Could London property prices crash by 40%?

Yes, according to Paul Cheshire, Professor of Economic Geography at the London School of Economics. Article is here.

The trigger seems to be when wage increases don’t keep up with inflation. Currently, inflation is 2.9% and wage increases are 2.1%. At the moment then, that is where we are heading.

Historically, inflation happens because too much money is chasing too few goods. This often happens when an economy is booming, people are getting paid more and are driving up the prices of goods (demand and supply). This is different though. Inflation has gone up because of the weak pound. Put simply, if you have to import parts or goods and you have a weak pound, you have to pay more to get them. You then need to raise the selling price of the goods to still make a profit. This is where the inflation is coming from. It is not coming from a rampant and booming economy.

So we have a weird situation – high inflation but a slowing economy (and hence lower wage growth).

The usual solution to inflation is to raise interest rates. This cools the economy and brings down inflation because people have less money. You can’t do this now because the economy is already cool. This means you can’t bring inflation down and you can’t stimulate the economy either. To stimulate the economy you would need to… cut interest rates. But this would… increase inflation. It is a no win situation for the Bank of England.

The only real solution would be to reverse Brexit which would strengthen the pound overnight. This would bring inflation down on its own. The economy would begin to recover and then we are back to business as usual. Without this happening, a 40% drop in property prices may well happen.

On a related point: Don’t rush to get on the property ladder. See the FT article here.

 

 

 

 

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