PropertyInvesting.net: Property Investment Special Reports

408: 2012 Prediction (and 2011 look-back)

12-31-2011

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 thousands of daily visitors to the website and the thousands of people signed up to your Newsletter. This Special Report describes our 2012 Predictions and takes a Look-back Review of our 2011 Predictions for good order.

 

We start with our view on 2012 property prices in the UK followed by economic criteria. We’ve 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.

 

  356: 2011 Prediction (and 2010 look-back)

  301  2010 Prediction (and 2009 look-back)

  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 2012, 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 2012

·         More competitive and abundant mortgages - though only slightly increasing

·         Effects of higher VAT, national insurance, petrol duty and tax on bonuses start to disappear      

·         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

*   Middle class British people/expats move back home due to economic hardship overseas – meanwhile immigration increases further – net immigration increases even further

·         2012 Olympics London affect

·         Crossrail building in London

 

Negative Criteria for Property Prices in 2012

·         Increased unemployment through 2012

·         Increasing inflation feeding through to higher costs

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

·         Public sector jobs losses continuing through 2012 and lower or freezes on public sector wages

·         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 2011 on an overall UK national level. However, we predict property prices in the more wealthy southern and London (west London in particular) 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  +5%  (West London +7%)

2.    SE England +2%

3.    East Anglia +1%

4.    Scotland +2.5%

5.    SW England +1%

6.    NW England -2%

7.    Midlands -2%

8.    Wales -3%

9.    NE England  -3%

10.  Northern Ireland -5%

 

Note: Because inflation is at ~4.5%, real terms property prices decline in all regions except London – however, mortgage debt levels drop in real terms.

Other criteria

• US Dollar to the UK£    $1.54 / £1 – broadly similar through year
• UK £ to the Euro    £1 / 1.1 Euro
• Oil price  $105/bbl early 2012 rising to $140 by June 2012 then dropping back to $120 by year end
• UK Gas price 48p/therm
•  UK Interest Rates – staying at 0.5% through 2012
• FT rising from 5300 to 5600 by end April then dropping back starting early May to 5000 by end 2012
• UK Inflation CPI rising from 4.2% to 5.8% by end 2012 – upward momentum  
•  UK GDP staying between 0% and 1% through 2012 (on quarterly annualized basis) 
•  Security outlook – Iran and North Korea key hot-spots. Continued turmoil in Syria and continued sectarianism in Iraq - worsening
•  Euro interest rate – staying at 1.5% through 2012
• US Interest rates staying at or close to 0.5% through 2012
•  UK unemployment – rising slightly through 2012
• Wage inflation – staying at ~3.2% through 2012 in both private and public sectors
• GDP growth London 2%, North -0.5%, Midland 0.5%, Scotland 1%. Wales -1%
• GDP China 8%, GDP India 6%, GDP Africa 3%, Global GDP 2.5%, UK 0.5%, USA 1%, Euroland 1% - as a whole over 2012
• Gold rising from $1525 to $2000, silver rising from $26 to $45
• Obama re-elected President by end 2012 with very small margin

Iran and North Korea developing nuclear weapons capability continue to be key issues – lack of global leadership not helping resolve. Terrorism threats increases along with inflation and oil prices as economic disparity increases between population groups in Middle East. Security situation Middle East deteriorates with frequent disruptions and fears over oil supplies. Possible war between Israel and Iran (possibly also involving Syria, Egypt and/or Turkey). Focus on Straits of Hormuz – potential next oil crisis due possible blockade by Iran.   

USA debt situation deteriorates still further and QE3 accelerates in lead up to elections. Dollar declines as the Obama administration continues to print money devalues the currency and causes bond rates to rise sharply.

Inflation situation deteriorates by end 2012 – UK official RPI inflation figures rise above 5.5% with little response from central bank. Actual (real) inflation more like 10+%. All commodities prices rise - oil, gas, copper, sugar, wood prices. Oil production continues on a bumpy Peak Oil plateau – oil shortages worsen.

Greece, Portugal, Ireland, Spain and Italy continue economic crisis as stagflation is exacerbated by high oil prices (oil import costs). Further Euro debt contagion and bail-outs for Italy, Portugal, Greece and Spain as oil prices rise >$115/bbl.  These countries need to leave the Euro to devalue their currencies and regain competitiveness – uncertain whether this happens in 2012 or not. 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 it’s boom with GDP 8% though slowing as real estate bubble deflates. Brazil and India also boom with GDP at 7% and 6.5% respectively.

General Decline With Election Boost: In general, we should expect more of the same. That is, a slow economic decline – part of an overall collapse in western living standards as the ravages of Peak Oil and over-indebtedness lead to many years of economic decline. Government numbers will be manipulated to give an impression of growth, but inflation, low wage rises and rapidly increasing costs of food and energy will sap more life out of the consumer and make almost everyone feel hard up and financially pressured. It will be like 2011 except a bit worse. Expect more civil disorder, more global riots, higher unemployment, an increase in resources wars and increase in the impact of natural disasters. The growth economies of China and India will also slow somewhat. Because there are so many elections in western developed nations in 2012 (e.g. USA, France, Greece, Italy), expect massive money printing and further stimulation from low interest rates (negative real rates) – that store problems up for 2013, when a more general collapse will likely occur. Hence stock markets are likely to rise through to June 2012, before heading south as a broadening of the western economic breaks out by early 2013. Any big military conflict could see gold reclaim its rightful status as safe heaven away from the dollar - this should be in terminal decline by now.

Note: Sometime in the next 6 month to 6 years we expect a real economic-financial crisis in western developed nations caused by the US bond market meltdown. At this time, gold and silver prices will go ballistic (silver from $26/oz to $400/oz and gold from $1550/oz to about $6400/oz. The Dow Jones will be range bound – but will continue its steady decline in inflation adjusted terms. At some time in the future the Dow should equal the gold prices.

 

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Look-back on 2011 Predictions

 

For good order we now look-back on our predictions for 2010. Overall we were close on most of the predictions.  

Positive Criteria for Property Prices in 2011

·         More competitive and more abundant mortgages after credit squeeze affects die away – generally accurate/correct

·         UK coming out of recession - – generally accurate/correct

·         Increased employment by mid 2010 –correct

·         Increase in private sector bonuses –correct

·         Lack of house building – correct (lowest level of building since WWI)

·         Increasing population – yes, increase by ~250,000

·         Pent up demand from three years of low market activity – people needing to move – not much evidence (people avoiding stamp duty)

·         Likely change of government - correct

·         2012 Olympics London – yes, positive impact in London

·         Javelin trains and East London Rail service-orbital London – yes, these opened and created positive impact

 

Negative Criteria for Property Prices in 2010

·         Higher VAT, national insurance, petrol duty and tax on bonuses – indeed, taxes rising were a big negative

·         Increase in inflation feeding through to higher interest rates and higher costs – yes, inflation rose to 5.2%

·         Increase in unemployment likely peaking around March 2011  - unemployment rose and stabilized but still rising a bit

·         High oil prices and energy prices - feeding through to inflation and higher interest rates – yes, oil prices rose from $90/bbl to $125/bbl then back to $110/bbl creating real damage to global economies

·         Public sector jobs losses continuing through 2011 and lower or freezes on public sector wages – yes, correct

·         Possibility the UK Coalition may break-up – did not happen (was only a risk)

·         High levels of deposit required – this continued

·         Low lending to salary multiples – indeed, this continued

·         Heat oil, petrol, diesel adversely affects rural areas and house prices in remoter parts  - yes, rural poverty increased caused by rising fuel prices

 

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. Broadly correct – no crash or meltdown, no boom.

 

Property Price Predictions – overall trends and numbers very accurate

 

1.    London  +2%  (actual +3.5%, trend correct, fairly accurate)

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% (accurate)

10.    Northern Ireland -5% (accurate)

Other criteria

·         US Dollar to the UK£    $1.65 / £1  (correct to Aug 2011, then £ declined to $1.54 by year end)

·         UK£ to the Euro    £1 / 1.17 Euro  (spot on – ended year at £1 / 1.19 Euro)

·         Oil price  $93/bbl early 2011 rising to $112 by June 2010 then dropping back to $90 – spot on - accurate

·         UK Gas price 45p/therm – ended year 51.5p/Therm – average very accurate

·         FT rising to 6050 by early May 2011 then dropping in June to 5000 then closing same end 2011 – very accurate, recovered in the last few months to 5300 from 5000. Did reach 6000 by early May.

·         UK Inflation CPI staying at 3.2% or thereabouts all year – rose to 4.2%, even worse than expected 

·         UK GDP staying at 2% through 2011 (on quarterly annualized basis) – actually ~1.5%, close

·         Security outlook – Iran and North Korea key hot-spots (Pakistan remains a concern) – absolutely accurate

·         Euro interest rate – staying at 2% through 2011 - close

·         US Interest rates rising from 0.25% early 2010 to 1% end 2011 – stayed the same, only prediction that was not correct, almost unbelievably the government kept interest rates 4.5% below inflation! – very dangerous and storing up fuel for a huge crisis in say 2013+   

·         UK unemployment – rising slightly through 2011 - correct

·         Wage inflation – staying at ~2.3% through 2011 - correct

·         GDP growth London 2.7%, North 1.2%, Midland 0.8%, Scotland 1.3%. Wales 0% - all accurate/correct

·         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 – all accurate/correct

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 population as a whole. Iran and Korea correct, Iraq also up to mid Dec – when US troops pulled out (then started deteriorating). Arab Spring not seen – Black Swan event   

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. All correct

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. Yes, broadly correct.

Greece, Portugal, Ireland, 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. Very accurate prediction.

As oil prices continue to rise, Dubai/UAE and Middle Eastern economies continue to grow strongly.   China continues it’s boom with GDP 9%. Brazil and India also boom with GDP at 7% and 9% respectively. Accurate. 

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. Spot on.

The Tory–Lib/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

Generally accurate though early days 

Such measures tend to benefit London and SE England and increase the 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. Accurate

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. Yes, this is what happened.

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. Indeed, oil prices rose to $125/bbl by April 2011 triggering more debt turmoil in Europe and bail-outs – we believe 50% of the issue is high oil prices, but no-one ever acknowledges this.

London will start to feel the positive impact of the upcoming Olympics in 2012 in 2011.  800,000 additional people swelling London’s 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.  Yes, news in mid 2011 that net migration is ~250,000 despite Coalition promises to bring this down confirm many people moving into London.

 

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