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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 anything becomes.

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 untoward hazards.

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 alive.

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 steady increase.

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.


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