Reading the Economist World Survey published last week presents a rather diffent picture, although The Economist always apears to me to be on the pessimistic side. It suggests that global interest rates are currently low and likely to rise in the meduim term, excess global labour supply is holding down and even decreasing real wages. I know people who's salaries have not moved or have decreased in construction and IT over the last few years.The cash flow on property for many people is of the order of 5%. If interest rates rise this would suggest that property prices in the UK are too high. ALthough there is currently high rental demand wages are depressed so affecting affordability. This would then point towards a stagnation or reduction property prices as it is possible to get better returns in other asset classes. I wondered if anyone else has any views as I am currently a little sceptical of investing in UK property unless it presents good development opportunity.

The Economist doesn’t actually have a great track record in these matters, don’t forget. It was they who famously advised everyone to sell UK property back in March 2002 so as to avoid the crash! In fact, according to data from the Nationwide, if you'd sold at that time, you'd have missed out on growth of 68%! Nice one! We said they were wrong at the time and we say the same now. Here’s the short response to your post, Paul. There’ll be an article on this subject on the site in a very short while. The argument simply can’t be made both ways. Subdued wage growth – or no growth, as you suggest - does not lead to pressure to raise interest rates. It’s the reverse. Accelerated wage growth, without accompanying growth in productivity is a key driver of inflation and very defintely does put pressure on interest rates to rise. So does increased money supply. What the Economist says about an ‘over-supply’ of labour is actually one of the reasons why we have so much global trade – low costs of production keeping prices down, but trading volumes are high. We argue that a large pool of willing and well-qualified labour from the new EU states, especially Poland, pouring into the UK in recent years has been a key reason for the UK’s excellent economic growth record AND crucially its low inflation (low waged labour keeps wage inflation in check). The same can be said of Ireland, another country with excellent GDP growth, low unemployment and also one that, like the UK, opened its doors fully to central European labour. Certainly, both have done considerably better than most of their big economy Euro neighbours, notably Germany, France and Italy, none of whom have also seriously restructured their economies to increase competitiveness and consquently all have very high levels of unemployment, Germany and France in particular. Anecdotal evidence about wages aside, the latest data from the Offfice of National Statistics shows that average earnings excluding bonuses, or regular pay, rose by 3.7 per cent in the year to July 2006, down from 3.8 per cent in June. Average earnings including bonuses rose by 4.4 per cent in the year to July, up from 4.3 per cent in June. In the year to July 2006, consumer prices increased by 2.4 per cent, which is below the rate of earnings growth. Wage growth then is far from stagnant. Of course, it’s true that interest rates are on the rise right now and there are inflation worries, caused in large part by oil and gas prices. But that doesn’t mean that the end of the world is nigh as the Economist seems to like to indicate every so often (OK, I exaggerate, but you get the idea). Investing in UK property has not suddenly become a bad move. The question that really matters is at what level will rates peak? Other factors are important, of course, but one of the most important will be the volume of mortage lending. It’s still rising, so rates will probably have to go up further. When lending starts to tail off, it’s a pretty good bet that that will be the peak time for base rates in the current cycle as well. As for other asset classes providing better returns – I think that’s a difficult one to convince many people of; especially those hit by big losses in recent years in their pension expectations. There are three crucial reasons for this – property is far less volatile than stocks; two, when cap growth slows, rents rise (the reverse is true as well), so you get a benefit either way. The third factor is that when you add in the ability to leverage - effectively invest with other people’s money - property is pretty unbeatable. In the long term, putting aside cyclical factors like interest rates, any property investor could do no better than to read the Barker Report – probably the best case made in recent history for investing in the UK property market. To sum it up: property demand in the UK hugely exceeds supply and will do so for many years. Cheers