553: Which Direction Property Prices and Why? Investor Update
Property Prices – Which Direction: There have been various predictions made in the last few weeks on property prices. We would like to give our objective prospective on this, and you can decide for yourself whether what we say stacks up or not. With our track record for analysis and picking the present and future property hotspots, we hope it will help you with your investment decisions, through following the trends that we describe. A few specific points:
Interest Rates: We have been highly sceptical of interest rates rising any time soon since the Tories gained power because:
· Sterling will remain strong against the Euro as financial markets like a tightly run economy
· The high Sterling value means it is difficult to put up interest rates for fear of making Sterling even stronger and UK exports uncompetitive
· A strong Sterling is deflationary – exports become cheaper – and because of this it is more difficult to put up interest rates
· The global slowdown particularly in China and mainland Euro creates headwinds that are not conducive for putting up interest rates
· Hence mortgage costs are likely to remain low because Sterling is high and financial markets have confidence the Bank of England and the Tories are properly managing money and the economy.
Election Cycle: The Tories engineered a house price boom in the period March 2013 to May 2015 – starting with Help-to-Buy and other initiatives – it had an immediate impact. For them, it worked a treat. They won with a majority. Labour are a spent force at this time. The Lib-Dems were destroyed. We believe the Tories have now engineered an upper market slowdown to prevent Prime London property going into bubble territory – although we will still see a strong ripple effect fanning out from London across the country – just like in the housing booms of 1986 and 1999. So don’t be surprized if you see property prices moderating for 3 years before a two year boom from 2018 to May 2020 – the next Election as another house price boom is engineered. The Tories, helped by the Bank of England, will do all they can to make sure there is no bust – but engineer strong growth across England and Wales starting mid-2018 to May 2020. They won’t worry about Scotland – being viewed as a “lost cause” for Tory votes, and in any case Nicola Sturgeon may ask for another Referendum. There is not enough mention of this election cycle – and over history we know the Tories like to drive up house prices before an Election to capture more votes from “middle England”.
Oil Price: Whenever the oil price drops – house prices go up in the UK. This was particularly noticeable after the oil price crashes of mid-1986 and mid-1999 – they immediately created a property price boom because interest rates were able to drop because inflation (fuelled by high oil prices) had been defeated. Why is this any different today? Well it isn’t really! When oil prices crashed Aug-Nov 2014 we predicted this would cause very low inflation, extended low interest rates, a booming financial sector and property prices rising sharply. Since August 2014, property prices in the UK have risen about 14%. So why is this? Low oil prices:
· Stimulate consumer spending – it leads to more disposable income – food, fuel and transport costs drop
· Creates more jobs in oil importing countries – more people to buy the same amount of property
· Inflation drops meaning interest rates and mortgage rates can stay low or move lower
· Financial services, hi-tech companies and “paper assets” boom – cheap debt is available to investors. Takeover activity increases.
London and Low Oil Prices: On the whole, London tends to do better with low oil prices than high oil prices even though it’s oil intensity per unit of GDP is quite low compared to the rest of the country because its economy is so dependent on financial services and hi-tech growth. That said, oil and mining companies suffer which knocks London somewhat, particularly super prime Real Estate that is reliant on super rich overseas investors – read oil oligarchs, Middle East princes and the ruling families of oil exporting nations. We can see the very upper end of the London market slowing and we believe it is in large part because of the dearth of super rich overseas cash buyers after the oil price crashed in Aug-Nov 2014. Of course it was not helped by Osbourne’s stamp duty changes at the same time.
Ripple Effect: For property investors, this is a critical thing to consider. Mayfair and Kensington house prices rocketing fan out as a ripple effect – and eventually pass through a familiar sequence, for example in London:
In England – it looks like this:
· Central London
· Suburban London
The last place to see house prices rises will be back-to-back derelict terrace houses in blighted western Bury. Once these start to shoot up – it’s time to sell up!
Many a canny investor has started in Central London and moved progressively out to bigger homes – then at the end of a cycle – maybe buy a mansion in Cumbria – sold for cash, sat, waited, then it’s back to central London for the start of the next cycle. Our steer is – its no use buying Mayfair property right now, it’s too late in this cycle – it’s better to follow the ripple and buy in Lewisham and Redbridge which should see prices rise at twice the rate of Mayfair in the next few years. But long term – Mayfair will be a good bet. Buying in Lewisham is good for flipping and moving on.
Cornwall example: It’s also true if ou look at southern England - for example property in West Cornwall – which is 6 hours drive from London – is now looking very good value – but the ripple will arrive there in the next 1-2 years and prices should shoot up 20%, like they already have done in South Devon, Exeter and areas near Padstow in the last few years.
London-Shoreditch: If you don’t like buying and selling – and would rather just buy and hold for the long term, we still think Shoreditch looks very attractive despite the already quite high prices. The reasons are numerous:
· Hi-tech centre of the UK and indeed Europe (used to be referred to as “Silicon Roundabout” now “Tech City”.
· Crossrail arrives in 2017-2018
· Many young entrepreneurial highly skilled diverse people – wanting to grow businesses
· Increasingly trendy – “hipsters”
· Fastest growing business area in Europe – exposure to successful hi-tech industry growth
· Lots of private sector jobs – not very reliant on the public jobs (that are in decline)
· Many overseas investors moving in
· New Shakespeare Tower to be built at a cost of £750 million – Chinese investment
· Close to the City – services sector growth
· Close to Eurostar St Pancras rail terminal
· Crossrail will give easy access to Heathrow from 2018
· Good central city location of overseas people that like to be central – Chinese-French
· Interesting night-life and shops in Brick Lane – history
· Close to the West End for entertainment and shopping
· Quite close to Canary Wharf and City Airport
· Rapidly expanding population of increasingly wealth people
Other Areas in Close Proximity: All these positive changes we believe will drive property prices far higher in the next ten years. Other places like Whitechapel, Hoxton, South Hackney, western Bow and Bloomsbury are all worth looking at in addition. Anywhere very close to Shoreditch or Whitechapel will in our view be a long term winner.
Crash or No Crash: There are a lot of people in the media that are “crying wolf” by predicting a property price crash ad describing we are in a property price bubble. It’s certainly true that interest rates have stayed extremely low at 0.5% for five years – leading to mortgage rates in the 3.5-5% range – mortgage rates still far higher than they should be but low by historic standards. How long can this go on for and what happens when they rise, particularly to buy-to-let investors after the punitive new tax increase Osbourne has announced. We believe the debt is now so huge, if the Bank of England put rates up sharply – so many business and private individuals would go under that they would then be forced to lower rates again. The biggest threat would be one or a combination of the following:
· Labour getting into power – seems almost impossible to imagine particularly with Jeremy Corbyn as Leader and the SNP taking all Labour’s seats in Scotland. If Labour got into power, they would “tax property to death” – no doubts with this one.
· Oil prices rising sharply – this is quite possible from about end 2016 onwards – because of lack of investment in supply and increasing demand – leading to higher inflation, lower disposable income, slower business growth and higher interest rates – something to definitely watch out for – a key risk
· UK and Global Recession – possible but frankly the UK economy is doing rather well at this time and even though its 7 years since the great depression of 2008, it’s quite possible the Bank of England will avoid this. If there was another recession, they would immediately start printing money again which would again feed through into house prices (asset prices).
Oil Prices: With low oil prices looking likely until at least Sept 2016, and no obvious recession on the horizon – we believe house prices in areas around London will rise sharply in the next 12 months. Yes – the boom will continue. Not many people are saying that out there! But if oil prices rise from $50/bbl to $80/bbl – this should be a cue to be very careful – and $100/bbl would be well into danger territory and time to “get out if you can” or at least stop investing.
Population Boom: Its worth mentioning the UK needs 330,000 homes being built every year – a similar amount as the deficit in the last 5 years - but only 140,000 are currently being built – less than half the amount needed. It’s simple supply and demand. But in places like Bury and Bradford – there is a good balance of supply and demand so don’t expect prices to rise sharply until the end of this boom. In London and the South-East, the story is of course completely different. There is a huge shortage of properties – particularly affordable home at prices of less than £200,000. The population of London will rise by 1 million in 9 years – 110,000 extra people a year. But only 30,000 new homes are being built – mostly luxury apartments. Is it any wonder flat prices in Lewisham and Bexley are rising so sharply – as younger people scramble to buy a place before they become too expensive – out of their range. The last places to rise will be Ilford, Dagenham and Tilbury – but they will.
No Risk No Reward – Stop Complaining: It’s worth pointing out that all the people that were sitting on the sidelines renting property during the big depression from 2008 to 2012 whilst taking absolutely no risk are now complaining bitterly in newpapers like the Guardian about how they are victims. The people that own no properties will try to talk the market down and describe how overpriced it is – a vested interest. Some people genuinely don’t like to see anyone else with any more assets, possessions or money than themselves – and it ca be “gut wrenching” for them to see someone having taken a risk, having bought a property,actually doing well out of it – whilst they have sat on the sidelines – and are complaining having taken no risk themselves. It was 13 years of Labour government that built ever decreasing amounts of property from 1997 culminating in an all-time low of 80,000 new homes being built the year Gordon Brown lost power in May 2010 – then a Coalition started a slight improvement albeit not enough. The new tax increase on buy-to-let properties will further reduce home building levels and increase rents – it won’t do anything to boost supply. If buy-to-let owners sell, less rental property will be available and rents will rise sharply. The Tories seem to be continuing the trend of making the housing crisis even worse by not encouraging rental property investment through this tax – this may be because people that rent properties are less likely to vote Tory. The ramifications of being “taxed on a rental loss” will be felt widely in the UK and buy-to-let investors should seriously consider their businesses now – it may not be worth continuing to provide rental business services and paying tax on a loss for the effort. It rather points to far higher returns by investing in your own home and also converting/ upgrading/ flipping existing homes. The Chancellor has made most buy-to-let insolvent for mortgage holders with price/debt ratios of >50% – particularly if interest rates rise.
We hope you have found this Special Report helpful in giving insights for your investment portfolio. If you have any comments or queries, please contact us on email@example.com
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