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550: Full boom just starting - housing crisis continues


09-26-2015

PropertyInvesting.net team

Property Boom – with North-South Divide: We predicted in Dec 2014, then again in May that the house prices would start moving up sharply in September – after everyone got back from their summer holidays – and that’s exactly what has happened. The period January to May was far more subdued than normal because most people thought Labour would gain power – either a straight majority or a minority government with SNP. But this never happened – the Tories won a shock majority and the market then started looking more positive in June – however, as it does every year, the market slowed to a crawl in July and August. Now that everyone is back home from their holiday distractions, whilst the Tories achieved a mandate to continue to manage the UK economy effectively (especially when compared to other European countries), people’s confidence has returned. We have therefore seen a severe tightening of the market which is seeing prices rising sharply, especially in southern England – or at least the line south-east of the Severn-Wash as is normal during Tories reigns. The north-south divide widens as more jobs and businesses develop in the south and public sector cuts continue to bite in the north and Wales. We expect the London ripple effect to fan out further, but frankly the market in a cathedral city like Durham in the north is always going to look very different to the market in cathedral city like Winchester. The big employment and business opportunities tend to be in the south and the housing crisis is more severe in the south, along with a rapidly rising population and inward migration. We expect this trend to continue – it would take 5-10 years to change even if there was the political will to do so – which there isn’t. Things are set in for the long term because housing supply is predicted to be very low in the next 5 years and demand very high. Nothing has changed. We’ve been warning about this dire situation for the last 11 years.

Only House Price Inflation: Meanwhile, just as we thought interest rates might finally rise after seven years at record lows of 0.5%, we have a big downturn in China and a slowdown in Europe. Oil prices have plummeted and general inflation is almost not existent. The Bank of England is seeing only minimal wage growth particularly in the public sector and in lower paid private sector jobs – mainly because of waves of migrant workers taking up low paid jobs. This has kept a lid on inflation for years and kept mortgage rates very low. This has then fed though to higher property prices. The migrants have also stimulated rental demand since most cannot initially get loans-mortgages, so it’s been a pretty Goldilocks period for by-to-let.

Crazy New Buy To Let Tax Increase: This will of course change with Chancellor Osbourne’s swinging tax increases that will stall out buy-to-let lending and lead to increasing rents, lower rental supply and a tighter rental market, especially in southern England were mortgages are required to finance buy-to-let properties because of high house prices. The rental market that needs stimulated the most in London will be zapped big time and London rents will start to shoot up henceforth from now, as London buy-to-let investment slows dramatically in anticipation of the high tax bills. This is the unintended consequence of taxing buy-to-let losses – the most stupid tax regime we have ever seen globally. Yes, a tax on losses and treating borrowing as a non-deductible expense – e.g. not treating buy-to-let as a business. This is crazy. The Tories will regret this move since it will distort the housing market and drive rents far higher, lead to increasing rental shortage and exacerbate the severe housing crisis in SE England – then there is likely to be some sort of backlash, especially from renters in London. They certainly won’t get many London votes. It’s worth pointing out that London was the only region Labour made any gains in the last General Election and this is likely to continue even with Corbyn as leaders partly because he lives in North London and represents desperate London renters. If the Tories know best, they will reverse this ridiculous shock tax hike plan announced in July, otherwise it will end in tears.

Crisis To Continue:  For 2016 we don’t expect any interest rate rise, or even if there is, it will be very small – since the inflationary environment is so benign caused in large part by the oil price crash we have described before that started in Aug 2014 when oil prices were $110/bbl – dropping to $47/bbl by April 2015 and continuing at this low level since then. We do not believe oil prices will recover until Oct 2016 at the earliest. Hence by extrapolation, expect this low inflationary world to continue at least until Oct 2016 and hence house prices to continue an uninterrupted accent for the next 12 months. Yes, we are predicting a boom believe it or not, we might be the only people out there saying this, but that is the hard truth looking at the numbers. The level of building has actually dropped to an annualised rate of 133,000 new units a year – however about 10,000 units are demolished – hence a meagre net 123,000 units. The actual building rate just to keep up with demand should be 280,000-350,000 units and the population is increasing by 500,000 a year. You can see why property prices continue to escalate in densely populated southern areas where more migrants are moving in, families are getting bigger and a baby boom is happening which is little reported. Anyone trying to get a place in a nursery or a car parking spot in West London will know the extent of the challenges. 

Worsening Crisis: People that own properties look at exceptionally high stamp duty, the property shortages, high moving costs and confidence and very few are now moving. In 1965, the average family stayed 7 years in a home before moving, this increased to 18 years by 2008 and is now 23 years in 2015. No-one moves anymore. If they do, they prefer to rent out their old property and become buy-to-let landlords. is it any wander there is a shortage of family homes - particularly in SE England. The baby-boomer are also hanging onto their properties to pass to their offspring with the new inheritance tax thresholds helping stimulate this. All these leads us to the overall conclusion that with a rising young population, the housing crisis will worse and house prices and rents will have to rise further. The new buy-to-let tax increase will only worsen the situation - particularly for renters. 

We hope this special Report has given you some interesting insights into the Uk property market and is helpful in shaping your property investment decisions. If you have any questions, please contact us on enquiries@propertyinvesting.net   

 

For reference - our Dec 2014 prediction-model 

 

 

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