It has been a while since my last post. As many of you know I have just got back to London after an extended business trip to SA. The idea was to spend just under 2 weeks visiting various clients and associates but the overwhelming response once I arrived forced me to extend the trip to just over 3 weeks. During my time there I conducted two seminars, attended numerous property events and met some incredible people including one of my all time property heroes - Dolf de Roos. All in all it was an extremely busy yet enjoyable trip. But more about this and what it means for our clients in my next article.

Last time I promised to reveal the major factors I believe will lead to strong returns on your portfolio over the next 5yrs and why among others we should thank the UK's big developers and OPEC. So let's start...

1. Oil prices

First please put your hands together for OPEC. Yes ladies and gentleman I know that everyone is telling you that it's thanks to them (those big bad capitalists) that we are paying more for our fuel but the upside for the property inventors is that it will also push up the cost of housing. Any material that is petroleum-based or transportation-intensive will have pricing pressure during periods of rising oil prices. What has this got to do with housing? Let me explain

Let' s first cover the obvious - All building materials need to be transported and higher fuel prices force suppliers to pass the cost on to the developers. Prices have gone up for steel, aluminium, copper, concrete, brick, asphalt and plumbing fixtures, among other materials. At the same time, diesel fuel, used by trucks and heavy machinery on construction sites, are seeing massive price hikes.

But that's not the end of the oil trail. Many building materials contain some form of petroleum. For example, oil-related materials such as asphalt used in roofing, siding, and for paving driveways. Asphalt was up nearly 26% year on year in April.
So in short it's costing more to manufacture key building materials, it's costing more to transport it to site and it's costing more to run the machinery that construct the houses. So what will developers do? Foot the bill and reduce their already depleting profits? I think not - they will simply tack those costs onto the purchase price of their homes. So as oil prices continue to surge, so will house prices.

2. National House Builders

While we on the subject of house builders we may as well thank them next. Let's face it, it's not a great time to be a developer. As if rows of empty units with no buyers in sight weren't enough, rating agencies have now decided to slash the debt ratings for several builders. So on top of higher material costs, the builders will have to pay higher interest rates (guess who will foot the bill) if they need to borrow more money. And many do need to borrow.
The buyers vacuum created by gun shy lenders and further fuelled by doom mongering journalist has led to builders taking longer to shift their stock. The bad rap that new build housing received thanks to property clubs like Inside Track has also been of little help. Even those who want to buy, find that they can't get lending. The National House Builders reaction was simple - put new developments on hold indefinitely.

What this means in short is that the supply of good quality housing for both buyers and tenants will be reduced even further. So BTL investor read: Higher rental return in the short term and continued capital growth over the long term. What's not to love?

3. Inflation

At the risk of stating the obvious inflation is simply the persistent and appreciable rise in the prices of goods and services. And this means housing too. The Bank of England currently puts the UK's inflation (CPI) at 3%. So in very basic terms you and I need to pay 3% more for everything we buy. As inflation continues to rise (even at the BOE's target of 2%) the money in your wallet will effectively become worth less and less. This means we will have to exchange more of it to buy appreciating assets (like property) in a few years time than we do now. Very simplistic economics but I think you get the point.

4. Increase in population

I have said enough about the factors of supply and demand in the past so I will keep this short. More people = need for more housing. Increasing demand = increasing prices. The UK's population is growing annually by 300,000. The worlds population is believed to be roughly 6.7 billion and many believe we will break 9 billion as soon as 2042. That's almost another third of our current figure on the same piece of mass we call Earth. Doctors keep making medical breakthroughs that keep us living longer. People are getting married later in life and divorce rates are ever increasing. All of this leads to more single person household which in turn leads to more demand for housing. Do the math.

5. Increase in level of affluence.

Oil prices are up, food prices are up. No more double digit house price increases and everyone's using the "R" word. And then the Centre for Economics and Business Research (they might know a bit about economics) comes along and reports that there will be 1.7m millionaires by the end of the next decade.
Oops! I bet those dooms day mongers didn't see that one coming. Let's put it in perspective - there is currently 376,000 people with assets worth more than £1m. So 1.7million by 2020 will mean four times as many millionaires as today. Based on the UK's current population of 60m people, one in every 35 people will be worth £1m.
So what will all these new age millionaires do with their money? I don't know for sure but it's worth mentioning that the CEBR's research report further estimates that house prices will rise by 71% between 2006 and 2020, along with a 10% drop in the average mortgage payment as a proportion of household disposable income. How did those clever reporters miss this one?

So ladies and gents, without any further a due I would like to announce the winner. Envelope please, drum roll. And the winner is.............The Property Investor! Cue: Thundering applause!

I'll let you work on your own acceptance speech...

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I look forward to speaking to you soon.

Mike Smuts
Property investor and Managing Director of Smuts & Taylor.