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75: UK housing crisis? who said that.....



Global property investing risks have been higher this last month than for the previous 12 months primarily because of fears of inflation, subsequent interest rates hikes and hence downward pressure on house prices. Most stock markets have again crashed about 10% (UK) to as much as 40% (Middle East) and private investors have been stung – many were again left high and dry because of the speed by which markets fall and the volatility of the market (memories of 2001 still in the back of our minds). When inflation rises, and interest rates rise, company profits and dividends fall since most companies need to borrow money and there is less consumer spending – hence equity valuations fall. Furthermore, bonds become more attractive and are considered a safe heaven in such times. Markets have quietened down in the last few days and there is a feeling the markets may have over-reacted to inflation data. The optimists say things are self correcting – the fear of further interest rate rises put the damper on spending and hence rates may not go up further.


The good news is oil prices have dropped to just below danger levels of $70/bbl – keep an eye on this – as previously advised, any rise above $80/bbl will put a lot of extra pressure on inflation and hence interest rates.


In the UK, the Bank of England Governor Sir Mervyn King makes periodic statements to politely spook the markets – in an attempt to persuade us to stop spending so much and calm house price rises – this worked very effectively in June 2004 when the housing market went from fast rising to a plateau and slight decrease late 2004 after Sir King warned of house price corrections and unsustainable house price rises. His messages more recently have been rather subtler – making references to increasing risks of inflation.


But here’s the rub – this time, despite slightly rising unemployment, high energy prices, slower consumers spending and fears of an interest rate hike later this year – UK house prices have been rising strongly and continue to do so. The latest report has prices in England and Wales escalating by 2% in May alone.  Why might this be?


Because there is a MASSIVE HOUSING SHORTAGE – crisis – this is not widely communicated or discussed openly because it’s frankly embarrassing. Our planning system has failed. Recommendations from the Barker Review Report of March 2004 have been largely ignored – in any case, her report way underestimated the amount of properties required. With inward migration of 250,000 every year from Eastern Europe and other countries – population is expanding but only 180,000 new homes are being built. And it usually takes 2 years to get a kitchen extension built! The Victorians took 10 years to build millions of houses – but in the UK it takes 10 years to build a 3 metre wide tarmac strip down 10 miles of the M25.  Population forecasts for the London area show an increase of 800,000 people in the next 10 years – where are the 400,000 homes needed to accommodate all these people going to be built? Meanwhile, everyone has quietly forgotten about Mr Prescott’s grand housing development plans – which will likely add further pressure on demand versus supply (cancelling the housing schemes will not help).  


Many British people own more than one home, and aspirations for second homes are increasing – wealthy people often own sometimes 2, 3, 4 or more homes in different locations – some abroad. People used to collect cars. Now they collect homes. The other strange trend is that, although the British would far prefer to own a house with small garden, we continue to build flats at a rate of knots, 70% of homes now built are flats – mostly with rooms of less than 10 ft by 12 ft and no parking – whilst house price shoot up further (a trend likely to continue).


Add to this the prospect of the Home Information Pack – likely to be a complete disaster for the average home owner – coming June 2007 – and one can only see the market tightening further. These packs, which will cost about £1000 each, will undoubtedly lead many sellers to consider staying put, or moving whilst letting out their old home – increasing pressures on first time buyers and lower income families. For investors with large property portfolio’s, the lack of property on the market will likely send prices higher and hence increase their net worth. We’re pretty sure this is not what the Government plans – but believe this could happen. It will also lead to less workforce mobility and the increasing frustrations of cash strapped first time buyers.


Okay, in the first half of 2006 property market has been strong despite rumours of property prices crashes and lack of affordability. It’s likely wealthy empty nesters will give cash to their offspring to help them purchase property – adding to the heat in the market.


For investors – because interest rates are fairly low, house prices have risen 3 fold in most areas in 10 years, it’s a strong spring market, there are few properties on the market and interest rates may rise in the Autumn - it’s probably best to hold fire from further investment at present unless good below market value purchases can be made – either privately, through auctions or by scanning 1000s of properties for bargains on the internet. Best time to buy is early December – it’s cold, depressing, dark, everyone wants an offer before Xmas and there’s less competition. If interest rates rise a lot, this could be a good buying opportunity with some motivated sellers. So, time to be very selective and don’t be concerned with holding your fire!


If you are going to buy, consider rapidly changing areas with increasing wealth, infra-structure developments and jobs – top areas are in London - Stratford, Bow, Shoreditch, Battersea, Clapham, Plaistow, Forest Gate, Kings Cross, Southfleet/Northfleet area, Limehouse, Hackney and Hackney Wick.  For the south coast investors - regenerating sea-side villages and towns in Cornwall, Devon and Dorset. In the North - Bradford. Abroad, it’s probably Canada (Calgary).


Best keep our eye's on inflation - an interesting article by David Smith casts some light onto whether it will be a long term problem. On he upside, if inflationary pressures subside and interest rates are able to drop to more like the Euro rates of say 3% from 4.5% - one can envisage a further surge in house prices - particularly in London with the "Olympic" and "Global business" effects kicking in.


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