194: UK market update - tough times ahead
More Doom this month: April wasn’t a very upbeat month and May was no different - Halifax reported a –1.3% monthly drop in house prices with the biggest drop reported by Nationwide at -2.5%. Interestingly, on 20th May Rightmove reported asking prices actually rose by +1.2% with the biggest increases in the south. They also described how vendors were being unrealistic and would likely not find any buyer unless they were willing to accept far lower than the (inflated) asking prices.
The negative sentiment is hardly surprising in view of the credit crunch, and oil prices being $125/bbl as we predicted back in June 2007. What’s on everyone’s mind is – will the situation get far worse or not. One other factor weighing on sentiment is the current government’s overall performance and Gordon Brown in particular – this is likely affecting confidence. The tax take has risen +76% since labour came to power in 1997 and 56% in inflation adjusted real terms – so household finances are being squeezed severely by a combination of high oil prices (this acts like a tax), high food prices (mainly because of oil prices) and the high tax burden (much of it interesting coming from tax on fuel). It seems all these aspects are coming together to create negative sentiment – people are fed up with high prices and tax all round.
We expect things to worsen in the next few months as the remnants of the credit crunch plays out and rates are re-set in the
One of the most depressing pieces of news was the inflation rate shooting up to 3% which means the Bank of England will find it difficult to drop rates further. And it also seems the banks are being very slow to pass on any rate cuts to their costumers – financial competition has weakened because of the credit crunch and the banks are clawing back losses via higher rates than they would normally offer. We also now expect interest rates to most likely remain unchanged for the rest of 2009 to control inflation – we hope the will not rise, but this is now a distinct possibility. The good news is employment remains high, unemployment low, the population is expanding and wages are rising 4% per annum – so the rental market is buoyant. We expect retail sales to slide and property prices to remain under pressure for the next six months at least.
We hold to our Dec 2007 prediction of an overall -5% drop in house prices in 2008 – it’s possible it will be slightly more than this. But don’t get too disheartened. Longer term we are still quite optimistic. What we need is oil prices stabilizing, a change in the leadership of Government or a new Government and an end to the tax hikes the population has incurred over the last ten years. All this seems likely in a few years time, but for now, we’re in a period of consolidation and mild distress.
We hope you have heeded our advice in investing in property in oil exposed cities and countries – the Special Reports describe these. As oil prices stay high, this advice will become even more applicable as a massive transfer of wealth takes place from oil importing nations to oil exporting nations. Oil exporting nations will boom. Oil importing nations with no alternatives will stay in the doldrums:
In Europe, the only country that produces more than it uses is
Buy-to-let: No strong evidence of a buy-to-let bust – most investors have made ample equity to shelter themselves from a downturn. As long as the rental market stays firm, which is happening, then – okay – the really good times are behind us, but it should not lead to a meltdown. It’s a period of consolidation. Some of the smaller players who got in late and bought new build flats in city centres may decide to exit the market, but anyone who has been in the market for say 3-5 years should be okay. The vast majority of buy-to-let investors intend to remain with the current portfolios or actually expand them.
It’s certainly a good time to go searching for a bargain – it’s probable prices will drop further – so most people are not in a big hurry. We advise searching hard for real bargains now with a view to the bottom of the market being in October 2008. We expect 2009 to be quiet, not sure yet whether prices will rise, but we think much of the doom and gloom may pass by October.
The stock markets are performing reasonably well and city bonuses will again be high at year end – corporate profits are also strong and the global economy is expanding by ca. 4% GDP with many international companies located in
The south-west long term is also very good, but expect some second home owners to sell up in the next year – this will likely suppress prices a bit.
Scotland: Prices stayed so low for so long that
Overall direction: So overall, we stick with our guidance that the prices in southern England and