PropertyInvesting.net: Property Investment Special Reports

267: UK Property Update

PropertyInvesting.net team

Two key surveys came out over the last two weeks. Firstly the Rightmove.co.uk on 18^th 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 29^th 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