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132: UK and US Market Update

05-08-2007 Team


UK Market Update: Rightmove reported a massive +3.6% increase in house asking prices in April alone in England and Wales. Highest increases were SE England (+4.3%), London (3.7%) and NW England (3.6%). All regions increased with the slowest growth being in Wales (still a healthy 1.9%). Asking prices in Kensington & Chelsea rose a massive 10% in a month! A spring boom. Followed by Merton (8.3%), Richmond (8.1%), Tower Hamlets (6.3%) and Wandsworth (6.25%). Lowest rises were in the City of Westminster (-1.7%), Bexley (+1.3%) and Brent (+1.4%). Year-on-year national price rises are now 15% according to Rightmove. The mini-boom continues though there are reports of some early signs of a cool down – for instance a 12% reduction mortgage lending in March.  However, most agents have been claiming a slowdown for the last twelve months and it never seems to happen. The likely reason is the chronic housing shortage – not enough homes being built to satisfy demand. The two recent interest rate rises to 5.25% seem to have had little impact as yet. It’s likely a further rate rise in May will start to bite, particularly if it looks like rates could rise eventually to 5.75% or over. However, if and when rates drop back again, it’s likely to re-invigorate price momentum. One strange analysis last month was that the impending introduction of home information packs in June has led to an increase in house prices in April – the increased supply sent prices up as more stock was bought…. believe that the supply of properties is likely to reduce after June this year because of the added costs and hassle of moving home – hence prices are likely to be supported in the medium term by the ongoing supply shortage. The boom in London’s population (800,000 in the next ten years) and lack of building (shortfall of about 120,000 a year nation wide) will continue to support prices.


For all those investors in SE England – you can look forward to regional wages rising at 5%, GDP growth of 4 to 5%, massive investment from overseas investors and a booming financial district. The global stock markets are at all time highs and mergers & acquisitions activity is booming. So for year end, another wave of city bonuses is likely to sweep London. These high net worth individuals will already be planning their investments for early next year’s bonus payments. Unless there is a global stock crash or severe terrorist actions, maintain their stance that property prices in London will continue to rise above national trend. Our prediction of 8% growth in London prices for 2007 now looks rather pessimistic.    


UK interest Rates: CPI inflations has risen from 2.8% to 3.1%. The Governor is now forced to write a letter to the Chancellor explaining what he is doing to bring inflation down toward s 2%. The Bank is predicting inflation to drop quickly towards 2% by year end – but increasing wages rises – now running at 4.6% is putting pressure on inflation – furthermore oil prices have risen from $53/bbl to danger levels of $67/bbl in the last few months. GDP is continuing at 0.7% in the last quarter, running at around over 2.5% on an annualized basis. The good news is £ Sterling (and the linked Euro) is high against the US$ which normally tends to ease inflationary pressures.    


The Bank of England is 90% certain to increase rates when it next meets in early May. We give it a 20% chance of a shock 0.5% rise in rates – this is if the bank is particularly concerned about upward inflationary pressures. We now think it best to factor in 5.75% rates from mid 2007 to the end of the year for your cash-flow forecasts. However, if rates start to drop quickly as the BoE have been saying and inflation gets back under control – house price increases could again pick up to rates of 8-12% in the SE of England and probably 3-8% in the North and Midlands


US Market Update and Dollar Backdrop: The US Dollar has dropped from $1 / £1 in 1992 to $2 / £1 currently. This is in large part because of the huge current account deficit and imports of oil – USA keeps printing money and lending it to US borrowers. This has fuels domestic retail spending and the housing boom. However, all the debit needs to be paid back one day – because of this, the financial markets take a dim view on the value of the dollar – despite interest rates running at 5.25% - amongst the highest in the G7 countries, global investors and governments have been buying £ Sterling and Euros. It may also be in part because the dominant position of the US economy will be challenged by China and India in future years - also some Middle East governments are reluctant to invest in dollars because of the USA’s unpopular foreign affairs policy of the last five years. The USA is no longer considered the ultimate safe heaven. Indeed, investing in the Euro and £ Sterling seems lower risk for now. Because of this, any investment in USA property by UK or European investors has to take into account the possibility the US Dollar will slide significantly further – particularly if the economy slows down and the Fed is forced to drop interest rates significantly. You might be able to buy plenty or real estate for your £ but the value would drop if the dollar dropped further.  


Meanwhile the sub-prime US market keeps grabbing the headlines. It’s likely this bad debt problem is overplayed – scaremongering – but others think it’s “the tip of an iceberg” and the bad debt could spread to prime markets.  Any which way, the risks have increased. The bold investor may be temped by bargains in depressed areas like Detroit (car manufacturing in decline, baby-boomers heading south, foreclosures and auctions) but things could get significantly worse. We maintain our long term stance that Florida is a good investment area – all those wealthy US citizens from NE USA and the continued influx of Hispanics plus the general population growth will mean shortages of land for building in future years. Low priced flights are also helping Florida’s popularity – particularly with the British. Currently there is an over-supply of properties for sale – the optimist would say this is a good time to buy into a relatively depressed market. The pessimist will say this oversupply will remain for many years and the US economy will slide into free-fall. We believe the US economy will not slide into recession – merely slow down. But the dollar will continue to slide. There are probably far better places to invest globally at present. But areas with land shortages, population growth, economic growth and under-supply of homes are where investments should be focused – examples are Florida, southern California and possibly coastal Carolina, Houston, Austin and Dallas. Also, New York if you feel particularly optimistic about USA’s continuing financial muscle, high corporate profits and competitive edge.




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