267: UK Property Update
Two key surveys came out over the last two weeks. Firstly the Rightmove.co.uk on 18th May reported a massive +2.4% increase in asking prices for the month – with London at 2.7%, East Anglia +5.1% and SE England +4.6%. This survey is a good leading indicator and indicates the start of a supply shortage, with sellers confident enough to put their home prices up. It was treated with a bit of scepticism when it came out. At PropertyInvesting.net, we have long held a view that this survey fairly accurately reflects the market and is the leading-first indicator in the direction of the market. The survey was then followed by the Nationwide survey on 29th May reporting national property prices rising by 1.2% on average in the month of May. This further consolidated most observer’s views that there is some firm evidence that the market may have bottomed out – for now at least. Nationwide tends to have a higher weighting of homes in the south of England compared with Halifax. What we expect to see is the Halifax survey out in a few days conflicting with Nationwide – possibly showing levelling out but not a strong rebound – this is because Northern and Midland property prices are likely to recover later than the south of England as manufacturing jobs losses exacerbate the weak property markets in these areas. The big question is whether the worst is over or not – and whether this is a temporary blip. What we say is:
· Expect continuing shortages of new build properties coming onto the market – and bargains being sold as developers continue to re-trench
· Unemployment continuing to rise into early 2010 delaying any strong rebound in the Midlands, Wales and Northern areas
· London and southern England leading any recovery
· Shortage of good quality houses in large part because people don’t move very often because of high stamp duty, telecommuting, importance of staying put close to good schools and lack of available financing
· As the year progresses, mortgage financing becomes easier to obtain as the banks recover confidence and lending rates continue to drop as the effects of the credit crunch wear off
But the next problems to watch out for are:
· Inflation – as the printing of money boosts the money supply, it’s likely by the end of the year that all talk of prolong deflation goes out the window and the Bank of England starts to get concerned about the effects of inflation – they may consider putting up rates by early 2010
· Oil prices continue to rise from $66/bbl today to $70 - $80/bbl by the end of the year – this starts to suppress the global economic recovery and increases inflationary risks
We think by year end property prices will indeed be rising in earnest – but this may be short-lived if oil prices escalate to levels over $80/bbl – oil prices above $80/bbl moving into 2010 we believe is very likely.
You see, the Middle East wants and needs oil prices over $60/bbl to balance their books. They have taken 5 million bbls off the market in the last year – they will start to increase production by the end of the year and could probably attempt to keep oil prices below say $90/bbl because they will not want the global economy to stall out. But they will want over $60/bbl to be in a profit. The problem is, we believe Peak Oil “was” July 2008 and the excess capacity that OPEC has will be eaten up quickly once the global economy rebounds in early 2010 – this excess supply is needed to offset dramatic non-OPEC production falls in range 5-15% per annum. By mid 2010 – there will be a supply shortfall according to our analysis. When the oil speculators get wind of this, despite OPEC increasing production, we believe there will be a massive bull run on oil which will see oil prices dash higher above $80/bbl in a rather uncoordinated and uncontrolled way. OPEC will blame the speculators again. Oil importing nations are likely to blame OPEC again. This time – no-one will be able to “pull a rabbit out of a hat” to save prices being driven higher. The result will be:
· Oil prices skyrocketing through the $100/bbl mark – gasoline prices following suit again
· Natural gas prices doubling in USA and Europe
· Coal prices rising sharply
· Uranium prices and metal prices dashing higher
· Green technology – renewable energy stocks moving higher – a scramble to solar/wind
· Property prices moving higher initially
Then – inflation will take hold, interest rates will rise and property prices will drop back again – they may crash of oil price pass $150/bbl again! This is why at PropertyInvesting.net, we keep harping on about why investors should hedge risks against high oil prices by purchasing property in suitable areas that can benefit from Peak Oil – and not be hindered by it. We are convinced there will be energy shortages in future years – and this will dictate economic developments on a local and global level. The days of cheap travel (car, plane, rail) are over – sorry. It’s going to get a whole lot more expensive to get around. So property investors need to be prepared:
· Invest in towns and cities close to excellent electric rail transport
· Avoid areas with high exposure to employment from airports
· Avoid areas very far from high wealth/value creating centres – that rely on expensive commuting by car (avoid very rural “far flung” areas with high oil intensity)
Some examples of places that will not be too badly affected by Peak Oil:
· Cambridge – good electric rail route to London, centre of new technology and Green Tech energy research and development, ability to drive to London 50 miles SSW – not too far south, well away from exposure to airline employment
· Woking – excellent 20 minute fast direct electric train commute to London, yet very nice town and good schools
· Stratford East London – on the Eurostar line – 4 mins to St Pancras, 2½ hours rail to Brussels and Paris, on new Crossrail line from 2017 onwards, Olympics, on DLR line, Jubilee Line, Central Line, close to City jobs and Canary Warf, massive new infra-structure projects, retail development and jobs. Little impacted by Peak Oil.
· Aberdeen – as oil prices rise, despite the declining oil and gas production in the North Sea, strong oil/gas company employment of high paid jobs working on big international energy projects (also in the Middle East) – these projects will benefit this city
Some examples of places that will likely to disproportionally hit by Peak Oil:
· West Wales – poor rail service, many diesel powered trains, expensive to drive to, well away from high paid wealth creating centres – expensive to get too – may become difficult or risky if oil shortages occur. Less Londoners buying second homes once petrol prices sky-rocket.
· SW Scotland – out of commuting range to Glasgow as oil prices rise, poor rail services, most of the area far from fast electric rail lines, energy intensive per unit of GDP produced – relies on huge injections of public funding that will likely dry up as North Sea oil declines and balance of payments deficits remain depressingly high. Less wealthy people buying land and second homes once petrol prices skyrocket. Slight depopulation and aging population.
Energy Efficient Homes: It’s worth considering energy efficiency when you invest in property. As energy prices rise, the asset prices of very energy intensive properties will likely lag those that are very efficient. So draughty properties with no double glazing and poor insulation will not be as marketable. In the UK, wealthy people love Georgian, Victorian and Edwardian properties – this is not likely to change just because of Peak Oil, but make sure you have the basics of energy insulation sorted out. The importance of being on a gas grid will rise. Oil fired central heating will be a hindrance. So called Eco Homes will see their value rise faster or at least not decline as fast compared to conventional new-build properties – and compared to those more energy inefficient properties built in the 1960s-1980s.
· Wind Swept Detached House in Cold Climate: An example of the least efficient and least marketable type of property would be a large detached house with small garden, one stranded miles from anywhere, not on a gas grid, with no double glazing, no land (for wood), no electric train routes, reliance on car travel to jobs and shops many miles away. If this property was in Scotland, there would be little point in installing solar power.
· Eco-Apartment in Warmer Climate in City: An example of a desirable property in the Peak Oil world would be an energy efficient Eco Home on the Greenwich peninsular – close to electric tube connection, jobs at Canary Wharf/City in the most energy efficient city in the UK per unit of GDP produced (massive wealth created urban centre within 8 million city within small radius of 25 miles, low mileage commuting by electric trains). London’s average temperature is 5 deg C higher than rural areas in winter with less wind - this also reduces heating bills.
UK Outlook: Just to re-iterate we believe unemployment will continue to rise through 2009 and may start to plateau sometime early 2010 – so a strong property price recovery is unlikely until unemployment starts dropping and lending becomes far easier. In London, as the financial markets improve and inflows of international money take advantage of Sterling’s drop and the property price drop to purchase property, expect to see a re-bound later in 2009. But further north, away from the “London effect” any recovery will be far more muted and the lack of funds to further expand the public sector will also act as a constraint. One the positive side, exports of manufacturing goods should pick up as the weak Sterling helps competitiveness.
But as previously advised, any oil price above $100/bbl will hit the north and west more than the south and east. Any change in government could also lead to lower public spending in northern areas – this is worth considering as a business risk for property investors in areas exposed to public sector spending.
London: For the investors in SE England and London, we have prepared a summary of the major infra-structure developments – click here - in the area in the next eight years:
Eurostar High Speed Links
East London Rail Line
Dockland Light Railway Expansion
Battersea – Nine Elms (US Embassy)
We hope you find this help – to give a comprehensive summary of maps, stations, routing and views of major developments and progress being made. For further details of these developments, you can read the following Special Reports:
· 259: UK property investor's update
· 254: London 2012 Olympic Regeneration - Property Investor's Update
· 226: London Property Hotspots - Tube, Olympics, Regeneration
· 220: London Tube Map, Olympics and Regeneration
· 219: Property investors - socio-economic trend update - hotspots
These multi-billion pound developments will help property prices, rental demand and commercial property markets. We will also provide in due course a listing for areas in the Midlands and north of England – but unfortunately many of these projects have been slowed by the credit crunch and lack of available combined private and government finding.
Copyright PropertyInvesting.net 2009
Copyright PropertyInvesting.net 2009
James Bond 007 Daniel Craig
Jean Paul Gaultier