“I have in sincerity pledged myself to your service, as so many of you are pledged to mine. Throughout all my life and with all my heart I shall strive to be worthy of your trust.” – Queen Elizabeth Alexandra Mary Windsor, June 2, 1953 (Coronation).
Welcome to a sombre Sunday supplement this week. What follows can only scratch the surface of what, in a year packed with surprise, disappointment, and the unthinkable happening, has been somehow by far the most eventful week so far. To put everything into perspective – the BBC news website currently lists the following as their headline subjects (in order):
Queen Elizabeth II
War in Ukraine
Cost of Living
(then onto the permanent headings – UK, World, Business, Politics, Tech).
On January 1st we’d have been delighted to have seen Coronavirus relegated to 4th place, although that would mean there were three major events that would have to come before it – and there certainly are.
The Queen’s passing is a monumental occurrence. 7 decades have seen immeasurable change in the fabric of society, culture, living standards, social norms and, happily, liberty and tolerance. You will always remember where you were at that moment the news broke – a moment just like that event which occurred 21 years ago today – the terrorist attacks on the World Trade Center. I only remember 3 events quite so momentous in my lifetime – the third, of course, being the news of the death of Diana, Princess of Wales.
I would hope the regular readership of this article would agree that I try to remain fair, balanced, and largely apolitical (that’s quite easy, because it is easy to criticise all the players in that game). The same goes for Monarchy versus Republic – an inevitable conversation at such an inflexion point in history. As so often, at both ends of the extremes there are some terrible conversations being had as people grab their opportunity to be heard by saying the most incendiary things possible – the oldest trick in the book.
That shouldn’t be relevant at a time like this. The Queen, born into the role, and unlikely to accede until her uncle abdicated when she was 10, performed to an incredible level well into her 90s. She even seemed to pass with grace – having seen in her 15th prime minister earlier in the week, a little over 48 hours later she was gone. Of all the ways it could have played out – this seemed the most fitting end to a life of fame and fortune, interwoven with trouble and strife, but most of all public service.
If you reflect on the objectives I try to adhere to when I write this article – you can see the parallels. One of the great strengths of the Queen was to remain apolitical, in a world that in the past decade has become so much more fractured on that front, with more extreme leaders, more extreme “mouthpieces” on social media, and more desire to split and go it alone as nations than stay together as a stronger unit. The hive of merger style activity at the government level has definitely shifted into the break-up/demerger stage in the recent decades.
With a nation, and indeed large swathes of the world, in mourning, the shockwaves are there for everyone to see. I thought long and hard before settling on what to include for this week, noting press reactions and also cancellations (the one that made me sit up, it won’t surprise you, was the postponement of the Bank of England Monetary Policy meeting scheduled for next week). However, in the background of this cataclysmic news, we were already at Thursday afternoon – and it had already been one of the most eventful weeks of the year for property and macroeconomic news – and it is that that I will continue to focus on, as I do week in, week out. God Save the Queen – may she rest in peace.
Scotland Rent Freezes and Eviction Ban
Some of the other events this week will no doubt, in the fullness of time, also go down in history for their impact on the property market – particularly in Scotland. We can only presume that Nicola Sturgeon heard what the new PM was intending to do, and believed that those measures did not go far enough – and so announced a policy that is likely to send permanent shockwaves through the PRS in Scotland.
For those that didn’t see – the policy is rent freezes until March 2023. The subject of rent controls in general has been discussed at some length in the past, but all of those arguments come back to the fore. The political motivations are perhaps to win votes, of course, but also, as with many ideologically grounded policies, I’m sure that also the intentions are good. However, intentions, actions and consequences can easily be divorced, and in fact the policies with the best intentions sometimes have the very worst unintended consequences – and this is one of those policies.
Scottish Landlords cannot put rent up between 7th September 2022 and 31st March 2023. There is also an eviction moratorium over the same period. As a portfolio holder with a more corporate/institutional mindset (one day I will be an institution, or at least that’s what I tell myself, so I might as well be acting like one now) – my first thoughts were “OK, so what (for me, and for my investment group)”. Rents are managed on an annual basis, and also on a turnover of tenancy basis – so next year’s rent rise will be notified in April to take place in the second half of the year. There’s little of any concern, in my view, in practical reality.
Very quickly my mind turned to the interpretation by the wider public, and the smaller landlords. Just as with UK businesses, the vast majority of landlords still have a handful of properties only – a sentence that I don’t suppose I will be able to write in 15 years time. What does this policy mean in both the near term and the long term?
Well, if I have one tenant who doesn’t pay – whether the reasons behind that are cost driven, or opportunistic – and I have two or three properties – what then? If I’m one of the 30% of mortgage holders in the UK who have a floating rate loan, and rates are rising at such a strong pace, and then one of my properties is not paying – I’m going to be into negative cashflow territory very quickly. Perhaps my two or three properties normally supplement my other income nicely; but perhaps I’m retired and don’t have much of a pension, and rely on that money for my own living costs, which have, like everyone else’s, gone up by a large amount.
I don’t actually need to even be in that position, though, do I? I just need to think about “what if?”. I’ve held the properties for years, probably, and finally have had a nice increase in the base value of these properties since the commencement of the pandemic. I’m sick of the press vilifying me. I’m sick of the propaganda put out there by pressure groups whose leaders get paid more money than one of my properties is worth for a year’s work. Time to get out, cash up, do something else with the money. In fact, I can finally get 2.5% a year in the building society now if I put it into a bond. That’s not bad. Haven’t seen those rates for over a decade…..
You get my point. We could go further. An infringement on the (increasingly highly regulated) free market in terms of telling me what price I can charge, and when I can actually exercise the side of the law designed to protect me? This sets further precedent, Ms. Sturgeon – and I don’t like the direction of travel. The institutions understand that the PRS is too big to fail and is a necessary evil, for all but those on the “left-of-Corbyn” left (i.e. McDonnell), and that this will simply lead to the withdrawal of stock in what’s already a sparse market for any tenants that are unfortunate enough to need to try and move at this time.
Even if I haven’t put my rents up in years, being told I CAN’T has an impact, even if I wasn’t going to. It also leads, most likely, to a massive swathe of rent increases from April 2023 “in case it happens again”. Everyone will see it coming – and so, more pressure on LHA rates of course. You understand why the institutions would be licking their lips.
You’ll struggle to find an economist who tells you this policy is a good idea. Rarely is the field quite so unified. The idealogues will continue, the “all property is theft” brigade will rejoice – but, frankly, a pox on their houses. The tenants will be the ones that suffer here, and I, for one, never got into renting property to see people get squeezed, hurt, or made poorer – just to provide an absolutely essential service, in a safe industry, at a fair price, with a fair service level. The rent freeze truly is a sad day for the Scottish PRS.
So – is that all confined to Scotland? We will see. We know that Wales has tended, under Drakeford, to follow Ms. Sturgeon’s lead. His apparent haplessness might see a similar policy enacted. Time will tell.
The Hardship Funds
Rather than just throw the stones, how about a solution? Well, the single most frustrating thing about this whole affair is that there already WAS one. It’s been provisioned for, and in place. I’m not saying it is sufficiently funded – it likely isn’t – but still, surely get stuck into that first of all then lobby for more money as needed. It is the hardship funds, provisioned for by our now-last-but-two chancellor, Mr Sunak. Instead, this route risks ripping up the rules on the PRS and, as always, fear will do much more damage than actual fact.
Within 30 seconds of the policy being announced, my brain was already thinking “Wonder how many tenanted units we might be able to buy in Scotland” – and you can be sure if I’m thinking like that, then it is because it is the contrarian view, catching the falling knife (hopefully with some skill).
Will England follow? Not in any great hurry, under this administration. I don’t believe Labour (under Starmer) would either. The opposition look a bit devoid on ideas in terms of how to engage with, and handle, the PRS – so I see little to worry about if this Scottish precedent concerns you.
New PM – First week
So – onto our new PM and what’s been done thus far. A barnburner of a first week in office, of course. For those under a rock on the cost of living crisis news – the cap on the cap was announced. Instead of OFGEM’s ridiculous £3,549 figure for the average house, the number has been adjusted down to £2,500 and will be held there for the next 2 years. This looks like a truly classic political decision – the least worst of a suite of horrific outcomes.
Some weeks back I suggested that the best way forward was to cap the cap, on the basis that simply freezing the prices was a nice idea but an element of substitution would be a good idea. Hard, with energy – one way is to turn off and drain down the hot tub you bought during the lockdown – another way is to wear 3 or 4 layers and turn the heating down a couple of degrees for those not in as fortunate a position. This hasn’t, of course, turned this into a non-problem – the £400 rebate still sees the cap up to £2,100 effectively – from £1,277 which expired in March 2022. Still an increase, on an annualised basis, of 64.4% which is well above anyone’s idea of the inflation rate (and, of course, has contributed sharply towards it).
It could be said, as someone who has been banging on about inflation for the past 21 months, that I should be praising the new PM’s fiscal policy for “taking it by the scruff of the neck” or “asserting fiscal dominance”. Well, that would be ignoring the near-complete lack of costings for this policy so far, guesstimated to cost £150bn (in their defence, who knows that the gas price won’t double again, or oil won’t hit $200+ a barrel in the next few years as and when Putin decides to fire the few remaining rounds that he has left in the chamber?). Would seem smart, as Vladimir, to cut your oil production in half for example, and see crude perhaps double from the relatively false lows it seems to have found at the moment. OPEC would openly be annoyed, of course, but given the massive conflict of interest in all of the members and just how much they profit when the oil price rockets upwards – is that an impossibility.
UK Credit Rating
Still, costings are useful. Useful for the entire credit rating of the UK – which at this point is in danger. The only other information we have at the moment is that it still appears to be the plan to scrap the national insurance rise, and cutting corporation tax still looks to be on the agenda – cutting from 19, or not raising to 25, we are not sure. The mini-budget (only mini because of the lack of preparation, not because of the quantum of the measures being announced, I’m sure) will be postponed for a week during the period of mourning.
The bond markets are the ones who have spoken first. They have, as yet, shown very little faith. Inflation in terms of the peak has undoubtedly been “solved” by this policy – and that’s likely a risk worth taking. Some months back I quoted the best piece of quantitative research I’d seen around just how much the inflation rate had moved on a semi-permanent basis in the US thanks to the pandemic, the stimulus, and the supply chain disruptions – it was around 75 basis points or 0.75%. Tiny, you’d think – but as a component of inflation, all else being equal, the pre-pandemic 2% becomes a post-pandemic 2.75%, which is not acceptable under the current inflation targeting.
Bond yields and the cost of debt
The yields are up, up and away. The 5 year bond is basically at 3%, the base cost before margin for our BTL mortgages – seeing rates likely to head towards 5.5% in the near future, pending the result of the next interest rate rise in the UK. The 15-25 year range is trading around 3.5% – a month ago it was 2.3%, 6 months ago it was 1.7% (so yields have effectively doubled). For the first time, I’m wondering just how much worse it gets from here – but the message is clear. The bond markets say this will now be “stronger for longer” and it will be harder to return inflation to the target, on the back of all of this extra borrowing that will need to happen (of course, if we don’t tax to raise the revenue, we must borrow it).
This is the lack of faith. At the moment we are being promised the world – sort the energy crisis, lower taxes, offer up growth (lowering tax does automatically raise the GDP in fairness), and sort out the NHS whilst being fiscally prudent throughout. This approach simply does not add up, and that is spooking the markets. This smells dangerously like Modern Monetary Theory, and at some point, someone has to break it to Truss that it just doesn’t work like that. The next £150bn of borrowing (as best guess, and it won’t surprise you that I’d go overs, not unders, on that quote) might be the tip of the iceberg when it comes to the money needed to actually enact a workable energy strategy in a short period of time. The message to business is very clear though – in a time where there is incredible bad feeling towards companies making profits as individuals struggle with the largest real terms pay cuts they’ve ever experienced – come and make some money. Frack – something that has been mischaracterized in the press. Who would have thought Climate could be fifth on the news list, after all? But it is, right now.
If you don’t trust the gatekeeper – you charge a bigger price. So what for the government? Well, payouts on inflation-linked bonds go down, in the short term, as inflation peaks at a lower level – but are larger in the long run if inflation is stronger for longer instead. The duration keeps the peak rate of interest down, but keeps the cost of money higher for longer as well. The bond market has adjusted its probability down from 70% for a 0.75% rate hike next time out to just over 55% – with the 0.5% hike picking up the slack. This would have been an unthinkable conversation in January this year, but that’s where we are. And so what for us? This inflation-busting measure does mean it is ever more likely that we “only” see 0.5%, but go back to the “stronger for longer” – a lot of my defensive measures that I’ve expanded on over the past few months, breaking mortgages to re-fix at the rates that were around, because of the upside risks – might see a higher return than I was hoping for.
It still isn’t too late to hedge on that front, and I’d recommend that if you haven’t already, you look at fixing. ERCs can be added to loans and valuations now are starting to see the now-expected drop in the market be priced in – before it has even happened, IF it even happens. That’s the game…….until next week, keep calm and carry on.