356: 2011 Prediction (and 2010 look-back)
12-31-2010
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 25,000 daily visitors to the website and the thousands of people signed up to your Newsletter. This Special Report describes our 2011 Predictions and takes a Look-back Review of our 2010 Predictions for good order.
We start with our view on 2011 property prices in the UK followed by economic criteria. Weve been performing this analysis for the last seven 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.
301 2010 Prediction (and 2009 look-back)
179 2008 House Price Predictions Global
102 Property Price and Economic Predictions for 2007
For 2011, 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 2011
· More competitive and more abundant mortgages after credit squeeze affects die away
· UK coming out of recession
· Increased employment by mid 2010
· Increase in private sector bonuses
· Lack of house building
· Increasing population
· Pent up demand from three years of low market activity please needing to move
· Likely change of government
· 2012 Olympics London
· Javelin trains and East London Rail service-orbital London
Negative Criteria for Property Prices in 2010
· Higher VAT, national insurance, petrol duty and tax on bonuses
· Increase in inflation feeding through to higher interest rates and higher costs
· Increase in unemployment likely peaking around March 2011
· High oil prices and energy prices - feeding through to inflation and higher interest rates
· Public sector jobs losses continuing through 2011 and lower or freezes on public sector wages
· Possibility the UK Coalition may break-up
· High levels of deposit required
· Low lending to salary multiples
· Heat oil, petrol, diesel adversely affects rural areas and house prices in remoter parts
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 +2%
2. SE England +1.5%
3. East Anglia +1%
4. Scotland +1%
5. SW England 0%
6. NW England -1.5%
7. Midlands -2%
8. Wales -3%
9. NE England -3.5%
10. Northern Ireland -5%
Other criteria
· US Dollar to the UK£ $1.65 / £1
· UK£ to the Euro £1 / 1.17 Euro
· Oil price $93/bbl early 2011 rising to $112 by June 2010 then dropping back to $90
· UK Gas price 45p/therm
· UK Interest Rates rising from 0.5% in Mar 2011 to 1.75% by end 2011
· FT rising to 6050 by early May 2011 then dropping in June to 5000 then closing same end 2011
· UK Inflation CPI staying at 3.2% or thereabouts all year
· UK GDP staying at 2% through 2011 (on quarterly annualized basis)
· Security outlook Iran and North Korea key hot-spots (Pakistan remains a concern).
· Euro interest rate staying at 2% through 2011
· US Interest rates rising from 0.25% early 2010 to 1% end 2011
· UK unemployment rising slightly through 2011
· Wage inflation staying at ~2.3% through 2011
· GDP growth London 2.7%, North 1.2%, Midland 0.8%, Scotland 1.3%. Wales 0%
· GDP China 9%, GDP India 7%, GDP Africa 3.5%, Global GDP 3.0%, UK 2%, USA 2%, Euroland 2% - as a whole over 2010
Iran and North Korea developing nuclear weapons capability will be a key issue lack of global leadership not helping resolve. Terrorism threats reduce as oil prices rise and economic situation in most of the Middle East improves. Security situation in Iraq improves considerably as government representation and political will wins over as expanding oil exports improve economic picture for the p
opulation as a whole.
USA debt situation is likely to deteriorate further. Dollar declines as the Obama administration continues to print money devalues the currency and causes bond rates to rise sharply. Chinese and other international investor become increasingly frustrated with declining dollar value. Further talk of valuing oil in a basket of global currencies causes dollar to drop further and forces US loan interest rates to rise.
Inflation starts to become a serious issue by March 2011 and interest rates in western nations rise. All commodities prices rise. Oil, gas, copper, sugar, wood prices all rise. Oil production continues on a bumpy plateau oil shortages start showing by mid 2011.
Greece, Portugal, Irelan
d, Spain and Italy continue economic stagnation exacerbated by high oil prices (oil import costs). Further Euro debt contagion and potential bail-outs for Italy, Portugal and Spain if oil prices rise >$120/bbl. These countries need to leave the Euro to devalue their currencies and regain competitiveness. France and Germany continue to drive the European economies through manufacturing and commerce expertise peripheral Euro-zone countries suffer as the Euro stays strong. Norway and Sweden will continue to excel. Norway with its huge budget surplus, high performing sovereign wealth fund and high transparency and environmental standards.
As oil prices continue to rise, Dubai/UAE and Middle Eastern economies continue to grow strongly. China continues its boom with GDP 9%. Brazil and India also boom with GDP at 7% and 9% respectively.
Property Commentary
Prime West London will see the largest UK price increases of about 4% driven by higher city bonuses, foreign investors taking advantage of the low sterling values and relative cost in Euro, Middle East and Far East currency terms.
The ToryLib/Dem Coalition will be further strained by a concerted effort by some newspapers to target Lib-Dem politicians in an attempt to destabilize the Coalition and cause a snap election. As the Tories gains political momentum, the following general policies are enacted:
· Higher rate taxes are lowered after a few years
· Private sector and financial services are encouraged
· Public sector cuts through pay freezes, jobs cuts, efficiency improvements and project cancellations
· Manufacturing and remaining heavy industry will not necessarily benefit
· Market economy stronger, competition more intense
· Social and housing benefits costs reduced
· Large infra-structure projects rationalized
Such measures tend to benefit London and SE England and increase th
e north-south divide. Rural areas will be particularly badly affected by public sector jobs cuts along with northern and western areas. Manufacturing will continue its long term stagnation with a decline in Sterling in value in 2009-2010 not having the desired positive export impact. Massive global wealth will continue to feed into London boosting financial services and positively impacting West End prime property demand and prices along with property in surrounding central areas.
We expect the property market to pick up by mid January until end May then rapidly cool and stagnate for the rest of the year. Any increase in property prices in the first five months of the year in most areas will be wiped out by a slide in the second half of 2011 as interest rates rise, inflation takes hold and oil prices continue to escalate.
If oil prices rise above $120/bbl then a recession in western developed nations six months later is highly likely in view of debt levels and fragile banking systems. Hence if oil increases to $120/bbl by mid 2011, a western developed nation recession will occur by Dec 2011.
London will start to feel the positive impact of the upcoming Olympics in 2012 in 2011. 800,000 additional people swelling Londons population in the next ten years and lack of building will support prices. The positive impact of the East London Rail, Javelin High Speed Rail links from Kent and other rail/tube upgrades will benefit the city and property prices close to new stations (e.g. New Cross Gate, Brockley, Gravesend) will continue to rise.
Look-back on 2010 Predictions
For good order we now look-back on our predictions for 2010. Overall we were close on most of the predictions.
Property prices in 2010 (in order of decrease):
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%
Very close - general regional trend correct London saw prices rise about 5% year-on-year whilst the north saw a slight drop (as close as one can realistically get looking at all indexes)
Other criteria
US Dollar to the UK£ $1.5 / £1 Very close, ended year at $1.55 / £1
UK£ to the Euro £1 / 0.88 Euro Not close ended year at 1.173 (Euro was far stronger debt contagion was averted or deferred for some months )
Oil price $75 early 2010 rising to $102 by end 2010 Rose to $94/bbl by end 2010 - close
UK Gas price 48p/therm Very accurate averaged about 48p/therm
UK Interest Rates rising from 0.5% in Feb 2010 to 3.25% by end 2010 Stayed at 0.25% - missed by a long margin despite inflation rising to 3.2% the BoE kept rates at record lows!
FT rising from 5350 Jan 2010 to 5550 by end 2010 FT closed 2010 at 5850 - higher than expected
UK Inflation CPI rising from 1.6% early 2010 to 2.9% end 2010 Very close, inflation rose to 3.2% by end 2010
UK GDP rising from 0% early 2010 to 2.2% by end 2010 (on quarterly annualized basis) Accurate more or less spot on
Security outlook worsening far more tensions in Middle East and increase in tensions South Asia - with Iran in key role. Indeed, Iran was a key security concern though North Korea also joined the list
Euro interest rate 2% rising to 2.75% by end 2010 Rates stayed at 2%
US Interest rates rising from 0.25% early 2010 to 1.25% end 2010 Rates remained at 0.25%
UK unemployment dropping from March 2010 slowly - Unemployment actually rose slightly through 2010
Wage inflation rising from 2.8% end 2009 to 3.7% end 2010 Wages inflation was somewhat more subdued at ~2.8% throughout 2010
GDP growth London 2.2%, North 1%, Midland 1%, Scotland 1.5% Yes, London had higher growth than Midlands and Scotland
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 Very accurate, almost spot on
Continued economic hardship in Middle East and South Asia along with lack of global lea
dership 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. Iran was a key issue but overall security levels did not deteriorate significantly.
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. Generally fairly accurate.
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 Euro 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.
For Reference Commentary made end 2009 for Property Prediction 2010
Prime West London will see the largest price increases of about 5% driven by higher city bo
nuses, 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. Wed 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 effects 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 its hardly surprising because:
· Its 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, Cornwalls 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 its 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.
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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