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 2021.
Assessment of our 2020 predictions:
Our predictions in the past have been pretty accurate, so what about the predictions we made in January 2020 for the UK property market in 2020:
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. Correct for the wider house market, and definitely uncertain times!
- Capital values: Direction: upwards, Magnitude: 4%. Direction correct, magnitude was even greater at 6% (Halifax) or 7% (Nationwide) 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! Correct, our 5 year prediction in 2016 was pretty much bang on; 2020 7%, total over 5 years; 23%
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. Direction correct, magnitude slightly more at 6 or 7
- 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. Correct, 2.4%
- 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. Correct, no rise, but there was a cut.
- 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. The Prime central London market was flat over the year. The opportunity remains.
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. Generally this was correct, then we were served the curveball of Covid.
- A couple of other random predictions for 2020: for entertainment purposes only! Oil prices will trade between $55 and $75 throughout 2020, too tight given Covid our stock pick for the year is still Microsoft ($167) $222; a very good 32% return, our short is Purplebricks (again!) 126p to 106p, 16% fall; not bad either, the FTSE 100 will end 2020 higher than it started the year 7620 to 6460; wrong. Sentiment will be positive guess correct, excepting Covid. Sterling will strengthen against the euro to E1.25 Boris will still be Prime Minister and there will be no assassinations in 2020 correct!
- 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! And then Covid hits!
Generally the predictions were very good, once again. Especially those relating the property market. What we didn’t foresee is Covid. But it would seem unfair to expect us to have known that!
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.
Lastly, we are really pleased with the 5 year price prediction we set in 2016; which was very correct.
Our Predictions for 2021:
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.
I think we have to re-run the phrase “optimistic”, which we used for 2020. 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%.
Same prediction as 2020; 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.
- Timing and Transactions: a strong market until the end of March (to benefit from the SDLT discount), followed by a bit of a mid-year lull as we get to grips with the roll-out of the vaccination programme and its impact on Covid numbers, ending with a strong recovery in activity in the latter part of 2021.
- Long term capital appreciation: Our 2016 prediction of a 5-year capital return of 23%; was correct. We are very proud of that prediction. Our prediction for 2019-2023 was 17% (Savills 15%), and now for 2020-2024 15% (Savills 13.5%); to date 2% in 2019 actual, 6% 2020 actual. Steady away, this being capital appreciation, combined 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). We still think there will be 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 from any economic recovery post Covid.
The “escape to the country” trend continues, and we can expect rural properties in the East Midlands where a perceived better quality of life exists, to remain in strong demand.
- 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 0.1%. We expect no rise in 2021. The economy has to recover, businesses will need all the help they can get, rates will not go up.
- Prime Central London: Last year, for the first time in about 5 years, we saw glimmers of hope for the PCL market. There was a catalyst to drive the market higher; Brexit and no threat of Labour party. Covid clearly put a dampener on things, alongside Brexit indecisions, but if we can control Covid then we believe that selective purchasing in Prime Central London will prove a canny investment over the next 5 years.
- Overseas buyers: will face the twin effect of a stronger pound and higher rates of stamp duty from April, due to the introduction of a 2% surcharge. Perhaps by April international travel restrictions will be relaxed. This could be used as a negotiating tool by international buyers, but its overall effect will be negligible, even on the London market.
- Stamp Duty: The Government realised that turning the lights out on the housing sector during Covid would kill the weakened economy even faster. Not only did they allow the housing market to re-open in May and have kept it open ever since, but they boosted its return with a stamp duty tax holiday. This ends in March 2021, and may cause some short term turbulence, but it is more likely to lead to a fall in housing transactions than a fall in house prices.
Headwinds: I said last year these were subsiding! Then that hurricane of a headwind called Covid hit. This year I think things will normalise to the new-normal. The country is united, the sentiment is one that we can and will beat Covid. Headwinds will subside in 2021, and in the second half of the year we will be in a much better place.
While Coronavirus remains a wild card, the vaccine appears to offer some optimism for the future.
- A couple of other random predictions for 2021: for entertainment purposes only! Oil prices will trade between $50 and $75 throughout 2021, our stock pick for the year is still Microsoft at $222 (we first picked this in 2019 at $106), our short is bitcoin (E31450), the FTSE 100 will end 2021 higher than it started the year. Sentiment will be positive, surely. Sterling will strengthen against the euro to E1.20. Boris will still be Prime Minister, Covid will be under control, Joe Biden’s popularity will increase, Rishi Sunak will be the next PM in time, and there will be no assassinations in 2021.
- We predict that these 2021 predictions will be OK! Last year, I said “for the first time in a long while we have some visibility, an element of certainty, a base from which to proceed”. I think this time I can say we have no visibility and absolutely no certainty BUT we do have a base from which things should improve. We will prosper.
LOOK OUT FOR PART 2 OF OUR NEWSLETTER WHERE WE SHOW OUR RECOMMENDED AREAS TO BUY
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We wish our clients and friends a very prosperous 2021
The Team at Osprey Property (a division of Residential Property Group Limited)
