PropertyInvesting.net: Property Investment Special Reports

301: 2010 Prediction (and 2009 look-back)

01-01-2010

PropertyInvesting.net team

 

More objective guidance and insights for property investors. Our aim is to help you improve your investment returns, flag key risk areas and stimulate strategic thought so you can position your portfolio to maximize gains, for the 30,000 daily visitors to the website and the thousands of people signed up to your Newsletter. This Special Report describes our 2010 Predictions and takes a Look-back Review of our 2009 Predictions for good order.

 

We start with our view on 2010 property prices in the UK followed by economic criteria. We’ve been performing this analysis for the last six years now. All our previous predictions can be reviewed on the website in our special reports section, so you can judge for yourself how accurate we have been.

 

  245  2009 Prediction (and 2008 look-back)

  179  2008 House Price Predictions – Global

  102  Property Price and Economic Predictions for 2007

  55    Predictions for 2006

  20    Predictions for 2005

 

For 2010, there will be a number of criteria that will pull property prices one way or the other, which we outline below:

 

Positive Criteria for Property Prices in 2010

·         More competitive and more abundant mortgages after credit squeeze affects die away

·         UK coming out of recession

·         Increased employment by mid 2010

·         Plentiful public sector and private sector bonuses

·         Low interest rates feeding through further after one year

·         Lack of house building

·         Increasing population

·         Pent up demand from two years of low market activity – please needing to move

·         Likely change of government

 

Negative Criteria for Property Prices in 2010

·         Higher income tax, national insurance, tax on bonuses

·         Increase in inflation feeding through to higher interest rates and higher costs

·         Increase in unemployment peaking around March 2010

·         Increasing terrorist threat from radical groups

·         High oil prices and energy prices - feeding through to inflation and higher interest rates

·         Public sector jobs losses from mid 2010 onwards – possible public sector pay freeze end 2010

·         Hung parliament or same government after May 2010

 

Overall, we believe the positive factor more or less cancel out the negative factors and prices will remain fairly subdued and fluctuating around current levels through 2010 on an overall UK national level. However, we predict property prices in the more wealthy southern and London areas will be stronger than in northern areas that are more exposed to public sector and manufacturing sector jobs losses and spending cuts.

 

Property Price Predictions

 

1.    London  +3%

2.    East Anglia +3%

3.    SE England +1.5%

4.    SW England +1%

5.    Scotland +1%

6.    Midlands -2%

7.    NW England -1%

8.    Wales -1%

9.    Northern Ireland -3%

10.  NE England  -3%

Other criteria

• US Dollar to the UK£    $1.5 / £1
• UK£ to the Euro    £1 / 0.88 Euro
• Oil price  $75 early 2010 rising to $102 by end 2010
• UK Gas price 48p/therm
• UK Interest Rates – rising from 0.5% in Feb 2010 to 3.25% by end 2010
• FT rising from 5350 Jan 2010 to 5550 by end 2010
• UK Inflation CPI rising from 1.6% early 2010 to 2.9% end 2010
• UK GDP rising from 0% early 2010 to 2.2% by end 2010 (on quarterly annualized basis) 
• Security outlook – worsening – far more tensions in Middle East and increase in tensions South Asia - with Iran in key role.
• Euro interest rate – 2% rising to 2.75% by end 2010
• US Interest rates rising from 0.25% early 2010 to 1.25% end 2010
• UK unemployment – dropping from March 2010 slowly
• Wage inflation – rising from 2.8% end 2009 to 3.7% end 2010
• GDP growth London 2.2%, North 1%, Midland 1%, Scotland 1.5%
• GDP China 10%, GDP India 6.5%, GDP Africa 2%, Global GDP 2.5%, UK 1.7%, USA 2%, Euroland 2% - as a whole over 2009

Continued economic hardship in Middle East and South Asia along with lack of global leadership will lead to increased tensions and further degradation of security in the Middle East and South Asia – disenfranchised radical groups. Iraq security and economic well-being will improve further. Overall global terrorism will increase. The Iran nuclear issue will be the key security point in 2010 – with significant risk of being a trigger event.

USA and UK will both come out of recession, but debt overhang will stifle any strong recovery because of increasing tax and massive public spending programmes making these economies less competitive and efficient. Interest rates will rise sharply mid 2010 as inflation starts to get out of control. All commodities prices will rise. Oil, gas, copper, sugar, wood prices will all rise. Oil production is on a bumpy plateau – oil shortages may start showing end 2010.

Greece, Portugal, Ireland, Spain and Italy will suffer long recessionary or periods of stagnation – there will be national calls for some of these countries to leave the Euro – so as to de-value their currencies and gain competitively. France and Germany will continue to drive the European economies through manufacturing and commerce expertise – peripheral Euro-zone countries will suffer as the Eruo stays strong. Norway and Sweden will continue to excel. Norway with its huge budget surplus.

As oil prices rise, stability of Dubai will improve – growth will resume end 2010 and by end 2011 the current financial turmoil will be a distant memory. China will continue to boom at GDP 10%+. Brazil and India will also boom. 

Commentary

 

Prime West London will see the largest price increases of about 5% driven by higher city bonuses, foreign investors taking advantage of the low sterling value and relative cost in Euro, Middle East and Far East currency terms.

 

One point to consider is the expectation that there will be a new government of Tories by mid 2010. We’d give this a 50% chance of a Tory majority, 25% change of a hung parliament and 25% Labour stay in power. Based on a Tory victory, what normally happens when Tories get into power is:

 

·         Higher rate taxes are lowered after a few years

·         Private sector and financial services are encouraged

·         Public sector will be cut through pay freeze, jobs cuts, efficiency improvements and project cancellations

·         Manufacturing and remaining heavy industry will not necessarily benefit

·         Market economy stronger, competition more intense

·         Social costs reduced

·         Large infra-structure projects rationalized

 

If such measures did not benefit London and SE England we would be surprised – these are also the traditional Tory strongholds. So we would expect to see mid to upper end southern property perform rather better than they would under Labour. Meanwhile lower end northern property – with proximity to public sector jobs and manufacturing jobs would expect to perform worse under Tory than Labour. So the period of stimulating northern prices by public sector jobs growth has likely come to an end. But the positive affects on prime London property could be significant. Okay, these are only trends – but they are based on previous actions implemented over many decades by both parties.

 

We expect the property market at the start of the year to be fairly active from mid January to early May with first time buyers re-entering the market after many years of very low activity. Interest rates will start rising likely March in response to increasing inflation – this will be the big story of 2010 – inflation. Record low interest rates and billions of printed money will feed through – if oil prices rise to $100/bbl as we expect – then inflation will start loosing control. And interest rates will need to be jacked up very quickly. This would then stall out any housing recovery fairly rapidly by end 2010. We see this scenario as about 50% chance by end 2010. If oil prices stay between $50/bbl and $80/bbl – then inflationary pressures will be far more subdued. And we would be far more confident that house prices in London and southern England would continue to rise in a sustainable manner.

 

London: There are some areas of the UK that look particularly attractive at present. London is of course one of these – with the Olympics in 2012, financial services industry that should stablize and then prosper after the Tories get into power mid 2010 and the 800,000 extra people expected in the next ten years, with very low levels of building. Crossrail, new High Speed Rail links, East London Rail Line and large redevelopments in various suburbs all point to higher prices. Talk of a mass movement of banking staff to overseas areas is, we believe, a little premature – if you were the head of a big bank, would you not first of all wait five months to see if the Tories get into power? Remember most banking staff have kids in public schools – it takes a year to properly implement an overseas move. Plans may be being formulated, but we believe the trigger would be a Labour victory – and this is unlikely.

 

Cornwall: This county is an interesting study. One tends to think of such counties as full of local agricultural workers and fishermen – with a few rich Londoner buying holiday homes. But the demographic make-up is far more varied. Many Midlanders, northerners and London-southern people migrate to Cornwall to start small businesses, retire, telecommute, or start work in the public sector. The population has the largest growth of any county in the last 35 years – about 25%. This is forecast to continue to rise – it’s hardly surprising because:

 

·         It’s a very beautiful place

·         Five hours by car or direct train to London – not so far

·         Improved airport links (Newquay)

·         Continuous stream of wealthy Londoners buying holiday homes

·         IT improvements – more consultants living in Cornwall and working in London

·         Lots of interesting people, arts, culture, scenery, beaches, sand, seas, sun, surf

·         Warmest UK place by far in the winter – longest winter days in UK with brightest sun

 

Add to this that there is almost zero building in Cornwall because of strict planning and you have a recipe for increasing property prices. Yes, despite property prices being about 10 times the average indigenous worker wage, we believe prices will continue to rise above trend to the average UK prices. For inland hotspots, Truro ranks highest with the best schools in the county, a Cathedral city, Cornwall’s capital and beautiful shops. Good rail and road links help. For coast destinations, the riches areas will probably rise as fast as the poorer areas. So the very most select areas are Manaccan, Mylor, Rock, Padstow, Mousehole, St Ives, Helford, Mawman Smith, Fowey, Helford, Looe. For more down-at-heal value, Newlyn, Newquay, Perranporth, Portreath, Penzance, Bude are good examples. Be careful with Newquay though – keep an eye to make sure there is no threat to flights being cancelled since this would adversely affect property prices in the immediate area. The same is true of direct trains to London – it’s a low chance these will be stopped, but always possible – this would be rather catastrophic for property prices through Cornwall. One would hope rail times would instead improve – but higher oil prices are not good news since long distance travel by car becomes far more expensive. Hence Cornwall is fairly exposed to the effects of Peak Oil.   

 

 

Look-back on 2009 Predictions

For good order we now look-back on our predictions for 2009. Overall we were too pessimistic on property prices and not pessimistic enough about the depth of the recession. Economic and security criteria we were far closer with.

Property prices in 2009 (in order of decrease):

• North -10%                      
• West Midlands -10%                    
• Wales -9%           
• Northern Ireland -9%    
• East Midlands -9%       
• North-West -9%
• Yorkshire -9%
• East Anglia -8%
• South -7%
• Greater London -7%       
• London-City/West -7%   
• London-peripheral -6%
• South West -6%
• Scotland -5%    

General regional trend correct but prices overall in 2009 dropped then recovered strongly – generally up on the year by about 3% overall. We were too pessimistic in this instance. 

Other criteria

• US Dollar to the UK£    $1.5 / £1  by Q4 2008   - Very close
• UK£ to the Euro    £1 / 0.82 Euro  Actually about 0.9, Sterling weaker than expected 
• Oil price  $40/bbl early 2008 rising to $70 by end 2009 -  Very accurate
• UK Gas price 50p/therm -  Recovered end 2009 to about 50p in cold snap
• UK Interest Rates – drop to 1% Feb 2009, then on hold until Oct 2009  - Dropped to 0.5% and on hold, close
• FT by end 2008   4700   (rising from 4300 Dec 2008) Finished 5350, bounce back too pessimistic
• UK Inflation  dropping to 1% by June 2009 then rising to 1.5% by end 2009 - Close
• UK GDP  -1% early 2009 rising to 0% by end 2009 – close but recession deeper early in 2009
• Security outlook – worsening – far more tensions in Middle East and increase in tensions South Asia.  Accurate   
• Euro interest rate – dropping to 2% by April 2009 then on hold - Close   
• US Interest rates held at 1% through 2009 – Dropped to close to 0% then on hold
• UK unemployment – increase by 20% from 2008 levels – Increased about 25%
• Wage inflation – drop from 3.8% 2008 to 2.8% end 2009 – very close
• GDP growth London 0%, North 0%, Scotland 0.5% - Recession deeper than predicted
• GDP China 8.5%, GDP India 6%, GDP Africa 2%, Global GDP 1.5%, UK 0%, USA 0.5%, Euroland 0% - as a whole over 2009  Overall trends very close.

Unfortunately, the economic turmoil globally will lead to increase in tensions in the Middle East and South Asia. Oil prices dropping to $35/bbl mid Dec 2008 have been a trigger for this - plus less trade with western economies because of the financial turmoil and global slowdown. Less money in the Middle East and South Asia with regret is likely to feed through to increasing security issues.  Very close – security deteriorating.

 

In USA and UK - the effects of almost zero % interest rates, spread rates on mortgages reducing, oil prices staying relatively low and fiscal stimuli (infra-structure spending) and likely to see these economies kick-start by mid 2009. Meanwhile, higher Euro rates, hang-over from boom years and lack of fiscal stimuli will likely lead to severe recessions in Italy, Spain, Ireland, Portugal and Iceland and possibly Greece. France and Germany will likely come off better with Nordic countries like Norway and Sweden staying relatively stable.  Commentary very close to what happened – Greece hit hard.

 

But expect further period of turmoil in Q3 2009 as UK and US recovery is called into question. House prices should however start a mild bounce back after steep falls in first half of 2009, some time Sept 2009.  Bounce back timing accurate. 

 

Property areas to avoid - Middle East, South Asia. Areas to consider purchase when bottom of market reached (as long as oil prices stay at or below $70/bbl) - USA (NE, California, Florida, Texas),  UK (south/London).   Indeed, Middle East (Dubai) was the place to avoid. And California is now improving, along with Florida and Texas. London/SE was the first area in UK to see sharp prices rises – from March 2009 onwards

 

We hope you have found this Special Report insightful. If you have any comments, please contact us on enquiries@propertyinvesting.net

 

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