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20: Predictions for 2005 - from PropertyInvesting.net


12-23-2004

PropertyInvesting.net

 

We do hope you have had a successful and prosperous 2004 – a time to pause and reflect on the year. Last Christmas the doom-mongers were predicting a house price crash. Mid January started off very quickly and activity levels increased through the Spring, finally dying down in most areas in mid June – this coinciding with the Governor of the Bank of England’s dire warnings. Since then, many economists have predicted a crash or steep declines, but most sellers have experienced reasonable demand as long as their properties have been realistically priced. So the big question is – what’s going to happen in 2005?

 

Enclosed are PropertyInvesting.net ‘s predictions for 2005:

 

House price change (north/midlands of England) : +1%

House price change (south England) : +3%

House price change (London) : +3%

House price change (Scotland) : +6%

House price change (Wales) : +3%

Inflation CPI : 1.7% by end 2005

Interest rates : 4.5% by end 2005 (dropping from 4.75% in August)

Oil price : $45-52 / bbl

FTSE 100 : 4,750

Dow Jones : 10,700

Manufacturing output: -3% (down)

Retail sales: +3%

Unemployment: unchanged

Birth rate: increasing

Wage inflation: +4.3%

£ / Euro : 0.695

$ / £ : 1.85

 

 Because of increasing globalisation, competition and manufacturing from low cost centres, we see inflation being subdued despite higher oil prices and relatively high wage inflation. This will mean the BoE can keep rates at 4.75% before bringing them down later in 2005 to 4.5% - this is partly helped by the continued strength of the £ against the $.  A key theme will be the increasing shortage of housing in London, SE England and southern parts of England. This should support prices. The buy-to-let investors will not panic mainly because they view their investments as long term and rental demand increases further from a tough period early-mid 2004.

 

The economies in manufacturing dependent UK areas which are exposed to competition from China and India (e.g. Birmingham, Coventry, Sheffield) will not show the robustness over the medium term as service related economic areas (Leeds, London, Plymouth, Southampton, Bristol). This is in part because of the high £ against the $, high UK interest rates (4.75%) compared to the US (2.25%) and Euroland (2%).

 

Wage inflation will be a healthy 4.3% meaning people’s disposable incomes will increase ahead of inflation. However, to plug the budget deficit, the Chancellor will have to increase taxes after the election – by the equivalent of some 2-3p on income tax, probably by indirect means. The Chancellor will avoid triggering a house price collapse with taxes on property since he will not want to discourage the building of new affordable homes. The increasing tax burden, higher utility, council tax and oil bills will dampen any feel good factor and mean house prices rising slower than would normally be expected.

 

The housing market will recover strongly towards the end of January 2005 and be fairly buoyant in the Spring during the election period. The continued mediocre performance of the FTE 100 will encourage more people to enter the buy-to-let market, with an eye on the introduction of tax efficient PIFs for residential property in April 2006. Increasingly, these investors will look overseas for value in emerging countries like Bulgaria and the established centres such as southern coastal Spain.

 

Based on these predictions, a strategy of buying high yield flats in areas of high rental demand close to communications in southern England / London would seem appropriate. Areas in the north which are experiencing a service related regeneration (e.g. central Bradford, Leeds, central Liverpool, Manchester) would seem to offer reasonable opportunities if prices are low enough, rental demand high and communications good. Any area in the south undergoing positive change will be worth considering – Stratford, Bow, White City, Wembley, North Woolwich, Greenwich peninsula, Woolwich, Gravesend/Dartford, Folkestone. Coastal “baby-boomer” retirement areas such as Plymouth, Portsmouth, Blackpool, Cornwall and Dorset would also seem a good option to consider. 

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