178: UK Market Update
01-01-2008
Rightmove shocked the markets by announcing property prices (asking prices) had dropped by 6.3% in the month to 18th December. About 40% of this drop was accounted for by distortions created by the 
introduction of Home Information Packs, but the drop was nevertheless a steep one that spooked the
What’s been so remarkable is that CPI inflation has been at 2.1% despite oil prices spiking to $99/bbl – danger levels for oil prices as we have previously described. Oil prices driving up act as a tax and retailers probably drop prices to entice shoppers in. Wage inflation has dropped to about 3.9% from 4.2% earlier in the year. As long as wage inflation remains a good deal higher than consumer inflation and employment remains strong, it’s difficult to see a house price crash occurring. Some significant correction may have begun, and it’s still possible prices could drop for a number of years, but we do not see very large correction of say 20-30% in a year.
Despite the reported turmoil in financial markets, the FT is up to 6500 and most corporate profits are strong. Unemployment is strong. City bonuses are still about 80% of the record levels of last year. City banks are still making healthy profits. Only small numbers of job losses have been announced. So we do not see any real reason for being too depressed. Property prices in the SE and
For all those doubting Thomas’s that think negative equity is just around the corner, the average mortgage is only 40% of property value on an average nationwide basis. The boom in prices has been sustained and huge personal wealth in the form of equity has been built. There is no strong indication this has been used for massive personal spending sprees. So a drop of 10% in house prices will not hurt most people unless one was a first time buyer who had just entered the market and secured a loan to value of >90% - frankly there are not many of these people around any more. So don’t be scared off my all the doom merchants. When the lemmings get scared, it’s normally the best time to start buying!
We do not expect a crash for the following reasons:
· Tax – the flat capital gains tax change to 22% should positively impact the market and increase returns for investors. This is a huge give from the Chancellor and should stimulate property development and activity levels. For all those investors that like to buy property, renovate and sell immediately for profit, your tax bill will drop from 40% to 18% - a massive boost – and about time too. It’s about time the Government started to stimulate development in view of the massive housing shortages, particularly in southern
· 
Shortage of supply – this is an underlying trend and it’s not likely to go away with an expanding population, smaller families, more singles and people's continued aspirations to live in a home, many on their own. We believe 300,000 new homes need to be built each year just to keep up with demand, with the biggest demand being in London and southern
· Employment – unemployment has remained stable a 5.4% - barring a recession, this should protect against too many distressed households. Employment has risen by about 10% in the last ten years. No large scale jobs losses are being announced.
· Interest rates – these started dropping early December and may continue in early January 2008 - another 0.25% drop is most likely in the next 3 months. This should ease household finances – the Bank of England cannot afford to see a wholesale house price crash – so expect them to react to house prices like they have done when prices have been rising strongly.
· Inflation – despite record oil prices close to $100/bbl, inflation (measured in CPI) has remained remarkably low. This allows room to drop interest rates.
· GDP – this is expected to slow to 2% or slightly below in 2008 and will further encourage the Bank of England to drop rates, which should in turn help support house prices.
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· Immigration – record levels of inward migration is boosting the UK's population and keeping wage inflation lower than it normally would be – both these boost property prices and should help prevent afully fledged crash.
We enclose our ranked list of the best towns and cities to invest in – the top two are both exposed positively to higher oil prices:
Highest growth (top)
1. London
2.
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10.
11. 
12.
13.
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17.
18.
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21. Middlesboro
22.
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24. Newcastle
Lowest Growth (bottom)
2008
PropertyInvestment.net predict property prices will drop (in order of decrease):
- North -8%
- South West -5%
- North-West -4%
- South -4%
- London-peripheral -3%
- Greater
- London-City/West -1%
Refer to full Special Report 177 issued on 17th December, plus Special Report 179 for Global house price predictions