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Beatles, Status Quo or the Rolling Stones? What is the property market's future?
Added: (Thu Jan 15 2004)
For the first time, property investors will have a predictive measure of the housing market (as opposed to looking back at what has already happened) with the new Property Secrets Investment Barometer (PSIB).
This unique way of measuring the UK property market gives property investors inside knowledge on whether now is the right time to buy, or whether they should cool their heels for a while to get a real bargain!
And, according to specialist property website www.propertysecrets.net who developed the monthly PSIB, we are entering a ‘Beatles’ period.
Neil Lewis from the website explains: "The PSIB suggests that there'll be no major Bank of England interest rate hikes, but a drip feed of minor ones, similar to the 25 base-point (.25%) rise we saw in November, where rates ‘beatle’ up gradually.
The PSIB tracks three scenarios for the UK property market:
Beatles (Bank of England interest rates 'beatle' up gradually over the next 3-12 months);
Status Quo (things remain the same and Bank of England rates remain unchanged, at or around 4% in the medium term) and;
Rolling Stones (this scenario is potentially the biggest handful, and puts Bank of England rates at 6% within a year - basically causing property prices to crash).
So how does the PSIB work? Lewis, who himself is an experienced property investor, says: "Six key fundamentals affect the property market. These are: Housing Market Growth, Mortgages Approved For House Purchases, Employment, Housing Stock, 3-Month Forward Rates, and finally, 6-Month Forward Rates. By putting these together, the PSIB gives a reflection of the UK property market trends.
"Currently, the housing market is still growing at a slower but healthy rate. Mortgage lending has had yet another record month. Employment is up, unemployment is down. The number of properties for sale is shrinking. The money markets are expecting Bank of England interest rates to be over 4% by the Summer, but below 5% at the end of the year.
"This all adds up to the Beatles scenario - a picture of healthy fundamentals and dented sentiment. To elaborate, healthy fundamentals in as much as the market, at 15.2% p.a., continues to outstrip any other form of investment around. There's lots of borrowing activity as people continue to buy; people are keeping their jobs; and buying demand continues to be greater than the number of properties for sale."
Long term, Lewis views the likely outcome for the UK property market in the next twelve months as Beatles (69% chance), Status Quo (30% chance) with just a 1% chance of it being a Rolling Stones scenario.
He summarises: "By using the PSIB to make a call on which scenario is playing out right now, property investors will know which strategies to employ, giving them the best chance to maximise profit."
The PSIB newsletter is available from the www.propertysecrets.net website, which gives subscribers a monthly newsletter as well as online access to the Property Secrets Private Website of advice, discussion boards and past newsletters.
Subscribers will also get a directory of relevant and important property sites and tools that can help save them money, providing extra advice and special tools to assess their property investments.
Visit www.propertysecrets.net for more information.
ENDS
CONTACT:
Stella Hulott, Speedie PR, email: stella@speediepr.co.uk or call: office 01634 727628, mobile: 07932 750271
Neil Lewis, MD, www.propertysecrets.net, email: neil@jojaffa.net or call mobile: 07803 503 558
EDITORS NOTES:
A years’ subscription to www.propertysecrets.net costs £27.47 (normal price £45.00) and can be ordered online at: www.propertysecrets.net
PSIB Excerpt (January 2004)
An excerpt from the PSIB this month examines the Status Quo scenario.....
Of our three scenarios, Status Quo is the second most likely one to play out over the next 3-12 months after the Beatles and equates to a settling of the UK base rate at or around 4%, at least in the medium term.
The 0.25% rise we saw in November simply takes the rate back to where it was in July 2003, and Status Quo suggests it's not going much further.
* Pros
Status Quo is likely because the latest rise appears to have taken the heat out of the property market, exactly as it was intended to do and, barring the Christmas spending insanity, should do the same to consumer credit.
If people are paying more in mortgage repayments, one of their reactions will be to cut back in other areas of spending. In this view, the rate drop in July, from 3.75% to 3.5%, seemed desirable to the economy at the time. By November, the Bank had decided that either:
a) that cut had done its job, had outlived its usefulness, and needed to be reversed, or
b) that cut was just a step too far, though necessary to test where the 'bottom' lay
Now it's been discovered, a reversal was necessary to return to that point of 3.75%
Another point in favour of Status Quo is the change in the way the Bank of England and the Treasury measure inflation, the primary economic target. To bring the UK into line with the rest of Europe, we are switching from RPIX (Retail Price Index) to HCIP (now called CPI, or Consumer Price Index).
The new measure is likely to drop the headline number by around 1%. However, the Treasury have dropped their target figure by only 0.5% to 2%. This slight-of-hand will mean inflation targeting will get 0.5% looser, meaning rate rises are less likely.
* Cons
It's not immediately obvious that this rate hike will have the desired effect of reducing house price growth. It's currently sitting at 15-16% for the year, which is around 50% higher than we feel is comfortable.
Unless there is a significant trimming of this growth rate in the next 2-3 months, then the Bank may deem another hike necessary. If there is another rate hike is the next 2-3 months, this may be seen by industry and the City as a rising trend taking shape, which in turn will knock sentiment.
Commentators are expecting another 0.25% rise to come in February, though that will only take us to 4%, still within Status Quo territory.
The PSIB
Let's take a look at the six elements of the Property Secrets Investment Barometer and see how things have changed over the holiday period.
---- Housing Market Growth ----
At year-end, most market commentators are settling for a 2003 growth rate across the UK of around 15%, which is down considerably from the heady days of 25% growth in 2002.
In terms of sustainability and interest rates, if not for our capital growth, this is Good News.
Better still, growth rates look set to moderate even further over 2004 and fall within our ideal annual rate.
Here's what a variety of leading commentators are forecasting for the year.
Nationwide 9 %
Halifax 8+ %
RICS 6 %
John Charcoal 7 %
Hometrack 4 %
---- Mortgages Approved For House Purchases ----
According to the Bank of England, gross lending amounted to £24.9bn in November, down on the previous month, though that means little as October was such a record. The Council of Mortgage Lenders expect the December figure to be around £23bn.
There is always a slight dip at this time of year, but at these levels, lending is expected to remain strong into 2004.
---- Employment ----
Employment continues to rise, unemployment continues tof all, and economic growth continues to forge ahead. It's a very positive economic outlook for the New Year!
And as we never tire of saying here, small increases in interest rates will have little effect providing people are earning - and clearly they are. (See the copy above and below...)
---- Housing Stock ----
The number of houses on the market, according to RICS (The Royal Institution of Chartered Surveyors), dropped again in November and are now lower than at any time since June 2002.
While property sales have risen by 16% between August and November, the number of sellers continues to fall, and the market continues to tighten.
---- 3-Month Forward Rates ----
At the time of writing, March 2004 short sterling was trading at 95.79, which means the traders are, at this time, expecting the base rate to be 4.21%, 0.1% lower than last month.
---- 6-Month Forward Rates ----
September sterling is currently trading at 95.60, signifying an expectation of the base rate at 4.40%, a hefty 0.34 % lower than last month. (Incidentally, the December 2004 contracts are trading at an
expectation of 4.79 %, a drop of 0.12 %).
So What Does It All Mean?
Let's take a quick look at what each element of the barometer is indicating.
* The market is slowing, in line with what the Treasury and the Bank want to see.
* Mortgage lending is still growing, but more slowly.
* Employment is still up, unemployment is still down!
* The number of properties for sale is still shrinking!
* The money markets have lowered their expectations for interest rates this year, and 5% is no longer on their horizon.
We are still looking at the healthy fundamentals and dented sentiment of a Beatles scenario, but Status Quo has moved up in the stakes this last month. Not only have the City moved away from a forecast of 5% by year-end, but other factors are kicking in, too:
1. The expectation is now firm that housing market growth will be well below 10% this year. This is fine. This is healthy. This is sustainable. This is within our own safety limit of 10 %. And it is
a lot closer to levels at which the Bank will be comfortable.
2. The new inflation measure, CPI, will be considered on its own merits for the first time in February when the Bank of England meet. By this measure, inflation was 1.4% in October, 1.3% in November, and has consistently been below the new target of 2% since May 1998.
At 1 %, the Governor of the Bank of England has to write to Gordon Brown and explain what's going on! He'll want to avoid having to do this, and higher interest rates could depress inflation even further.
It still looks like we are in Beatles territory, so the strategies given last month are still 'in force'.
However, if you believe we are shifting slowly towards Status Quo, here are...
... Two Status Quo Strategies
One or two more quarter-point rises will have the market stable and rates will plateau. Fundamentals remain strong, but sentiment is weak now, and will remain so through the remainder of the winter.
1. Look to buy bargains now, from auction (see www.Property-Auction-Secrets.co.uk) or elsewhere, ready for the inevitable up-tick in sentiment come the Spring.
2. Consider some of the off-plan deals (see our 'Deals' newsletter for more opportunities) to lock in profits now that can be released in 6, 12 or 18 months time.