Asian buyers – mostly from Hong Kong or Singapore – now account for the majority of new home purchases in central London for the first time, according to upmarket estate agent Knight Frank.
Asian buyers accounted for 59% of deals in the six months to the end of April. That’s up from 48% the year before. UK buyers account for just 35% of the total, from 40% last year.
It explains a lot. There’s a big gap between the strength of the housing market in London and across much of the rest of Britain.
If you don’t get paid in sterling, then Britain looks cheap. Or if you get paid so much sterling that it doesn’t matter, then borrowing looks cheap.
For the rest of the population, life is less comfortable – and it doesn’t look like getting any easier.
The rise of Asia made life cheaper for the West – not any more
Asian buyers now dominate the new homes market in central London. Do they have more money than sense? Not at all. The fact is, if you’re from Hong Kong or Singapore, London looks cheap right now.
Hong Kong is now the most expensive place in the world to buy a flat, according to Bloomberg. Property prices have soared by 70% since the start of 2009. So relatively speaking, London doesn’t look too bad.
As for Singaporeans, not only have their property prices shot up, but the Singapore dollar is also up 50% against the pound since the UK housing market peaked in 2007. So to them, it looks as though Britain has suffered a house price crash of unheard-of proportions.
My colleague Dominic Frisby’s fondness for measuring house prices in gold is a controversial topic among some readers, I know. But this just shows the importance of relative valuation, especially in a world where a whole region-full of new fiat currencies are competing with the old players as desirable stores of value.
The reality is that Britain and the West in general, have been relying on Asia to keep life cheaper than it otherwise would have been for a decade or more. Now the boot’s on the other foot. The rise of Asia is making our lives more expensive, just as we need it least.
The UK consumer is back in recession
Just look at what’s happening to the UK economy. If official figures are to be believed, Britain has actually fallen into double-dip territory, if you want to get pedantic about it. As the Financial Times points out, “output across the economy in March was £11m less than it had been in September, suggesting a tiny contraction”.
Now, everyone is taking the GDP figures with an even bigger pinch of salt than normal right now. There’s every chance they’ll be revised again at some point in the future.
But if the first quarter figures were even remotely accurate, they paint a pretty gloomy picture. Consumer spending fell by 0.6%. That’s the biggest drop since the second quarter of 2009, when we were still in recession.
That’ll make the Bank of England even less inclined to raise interest rates. However, as several analysts point out, at least one of the reasons that spending is weak, is because inflation is high, which is precisely what the Bank is supposed to prevent. Consumers are being squeezed because prices are rising, but their wages aren’t going up to match.
This doesn’t look set to change. Chinese manufacturers are putting up prices across the board. Bloomberg notes that big toy companies are pushing through price hikes, because of a combination of rising wages, rising raw material costs, and an appreciating yuan.
It looks very much like ‘stagflation’ to us – slow growth and higher prices.
And don’t expect the Bank of England to do anything about it. As my colleague Merryn Somerset Webb points out in this week’s issue of MoneyWeek, out tomorrow (If you’re not already a subscriber, subscribe to MoneyWeek magazine). a bit of inflation is just what the government wants to take the edge off our debt pile.
Rates will be kept low through “financial repression” (Merryn explains, but this is basically a set of tricks and tactics that policy makers use to keep both long and short-term rates low) while savers will be at the mercy of drip-drip inflation.
Four ways to protect yourself against inflation
So your priority as an investor right now should be to protect your wealth against inflation. Your first stop should be National Savings & Investment index-linked certificates – get your £15,000 allocation if you haven’t already.
Another option worth considering is Asian currencies. They aren’t easy to get exposure to, but it is possible (see: How adventurous investors can beat inflation).
We’d definitely hang on to gold. It’s a good hedge against any turmoil that lies ahead. And we still like defensive stocks – they’ve started to perform well recently, but they are still paying out healthy dividend yields off the back of strong businesses that should be able to protect their profit margins better than smaller rivals.
Our recommended article for today
How to invest like a Dragon
The millionaires on TV’s Dragons’ Den look for businesses that have a broad ‘economic moat’. But what it is it, and how do you use it to spot a good investment opportunity? Bengt Saelensminde explains, and picks one stock with a real economic moat.