A new year and apologies for bringing this to you at the beginning of March. Is it Brexit or is everyone busy and time just seems to be flying by?
As we indulge in our annual ritual of forecasting the 12 months ahead, we are reminded that predictions are only of use if the forecaster has a good track record of forecasting! So, as usual, we’re going to kick things off by reviewing how our predictions performed last year, before giving our forecasts for 2017.
Assessment of our 2016 predictions:
Our predictions in the past have been accurate, so what about the predictions we made in January 2016 for the UK property market in 2016:
(Following a similar format to previous years, please find below our thoughts for the market in 2016.)
We are “confidently optimistic” about the residential property market in 2016. Last year we were more cautious, now we are more confident. Correct
Whilst returns may not be huge, it is a good, positive, stable market. We do not want a “run away” situation of boom & bust but a steady increase in capital values and a strong rental return.
There is real wage growth, good economic growth, low unemployment, low interest rates and cheap mortgage debt…momentum is on the upside. Correct
As per previous years, we repeat and reiterate that; residential property investment is a long-term investment over a 5+ year time horizon. Predictions over 12 months are provided for interest only, rather than any forecast of investment performance.
- Capital values: Direction: upwards, Magnitude: 5%.
A national house price increase of 5%, or the equivalent of a real house price increase (after inflation of c1%) of 4%. Similar to last year, and boring I know, but there is nothing wrong with a good steady long term positive return! This the type of market we want. About right, the consensus performance was probably 6%
- Long term capital appreciation: As above, we need consider the long term, although this will take 5 years to judge the prediction we believe a 5 year capital return of 23% is easily do-able. With a running net rental yield of c4-6% depending on the location of the property; an attractive, blended return of capital appreciation and annual rental yield. To be monitored, by 2020 we need 17% more upside, having done 6% in 2016
- Regional variations in property prices: The market is highly fragmented and it is imperative that residential property is purchased in the right location (location, location) and at the right price. We believe the East Midlands and East of England will outperform other locations. Areas with strong economic activity and strong job prospects will outperform and we are big believers that the East of England and Cambridge will be the driver for increased activity. Spot on, East of England and Cambridgeshire lead, the rest follows
- Rental growth: Will be 4%. A small increase on 2015 due to the new buy to let rules coming into play as of April 2016, (3% extra stamp duty) and therefore constrained supply of rental stock in the short term. The demand from Generation Rent will continue to grow and immigration, increased job mobility and a generation of younger workers priced out of home-ownership will all put further upward pressure on rental levels. Very correct, Savills forecast further 19% rental growth over the next 5 years
- Transaction levels: Will be static from 2015 levels (c1.2m versus 1.7m in 2007) though this will depend on the local market. One of the unintended consequences of stamp duty changes/increases will be a reluctance to move. Levels will drop in Prime Central London. Stats from HMRC show 2015 figures at 1.225m and 2016 at 1.231m; so spot on. Correct, re levels dropping in London causing listed estate agency share prices to plummet.
- Interest rates: base rates will remain at 0.5% throughout 2016. The longer this prediction remains as is, the higher the risk of getting it wrong; one day rates will rise, we are sure of that! We would like to mention that if there is any increase in 2016 then it will be a rise of 0.25% in the final quarter of 2016. Low oil prices, low commodity prices and an economic recovery lacking real conviction will keep inflation under control and interest rates flat. Wrong; but who out there guessed that rates would fall! Brexit was not foreseen!
- Mortgage availability: Will be flat vs. 2015 levels. There may be a small uptake in first time buyer loans, but a proportionately larger downturn in buy to let lending. The mortgage market is in a much better condition than it has been for a long time; lending is prudent and executed on sensible metrics. Expect further legislation in the buy to let mortgage sector. Broadly correct, await final numbers
- House builders: Share prices will fall c20% from their levels in December 2015. We said this last year, and got it terribly wrong, so don’t focus on this prediction too much! Yes they have Government support for more house building but there is only so long this bull market can last. Barratt down 26%, Bovis down 18%, taylor Wimpey down 25%; broadly correct!
- New housing starts: Will be up on 2015 levels. With Government support/stimulus and a low interest rate environment we expect further increases in the supply of new housing.
- Prime Central London: A small 3% rise for under £2m, a continued drop over £2m. More stamp duty is now paid on purchases over c£950k, add in a further 3% if it is a second home or buy to let, and stamp duty on £2m+ properties becomes very substantial. Furthermore, due to currency changes there will be a drop off in international demand. Clearly London is a leading Global city now, in the past 5 years it has attracted considerable wealth from around the world, but this tap is turning off naturally and being further exacerbated by new taxes. As a footnote, we would add that many of the new build apartments sold to international investors are likely to drop in price by c10%. Correct that lower priced property held firm, whilst higher priced properties fell, principally stamp duty related. Brexit caused the pound to weaken which has led to further strong international demand; no drop off.
- Buy to let sector: Higher stamp duty and higher taxes are set to plague the sector. However, this will not distract from the long-term attractiveness of residential property as an investment. Rents may increase as there is a short term hit to supply. Correct, investors still fundamentally understand property investment and its relative safety
- A couple of other brave predictions for 2016: North Korea will increasingly worry the world wrong or no more than usual, oil prices will hit a low of $30 $28 so not bad! and remain below $50 $56 for the whole of 2016, our stock picks for the year are Google/Alphabet a miserly 2% and Bacanora Minerals flat and nothing like as good as last years pick; a 60% increase! , the FTSE will end 2016 lower than it starts 2016 Wrong, Hilary Clinton will win the presidential election How very wrong!, Britain will vote to stay in the EU disastrous prediction!.
- We predict that 2016 predictions will not be as good as 2015 predictions! Correct! We called the market well in 2015 despite not knowing who would govern the UK nor indeed what their economic policies might be. We go into 2016 relatively clear in where we stand, but we are never sure what “unknown unknowns” might be sneaking up on us in 2016, and rest assured there will be plenty! Very correct, and the two big unknown-unknowns were Brexit and Trump’s election. I don’t mind not predicting those outcomes; who did?
We are pretty happy with the above, importantly, we seem to understand the UK residential market and predictions on this over the long term seem to have been good (or are we setting ourselves up for a big fall by saying that?!) Importantly we got the direction and magnitude of movement of the wider property market broadly correct.