As we indulge in our annual ritual of forecasting the next 12 months, we are reminded that predictions are only of use if we (the forecaster) have 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 2020.
Assessment of our 2019 predictions:
Our predictions in the past have been pretty accurate, so what about the predictions we made in January 2019 for the UK property market in 2019:
It is going to be a similar story to 2018 but with a sprinkling of caution; we are “cautiously optimistic” (downgraded from 2018’s “confidently optimistic”) about the residential property market in 2019 excepting any extra-ordinary events! Whilst returns may not be huge, it will be a good, positive, stable market with limited volatility; just the sort of market people should want exposure to in these uncertain times. Broadly correct
- Capital values: Direction: upwards, Magnitude: 2%. correct
A national house price increase of 2%, or the equivalent of a real house price increase (after inflation of c2%) of 0%. This is down from 2018’s 3%. Hardly exciting stats but this is a mature, stable, low volatile asset class. This is the national figure, there will be large regional differences. Broadly correct
- Long term capital appreciation: It will take another 2 years to really appreciate the accuracy of our prediction! In 2016 we forecast a 5-year capital return of 23%, we did 6% in 2016, 5% in 2017, 3% in 2018, leaving 9% to achieve in 2019 and 2020. We are saying only 2% for 2019, so that would leave the market having to do 7% in 2020; do-able but probably a bit punchy! It is important we review our 2016 predictions. For new prediction of 2019-2023 we would go for 17% (Savills 15%); steady away, this being capital appreciation, combine with the running net rental yield of say 5% per annum in the Midlands, and this is an attractive blended return of capital appreciation and annual rental yield. Broadly correct, we seem on track for hitting our 5 year forecast, perhaps a bit punchy for 2020 needing to do 7%, but more on that later!
- 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). This is always the case, BUT perhaps the variances will narrow in 2019; some places will see +4%, some see -4%; the North and Midlands will outperform London and South East. correct For our favoured region of the East Midlands we predict +4%. The “East” (East Midlands and East of England) are economically vibrant and will benefit further due to its proximity to London and the South East. It is difficult to measure but would say 2-5%, so this about right.
- Rental growth: Will be 3%, or in real terms flat. (Savills forecast 1% in 2019 or 14% over 5yrs) There is continued constrained supply of rental stock (buy to let supply falls), whilst demand continues to grow. Technology has enabled the younger generation to have more job mobility and more demand for renting as a whole; rent a car, rent a TV, rent a house; why own when you can rent? Not that affordability allows many to buy houses anyway! Correct
- Interest rates: base rates are presently at 0.75%. We expect no further rise in 2019, for choice there is more upside risk and could be 1% by the end of the year. Any rise will be due to prudent management post brexit. Suffice to say interest rates will not rise aggressively; look at the 5 year swap rates or 5 year fixed mortgage rates at 2-3%. Correct, but no upside risk at present
- House builders: we said their share prices would fall in 2018 which they did. We think they will have another year of negative share price returns; they will fall 15% over the year. The Help to buy scheme will continue until 2020 this effectively allows housebuilders to charge a 5% premium over market price; which goes straight to the housebuilders bottom line, but the end of this ludicrous scheme is in sight. Mais non, the “help to buy scheme” has been extended to 2023, and Boris elected; long live the house building sector! Share prices rose over the year.
- Prime Central London: Whilst there may be pockets of value in PCL it is still difficult to say what the catalyst will be to drive the market up higher. As such, we forecast another year of negative returns, like 2018, at -4%. Properties under £1m will outperform (marginally more affordable!). Non doms are punished correct, even more given proposed stamp duty surcharge, buy to let investors punished, the pound will likely strengthen; it is unlikely that international buyers will drive the market correct. Like much of these forecasts, the success (or not) of Brexit will determine how we kick off in the 2019-2021 period. Pretty much correct
- Buy to let sector: we have stopped moaning on about the increased taxes and lack of reliefs; suffice to say the sector had it very good for a very long time. Some of the “allure” may have gone, BUT fundamentally the asset class is still attractive. Residential investment property is a real, tangible investment that people understand and will steadily rise over time. There is simply a lack of credible, understandable alternative asset classes. If I had £500,000 cash today where would I put it? Not volatile shares, not loss making cash, not classic cars. No, I would put it into residential property, and if it all goes horribly wrong then I can always live there! Not really a prediction but correct
- Brexit: too much of “the elephant in the room” to not mention; the route Britain takes will have large implications for the future strength of the UK economy. The fundamentals of the UK economy we predict will remain broadly positive, but sentiment will be very fickle. Broadly correct
- Headwinds: this is a new addition to the list, and we do feel for the first time in 10 years that there could be headwinds to the UK residential market. Aside from Brexit, and the Buy to Let and stamp duty tax rises there is, of course, President Trump; he seems serious about trade war correct, China, serious about confronting Iran very correct, serious about intimidating the US Federal Reserve; is this a global risk, possibly. There are signs of faltering growth in China and just too much debt globally. Also it is only fair to mention the Labour Party; if there was a snap election and the Labour party were to govern, then there is a real risk that rent controls would return, which would be disastrous for the residential investment sector. All pertinent and correct, but good news for the property market is the lack of support for Labour Party.
- A couple of other random predictions for 2019: for entertainment purposes only! Oil prices will trade between $50 and $70 throughout 2019 $55-$74 was range; not bad!, our stock pick for the year is Microsoft ($106) $158 a very correct 49% rise, our short is Purplebricks (again!) from 165p to 126p a correct 24% drop, the FTSE 100 will end 2019 lower than it started the year (again!) 6700 to 7600; wrong a 14% rise. Brexit will happen correct, and come the end of the year sentiment will be positive I think generally correct and more so than at any other time in past 12 months!. Sterling will strengthen against the euro by 18% to E1.3. it strengthened but only to 1.18, Theresa May will remain Prime Minister(the lunatics cannot decide who should run the asylum)wrong. Scotland will win the 5 nations wrong and there will be no assassinations in 2019 correct.
- We predict that these 2019 predictions will be good! We called the market well in 2015 despite not knowing who would govern the UK nor indeed what their economic policies might be. Our predictions were not too bad for 2016 considering Brexit and Trump. In 2017 our predictions were generally good for property and weak on other subjects and likewise in 2018. For 2019 I think it will be a subdued year from a property perspective BUT both globally and domestically the economic and political environments remain volatile. Correct, correct, correct.
What a good set of predictions! Importantly, we seemed to get everything property related correct. We understand the UK residential market and predictions on this over the long term have been very good. Importantly we got the direction and magnitude of movement of the wider property market broadly correct.
We slipped up on the housebuilders share prices, the FTSE100, politics and rugby; as we made very clear “these were for entertainment purposes only”.
Our Predictions for 2020:
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.
In 2018 we were “confidently optimistic”, in 2019 we were “cautiously optimistic”, and for 2020 we go for plain & simple “optimistic”. Whilst returns may not be huge, it will be a good, positive, stable market with limited volatility; just the sort of market people should want exposure to in these generally uncertain times.
- Capital values: Direction: upwards, Magnitude: 4%.
A national house price increase of 4%, or the equivalent of a real house price increase (after inflation of c2%) of 2%. Hardly exciting stats but this is a mature, stable, low volatile asset class. This is the national figure, there will be large regional differences.
- Long term capital appreciation: It will take another year to really appreciate the accuracy of our prediction in 2016. Back then we forecast a 5-year capital return of 23%; we did 6% in 2016, 5% in 2017, 3% in 2018, 2% in 2019, leaving 7% to achieve in 2020. We are saying only 4% for 2020 above, so that leaves our prediction 3% short; do-able but probably a bit punchy!
Our prediction for 2019-2023 was 17% (Savills 15%), and now for 2020-2024 15% (Savills 13.5%); steady away, this being capital appreciation, combine with the running net rental yield of say 5% per annum in the Midlands, and this is an attractive blended return of capital appreciation and annual rental yield.
- 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). Recently the North and West has outperformed the South and East, we think this will re-balance this year with new impetus returning to the market in the South and East. For our favoured region of the East Midlands we predict +5%. The “East” (East Midlands and East of England) are economically vibrant and will benefit further due to its proximity to London and the South East.
- Rental growth: Will be 2%, or in real terms flat. There is continued constrained supply of rental stock (buy to let supply falls), whilst demand continues to grow. Technology has enabled the younger generation to have more job mobility and more demand for renting.
- Interest rates: base rates are presently at 0.75%. We expect no rise in 2020. The markets think there may be a 0.25% cut in 2020. This seems likely. Suffice to say interest rates will not rise aggressively.
- Prime Central London: Last year we saw no catalyst to drive the market higher. We think now with some clarity on Brexit, a new conservative leader with a majority and no chance of a Labour government that perhaps these factors might just combine to be the catalyst. Prices in London have drifted for the past 3 or 4 years with prices in some areas are down as much as 25%, some value is returning the market. Selective purchasing in Prime Central London might prove a canny investment over the next 5 years. If one is looking for an “opportunity” to invest, then 2020 might be the year; don’t be left behind once again! It is very Brexit-sensitive, and of course will be massively influenced by the trade deals struck and the wider economic factors.
- Headwinds: We think these are subsiding. A new Government, a government with a majority, a decision made on Brexit, an opportunity for a successful future. Last year and last year’s predictions were just gloomy (correctly), be it a Boris bounce, a Boris bubble or a Boris bingo; quite honestly it doesn’t matter; we are where we are and as a country it seems relatively united with a need to get on and make the most of the situation.
Importantly the risk of a Labour Government and their very real threat of rent controls and higher taxes, have receded. For a while this was a real risk, and for now at least it seems truly scuppered.
- A couple of other random predictions for 2020: for entertainment purposes only! Oil prices will trade between $55 and $75 throughout 2020, our stock pick for the year is still Microsoft ($167), our short is Purplebricks (again!), the FTSE 100 will end 2020 higher than it started the year. Sentiment will be positive. Sterling will strengthen against the euro to E1.25. Boris will still be Prime Minister and there will be no assassinations in 2020.
- We predict that these 2020 predictions will be good! For the first time in a long while we have some visibility, an element of certainty, a base from which to proceed. This makes forecasting easier than at any time in the past 5 years!
PLEASE SEE PART 2 OF NEWSLETTER WHERE WE SHOW OUR RECOMMENDED AREAS TO BUY
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We wish our clients and friends a very prosperous 2020
The Team at Osprey Property
(a division of Residential Property Group Limited)