18: What is happening to house prices in England and Wales whats the outlook?
12-06-2004
Property investors are faced with an ever increasing amount of house price data and commentary which can lead to confusion and a feeling that the uncertainties are increasing, rather than decreasing, after reading such material. PropertyInvesting.Net would like to give an objective view based on available house price data, trends and our experiences over the last 10-15 years.
PropertyInvesting.Net finds that the Rightmove.co.uk reports provide accurate leading indicator reports for house price movements some 4-6 weeks ahead of the Nationwide and Halifax surveys. Price are likely falling at present in almost all areas of England and Wales albeit not by much some 0 - 1% in the last month. There is not particularly worrying at present since prices have risen in much of England and Wales outside SE England by 10-20% in the last year. A small correct downwards is in part probably a seasonal feature though undoubtedly the scare stories in the press added to those given out by the Bank of England Governor have consolidated an already slowing market.
Prices in London and SE England are little change from a year ago in some areas prices have slipped by about 5%. However, this is not surprising in view of the doubling of prices in the preceding five years - and because interest rates have rocketed quickly from 3.5% to 4.75% in the last year.
Prices rises in Northern England and Wales have slowed down in some areas of Wales asking prices have dropped significantly in the last few months. In the Midland, prices on the whole have been in the doldrums since mid 2004, albeit they have been firmer in the SE and eastern areas of the Midlands.
So what is the outlook for 2005? It seems the economy is almost certain to grow in a healthy fashion between 2.5% to 3.5% of GDP. Unemployment shows no signs of rising significantly if anything, it might fall slightly, particularly in areas with high service related economic activity such as SE England. Inflation at 1.2% is low and although there have been many reports of the threat of inflation taking off I believe many of these are scare stories to encourage the average customer to go easy on expenditure. Inflation dropped six weeks ago to 1.1% - very close to the 1% which triggers the Bank of England Governors obligation to write a letter to the Chancellor explain why the UK so far beneath the Bank of England target of 2%. With oil prices dropping added to the strength of the pound against the Dollar one would expect these factors to weight against inflation increases. I believe there is also something else less transparent going on more people are using the internet to purchase goods and services leading to greater competition, reduced activity in the high street and greater cost cutting and discounting in the shops. While it is true wage inflation is running at about 4% and energy costs and tax have risen, the costs of goods and services is hardly moving often falling. I would not be surprised if we get benign inflationary news in the next few months which leads to interest rates not needing to rise any further from their present 4.75%.
Manufacturing is suffering because of the high pound, particularly exports to non EU areas so the Bank of England will not want to raise interest rates if it can avoid it since it would hurt manufacturing even further and might lead to higher unemployment particularly in the Midlands and North. The dollar is likely to slip even further, from the current $1.84/pound possibly to $2/pound. This could lead to conditions where the Bank of England would consider reducing rates below 4.75%.
Why do I talk so much about interest rates? Because it drives house prices if and when rates start to drop, there might well be another surge in house prices as affordability increases. This is particularly true in area where the supply of homes is not keeping pace with demand in SE England, Southern England, SW England, SE parts of the Midlands and SW parts of East Anglia. In summary all areas with long commuting distance to London and all areas in the south. In the next ten years, there is forecast to be an increase in the Greater London population of 1 million people where are all these people going to live? They will increasingly share large flats, take rooms rather than flats, and take flats rather than houses. In Cornwall, the population will increase by another 15% in the next ten years, some 100,000 people again, very few houses are being built.
So my guidance to property investors in the UK is head south, buy while the market is quiet by getting low offers accepted, and make sure the property has a very strong rental market. In other parts of www.propertyinvesting.net I give my views on the specific best investment areas. What I will tell you is, as they say put your money where your mouth is- I am currently buying flats in SW London and have recently bought houses along the south coast.
Oh you might be concerned about rental yields well, to my surprise I found yields of over 10% in SW London. I am struggling to thing of ways I am not going to make serious money in the medium to long run from investing in such property I see the risks as low, potential as high and rental income as very strong and sustainable. SW London an unattractive place for people to live compared with many other UK areas so I see the area as relatively safe for investment purposes.
Just a further note the stock market is not higher now that in 1997, 7 years ago. Why do I think this will stay the same? The large companies are finding it increasingly difficult to grow, tax burdens, employee and raw material costs are increasing and margins in capital intensive industries are often reducing. The long term depression in the manufacturing sector is unlikely to go away. So I frankly see not reason why stocks should rise significantly in the next few years in fact, as the baby boomer retire and start selling stocks from 2007 onwards, and some of the best people leave FTSE floated companies to join private companies, venture capital companies or start-ups, this could also have a negative impact on stock prices. Capital may not be required as it was years ago and the smart private money will go on small high margin, low capital start-up ventures (e.g. internet, software, bio-tech, retail internet). This will have a depressing effect on the big stock markets in the UK and USA, along with the budget deficits.
This leads me onto a key insight I would like to share with you. Why do I not tend to buy retail and commercial property, and instead focus on residential? Because I believe these industry trends will lead to:
- More home working and home offices therefore greater value to residential and combined live/work units
- The demise of the small retailer as ever increasing quantities of goods and service are done over the internet and shoppers increasingly look to save time by buying at large out-of-town retail parks (the so called all in one shopping experiences)
- Manufacturing will further decline as competition builds from China and India (the north and Midlands will be worst hit)
- Service related industries in IT/financial/internet/healthcare/bio-tech will expand and create more jobs (the south and SE and largest northern cities like Leeds will benefit the most)
These trends will lead to lower quality suburban retail and commercial premises being hit hard, along with large manufacturing plants in the Midland and North. However, some of the largest retail parks will likely do well and very highest quality central town and city premises, particularly in the south of England, but also in the north (e.g. Meadowhalls near Sheffield).
So if we take these trends to their normal conclusion, I would focus property investment in buy-to-let in southern England and would be most cautious about investing in retail and commercial premises unless it was a house that had office facilities.
And as far as timing is concerned I would be prudent but be investing in such places in the south and SE England at present, particular since December is the quietest time of the year at the Estate Agents and they will be delighted to see you and offer you their best deals!
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