Supplement 03 Mar 24 – Boingggggg

Mar 2, 2024

“Rising unemployment and the recession have been the price that we’ve had to pay to get inflation down. [Labour shouts] That is a price well worth paying.” – Norman Lamont, former Chancellor of the Exchequer, from a speech in the House of Commons, 16 May 1991


Before we begin – Rod Turner and I ran a Property Business Workshop in January in London. We covered a wide range of topics – all the way from what a great investment looks like, to how to operate more than one company, why you would do that, how you might structure it, all the way down to a whole host of productivity hacks and general “January fitness” activities for your business(es). We enjoyed it, got some great feedback, and met some great people too. We are going to run another one with fresh content including due diligence (both on business partners and with a view to lending money), joint ventures, mergers and acquisitions and some accompanying case studies on some easy (and more complex) deals that we’ve done. The tickets for the next one are here – the date for that one is Wednesday 24th April, and there’s a discount for the early birds that’s ending very soon so don’t be shy………


So – the march into March. One of the great things about writing the Supplement is that anchor in the week – the check in. On an individual level – how did the week go from a business perspective? From a personal perspective? I get to reflect as I sit and write. That’s where this week’s quote came from – reflection. I have, on a few occasions, harked back to the 1990s as the place to look for lessons about inflation that looks and feels a “bit like this”. The 1970s was cited as people got excited, talked about runaway inflation, stagflation, and oil price shocks – however, there were lessons learned back then that have definitely influenced policy decisions this time around.


The 1990s – not so much. And a more similar root cause to an extent, with financial and geopolitical factors at play in a frictional sense, rather than on a war footing. But as Lamont’s quote shows, the “route one” philosophy for solving inflation – destroying consumption – was the 1990s solution, whereas the “warning shots” of returning to what’s been deemed normal interest rates has – at the moment, and we are nowhere near the end of the cycle, the Bank of England’s “70% of the rate rises have taken effect” as cited last week sounds hopeful – led to the approach to a relatively soft landing.


Unemployment could be reframed here though as unemployment plus inactive. We are 75% employed in the 16-65 category, as opposed to 76.2% before the pandemic. That doesn’t look obvious at all at the macro level when you only focus on unemployment, where the figure remains very similar to pre-pandemic. Consumption finally DID drop significantly in Q4 of 2023, and the measure of just how much was particularly stark around Christmas-time. I’m still very sceptical of the hugely dropping retail figures in December 2023 and the immediate recovery in January 2024, but time will tell. As I revealed a couple of weeks back, the standard period for revision of macro figures is three years in total….


The moral of the story in 1991 is that, somehow, the incumbents held on and were given another chance. Their hard choices, although there were definite mis-steps along the way, DID solve inflation and laid the foundations for a 15-year boom, which morphed into uncontrollable and unsustainable credit growth that no-one did anything about, but moved average wages, healthcare outcomes, and a whole number of other very important macro metrics forward in a very big way. The overblowing and gorging on boundless credit then led to a big bubble that burst, of course, as you will know. That wasn’t really in any way politically motivated – the right of the US system did as little, or even less, than the centre-left of the UK system at the time. There’s no way, I don’t think, that anyone believes 2008 would have been particularly different under a Conservative administration.


However, it set a pretty incredible set of expectations which were then impossible to keep up with, as the decision was taken to cushion the blow of 2008 over what should have been around 20 years. Instead there were 12 until the pandemic. At the same time, the incredibly cheap debt that resulted from the Great Financial Crisis, whilst underwritten in a much better way, was incredibly easy to service (of course) and led to booms in private equity markets and debt-fuelled takeovers. These, some of which are ticking time bombs, are one of the reasons why I have become more sceptical over the “70%” claim from the Bank of England and am getting worried that we are becoming overconfident, especially in terms of the rhetoric around cutting rates being the way forward, when there’s still a 10-15% chance the rate might have to go to where it should have gone last September, and perhaps beyond that.


I’ve reflected “across the pond” a number of times in this cycle and spoken of how the US are ahead of the UK in the cycle. Their recession that never was – their technical recession – of 2022 – is 12+ months further behind them than ours. Their CPI path even looks pretty similar to ours, in the rear view mirror – the halving of the rate (theirs was 6 to 3 percent between Feb 23 and June 23, ours was 7.9 to 3.9 June to Nov 23) – so it seems reasonable to look to them for the way ours might pan out. 


Since June 23, it has simply bumbled around that 3% level. They have slightly different names for the types of inflation they measure, but there is a similar focus on core inflation, and even a “supercore” notion that doesn’t exist that I’m aware of in the UK. Keep it at the high level though – they’ve done OK on a growth footing (2.5%+) but failed to get inflation to move at all on the needle since June last year. There’s often a stubbornness of around 12 months, as I noted when first analysing the likely path of this inflation cycle whilst “team transitory” were busy navel-gazing and speculating how quickly all of this would pass.


Indeed, their CPI ticked back from 3 to 3.7. This is what ours may look like around April 2024, due to cuts in the energy price cap, but trailing inflationary headwinds. Many have been convinced that in April we will hit 2% or go under it, but I think they’ve generally failed to see the writing on the wall with things like large wage rises, services inflation still being over 6%, and the likes. Printing a “high 2s” and then going back into the 3s and 4s is a more likely outcome in my view. 


It is a strange phenomenon, because genuine growth inflation is our only way out of the extra debt burden created by the pandemic and the response to the pandemic. Any party of any colour can see that, but can never really talk about it – even though people still don’t really understand, or particularly care too much, about inflation. When wages don’t keep pace you have a social unrest situation, or at the very least a large amount of industrial action – sure – that has mostly played out now, with a couple of outliers still holding out for their settlements, and the Government happy to play a war of attrition against them. Whether they will hold out for the election – or get a sweetheart deal when an election date is set, at least internally – we will see. 


Anyway – an opening paragraph has ballooned into an opening 1200 words, so, for reasons of expedition, I’m going to move forward with the macro metrics roundup for the week. As usual – four to discuss. The CBI distributive trades needs a mention due to the surprise results. The mortgage lending figures are of course of interest. The money supply figures are out also for January – and, of course, last but never least – the bond and swaps yields.


Onto the Distributive Trades then. A survey of businesses taking the retail temperature of the country in a quicker fashion than waiting for the monthly retail figures. The forecast was -47 on the back of a -50 print last month – the lowest since 2020 – but the outcome was actually -7. Still negative, but a lot less negative than expected, and a sign that cautious optimism may be on the horizon. Cuts in investment by retail businesses are still there, but at a much lower differential than this survey over the past 12 months or so. The call to the Chancellor, in anticipation of next week’s budget, is to cap business rates increases for retail businesses particularly.


Mortgage lending has made a few headlines in recent times. The simple reality is that mortgage takeup scaled back significantly last year with rates escalating as much as they did. Credit was (and is) available – very much – but expensive – in comparison to recent years, anyway. There are two particular areas of interest to look at here. Firstly – mortgage approvals. Seen as a good bellwether of the health of the market for buyers, of course. Your “average” (a dangerous word, as you know) healthy market would generate between 65 and 70 thousand mortgage approvals per month.


In 2021, this tipped over 100,000 mortgage approvals per month – a sign of a bubbly market, of course. Once Truss had done her bid, and the bond yields had surged, we hit a cycle low under 40k in January 2023. With the same sort of level of bond pricing (or, actually, a bit higher) there was volatility last year back up above 50k per month (June ‘23) and then back under 45k very quickly afterwards, due to the “second wave” of yield surge (not often talked about, but higher yields than post-Truss). That’s subsided and we had our best month since late 2022 in January with approvals over 55k (55,227 to be precise). I’d expect February to have been significantly better than that. Once again we find ourself in that place of cautious optimism – well below par in absolute terms, but unmistakably heading in the right direction.


Then, there’s net mortgage lending. Do we pay down – a decision that many property investors ask all of the time. Is it the best way to get access to a savings account? Or are people having to bridge the gap between what their monthly payment will be in the “new world” of rates and are using savings to get those balances down, to soften the blow or in caution? As discussed last week, we are saving at a fairly aggressive level in the UK right now, and perhaps this is where some of those savings are going?

The consensus was to expect a small increase in net mortgage balances across the board of £200m or so. The result, instead, was a net payback of nearly £1.1bn, so a fair miss given we are not talking a ridiculous amount of new mortgages etc. Consumer behaviour right now is not what is being modelled, and perhaps this reduced consumption is going to finally put the nail in the inflation coffin after all. It is a beautifully soft landing if it all works out this way – but it still remains a 50/50 for me, rather than a 70/30 in favour.


I will quote from the Bank of England statistical report directly because there are a few points that are fairly eye-popping – all with some commentary afterwards from me:


  • Individuals repaid, on net, £1.1 billion of mortgage debt in January compared to £0.9 billion in December. A miss on the consensus forecasts of £1.3bn, as mentioned above.
  • Net mortgage approvals for house purchases rose from 51,500 in December to 55,200 in January. Net approvals for remortgaging remained stable at 30,900 in January. Not unhealthy, not roaring back to a healthy market quite yet though.
  • The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages fell by 9 basis points, to 5.19% in January. 5.34% was the high in November 2023. At that level around 40-45% of mortgages would have been above the “magic” 5.5% stress test level which was in place since 2012, but not massively above that – and of course, would have been on fixed rates so scored for affordability. What I’m saying is – uncomfortably close to real crunch times. 5.19% still isn’t great when you look at the market promising 4% rates or thereabouts in their marketing, and is a much more accurate temperature-taker. This needs to get back under 4.5% to get mortgage approvals back up to the 70k+ level monthly.
  • Net borrowing of consumer credit by individuals rose to £1.9 billion in January, from £1.3 billion in December. Borrowing to pay for the after-effects of Xmas? I am concerned about where the “buy now, pay later” data appears in these figures and am enquiring with the Bank of England. 
  • Households deposited, on net, £6.8 billion with banks and building societies in January. Savings are increasing – the trend started in September 2023 and is continuing. There was also a relatively less attractive result for the savers in January: The effective interest rate paid on individuals’ new time deposits with banks and building societies fell by 27 basis points, to 4.53%. The effective rate on the outstanding stock of time deposits increased by 5 basis points to 3.76% in January, and the effective rate on stock sight deposits increased by 4 basis points to 2.07%. (for time deposits, think building society bonds, for sight deposits, think instant access)
  • UK non-financial businesses (PNFCs and public corporations) borrowed, on net, £0.3 billion, up from £0.1 billion in December. Businesses are borrowing less, and this trend has been the case since the middle of last year as rates went up. Including all SMEs, there has been net repayment now rather than net borrowing for 10 months now. How do CBILS and Bounceback loans affect this figure of course – in many SMEs they are creating their own type of mini fiscal drag.
  • The net flow of sterling money (known as M4ex) continued to be volatile month-on-month. M4ex fell by £0.6 billion in January, compared to an increase of £19.4 billion in December. As seen in recent months, flows have largely been driven by movements in non-intermediate other financial corporations’ (NIOFCs’) holdings of money. These holdings decreased by £6.9 billion in January, compared to an increase of £15.0 billion in December.
  • The flow of sterling net lending to private sector companies and households (M4Lex) amounted to -£3.5 billion in January, down from £6.4 billion in December. This was mainly driven by a decrease in the flow of lending to NIOFCs.


The last two points segue us nicely into the money supply. I prefer to look at M2 (the Bank get more interested in the shadow banking sector, because it is less regulated and more difficult for them to control, of course – but should spend more time assessing the root cause and implementing solutions as to why the shadow lending/banking sector exists and has got quite so large, in my view) – and M2 has moved from 2.46 trillion in Jan 2020 to 3 trillion or so (reduced slightly month on month) for Jan 2024. This is an increase of just under 22%, an incredibly close number to the amount of inflation there has been since this point (depending on what you are measuring and how). 


This is interesting when you go with my “across the pond” comparison. The M2 increase in the US in the same time period is 36.2%. This is in a country that has suffered less inflation (in headline terms) than the UK – fairly significantly less. It has also managed to grow a lot more than the UK. The real household disposable incomes (my preferred household temperature-taking measure) looks similar in the US as to the UK but a few months further on (probably in a pattern that the UK will struggle to repeat, but I echo my broken record point around April wage rises and it seems we are having a go). It also seems – to Mr Hunt’s disappointment, I’m sure – that a relatively robust economy and solid growth figures are not going to guarantee Mr Biden (if, indeed, it is he as the candidate) an election victory. 


I wouldn’t be surprised if this election had the longer-term result of a constitutional amendment in the States, as an aside. You can’t stand for president if you are under 35. The amendment may well say you also can’t stand if you are over 75, or 80, or similar. This will all be after the event of course – perhaps many years after. It’s a Hobson’s choice of truly generationally epic proportions at this point.


So – back to the money supply. The first really favourable metric of comparison between the two countries in favour of the UK. It is possible that inflation can be contained if that money supply metric remains under control. The issue is, of course, that it is not completely controlled by the Bank of England! The monetarist school may well be celebrating the control of inflation, however – although the figures will still need to play ball at some point, which they aren’t going to do in the next few months in a meaningful way.


That leads us to the yields. We opened the week on the gilts at 3.912% yield on the 5 year gilt, and closed it just the right side of that psychological barrier at 3.996%. There was a breakout above 4.1% on Thursday for a short while, presumably because of the better-than-expected mortgage lending figures, although I’m not sure that had any substance to it. A healthier housing market perhaps does suggest “stronger for longer” on rates is OK, but not in any meaningful way I wouldn’t have thought. The Nationwide supported this on an ongoing basis by, as always, being first to the presses with their February figures – 0.7% up for the month and 1.2% up for the year, compared to consensus forecasts of +0.3% and +0.7%, as the market continues to outperform expectations. It will be interesting to see how long this goes on before the minds start to change in the doom-mongering media, but the election will likely come along at an appropriate point to stall this fledgling market……


The swaps also managed to stay below the bond yield still, even in the face of slightly higher demand. This speaks to just how low demand still is in absolute terms for mortgages, at around 20% below “healthy” levels, and price sensitivity (forced or elected) is the clear reason. At the close on Thursday, the uk 5-year gilt was around 4.04% whereas the last 5-year swap was traded 3.964%. A discount! Handy for the borrowers.


That leaves 2 remaining points, one for the soapbox and one for those who enjoy the analytical pieces. Firstly, I talked in detail last week about the Bank of England in front of the Treasury committee, and my tin foil hat part was that the person currently advising Jeremy Hunt’s Treasury might get the gig as Deputy Governor of the Bank of England ahead of someone who had already served 6 years on the committee – in spite of the fact that the committee is losing its most experienced member by some way, Ben Broadbent, this summer. It seemed clear that the politically expedient appointment (made by the Chancellor and the Prime Minister) would be the “Hunt Treasury Insider” – and so it came to pass this week, as it was announced that Claire Lombardelli would join the committee as the Deputy Governor for Monetary Policy. Nothing to see here, of course – but any votes from Lombardelli that aren’t downwards, from her appointment in July onwards, would be a surprise to me – let’s just leave it at that!


Catharsis complete. The other report I read with interest this week was the Zoopla February market report on their House Price Index. The tale of the tape was fairly straightforward:

  1. Prices down 0.5% year-on-year on Zoopla numbers
  2. 15% more sales agreed in Feb versus Feb 2023 (correlation with the mortgages agreed numbers there)
  3. 21% more homes for sale than a year ago – so the sellers are also back to the market in volume
  4. Of the 12 regions Zoopla consider, 7 are up in value and 5 are down
  5. The market splits into 3 tiers in Zoopla’s eyes – Southern England, London, and the rest of the UK – defined by affordability
  6. Activity has been boosted by falling mortgage rates (which have stopped falling)
  7. The outcome expected is more sales, rather than price growth
  8. Sales volume expected for 2024 is now 1.1m, 10% more than 2023


I have come to have great respect for Richard Donnell, the Executive Director of Research at Zoopla. When I disagree with him, and work that bears his name, it tends to be a nuanced or even pedantic disagreement rather than a direct contrary position. I think their call of falling prices in 2024 is wrong, and said so – they’ve started to soften that language now only 2 months in. My 4% mid-point prediction still looks a lot more accurate than their sideways or slightly down prediction, to me – and I’ll happily have a 50p wager I end up closer than they do.


To be clear, the new supply is lower than the sales agreed – the 21% represents the outcome of a year where more has come to the market than has been removed on it, down to low sales volumes.


Zoopla sees the current market 1.5% off the top which on their numbers is October 2022 (that feels very close, just a month or so late, from the real peak). 

With respect to their 3-tier market, “Southern Regions” – The East, The South East ex-London, and the South West, have seen the biggest price falls. As a rule they are 30% (on average) more expensive than the typical UK house.


London is doing better, in Zoopla’s eyes, on the back of a 7-year lull in pricing. This makes sense. There was a bubble in London, caused by international cash of >£100bn coming into that market from 2009-2015. There was no particular burst – just some time to let inflation take its effect, and a slow period. That has made affordability better in spite of high pricing, and that therefore puts London in a better position. 


I would add to that – London also underperformed the rest of the UK in capital growth terms in the “Covid dividend” period, and was the lowest region in terms of capital growth – almost half of some of the figures touted for the South West, or Wales. That lack of Covid dividend also put them in a stronger position to kick on when inflation and wage rises took hold.


The “rest of the UK” has house prices 28% below the average (almost a mirror of region 1). In reality, both of those regions should be looked at as a percentage with them taken out of the denominator, which would exacerbate those percentages even more (see – when I disagree, it is nuanced/pedantic!).

On rates it is worth quoting directly: “Buyers should anticipate 4-5% mortgage rates over much of 2024. Our consistently held view is that 5% mortgage rates are the tipping point for annual house price falls. Mortgage rates over 6% for a sustained period would lead to larger double-digit price falls. Mortgage rates in the 4-5% range are consistent with flat to low single digit price rises.”


There is a psychological reason for picking the tipping points on the absolute number, although the mathematical science behind it should be questioned. In this article, you can see that the average completion is drawing down at 1% higher or more than the best buy rate (5.19% vs 4.09%) – although you’d need to look at the best buy rate from 2-3 months ago rather than today to get a fair comparison, to allow for the time lag in completions. 


The difficulty in going further is in understanding which “mortgage rates” are being referred to, really. I’ve used that as this week’s image, because Zoopla blend their data with the Bank of England to come up with a number (and they see today’s number at 4.4% – 4.29% is available as I write this).


There isn’t too much reasoning given behind it only being sales volume growth, rather than price growth, certainly not anything data-based. It sounds like they are anchoring the analysis by what they’ve forecasted rather than digging further. The reality, though, is that if rates do fall from here/we go into a bond bull market, which I expect us to do at some point (even if a relatively slow one), then prices are more likely to accelerate away than volumes to rise. Will we see those swap rates back at 3.25% before the end of 2024? If we do, expect my pricing estimations to be too low – although I am aware that the election will knock the steam out of the market somewhat.


One more shoutout for a surprise call I had this week, which I enjoyed. It wasn’t a long conversation. It was one self-confessed data geek calling another. The excitement whilst discussing a stat that has a 98% correlation with the land reg data 5 months into the future was palpable. Once I am cleared to say more, I definitely will do – but “nowcasting” the future land reg data could be a very valuable tool to have in the toolkit, I’m sure you’d agree!


The short term looks bright enough, without anything too obvious to knock this market off its perch. Trappy, great for the hard workers – loads of deals out there, vendors now think it is 2023 rather than 2022…..all has lined up very well in my operation for purchases in the first two months of 2024 thus far, and we are looking forward to doing more and having a good year, even if the green shoots only take us to the lower end of my forecast in terms of pricing. 


Next week, make sure to order your coffee pods or whatever you need in advance, because there will have been a budget in the interim period!


Congratulations as always for getting to the end – don’t forget the Property Business Workshop on Wednesday 24th April – tickets for you, or anyone you know who might want one, here: . Onwards, upwards, and we spring into March – Keep Calm and Carry On!