Property Price Predictions Week

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Property Price Predictions Week

Postby Nick » Tue Nov 02, 2010 11:16 am

This is the week when all the house price predictions for next year come in. They are getting monitored on the blog of top Property Journalist Graham Norwood & I will be commenting on his reports on this thread (his blog doesn't accept comments).

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Cluttons

Postby Nick » Tue Nov 02, 2010 11:46 am

First in Cluttons:

Small falls in early 2011, then stabilising in the second half. 2011 prices will end just 0.1% off their starting point;
  • 2011 +0.1%
  • 2012 +4%
  • 2013 +5%
  • 2014 +5%

I think that's quite optimistic - 14% over 4 years. But it doesn't have too much meaning unless you know what general inflation is doing at the same time. The BoE target over those 4 years is inflation of 8% so that would mean a gain in real terms of 6% which I would think would make everybody very happy. If inflation averages out at it's current rate house prices will marginally outperform - nothing to panic about. But what if the falling pound & QE have the effects that they ought to have, and the coalition can't introduce extra cutbacks & a corrective leap in interest rates to the 5 - 10% necessary to control inflation?

Graham identifies Clutton's caveats, the assumptions behind their predictions:

• Spending cuts – “it is possible that the impact has been understated”;

• The ability of the private sector to provide more jobs - “the extent to which this occurs in the short term is questionable”;

• Monetary policy – Cluttons expects more quantitative easing in 2011 and says this may provoke higher-than-expected inflation;

• Lending – this will remain tight and the agency reminds us of why there will be no significant increase in lending shortly, namely “the upcoming need for financial institutions to repay various support schemes”;

• Global issues – another ‘Ireland’ or ‘Greece’ could have severe implications for the UK banking sector and could hit “the central London residential sales and lettings markets which are aligned to the fortunes of the financial sector.”


So their predictions are based on:
  • accepting the government predictions for the effect of the cuts
  • accepting the government predictions for inflation
  • Lending to continue as is.
  • There being no adverse effects from the global economy

Those are reasonable assumptions to make, although I believe government & BoE have got it totally wrong about inflation. However there are already signs that the government has got it badly wrong about employment.

The second point about jobs in the private sector is already brought into sharp relief by the Chartered Institute of Personnel and Development

An average of 320,000 private sector jobs a year would have to be created by 2015-16 just to keep unemployment steady at 2.5 million.

"The full impact of the coalition government's planned fiscal tightening has been understated,".

"The 490,000 public sector job losses cited in the Spending Review looks like an underestimate, given what most public sector managers are telling [us]."

The total number of jobs to be lost in the public sector between 2009-10 and 2015-16 at 725,000.

The number of jobs lost in the private sector due directly and indirectly from the cuts would be 650,000, with an additional 250,000 jobs to go due to the VAT increase


That is about as different as you can get from Cluttons (& the government's) assumption that Public Sector job losses will be balanced out by gains in the private sector!
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Re: Property Price Predictions Week

Postby Jo King » Tue Nov 02, 2010 12:50 pm

Nick

As we all know, house price predictions usually turn out to be wrong, whoever is making them as none of us can predict ALL the things that you need to take account of that affect house prices and not all areas perform the same. Somehow, there is always something we 'didn't see coming', when we predict the market.

Historically you can put reasons to house price movements which give an entirely logical picture to what happened and why but going forward it is very difficult to see the picture as the picture keeps changing.

However, in over 30 years of buying, renovating, building, renting and selling property I have never been so concerned as I am about 2011/12 for the reason you list - the banks having to repay their debts. If action is taken to mitigate the impact of this ie short supply of money to lend then the market may not react too badly but at the moment I think the end of 2011 and into 2012 we will see stagnation and downward movement.

I have never predicted a downward market before (I didn't predict the banking crisis) but on this occasion I am unusually pessimistic.

If I had to put figures on the next 5 years they would be:

2011 - first half upward by 3%, then back down by the same at the end of the year.
2012 - Downward by 5%
2013 - Stagnation
2014 - Upward by 5% as I'm going to assume the black hole in funding will have been addressed due to its' impact on the market or someone seeing an opportunity ie foreign investment or Government intervention.
2015 - Upward 5%.

BTW I differ to most commentators in that I don't agree that houses are unaffordable. It's just that buying houses has dropped down in the list of priorities for many people as there have been so many safety nets for people with regard to housing. If this were to change I think we'd all be surprised just how much people can afford if they try hard enough.
Last edited by Jo King on Wed Nov 03, 2010 12:05 am, edited 1 time in total.
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Re: Property Price Predictions Week

Postby REI » Tue Nov 02, 2010 10:58 pm

Three comments.

1. Barclays ran a seminar for businesses. The head of business lending was there along with the chief economist. They are predicting -10% for next year when they run their internal models to check for risk.

2. I like Jo closing comment. What people can afford does change based on what else is on the shopping list.

3. I am not sure that banks need to pay down their loans. They want to remix their balance sheets and that can be less lending to specific sectors or asset classes. The banks are pretty well capitalized right not (Tier 1 measures are strong).

Let's assume that someone does predict things correctly. Would anyone do anything different? Most people buy or sell for reasons other than market predictions.

As Jo says, they are almost always wrong and the prediction that is right one year tends to happen because of random luck rather than a consistent talent to predict.
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Re: Property Price Predictions Week

Postby REI » Tue Nov 02, 2010 11:40 pm

I forgot to mention one other point that relates to some text Nick quoted.

There is a concern that the public sector staffing cut backs will be an issue. At the Barclays seminar one speaker was from the British Chamber of Commerce. He said that in Q1 the private sector created over 300K jobs. I have not verified the number or looked to clarify what exactly it means. Assuming for one minute that a job is a job, the rate of new job creation in the private sector would look healthy enough.

Maybe someone has a good source for the real scoop.
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Savills

Postby Nick » Fri Nov 05, 2010 12:02 pm

Today Savills, and this really is a biggy.

Savilles have taken the approach that most property professionals know - there is no such thing as "House Prices". It's an amalgamation of individual sector prices, which may have some meaning to some people, but which is often misquoted, misused, and generally abused.

Savills say prices of different property types in different locations will perform in different cycles. Now I have to say that surprises me - it makes sense to me that there is a fairly tight linkage, people move up and down the property ladder. They move around the country. All the time those links tie prises together - that's what I still think, and I thought it was generally accepted, with the idea that prices tended to be led by London and the SE, with the rest of the country lagging the price movement, the lag getting greater the further north and west you went.

Not according to Savills who have divided the market into Grade A (best in class houses); Grade B (the mainstream bulk); and Grade C (low-end, possibly best measured by rental yield rather than very low or negative capital appreciation) in three different types of location, which are Prime, Secondary and Tertiary. To me that is too complicated, where you get a Grade A house in a Tertiary location someone turns it into a Grade C Nursing Home/Student Block/HMO .... I'm not saying that they don't exist, just that they aren't of sufficient significance to warrant complicating the subject.

Finally when you turn to the nitty gritty I am astonished to discover an authority being as bearish about prospects as my own personal views. Over the last 18 months I've found myself a bit of a lone voice forecasting doom & gloom, but Savills says mainstream house prices will not return to their 2007 peak until 2016, making this a decade-long slump. They say that Prime central London prices will return to peak in 2012 (of course many of those Grade A examples have done so already) while prime properties in the regions, particularly south east and south west England, will be back by 2014 with a large, and growing, gap between north and south of England. That's pretty much what I have been saying, and if anything is much worse once you factor in a dollop of inflation.

Savills seem to see something similar to the situation of the 1990s - and if that's what is on it's way we ain't seen nothing yet!
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Re: Property Price Predictions Week

Postby REI » Sat Nov 06, 2010 7:58 pm

I think Savills point at a marco level is well stated. There is no country wide market. People pay what they pay in specific areas or regions based on local conditions. Just because prices are a lot lower up North or in parts of Wales people do not move there.

A national average hides a lot of detail that matters. In the US there was never a down market in 67 years even though lots of cities, states or regions were down at various points. In other words too big of a market sample hides meaningful distinctions.

Russian buyers focus on specific areas of London. Does it really matter to them if prices are lower or higher outside of their target area? They also look for specific features so many properties will not be considered. For all they care the properties do not exist.

Saying prices will not return to the prior peak until 2016 when some areas have already exceeded the prior peak means what? Saying that London will lead implies that the average for the UK is not indicative of the London market. By the time the average is compute London is already 18 to 24 months ahead.
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Re: Property Price Predictions Week

Postby Jo King » Tue Nov 09, 2010 11:09 pm

John

Going back to your Barclay's seminar for businesses - did they give any justification for their 10% increase prediction for next year?

Nick - I tend to agree with Savills on this one, but that's because I am witnessing something very different to media reports.

Prices in Exeter and some of the surrounding areas have already exceeded their 2007 highs. All but one of my properties are now well above those highs. We have seen some big companies go down over the last few weeks and are yet to see more job cuts I'm sure, but something is bringing hoards of people here. The primary schools have taken 30% more intake this year and I have just been contacted by my agent to advertise my student houses even earlier this year for 2011/12 as they are already getting lots of enquiries and the rents are going up again.

I am certainly not complacent though, I still remain cautious and slightly pessimistic for 2011/12.

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Re: Property Price Predictions Week

Postby Nick » Tue Nov 09, 2010 11:28 pm

Jo,

You are an excellent example of the advantages of concentrating in one area - you know your business. It is generally known why Central London prices have separated from the national trend - it's the fact that london is part of the Global Economy rather than the National one, plus it is seen as a safe haven during bad times (hence Greek Billionaires shelter their money in London Zone 1).

Why Exeter is also doing well isn't quite so obvious, but I believe your report. Obviously the University is a major force, but I would be surprised if it's success could drive the whole city.
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CBRE

Postby Nick » Tue Nov 09, 2010 11:34 pm

The latest report from CBRE isn't dramatic, but confirms the general view that the downturn in transactions, building volumes and values is now more like a long term trend than a short term blip

- transaction levels seem stuck 25 per cent below old long term averages;

- 2010 price growth will dwindle to 0% by Christmas;

- 2011 will see unquantified "moderately declining prices";

- the mortgage shortage will worsen under FSA regulatory changes;

- the private rented sector will grow because of affordability and accessibility issues in the sales market;

- it remains "uncertain" whether the coalition's espousal of market rents in the social sector will indirectly create enough homes to compensate for the £2bn capital cuts it announced last month;

- there remains worry over a double dip recession.


I ask myself - does a consistent view from many experts reinforce that view, or mean that sheep follow a herd?
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Re: Property Price Predictions Week

Postby Jo King » Wed Nov 10, 2010 12:00 am

Yes Nick the Uni is a big driver, it's a big and expanding uni in a small city.

There are a few other key drivers that I believe are contributing factors:-

The Met Office moving here a few years ago made a big impact
Exeter airport & Flybe's expansion
New Shopping Centre completed 2009 and some really big names moving in (eg John Lewis)
New Peninsula Medical school
Huge expansion to industrial and retail parks alongside motorway
Improvements to A30 completed
More people holidaying in the UK is bringing more visitors to the South West who subsequently decide to relocate for more stress free lifestyle - more working from home etc
Improved Rail links - Exeter to London in less than 2 1/2 hours - increasing prices in London is bound to have an impact on nice areas where prices are more reasonable. If Russians (& others) pay £m's for properties in London then savvy people will sell up and move to nicer areas where they can have a better property, better quality of life and enough money in the bank to take life easier - I know, we did it.

A trendy, cosmopolitan city with character situated on a beautiful river, close to sun, sea, surf and one of Britain's last truly wild national parks yet within easy reach of a good transport network and only a couple of hours from London.

Wow! I love it here :-)
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Re: Property Price Predictions Week

Postby Nick » Wed Nov 10, 2010 12:50 am

Jo,

OK - your list could well explain why Exeter bucks the national trend. One thing jumped out at me - I was house hunting over the 1989/90 bubble and very many sellers were cashing in their equity to retire to scotland. If you are saying that a lot of Exeter buyers are coming from London/the SE that would fit perfectly with a national bubble about to burst.
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Re: Property Price Predictions Week

Postby Jo King » Wed Nov 10, 2010 12:56 am

Oh and Exeter FC just beat Plymouth 2:1 - what else is there? :)

London will burst first, Exeter follows 2 years later - I'd better make plans for Italy then.
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Re: Property Price Predictions Week

Postby Nick » Wed Nov 10, 2010 10:27 am

I've published my view of this graph as a blog:

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I was wrong about Flat Prices
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Re: Property Price Predictions Week

Postby REI » Thu Nov 11, 2010 11:58 am

Nick wrote:Jo,

OK - your list could well explain why Exeter bucks the national trend.


There are some people who look at macro trends and then advocate investing in things other than real estate. Nathan on PT is an example. Many times the people advocating other sectors also use technical means to predict trends (technical analysis, looking for specific inflection points in the curve or trends based on the slope). The implication is the graphs can summarize the mood of the market and therefore changes in the curves are signals that matter.

I make the claim that a savvy real estate investor will be doing deals one at a time. They look at the specific property, the numbers and the terms/conditions. The macro environment matters just like the weather maters to the long term health of a property. At the same time the profits are made based on the deal and not so much based on the landscape. No one on PT or this forum is investing in real estate primarily though indexes or other proxies. We build a structure, not a trend. We pay down the debt secured by a building and hopefully the tenant pays 100% of that debt. What the market does is less important.

Consider the following:

If you buy for 100, borrow the 100, someone else pays off the 100 (the tenant) and you then sell for 50 you are still ahead compared to the person who does not have an external third party to pay the full cost of the investment.
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Re: Property Price Predictions Week

Postby Jo King » Thu Nov 11, 2010 8:30 pm

Consider the following:

If you buy for 100, borrow the 100, someone else pays off the 100 (the tenant) and you then sell for 50 you are still ahead compared to the person who does not have an external third party to pay the full cost of the investment.


Excellent point John.
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Carter Jonas

Postby Nick » Wed Nov 24, 2010 7:00 am

Carter Jonas, which specializes in mid- to top-end properties in the country and London, has not hitherto been a forceful ‘pundit’ of housing market activity. They say there will be a 5% fall in average prices next year “as job losses intensify”. “With austerity measures and public sector cutbacks set to firmly take hold over the next year, UK house prices are expected to fall further in the short-term. Inevitably, isolated bubbles of activity will buck the trend although overall we predict a fall in values of circa 3% in 2012.”

Like several other agencies, Carter Jonas foresees the emergence of a multi-tiered market. The top end generally, especially in London, will continue to do well thanks to a lack of reliance on mortgage lending and at least some overseas buyers. “’Best in class’ product is currently achieving in excess of 2007 prices although potential purchasers remain very price sensitive and there is a widening price differentiation between the best and the rest. Pricing will become increasingly sensitive as we move into the seasonally busy spring market and we anticipate London house prices to increase circa 5% during 2011”
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Centre for Economics and Business Research

Postby Nick » Wed Nov 24, 2010 7:11 am

Centre for Economics and Business Research (CEBR) says average prices will rise 2.2% in 2011 and will rise 16% in the next four years – enough, probably, to mean that bricks and mortar appreciation will be positive even after taking inflation into account. House prices may not move much during 2011 but they are likely to rise significantly in the following three years. Critically the consultancy believes mortgage approvals will rise – by as much as 50% on current levels – by 2015. The CEBR says the Bank of England is “highly likely” to follow the US in introducing more quantitative easing, leading to a reduction in the cost of borrowing and an increase in mortgage lending as a result.
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Jackson-Stops & Staff

Postby Nick » Wed Nov 24, 2010 7:19 am

Jackson-Stops & Staff prediction for next year says:

  • “It is no longer possible to see what the London market is doing and anticipate the effects rippling out to the country. Properties at all levels are going to be price sensitive”;
  • 2011 will begin as a “mover’s market” with demand and supply roughly in balance;
  • A small minority of country houses may attract international interest and these may see 5% price rises. “South east England is no longer the only key hot spot” it says, suggesting a few posh areas Wilmslow may see a London-like price surge;
  • But most country houses will not enjoy that rise. “There are some regions and sectors of the market which could still see a drop of 10% in the coming year as a result of the austerity measures”.
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Jones Lang LaSalle

Postby Nick » Wed Nov 24, 2010 7:26 am

Jones Lang LaSalle needs an introduction to the common man not being a High Street name, but a consultant helping developers find funds to build homes, advising housing associations or regeneration bodies on residential market prospects. As such it is a significant voice in the market:

  • 2010 - it anticipates prices ending the year much as they started, with autumn and winter falls negating spring rises. It also warns that new homes completions are 11.4% down on 2009 levels.
  • Its forecast for the years ahead bucks the trend - Buoyed by a surge in new home starts (up 56.6% on the admittedly-shocking level of this time in 2009) JLL believes house prices across the UK will fall an average of just 1% next year before three successive years of healthy rises. London, almost inevitably, will perform even better all round.
  • Where JLL does agree with other analysts is in its perception of a north-south divide. Despite the rosy UK-wide picture, northern England and the Midlands will rise only 3% in 2012 and 7% in each of 2013 and 2014. Contrast that with southern England, rising 7% in 2012, 11% in 2013 and another 8% in 2014.
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