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170: UK and US Market Update

11-04-2007 team


UK Market Update


According to Nationwide, UK house prices continued rising by 1.1% in October whilst Halifax reported a 0.9% increase despite the credit crunch and Northern Rock problems in August. However, other surveys were not so positive – some showing drops in prices. Again, surveys have been diverging and are no consistent. It’s probable that price indexes are still being affected by the introduction of Home Improvement Packs on 3 and 4 bedroom properties. The changes in taxation are also confusing the picture.


We hold our stance that London prices will hold up better than those in the Midlands and North for the following reasons:

·          the booming services sector driven by London – banking, finance, tourism and billionaires tax haven

·          immigration to southern and eastern areas

·          booming population in the south

·          shortage of housing caused by the Nimby affect and slow planning process – more in the south than the north

·          public sector jobs growth has now tailed off – this impacted the north more than the south and helped boost northern prices from 2002 to 2006 – this has now ended

·          immigration from eastern Europe and other countries – for example 460,000 Polish people have arrived in the last 2½ years, but only 60,000 to 80,000 homes a year are being built in the south

·          Low unemployment and increasing employment


Unless there is a financial crisis or meltdown, we believe property prices in London will continue to rise at moderate levels in the next few years. It’s most likely prices in some areas of the Midlands, west and north will see prices slip, though we would not expect these to drop more than 10% over the next few years.


So we concur with many commentators that the boom is over. But we do not expect a crash. We give it only 20% chance there will be a severe correction (prices dropping more than 20%). If we were an average first time buyer now, we would be avoiding the UK market. But as investors, we advise looking for any bargain you can find. Investors with medium to large portfolios with a lot of equity already built up should not have any problem raising finance and continuing to grow their portfolios. Make sure you never run short of cash. As they say, cash is king, and if you have cash for a quick purchase you can help distressed sellers by purchasing quickly at below normal market value.


That said, cities like Leeds, York, Edinburgh, Glasgow and Manchester and nice areas within commuting distance of these cities will likely see prices continue to climb because of their business and services industries. Liverpool could also benefit from the 2008 Culture festival, though prices now look high in this city. We remain cool on Newcastle, Hull, Nottingham, Birmingham, Derby. To be more explicit, we enclose our ranked list:


Highest growth


1.      London

2.      Aberdeen (oil town)

3.      Cambridge

4.      Reading

5.      Bristol

6.      Brighton

7.      Plymouth

8.      Portsmouth

9.      Southampton

10.  Manchester

11.  Leeds

12.  Bradford

13.  Chester

14.  Glasgow

15.  Oxford

16.  Edinburgh

17.  Leicester

18.  Liverpool

19.  Derby

20.  Birmingham

21.  Middlesborogh

22.  Hull

23.  Nottingham

24.  Newcastle


Lowest Growth


As for interest rates, as oil prices rise, this will put pressure on inflation whilst slowing the economy. We anticipate a slight tendency towards a drop in rates, probably by 0.25% some time within the next 3 months. Do not expect any drastic moves, because employment is strong, GDP growth continues at 2.7% and despite the recent credit crunch, the economy looks fairly stable – fueled by booms in China, India, Russia, Middle East and to a lesser extent Africa.


US Market Update


The US real estate market in many areas is taking a bit of a hammering. However, the picture is very mixed depending on which city or state you are in. In southern California and Florida where price rose dramatically in the last five years, prices have dropped 5-10% in most areas. In Detroit, which is affected by the auto industry, prices have dropped 5%. But in other area live Portland, Oregon and Seattle and Washington State, prices continue to rise. In New Year they are fairly static. The Texas they are rising in most areas because of increasing population and oil, gas and energy related activities. In Arizona they are dropping – after skyrocketing over the last ten years. If you read our special reports on the future direction of population growth, you would choose Florida, California, Texas and Utah – most of the places that have dropped. For the longer term we believe when the market turns – likely end 2008, these areas will offer some good bargains. We have a watching brief on these area – and the trick will be to enter the market on low in the next two years. Land shortages will increase – populations will increase – employment will increase and real estate prices are likely to continue to increase. However, for the investor from outside the USA, we advise steering clear because the dollar is likely to decline further as interest rates drop, the economy cools and oil price rise. Inflationary pressures will be ever present, and it’s not a good idea to take on both the currency and the real estate price risk at the same time in the current market. We believe the sub-prime woes will play themselves out in the next 12 months and will become a memory by end 2008. The more pressing issue will be rising oil prices and a slowing US economy.  


As for interest rates, these will continue to drop as the US economy cools and employment weakens. We do not expect a recession (20% chance only) – unless oil prices rise to well over $150 / bbl. We expect the dollar to further weaken, oil prices to rise further, gold to rise and commodities to rise. We expect real estate price to stabilized by mid 2008 as interest rate drops kick in – they then may very well start rising again.


If you want to hedge against the ensuing oil price shock, we advise the following areas:


·          Wyoming – Green River area for coal boom

·          Colorado NE – oil shale potential future boom

·          Texas – Houston, and Dallas-Irving-Fort Worth – oil/gas HQs and technical services

·          New York City – oil/gas/energy trading

·          Oklahoma – ethanol from corn and some old oil/gas wells


The USA has more coal than any other country in the world. So it seems clean coal technology with electricity to automobiles (electric cars) will be a key future response to dwindling oil (and gas) supplies.


As we predicted, Houston has done well in the last few years to weather any downturn in the real estate market and we expect this to continue. But be very careful not to purchase property more than a 30 minute auto commute to a city center – when oil prices skyrocket, people will want to move into the cities to reduce their fuel bills. Outlying suburban areas will suffer. An extreme example is – don’t buy a large detached suburban house 80 minutes commute to downtown Detroit. The gasoline guzzling car plants will close. No-one will afford to commute or heat a huge house in the north. Better off buying a downtown apartment in the oil capital of the USA – Houston which will benefit from the high oil prices that destroy the gas guzzling auto! If you don’t agree with this synopsis, please contact us on 







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