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Money doesn’t grow on trees….it is printed!

This week I met a couple who wanted to sign up to our sourcing services, they have been married for five years and have managed to save up £80,000. They were concerned they should now do something which will grow their funds, as they realise £80,000 sitting in the bank for another five years will not buy them what £80k buys them today. In other words inflation will erode your funds day by day. So they made a decision to invest into real assets and they were recommended to us by an existing client. Whilst looking at their scenario we unearthed another issue, their family home is worth £800,000 with a nominal mortgage. This is a red flag as it is above the inheritance tax threshold and without any kind of planning in place this is a ticking time bomb.

Instead, this can be geared up and used to invest in property, if done in the right way it can be used as part of the tax planning as well as putting the money to work much more aggressively.

Many consider investing money into property a risk and prefer the perceived safety of the bank, of course there’s an element of risk with any venture you undertake.

However the point they miss is you’re already at risk with money in the bank, as often it is not keeping up with the current level of inflation let alone the consequences of future inflation caused by the recent printing of money. So by default you’re in already a risky position by keeping all your savings in a bank. This is the true position. By doing something you’re trying to move from a position of risk to safety. Not the other way around i.e. moving from a position of safety to risk. This is a misconception. ______________________________________________________________________________________________________________________________________

Property is one option to keep your money safe, there are other such means, such as precious metals which are rising in value too. There seems to be a flight for assets which are real and tangible. ______________________________________________________________________________________________________________________________________

As the grim reality of the US and Euro-zone countries’ struggling economies continues to unfold, more and more people are waking up to the fact that their savings may not actually be as safe as they once thought, and as a result more people are buying tangible goods.

As much as your bank manager would love you believe that your money is safe in the bank, the fact is that money in the bank is in the form of currency, and all currencies of the world today are what are known as ‘fiat currencies’.

Fiat currency in simple terms is money that is not backed by anything tangible, it is simple an I.O.U. note from the issuing country’ government to come good on the promise of the money being able to purchase goods. Tangible goods like gold and property have been used as forms of wealth for thousands of years long before the invention of fiat currencies.

If the issuing government’s economy is doing well and they are not heavily in debt and they have healthy exports and low unemployment, and are not involved in wars, then the currency is usually in a good position. However if the opposite is occurring, as we see in the UK today, then the currency can be in trouble.

But that’s not the only issue at hand, the bigger issue is ‘printing money’ or to give it a nicer sounding name like the government does “quantitative easing”. Whatever you call it, it simply means creating more money that goes into the pool of existing money that is already in use.

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It is creating money out of nothing and diluting the buying power of the existing currency in circulation.

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To put it simply, you can’t buy the same amount of oil with your money that you used to be able to if more and more fiat currency is printed, as it is watering down the buying power of each and every pound.

So now that we’ve established the problem, we can discuss the reason why it seems that everyone in the world is dumping their funds into UK property, specifically in Central London.

Central London property is what it is, and it will always have value. Central London property will never be worth nothing. However fiat currencies can and do go to a value of nothing. It has happened many times in history, the most recent example being Zimbabwe, where hyperinflation caused the currency to be worthless.

Therefore when a currency looks like it is heading into hyperinflation people want to get rid of it as fast as they can and buy something else that is safer. In the past people would buy other currencies, however today this is really not a great idea, as all currencies of the world today are fiat currencies and if the USD and the Euro dive then all currencies will be brought down with them.

However Central London property is not a fiat currency, and people see it as a ‘safe haven’ in economic turmoil especially as the legal system for purchasing property here is perceived to be safe. No one would dispute when they purchase a property whether it’s in their name or whether someone can challenge them in regards to the property title. Investors do not have the same level of confidence elsewhere in the world, for example Spain, Italy or India cannot offer the same level of reassurance.

And….You can’t make gold – unless you know the secret of alchemy, or land. There is a finite amount of it in the earth and available for sale. So if the currency is on the verge of collapse there will be a stampede of people trying to purchase tangible goods to protect their savings from being wiped out, however much like the children’s game “musical chairs” there is only a limited amount of assets, not enough for everyone.

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This massive increase in demand will cause the price of assets to sky rocket.

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Starting in 2009 as part of the Quantitative Easing measure, the BOE electronically created £200bn of new money out of thin air. With this money the bank bought up government gilts, despite most economists saying this is the worst possible way to spend the money. Gilts are one way the government can raise money. They are effectively an IOU, a promise to pay a fixed interest payment every six months until the maturity date, at which point the full value of the bond is repaid. The proceeds from a gilt sale are then spent by the government and the value of the gilt is added to our national debt.

By purchasing these second hand gilts vast sums of money effectively left the UK and went to overseas bond markets. The bank could have purchased corporate bonds which would have allowed the money to go directly to companies which needed it. But it didn’t, and so the BOE became the main purchaser of government debt and now holds about 20% of government issued gilts.

In short this means there is more paper money created without backing. This will mean you will require more paper money to purchase real goods, this is the inevitable consequence of creating money out of thin air.

The Real Deal

Old Marylebone Rd

  • 800 sq ft two bedroom flat
  • Long lease
  • Long completion date
  • Price done up £650,000
  • In time to resell for the spring, when demand increases
  • Agreed contract price of £525,000

Call now to reserve

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Normally the best in buy and flip opportunities are on the top of the pyramid, i.e. priced £800k and above. If you don’t have the required cash, you can join hands with others and start investing.

To generate good profits by flipping properties you need to be able to pick the right property, in the right location, at the right price. And all this requires the right knowledge.

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