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194: UK market update - tough times ahead

06-07-2008 team


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 UK. Furthermore, we see oil prices heading higher – we’ll make another we hope accurate prediction in the next few months, but do not be surprised to see $150/bbl in the next six months.


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:


191:   Oil Price Update and Real Estate

187:   Real Estate and the commodities super-cycle

186:  Oil price starts to skyrocket as predicted - how to profit

180:  Oil prices continue to skyrocket

172:  Make serious money - best investment sectors

169:  Oil supply crunch begins… protect yourself

168:  Alarm bells ringing – oil price shock now on the horizon

163:  Making Serious Money as asset prices plateau – resources and property

161:  Resources winners and losers - ranked list for property investors

160:  Find out the winners and losers in the biggest oil boom in history - about to happen...

159:  Massive oil boom - the winners and losers - be prepared

158:  Supply and demand scenarios - oil boom and the property investors insights

157:  Impact of "Peak Oil" for Property Investment

151:  Oil price $125 / bbl and rising…how to take advantage in property

150:  Peak Oil shortly due to be reach – unique insights for a property investor  

148:  Take advantage of the oil/gas/coal boom – key insights


In Europe, the only country that produces more than it uses is Norway. The UK supplies half its own oil requirements (not bad) – so is better off than most. And London is home to many of the world’s largest oil/gas and mining companies – so in general London and Aberdeen will benefit, whilst the rest of the UK will suffer.


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 London, so don’t expect a recession. We think UK GDP will drop to ca. 1.5% Q4 2008 with London at 2.5% and the rest of the UK at a meager 0.5%. So we re-iterate our long term stance – invest in London or anywhere within a 60 mile radius, or Aberdeen. We are also still fairly positive about south coast towns and cities like Southampton, Bournmouth, Brighton, Weymouth and Portsmouth.


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 Scotland is still playing catch-up with England. The de-population has also slowed and many areas now have moderate population growth such as Inverness and Aberdeen. So price should keep rising albeit at a moderated pace. 


Overall direction: So overall, we stick with our guidance that the prices in southern England and London will outperform other areas in the next 2-10 years. South-west England will continue to be a good place to invest because of a massive housing shortfall as the population increases – partly people settling from London and the Midlands, and partly babyboomers retiring and an aging population living longer. Aberdeen (and within 50 miles of the Granite City) will be a bright spot in the north of the UK. Scotland should weather the credit crunch relatiuvely well in the next year. The oil boom will drive prices further up as housing supply falls short and wealthy oil workers look to retire in the region in the next 5-10 years.  In summary – follow the wealthy job, jobs, jobs – and you will find property prices going up.


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