Wednesday, 4 September 2013
Over-heating UK economy?
Rather like the now nicknamed Walkie Scorchie building in London, the new is not always without teasing problems. Indeed, the building is a metaphor for the wider economy too. On the dust if the financial crisis a new boom has begun. That of London property. Yields are plummeting and prices rocketing as investors from all over the world seek "London Gold".
Last week a banker who is well placed to know, suggested to me that nearly 1/3rd of the world's movable wealth was either being managed in London or looking to be invested here. The new boom has carry over effects as the prime parts of the City have short supply, slowly outer areas of the City are gaining investment.
Another huge benefit for the Banks comes in the form of their over-weight property lending portfolio's, as prices improve these become less toxic, profitable even and the banks' financial worries go away. Indeed a big chunk of the new lending by banks is on property; traditional corporates shy away from debt and with property lending comes an asset that can be held as security. Banks love it again.
All of the above is good news and is praised by the Government as the end of the long recession. However, its birth is inspired too by Government programmes of keeping interest rates artificially low, printing money and the 'Help to Buy' scheme that will see Government invest with people in residential property too.
Does anybody else see a problem with all this? Anybody else reminded of the craziness of the early 2000's as the recipe is the same. A positive now is that overseas equity is investing rather than our own bank's debt at huge leverage, meaning the bust will be less painful for UK Government and people - but bust there will be.
This is no way to run an economy either or ti try to re-balance. A much better bet would be huge investment via tax breaks into the North Sea and Shale exploration. Cheap energy would help non-service industry and lower inflation. Interest rates need to rise, very, very slowly, but rise they should to more normal levels to curb the housing bubble. The Government has no business in Help to Buy and this policy should be scrapped in the face of a recovered housing market.
The party has begun, its nearly time to take away the punch bowl before it gets out of control again.