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  • Property-a-holics

    Forecasting Stronger Home Gains in 2015

    Sifting through all the new years' economic forecasts I'm struck by how average they all look. There is some discussion around "convergence" (the tendency for economic forecasts to be broadly the same) and some more interesting discussion about the relative lack of value in forecasts including the Office for Budget Responsibility's (OBR) Robert Chote's rather blunt (but refreshingly honest) point to George Osborne that his organisations forecasts will only ever be accurate by accident. So basically you have to make up your own mind about what's likely to happen and then act accordingly.

    Focussing on house prices (because that's what I've been investing in for nearly 15 years) most forecasters are sticking with the standard guesstimate of between 3-7% with the only real difference this time being an expected continuation of the slowdown in Central and Inner London and the biggest rises now expected in the mainstream market in the South East of England in areas with easy commuting access to Central London. This is because Central & Inner London prices have already risen so much that they are now unaffordable to all but a very small proportion of the population. I agree with the direction of the forecasts but I disagree with the degree. I'm going to stick my neck out and say that I am expecting much more substantial gains in house prices in the South East in 2015 for a number of key reasons:

    1) With oil prices plummeting, inflationary pressures easing and concerns around the European economy lingering the Bank of England is unlikely to rush into increasing interest rates from their record 0.5% low. And the economic recovery looks to be on a much stabler footing than it has done so far. Growth is strong; unemployment is low and falling further; real incomes are finally rising and corporate earnings and balance sheets are solid. Not to mention the U.S. economy (which often leads ours) is experiencing booming GDP growth; plummeting unemployment and rapidly rising real asset values.

    2) We had the usual seasonal slowdown over the summer this year (2014) which led to the usual comments about the market starting to fall back but in addition the Mortgage Market Review really took the wind out of the recovering mainstream mortgage lenders and sentiment. The lenders have now digested the worst of the new regulations and began stepping up their lending again in the autumn. These figures will increasingly feed through into market commentary and I expect this to fuel positive market sentiment as we move into the seasonal peak in the spring. Many domestic and foreign investors are already sitting on substantial gains from their investments in UK (particularly London) residential and in a relatively safe market they are likely to reinvest. First time buyer numbers are also up and rising and should continue to rise as mortgage constraints ease further.

    3) The old arguments for supply failing to meet demand remain true with construction capacity joining planning and finance in restricting the supply of new housing to the burgeoning population which I very much doubt that (despite their posturing) the political parties will be able to do much about stemming through new immigration measures - we still have a very high birth rate (twice that of Germany for example) and anyway much of the net migration into the UK is a good thing for the economy (skilled young workers are exactly what we need to offset our ageing incumbent population).

    4) The UK with its relatively stable political environment and solid legal system remains attractive to many foreign investors. There are likely to be more coming here from Asia in particular as local restrictions on speculation are tightened up. As tourist visa restrictions are resolved the shoppers could well be buying more new build apartments along with the luxury goods that they love buying when they're here (which are more expensive than you might imagine in their home markets).

    5) Then we have the pension revolution in April at which point millions of private investors frustrated with their pensions consistently failing to match inflation (let alone achieve real house price gains) will be free at last to invest in consistently much better performing Buy-To-Let investments - many will do exactly that and I believe these extra buyers will drive the market up to new highs.

    For these reasons I believe we are going to see house price growth in the teens for the UK this year and in some South East and Prime Regional City locations I can see the gains being north of 20% as the ripple from London spreads out.

    At Inspired we have focussed on fundamentals and have bought close to stations in locations with good public transport times into Central London and in many cases in areas where major transport infrastructure upgrades and regeneration projects will be transforming the areas in the years ahead. We have also concentrated on turning tired old buildings that relatively few people wanted or were even able to occupy or buy into beautiful new compact apartments that many times more people would love to live/invest in. By producing a product that is both higher specification and more affordable we believe they should outperform in the short, medium and longer term. Even if you base your return assumptions on those of the conservative forecasters who typically expect HPI of between 25-40% in the South East of England over the next 5 years then add in the attractive and rising (with rental inflation) net yields (which are typically in excess of 4%) from our smaller and very practical new Greater & Commuter London homes should deliver un-leveraged returns in excess of 50% over the next 5 years. This is roughly double the capital growth, yield (and therefore total return) forecast for other house builders in more established Central/Inner London locations. Relative to or after adjusting for inflation (estimated to total approximately xx% over 5 years) the real gain is even more impressive. And in my option the returns should further surprise on the upside, particularly this year - so I am investing further both in more blocks for redevelopment and more units in my own developments and from the auctions for short term trading and longer term investment.

    It's now over to you to make your minds up and place your bets accordingly. Good luck and Happy New Year !!

    Savills (Nov 2014):
    "Due to prices in central locations, to satisfy this greater level of demand in lower price brackets, we must look to London’s outer boroughs – the doughnut ring in zones three and beyond."

    JLL (Nov 2014):
    We see the most significant impact on London housing over the next few years coming from the sheer volume of ‘ordinary’ people who will benefit from an expanded labour force and higher salaries. London’s population, for example, is expected to grow by around half a million over the next five years.
    With affordability becoming increasingly stretched, many first-time buyers are being forced to look further afield to find suitable accommodation, while existing homeowners wishing to trade-up are also having to look outward. Parental support for those fortunate enough ‘ordinary’ people will also boost demand, especially in outer London.
    Consequently, we are expecting housing demand to be particularly strong in outer London where property is most affordable, and although housing delivery will also be greatest here, we believe that upward price pressures will be highest in outer London over the next five years.

    Office for Budget Responsibility (Dec 2014):
    "In total, house prices are expected to rise by 31.4 per cent by the first quarter of 2020."

    Rightmove (Oct 2014):
    "The majority of fastest performing areas are all within easy commuting distance of London with the home counties and outer boroughs set to benefit from the ripple effect of a year of strongly rising prices in London, alongside the brighter economic picture."

    Smile Martin
    Inspired Homes
    Inspired Asset Management
    Thanks Martin. That made a very compelling read.

    Despite the changing economic conditions, the fundamentals of property investment will always remain the same. Smile