43: How will London perform compared to the north of England?
10-01-2005
PropertyInvesting.net
There are some interesting dynamics happening in the UK economy at present, that experienced property investors need to consider. A number of forces will start working in the next two years that PropertyInvesting.net believe will lead to London outperforming the north of England in regard to capital house price increases, for the first time in four years.
Public sector jobs growth slows: The 2001 – 2004 property boom in the north has been strongly supported by reducing unemployment as the public sector has expanded. In the north, manufacturing has remained in the doldrums during this period, and the services sector has not done much better. The “feel good factor” has primarily been felt from a huge injection of government money into expanding the public sector – it was reported in September 2005 that in Newcastle, there is a higher proportion of state jobs than in Hungary before the collapse of communism. This is unsustainable in view of the state deficit and pressure on taxes - it’s likely that unemployment will start edging up as manufacturing jobs are further lost to countries in Eastern Europe, India and China. The entrepreneurial culture is not fostered by such state job dependency – so to think the private sector will start creating jobs in the north is wishful thinking when the economy is slowing. Reliance on public sector jobs is far less in London – and there is a far stronger services sector.
City and Services Growth Continues: GDP in London has been about 4% in the last year, albeit this is slowing now – growth has been lead by financial and services sector expansion. This is likely to continue as London cements itself as the leading global financial / services centre – particularly for international investment banking. Jobs growth in IT/media/telecoms should continue – these are focussed in the UK on the M4 corridor from Hammersmith to Reading, and the M11 corridor from north London to Cambridge. City bonuses are likely to be up some 30% this year – coming between January and April 2006. This money often finds its way into upper end residential property (homes for bankers) in London and the SE, and medium/lower end rental and commercial property (investment property for bankers). These bonuses should help support the London and SE property market – plus second homes in the South West and SE of England.
Olympic Effect: The terrorist actions in July most likely stifled enthusiasm for investment in London for a time over the summer of 2005. Prices have risen though by 1-5% in the Stratford/Newham, Hackney and Walthamstow areas since the announcement on 6th July, but it is likely the smart money will start moving in on a continuous basis in the regenerating East End close to the Olympic Park in the next few years. It’s difficult to envisage prices not rising in the next few years in such areas, particularly if interest rates reduce and employment stays stable.
A-Day: The introduction of tax efficient pension funds whereby residential property can be purchased with up to 40% tax credits should strongly support the London property market. Since there are so many high earners who pay 40% tax in London and the SE, this will be a good vehicle to reduce tax burdens – albeit the fact that one can only borrow 50% of the value of pension fund will probably prevent a mass influx of investment money. It will be a multi-billion £ wall of money, but it is not likely to create a boom. It’s also possible the Government will prevent holiday homes from being put into such pension funds, since this will have the effect of driving up rural and seaside property prices even further out of reach of the local populations, and hence is a politically sensitive issue that labour might act on to mitigate. But standard buy-to-let residential properties in London will be given a boost by this new legislation, to be enacted April 1st 2006.
London price stability: London prices have not moved significantly higher in the last few years – hence as incomes have risen some 5% per annum, and interest rates are on a probable downward trend, with rental yields going up, affordability for investors and first-time buyers has improved somewhat. Hence one can argue that London prices have head-room to move higher, particularly if one believes the services economy will remain robust and unemployment stays low.
Population: The population of London is due to increase by 800,000 in the next ten years. We don’t see much building though! It seems very likely that the current housing shortage will continue and even increase – so few council houses are being built and most luxury flats are out of reach of the average person. Restrictions on Green Belt development and sustained Nimbyism should prevent large influxes of housing supply. Surely the influx of people will help drive prices higher? And I would not count on the promised building programme for the Thames Gateway getting up much of a head of steam – there are simply too many pressure groups who don’t want to see any building at all, never mind 200,000 homes. Meanwhile, the population of the north is likely to stay stable – some more rural areas will decline, as will many areas in Scotland. The population in the south of England will follow that in London and increase. Northern prices are unlikely to collapse since they had so far to “catch-up” with the south, plus there are so many gainfully employed in the public sector with relatively secure jobs. But the growth in northern prices in most areas will likely halt.
The Next 6 Months: There are tentative signs the market in London is warming up – many people are back to work after long summer holidays - some are thinking of the combined effects of the introduction of UK-REITs April 2006 (A-Day), the Olympics in 2012 and the City bonuses in Q1 2006. This combination, along with lower interest rates, a rising stock market which may be peaking, and better affordability, combined with robust rental demand should lead to prices edging higher in the last quarter of 2005. PropertyInvesting.Net predict that London prices will rise by some +0.1% per month until year end, then stay flat until February, before then rising by +0.2% after this up to June 2006. This will coincide with high City bonuses, A-Day, more news over the “Olympic regeneration effect”, interest rates coming down to 4.25% by Feb 2006 and the UK economy as a whole continuing to grow, albeit at a mere 1.5% by Feb 2006 overall, but at a higher 2.5% in London (the north might see a meagre 0.5% GDP growth by early 2006).
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