On The Budget, Housing and the Coming Inflation

On The Budget, Housing and the Coming Inflation

This article looks at the budget and housing and says the real story of the budget is a drive for some inflation.

A lot of people spend a great deal of time up worrying about what will be in the budget before it happens and then discussing what it all means after it has happened.

But is there something to be said for just “going with the flow” a bit and not getting too worked up about budgets. After all, property, for a landlord, is a “long game”.

So, let’s consider that in the context of the last budget.

So, we have a Conservative government in power. Now we know they have this obsession with getting first time buyers onto the property ladder. They have it now, they have always had it. It is in their DNA.

Right now, the government’s finances are in an awful state as a result of their mistaken belief that imposing house arrests and loss of rights on people would sort out Covid. It didn’t and it led to probably more lockdown deaths than the avoided “Covid deaths” and it buggered up the economy too. Discuss! (I don’t expect you all to agree!)

Debt and the Magic Money Tree

And yet despite the staggering debt that has now been built up, the Covid magic money tree could still be relied upon for some measures to help first time buyers get mortgages by widening access to mortgage loans at higher loan to values.

This is, of course, good for house prices.

Corporation taxes have gone up too as we predicted they might. This makes the company structure for holding a portfolio of properties a little less attractive – a possibility that we alerted to at a previous post. See the link here: landlords moves to company structures may be seen as a tax avoidance Ruse. – Letting Focus

And the Stamp Duty Land Tax holiday has been extended for a bit. This means that lots of people will continue to want to rush in to get the benefit of less stamp duty by buying before the new extended window closes again – and many will probably pay 75 to 100% of the savings on SDLT back by paying more for the property they are buying. Such is the madness of human nature.

And so I think, so what? No real big surprises in there.

But of course, there is a whole subtext to all of this.

And that subtext is not in the budget, but it is all about debt.

The government has a huge debt. It has been issuing bonds at very low interest rates to pay for the Covid Car Crash. Some of this debt is bought up by itself, some is bought by big merchant banks like Rothschilds, some is forced on pension funds to buy. (Yes, government can really force pensions funds to buy up government debt IOUs).

But what next?

Inflation – The Hidden Agenda in Plain Sight

Well, the government is hoping to get rid of this debt by inflating it away.

Yup, it wants inflation. Not too much, but it wants a decent amount of it.

And I think it will get it.

The private sector – that’s you and me – are effectively holding a lot of savings (which has been recycled by the institutions who bought the debt back onto us through loans). This is just the flip side of the government debt.

Now, before you scream, “Not me, David, my business has been destroyed and I have got no help from the state”, I will say “Yes, I know”.

The fact is we are not “all in this together”. We never were. We never are.

Big losers are people who switched to self-employment just before the balloon went up and small business owners and their employees, especially those in sectors like travel, tourism and hospitality (including, of course city Air B n B owners).

Big winners are state employees and workers in the private sector who have been able to work from home on full pay, but who have had less to spend their cash on. These people have made the savings.

Other winners are, of course, any firm who trades or has learnt to trade mostly online. Big tech firms are obvious winners. And Big Pharma have also done very well by the government and media’s propaganda scaring entire populations to be vaccinated, (to avoid possible loss of long held rights), even though 99 to 99.8% of them would survive Covid anyway. (Goebbels would have awarded an A Star for this).

With reduced competition from the small firms who have gone to the wall and shortened world supply chains post-covid, the way should be open for big firms to raise margins by increasing prices.

In the UK, with possibly fewer foreign workers, post-Brexit, it should also be possible for our workers to get better pay demands met – another inflation driver.

Of course, government won’t want too much inflation, but it will be happy with say up to 5% per annum.  It will look on happily as the debt gets reduced.

If things start overheating and inflation gets too high, then it will likely turn to fiscal policy, (raising taxes), to cool things a bit. It won’t be keen on increased interest rates as it wants to get that debt down, remember. Raising long term interest rates on new debt won’t help!

When taxes rise – and they will at some point – landlords can expect to be one of the targets. We always are, but that is the price of being in this business. Learn to live with it.

So, is this whole thing anything to fear?

No, probably not.

Inflation and House Prices

In fact it should be a good scenario. It is good because inflation is good for house prices, in fact it is good for all real assets. It is only bad for anyone with cash on deposits in the bank – as their real returns, which are already negative, will only get worse.

Of course, 95% of money that swills about is just credit and debt. So, there is always a risk that the whole pack of cards comes tumbling down in a big crisis of confidence and run on the banks.

Perhaps this is what Mr. Klaus Schwab, founder of the World Economic Forum and his well-connected friends, like Tony Blair, Bill Gates and Ursula Von Der Leyen want. Schwab is the Davos meeting head-honcho and professed fan of the Chinese system of a total surveillance on-line society controlled by technocrats like himself in which, as he says: “You will own nothing, but you’ll be happy” (I recommend everyone to spend some time reading the reviews of his book, “The Great Reset”).

But I hope we can ignore these doomsday thoughts. After all, the world’s economy has absorbed bigger crises than Covid. And it has seen off totalitarian headcases like Hitler and Stalin (though they were far less well connected than Schwab). (I will note here that I do know people who fear the worst and have gone or are going “off grid”).

But ignoring the real worries for a moment and assuming the world stands up and rejects the “great reset”; right now, with inflation to come, property looks a good bet.

Property is a great hedge against inflation – and one you can leverage up to buy. Ideally try to borrow on fixed term long rates, because interest rates could still rise (despite the government not wanting them to go up).

So, in summary, don’t worry about the budget detail too much.

Of course, where to buy property and what type of property to buy is another matter. Despite the coming inflation, some areas (and types of property) will do well and some will be basket cases. This, of course, is the more granular level stuff that we work with our clients on.

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