Property Insights May 2008

UK Market Update

More Doom this month: April wasn't a very upbeat month and May was no different - Halifax reported a –1.3% monthly drop in house prices with the biggest drop reported by Nationwide at -2.5%. Interestingly, on 20th May Rightmove reported asking prices actually rose by +1.2% with the biggest increases in the south. They also described how vendors were being unrealistic and would likely not find any buyer unless they were willing to accept far lower than the (inflated) asking prices.

The negative sentiment is hardly surprising in view of the credit crunch, and oil prices being $125/bbl as we predicted back in June 2007. What's on everyone's mind is – will the situation get far worse or not. One other factor weighing on sentiment is the current government's overall performance and Gordon Brown in particular – this is likely affecting confidence. The tax take has risen +76% since labour came to power in 1997 and 56% in inflation adjusted real terms – so household finances are being squeezed severely by a combination of high oil prices (this acts like a tax), high food prices (mainly because of oil prices) and the high tax burden (much of it interestingly coming from tax on fuel). It seems all these aspects are coming together to create negative sentiment – people are fed up with high prices and tax all round.

We expect things to worsen in the next few months as the remnants of the credit crunch plays out and rates are re-set in the UK. Furthermore, we see oil prices heading higher – we'll make another we hope accurate prediction in the next few months, but do not be surprised to see $150/bbl in the next six months.

One of the most depressing pieces of news was the inflation rate shooting up to 3% which means the Bank of England will find it difficult to drop rates further. And it also seems the banks are being very slow to pass on any rate cuts to their costumers – financial competition has weakened because of the credit crunch and the banks are clawing back losses via higher rates than they would normally offer. We also now expect interest rates to most likely remain unchanged for the rest of 2009 to control inflation – we hope they will not rise, but this is now a distinct possibility.

The good news is employment remains high, unemployment low, the population is expanding and wages are rising 4% per annum – so the rental market is buoyant. We expect retail sales to slide and property prices to remain under pressure for the next six months at least.

We hold to our Dec 2007 prediction of an overall -5% drop in house prices in 2008 – it's possible it will be slightly more than this. But don't get too disheartened. Longer term we are still quite optimistic. What we need is oil prices stabilizing, a change in the leadership of Government or a new Government and an end to the tax hikes the population has incurred over the last ten years. All this seems likely in a few years time, but for now, we're in a period of consolidation and mild distress.

We hope you have heeded our advice in investing in property in oil exposed cities and countries – the Special Reports describe these. As oil prices stay high, this advice will become even more applicable as a massive transfer of wealth takes place from oil importing nations to oil exporting nations. Oil exporting nations will boom. Oil importing nations with no alternatives will stay in the doldrums:

191: Oil Price Update and Real Estate
187: Real Estate and the commodities super-cycle
186: Oil price starts to skyrocket as predicted - how to profit
180: Oil prices continue to skyrocket
172: Make serious money - best investment sectors
169: Oil supply crunch begins… protect yourself
168: Alarm bells ringing – oil price shock now on the horizon
163: Making Serious Money as asset prices plateau – resources and property
161: Resources winners and losers - ranked list for property investors
160: Find out the winners and losers in the biggest oil boom in history - about to happen...
159: Massive oil boom - the winners and losers - be prepared
158: Supply and demand scenarios - oil boom and the property investors insights
157: Impact of 'Peak Oil' for Property Investment
151: Oil price $125 / bbl and rising…how to take advantage in property
150: Peak Oil shortly due to be reach – unique insights for a property investor
148: Take advantage of the oil/gas/coal boom – key insights

In Europe, the only country that produces more than it uses is Norway. The UK supplies half its own oil requirements (not bad) – so is better off than most. And London is home to many of the world's largest oil/gas and mining companies – so in general London and Aberdeen will benefit, whilst the rest of the UK will suffer.

 

Buy-to-let : No strong evidence of a buy-to-let bust – most investors have made ample equity to shelter themselves from a downturn. As long as the rental market stays firm, which is happening, then – okay – the really good times are behind us, but it should not lead to a meltdown. It's a period of consolidation. Some of the smaller players who got in late and bought new build flats in city centres may decide to exit the market, but anyone who has been in the market for say 3-5 years should be okay. The vast majority of buy-to-let investors intend to remain with the current portfolios or actually expand them.

It's certainly a good time to go searching for a bargain – it's probable prices will drop further – so most people are not in a big hurry. We advise searching hard for real bargains now with a view to the bottom of the market being in October 2008. We expect 2009 to be quiet, not sure yet whether prices will rise, but we think much of the doom and gloom may pass by October.

The stock markets are performing reasonably well and city bonuses will again be high at year end – corporate profits are also strong and the global economy is expanding by ca. 4% GDP with many international companies located in London, so don't expect a recession. We think UK GDP will drop to ca. 1.5% Q4 2008 with London at 2.5% and the rest of the UK at a meagre 0.5%. So we reiterate our long term stance – invest in London or anywhere within a 60 mile radius, or Aberdeen. We are also still fairly positive about south coast towns and cities like Southampton, Bournmouth, Brighton, Weymouth and Portsmouth.

The south-west long term is also very good, but expect some second home owners to sell up in the next year – this will likely suppress prices a bit.

Scotland : Prices stayed so low for so long that Scotland is still playing catch-up with England. The de-population has also slowed and many areas now have moderate population growth such as Inverness and Aberdeen. So prices should keep rising albeit at a moderated pace.

Overall direction: So overall, we stick with our guidance that the prices in southern England and London will outperform other areas in the next 2-10 years. South-west England will continue to be a good place to invest because of a massive housing shortfall as the population increases – partly people settling from London and the Midlands, and partly babyboomers retiring and an aging population living longer. Aberdeen (and within 50 miles of the Granite City) will be a bright spot in the north of the UK. Scotland should weather the credit crunch relatively well in the next year. The oil boom will drive prices further up as housing supply falls short and wealthy oil workers look to retire in the region in the next 5-10 years. In summary – follow the wealthy job, jobs, jobs – and you will find property prices going up.

USA Market Update

We believe all the gloom regarding the US economy is way overdone. An example is the first quarter GDP figures reported last week. Most of the media was reporting the USA was probably “already in a recession” in February and March – as it transpired, Q1 GDP was a whopping 0.9% (or 3.6% on an annualized basis). This is above trend growth. Tax breaks and low interest rates should start feeding through shortly – so we expect growth to continue to be strong. Okay, there has been a severe credit crunch for about 8 months, but this is more or less ended now in the USA. Foreclosures are still rising and house prices areas still dropping markedly, but we expect the worst to be over by October 2008, as the main period of rate re-setting has worked its way through.

As oil prices have stayed high, many oil exporting countries have taken the opportunity to invest in banks, real estate and businesses in the USA whilst asset prices are relatively low and the dollar is weak. The weak dollar has also benefited US exports and reduced imported goods – so the USA's current account deficit and balance of payments deficit have reduced significantly. The dollar is likely to remain weak, but this should boost growth, employment and inward investment by oil rich nations. As the banks work through their bad debit, and take their learnings from the spree of lending too much money to sub-prime candidates, we believe the real estate market is likely to start improving by year end. By end 2009, we see prices rising. So in summary, anytime in the next 8 months is probably a good time to pick up some real bargains – we're thinking foreclosures and distressed sellers.

The biggest downturn has been in Florida, Arizona, and Utah plus parts of California. We actually believe all these states in the longer term are the best states to invest in – the reason is the massively expanding population and good weather for retiring babyboomers – as you can be read in our US Special Reports. The main reason why prices have come down by up to 25% is because of the boom in prices in the previous five years, large building programs and intense speculation. So you might now find you can pick up foreclosures, and real estate from distressed developers for reduction of a further 20-35%. It's when things look the most distressed that it's best to buy, and we think things should start looking less distressed in 2009.

USA boom areas. The latest real estate price news has confirmed our predictions that some of the best areas to invest in are those areas exposed to the energy business – examples are Texas (Dallas, Fort Worth, Houston, Irving, Galveston, Austin), Montana, Wyoming (Green Rover area) and to a lesser extent Oklahoma and Bakersfield in California. All areas positively exposed to soaring oil, gas, coal and energy prices. Some parts of northern Utah may also eventually benefit from oil shale production. Areas around Houston – the Bakken Shales play – are also benefiting from renewed drilling activity.

The coal mining areas of Virginia are also worth a look – it's predictable that coal prices will keep rising and coal mining activity will boom in SW Wyoming and parts of the Appalachian Mountains coal belt. Jobs will be created and previously depressed areas will improve driving real estate prices higher.

We also like Carolina – many businesses are moving south from New York and NE USA in part because of the nice climate, educated workforce and new technologies – Charlotte is the only highlight in the Schiller real estate price survey with real estate prices up over the year.

Canada : House prices in Canada should keep rising and the Canadian dollar should strengthen further against the US dollar as the commodities boom continues and oil sands developments expand. Particular boom towns are Fort MacMurray, Calgary and Edmonton. The whole of Canada though should be positively impacted. The sheer size of the resources of Canada is impressive and this stable prosperous country is sure to do will in future years – a low risk place for real estate investing with good upside, particularly in the oil boom areas.

European places to avoid investing in

There will be a slow and telling suppression of the economies:

• that do not produce an oil, gas, coal and minerals
• have an aging and declining population
• have weak manufacturing
• are slow to reform – especially if socialist government, large public sector and strong unions
• prospered during low oil price times, and before the Indian and Chinese manufacturing and services global boom hit their economies
• where innovation, new technology and education is not strong

In Europe, highest on the list of countries that will suffer are Italy and Greece. Much of the property price booms of these countries has been fuelled by low priced airline travel bringing in NW Europeans to prop up property prices. We see both economies suffering in the next ten years and do not advise any property investment in these developed but potentially declining economies.

Spain is also a candidate for decline, though the country is closer to wealthy NW European neighbours and its economy is rather more dynamic and progressive than Greece and Italy. The population is also more stable. So we do not expect Spain to suffer like Italy and Greece. Portugal will also suffer – we rate Portugal half way between Spain and Italy.

As airline travel becomes far more expensive, and routes are cut, along with new taxes because of climate change, expect any city or country that relies on foreign long distance airline travel to decline – avoid these locations like the plague – examples: Cape Town in South Africa, Gambia, Seychelles, Mauritius and Maldives and possibly Cape Verde. It may sound boring, but wait ten years and oil prices will have hit home in some unlikely locations.

The best place to avoid such a scenario in Europe is to invest in or close to major population centres with prosperous services based businesses. These cities are less energy intensive and may actually benefit from rising oil prices – examples are: London, Amsterdam, Paris, Moscow, St Petersburg, Rotterdam, Munich, Oslo and Copenhagen in Europe. But avoid areas, cities and town way off the beaten track that need much energy and cost a lot to get to – unless these are the most desirable richest enclaves frequented by the most wealthy (e.g. Virgin Islands). Examples are Calabria and Sicily in Italy, and remote parts of Greece.

Other European countries we are neutral on are France, Belgium, Sweden, Finland, Estonia, Latvia and Lithuania. Prices in the countries should slowly drift upwards – all of these western European countries use technology and innovation to mitigate risks of high energy prices (e.g. renewables, nuclear, wind, efficiency savings). Meanwhile the Estonia should benefit from the proximity to booming Russia and stable Finland.

In eastern Europe, prices will still be playing catch up so we expect prices to continue climbing in Romania, Bulgaria, Montenegro, Croatia, Albania, Czech Rep., Poland, Slovenia, Slovakia and parts of Serbia. The point is, in older EU countries that boomed in the 1990s, we expect suppressed GDP and house price growth and a decline in tourism as airline travel becomes far more expensive.

We reiterate the safest places to invest in are Aberdeen, London in UK and Stavanger, Bergen and Oslo in Norway – higher risk but large upsides are St Petersburg and Moscow in Russia. The common thread – they're all oil boom towns!