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From: Property Secrets UK newsletter, 15th
January 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.
- 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. |