London has a hugely international property market, with the Middle East and the Far East in particular two big players. So firstly, what has happened in China recently? You may have followed the Chinese market of late, and seen that trading had come to an abrupt end, due to a less than acceptable fall in the market value . In short, the Chinese regulators have installed a “circuit-breaker”, which stops trading for the day as soon as the market falls by a certain percentage. When you look at this from an external perspective, you think it makes sense, however, flip the coin over, and you ask yourself – “if I were an investor, and I saw the government implement a circuit breaker to prevent a crash – would that reassure me, or fill me with a load of panic?”. For lots of investors it appears to be the latter.
All in all the reason behind all of this, is speculative to a certain degree. The People’s Bank of China cut its reference rate, fuelling speculation that growth in China was slowing, or that predictions for 2016 had been over-inflated. This isn’t far from the truth, as predictions had stated a potential 8% growth in GDP for 2015, whereas in actual fact it turned out to be closer to 7%. Which – compared to other countries – really isn’t that bad , especially for an economy that has grown so much over the past few years. It’s not stunning growth, but it is not low enough to lead to any “crash” per se. This lead to a devaluation in the yuan – in simple terms, foreign products, became more expensive. As a result of this, lots of London agents which were heavily dependent on buyers from China and the wider Asian markets have experienced a slowing in demand. This then generates an impression that the London market is cooling, which can become a self-fulfilling cycle.
In the Middle East, they are experiencing problems of their own, this time, over oil. In January, sanctions on Iran were lifted. This lead to the logical belief that more supply would hit the global economy, thus forcing already low prices per barrel, even lower. At the end of January, oil had fallen to below $30 a barrel, which is a huge drop from its former heights at $147 in 2008. Oil producers in the Middle East have been hit by this and as a result, the wealthy elite are now looking to take their money out of the gulf region. Where to? Our beloved London market. Overall a lower oil price will keep the UKs inflation under control, and a fall in oil prices are the equivalent of a tax cut for a large majority of business here in the UK: the cost of oil imports, and subsequently the cost of living, falls (petrol for everyday consumers, falls in price, thus leading to the population having more disposable income). In turn, this causes the Bank of England to keep the base rate low. China’s economy, experiencing a slower growth itself, will mean demand for UK products has fallen as they become more expensive, subsequently, leading to the same result of a slowed growth in the local UK economy. After all is said and done, lest we forget, brick and mortar, as an asset class, has stood the test of time. London is a completely separate economy to the rest of the UK and has performed well for many years – some would even call it a bubble. I hate that term, as it implies, that at some point it will pop. Regulation has tightened so much over the last decade, and I tell myself that we have learnt from our mistakes in 2007/2008, at the very least, to minimize the impact a “crash” could have on the London property market.