the British economy to launch into the first industrial
revolution was a surge in energy production. Britain started digging
for coal, and there was a lot of it, and it was good quality.
What helped Britain in its time of dire need after the second world war
was the discovery of oil in the North Sea. This was at a time when
sterling was at a low ebb and had just been devalued yet again.
A modern economy without innovation and energy is a dead loss. Britain
has both. We have a lot of innovative technologies on the drawing
board, from discoveries in medicine, to advanced robotics, and the
discovery of deep black, to the discovery of vast reserves of natural
gas, and an amazing substance called graphene. Put all this together
and the future is bright.
On the debit side, the country has an unemployment level of 7.6%, and a
massive debt overhang. This latter problem is going to overshadow the
economy at least until the end of the decade. Unless the debt can be
contained the country will slide inexorably into decline. That will
take almost all aspects of wealth with it, including housing.
If (and it's a big if) this debt can be contained, there is a bright
future ahead. The sheer size of the gas deposits is such that it could
ensure prosperity for the nation for decades into the future.
There are a whole plethora of objections to the extraction of the gas,
and they can be bundled into two main ones. The first is the mess it
will make, and the concomitant risk to contamination of the aquifers.
Tests in the US have found no risk on this score. The main reason is
that the gas deposits are well below the levels of the aquifers, and so
any seepage is highly unlikely.
The other risk is above ground. The size of the gas fields means that
the infrastructure on the surface is likely to be intrusive. If a way
can be found to minimise above ground disturbance then I think the
drilling will go ahead apace. All political parties support drilling,
and the first licenses are in place. In fact, small scale drilling has
been taking place ever since the beginning of the century with no
How does this impact on house prices?
I still think that in the short to medium term we have a static real
estate market. Debt weighs on the economy. The big problem with any
kind of debt is that it gets out of hand. First you borrow to get a job
done. Then you borrow to get another job done, and so on. As you go
forward, each borrowing has to be paid back plus interest, and all that
impacts on the bottom line, until you are merely borrowing to stay
There is a useful statistic of how this is happening in the USA. Back
in 1950 a dollar borrowed brought a profit of $4.50. A dollar borrowed
today brings a profit of a couple of cents. That is idiocy. I dont have
UK figures, but that scenario is unfolding there as well. While that
happens the economy cannot move forward in any meaningful way, which
means the standard of living cannot increase, which means house prices
cant increase either. They may bounce around a bit, but there can be no
Longer term (a decade away) assuming the fracking business gets under
way, things will improve immensely. That may well be the time to pile
into the property market with a vengeance.
The other thing to look for is the siting of the drillings. We may well
find that Blackpool is about to see a resurgence. If you were thinking
of selling that fading hotel, maybe you should think again. Maybe
Liverpool will expand its docks again to ship out the liquid gas. These
are all suppositions at this stage, but the possibility is now showing
on the radar.
I suspect the fist major areas to start drilling will be offshore
Lancashire, and around the North York Moors. I can see massive public
outcry over any drilling in the Surrey Hills. Here is a map of the
currently known reserves.
Okay folks, let's see how this develops, but do bear it in mind.