Budgets, Property Demand and the Long-Run

Long-term demand for commercial property is inextricably linked to the level of employment, allowing for technological advances and some changes in working patters, working from home, etc. The level of employment is also directly related to the prospects for the economy as a whole. In the post-industrial world employed people spend more and invest more acting as a further spur to growth.

Given this, it appears that the UK market is now subject to a mammoth bet. If it comes off, it will be the best heist since George Clooney’s 11-strong crew emptied Andy Garcia’s Bellagio Grand Casino. The assumption, or hope that the private sector will generate enough jobs to add more a million net jobs to the economy over the next five years (according to the Office of Budget Responsibility) to more than cover the unprecedented public sector job cuts and associated private sector employment loss appears overly ambitious. Public sector employment growth was already falling prior to the collapse of the banks.

To generate this level of growth, the economy would have to deliver net jobs at an unprecedented level. Any comparisons with the early 1990’s appear fanciful given that we:

1. Will not have a global economic and investment boom
2. Will not have strong asset/house price growth
3. cannot have a step change in inflation and interest rates like post 1992 given that interest rates and bond yields are already as low as they can be by any meaningful historic comparison
4. Will face weaker demand from the UK’s main export market (the EU) as many governments adopt simultaneous austerity packages. We cannot all export our way out of growth at the same time!
5. also face concerns about weaker than expected growth in China/Asia and the USA

We also face the fact that real wages, particularly around the median level, have fallen during the recession as staff worked fewer hours and often accepted pay-cuts in order to sustain employment. This has, to a significant extent, made the unemployment figures less bad than they may have been but also limits the capacity of the economy to generate ADDITIONAL jobs with the modest growth that is anticipated. That is, unless hundreds of thousands voluntarily accept further pay-cuts and fewer hours – Unlikely in this environment. In addition, the higher taxes that go hand in hand with the spending cuts are going to impact on consumer confidence even further in the medium term. We can save more and maintain levels of consumption only if the private sector invests, in a sustained manner at levels which appear unlikely as the global recovery will struggle to offer sufficient opportunities given the paucity of expected demand.

Lets hope that the USA and Asia generate stronger than expected growth to save us and that Germans decide to consume a bit more of our output. If not, heading back to the casino and putting everything on black may be a more comforting option than holding anything other than prime commercial real estate outside the South East or London markets.


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