55: Predictions for 2006 - PropertyInvesting.net
12-26-2005
PropertyInvesting.net
First of all, you can review PropertyInvesting.net’s predictions for 2005 (from Dec 2004) in Special Report 20. The predictions were pretty accurate in that they predicted the highest house price growth in Scotland and the North, with London following suit. Also, no property price crash, and interest rates dropping to 4.5% in August and staying at this level to year end – spot on.
For 2006, in a way, it’s probably easier to predict than 2005. Wages inflation will again be around 4.3% overall and inflation is likely to drop back to 2% mid 2006 after the effects of the increase in oil and gas prices eases. Oil prices should stay between $48 and $70/bbl. The tax burden will increase further, but the affects will not be as marked as they were in 2004/2005. However, this increasing indirect tax burden will again stifle GDP growth, which will struggle to get above 2% and stay below 2.5%. The reluctance for planners to allow homes to be build, particularly detached houses, will support prices as they did in 2005. Unemployment will rise slightly, but not enough to have an impact on house prices. Levels or mortgage lending and debit will increase further, though this will be broadly in line with increases in wage inflation and deposable income.
Tensions in Iraq should ease slowly and this might have a positive impact on global security – and hence business confidence. The depressing outlook for future pensions provision will likely stifle retail spending as the aging population is more careful with spending – this should keep a lid on inflation. Aggressive price cutting at large retail outlets and massive increase in competitive internet shopping should help reduce inflation and give the Bank of England an opportunity to cut base rates by 0.25% as late as March 2006 (possibly in February), to 4.25%. A second and final 2006 rate cut to 4.0% by end 2006 is likely, because of people’s reluctance to spend, inflation dropping to say 1.8% and GDP growth failing to get to neutral trend level of 2.5%. The interest rate reductions will be slower coming than many expect because the pound will dip significantly against both the Dollar and Euro.
Manufacturing will continue to struggle, though it will be helped a little by the declining Pound against the Dollar and Euro.
The Chinese and Indian economies will continue to grow at over 8% of GDP – it will dawn on other global states that this will create huge energy related issues in future years, as these countries become the biggest consuming nations in the world some time after 2025. Economic tension related to energy access and security will increase.
The UK banking and services sector will continue to do well, with GDP growth in the London area being over 4% (similar to 2005) - with more big city bonuses as mergers and acquisitions business takes off. The booming population in the SE England will lead to further house price rises and housing shortages. As some of the early babyboomers start to retire, they will continue to buy nice homes in southern and south-western regions – this will support prices in these regions, particularly on the coast near good communications to London.
Prices in Aberdeen and Peterhead will continue to benefit from high oil and gas prices and North Sea energy related activity. Peterhead might also benefit from the cudos of the BP Hydrogen project announced mid 2005.
Capital Value Increase - predictions:
- London 5% (West End 10%, East End 7%, South 3%, North 2%)
- South-East 4%
- South-West 4%
- Midlands 0%
- East Midlands 1%
- East Anglia 2%
- North-West 2%
- North & Yorks 3%
- Wales 2%
- Scotland 6%
PropertyInvesting.net expect the market to start promptly in early January, particularly in London where the expectation of high city bonuses will lead to early offers going in, particularly at the top end market.
New build flats will perform worse than houses, particularly in northern cities. As there is an ever increasing shortage of good quality smaller houses, particularly detached and semi-detached with gardens. These properties in coastal areas in the south of England will perform well, as the baby-boomer start retiring. The rate of new built apartment building will decrease perversely increasing the housing crisis. Any property in England valued at below £80,000 will likely rise in value as first time buyers scramble to secure a home before they get prices out of the market.
The FT100 will struggle in Dollar terms because investors will view the tax burden on UK companies as excessive and choose to invest in other countries like India, China and the USA. However, the FT 100 index will actually rise to 6000 from 5600, but overall value benchmarked against the US dollar will not – e.g. because US rates will increase further and Sterling rates will drop, this will lead to the US Dollar appreciating by 15% against the Pound the stock market moving higher in the UK. This phenomena will further support local house prices, particularly in SE England and London.
West End and West London will perform particularly well, followed by East London areas that are due to benefit from the Olympic generation (e.g. Bow, Stratford, Limehouse, Plaistow, Hackney, Woolwich). Trendy areas close to the City that are re-generating such as Whitechapel / Shoreditch, Vauxhall, Borough will also perform well.
Meanwhile, in the North, very low priced towns and cities will likely perform above average such as Bradford, Bury, Blackpool, Burnley, Barrow, Liverpool/Bottle and possibly Hull. In Wales, Newport will likely see prices rising faster than neighbouring Cardiff and Bristol – the ripple affect taking hold in these lower prices areas. However, the tailing off of the public sector jobs growth will dampen the housing boom generally in the north – so these average northern areas will not benefit as much as the fast re-generating areas. So the more expensive suburban areas of Newcastle, Manchester and Leeds will likely see little price movement.
Finally, there will be quite some disquiet about rising natural gas prices in January and February due to a particularly cold winter and later end 2006 – but this will not be enough to increase inflation and prevent interest rate reductions. The Chancellor will continue to close tax loopholes – and will start to target foreign home owners. UK REITs will be launched early 2007 and be successful – with many private and public property companies converting to REITs, and many pension funds investing in these tax efficient vehicles. This will help stimulate the property market in late 2006.