The individual has always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, and sometimes frightened. But no price is too high to pay for the privilege of owning yourself.” – Friedrich Nietzsche, German Philosopher
Welcome to the supplement! This week I wanted to make a particular feature of the phenomenon of benchmarking – because I’m seeing it all around us on social media, and getting a lot of messages that are falling foul of this (very typical) human trait. This is where, sometimes consciously but most often subconsciously, we measure things by having a false, out of date, or unhelpful frame of reference – and then get stuck, or make bad decisions on the back of it. It is absolutely rife at the moment! We humans are flawed beings, and by understanding a little more about that, we can improve our decision making significantly. Before we get stuck into that however, a quick roundup of what’s been happening this week.
Sterling has calmed somewhat, according to the press because of the (symbolic) U-turn performed by the government on the abolition of the higher rate of taxation (45%). Whilst there’s an element of truth to this, the vast majority of the movement in the currency this week is better explained by what’s happened in the USA.
A fairly common event these days is that the labour market is returning figures that are far better than expected. This week was no different – the US added 263,000 “non-farm” jobs to respective payrolls in total in September (farms not counted for seasonality reasons, naturally), and although the forecast was 250,000 the expectation seemed to be that the forecast would be missed. More significantly these jobs moved the percentage unemployed down from 3.7% to 3.5% (so the big news was not the number of jobs, but the number of people leaving the labour market) – and 3.5% is a very low number indeed.
This news made the dollar stronger (the logic being that the central bank can afford to raise interest rates more, because one of the things that stops them is unemployment in their secondary mandate to curate economic stability), and shaved the edge off a stock market that was enjoying what looks like yet another bear market rally. Earlier in the week stocks were moving upwards and the currency weakening, which was making the pound look good. On a number of metrics the pound still looks exceptionally good value against the dollar, which should be a positive case for investment from the US to the UK (although a negative case for imports from the US of course).
The bond and gilt markets were calmer thanks to the ripples of the Bank of England interventions from the week before – and the real point around the u-turn was not the £2.5bn (uncosted) or so that it adds back to the fiscal pot (there’s still £43bn to explain from the fiscal event), but that despite a significant majority, the Conservative backbenches will clearly rebel as necessary if they see the Truss administration making what they deem to be significant errors. I think this is sensible and definitely made me feel a little better about what looks like the weakest team in 10/11 Downing Street for some decades.
Some days ago the Bank, instead of the £20bn they could have bought by this point, had “only” spent £3.7bn – so there has been no need to spend anything like the money they mentioned in order to calm the markets. As so often, proper and decent central banking proves itself to be more about words and intent than it does action, and overall this has been an excellent exercise.
Market expectations of the Base Rate next year calmed down to around 5.6% (from 6 and even 6.5% at some points the week before) – and the Bank seems very convinced that we will not see a world with base above 6. 6 is still “danger zone” territory for me, and I still think that we have not seen the full story as yet about inflation in the UK and its persistence – but the world looks much more in tune with that now even if recent moves in the base rate have more been about the UK as a credit risk, and the competence of the Truss administration; one way or another we are getting to the correct destination, even if the methodology is different from that which I expected.
Also, hairs were split over whether the UK grew or not in Q2 of this year, with us ending up at 0.1% growth, rather than 0.2% contraction – meaning that a technical recession cannot be reached until 31st December 2022, and we will not know those figures for absolute sure until around early April 2023 – although if they are significantly different from zero, say 0.5% down, we won’t need to wait for the formalisation of the numbers – we will know around February 2023 time. Either way, I think we can agree that if we are slumming around 0% growth, we are not in great shape, and have definitely seen the end of the bounceback post-pandemic.
Housing market stuttering?
Headlines have continued around a stuttering market for housing – again, Halifax’s numbers for September revealed a 0.1% contraction; Nationwide who are always first to market with their monthly figures showed no movement at all. The number of transactions falling through was advertised (bearishly of course) at 29% – this remains below the long term average of 33%. Personally I’d be expecting more transactions to stay together than normal as the 4-5 months worth of people transacting on “yesterday’s” mortgage rates try to hold on to their much more affordable deals, in spite of uncertainty about the market. As usual, a number of commentators decided to try and talk the market down – but also as usual, I prefer simply to look at the data and ignore the noise. I don’t think there’s many reasons to be overly positive about upward pricing (although inflation, and specifically wage inflation, are still moving forwards) – but likewise, I am not seeing crash territory (more expensive mortgages are no doubt damaging, but not as damaging as the withdrawal of mortgages never to be seen again as we saw with self-certification and more than 95% LTV being withdrawn in 2008).
So – moving on to the meat of today. I’m a big fan of behavioural science and understanding more about ourselves as, ultimately, deeply flawed human beings. We assume, we are over-optimistic, we over-react, and, to focus on today, we benchmark. This means that we look at something (often a number) and use that as our guide. There will be many who have seen what’s happened to property prices over the past 2 and a half years, for example, and expect that to be the relative norm for prices going forwards (those of us a little more sanguine know that’s not the case, and actually know that breakneck speed capital rises are not good for us and the market because that is what can lead to a major correction or crash if it goes on for too long).
Benchmarking can be unhelpful, and, if left unchecked, an outright danger to ourselves. This is manifesting itself in different ways at the moment, and I wanted to cover a few of them. Firstly, buyer’s remorse. This is when we have missed an opportunity (with the benefit of hindsight) and so, because we’ve missed it, it means we make further bad decisions because “we could have done this or that some time ago”. We all know that we can’t change the past – and in this specific example, if you didn’t fix that mortgage at 3.5% or whatever you could have done, then that’s regrettable, of course, but shouldn’t stop you fixing at 5.1% today if that means you can hold on to the asset and get through the rocky period we have coming up.
Rod released a great Rodcast this week with Mike Kovacs of Castleforge Partners. He framed this beautifully – when a recession comes, the number one job that you have is holding on to the asset. Beyond that is both safety and luxury. Many will NOT be able to hold on to their assets over the upcoming 18 months – your role should be to ensure you can hold on to yours, and also to put yourself in the position to buy any good value assets that you can.
Alongside this, Mike raised another great point which I wanted to just segue into, temporarily. The number of assets that, today, are not underwater and unlikely to be underwater, but might have loans against them that prove difficult to service in a 6% base rate environment, are significant. This is a stark difference from 2008 from the lenders’ perspective – because instead of having lent £31m against a £30m asset (which was not uncommon at the time) they might have lent £15m against that same £30m asset, and if the price did drop to £25m or £20m, then there’s still plenty of headroom to call that loan in. Taking possession is a much easier decision, as a lender, than it was in the great recession of 2008-9; this should be an alarm bell to anyone lulled into a false sense of security (or benchmarking……) by the lack of repossession activity over the past 2.5 years.
Comparing yourself to others
So – from buyer’s remorse to a phenomenon that informs today’s quote and is one of the very most dangerous things I see in property and life – benchmarking yourself against others. I’m a huge advocate of placing the right people around you – I talk about it a lot – but in a positive way. You should draw inspiration, support, tips, energy, and many other positive things from doing this – not be jealous, demoralised, or deflated by the success of others. Firstly – if you are reading it on social media rather than real life – remember that a huge pinch of salt is best taken alongside some of the broad claims that are often made. Secondly, if you need to train your mind to be more supportive, and adopt a philosophy of abundance, then I think you should do so and get on with it from today. The UK property market is worth over £10 trillion, and, by anyone’s metrics, that’s enough to go around – more than enough. One thousandth of one percent of that is £100 million – which puts things into perspective, if you need it, I hope. This is not a trap you want to be falling into.
I prefer the analogy of being a better person than you were yesterday. That’s the benchmark – keeping the train on the tracks and moving forwards, not sideways or back. This is a frame of benchmarking that I’m happy to engage in.
Past performance is no guarantee of future results
Moving onwards with the benchmarking, I’m still seeing and hearing some fairly concerning chat around the interest rate, which needs to be addressed in this conversation. Again, this is being benchmarked against the interest rate since 2009, the lowest rate in over 300 years of central banking around the world. Let me be very clear on this point.
In my view the days of ultra-cheap rates are OVER. The spectre of inflation, poorly understood, poorly managed, and still rampaging through household affordability, has put paid to that. The belief is very much that whatever pain is inflicted by controlling inflation is pain we must take rather than the pain that long-standing inflation over the target can and would cause (although, in reality, 3% inflation would not be the worst thing in the world, especially for property investors). So this is not a cycle that looks something like the US attempted tightening cycles of the 2010s, where they reverse direction when the stock market starts to fall (just look at the US markets around 3700 for the S&P 500 which did touch 4800 around the turn of this year – previous moves have pivoted long before that) – the single difference being the presence of significant inflation.
We are unlikely to go back to days with 3% mortgage rates. I hope you got as many as you could and frame them on the wall. If we DO go back to those days, it means we have had a significantly negative financial event, which would almost certainly be accompanied by a 10%+ move downwards in property prices – so be careful what you wish for. The sensible range for the longer term base rate is between 2 and 3.5% – although I would be stunned if we didn’t go higher before we come back down to those levels. That will see mortgage rates that look more like the earlier part of the 2010s, where 4-5% is fairly common. Two years should be enough to see us back there, although if you were taking some insurance, three years might be a sensible time period to pick.
So – don’t benchmark against the last 13 years of interest rates. The world has changed – yet again. I have observed, since the pandemic, a number of changes which are not positive. For example, regardless of your views around the pandemic response around the world, any but the very most hardened conspiracists appreciate that there is a new pathogen around – and thus another way for people to die. They might die from the disease itself; they might also die from the way the disease was managed and is being managed – China will be the greatest example of this as the country that is carrying on with zero-covid policies long after it appears that the virus has, in its most common form, become far less deadly than the early days of the pandemic. This is hard to swallow – and a bit miserable – but what we can’t do is benchmark today’s world against 2019, much as we would like to, and much as we like fluff and safety as human beings.
While we linger on the subject of benchmarking, there’s one more lesson to revise here. Don’t benchmark against returns from the past couple of years. If you’ve been in the property market, this has been the equivalent of what poker players call “getting hit in the face by the deck”. This is when you are dealt cards that are so good, even an idiot or unskilled player can win games against people with far greater skillsets. The underlying market has moved up 26% between March 2020 and July 2022 (figures from ONS House Price Index), which is around 20% more growth than happened between January 2015 and March 2020. (figure was 21.6% in that time period).
It doesn’t matter that we all should have bought more. If we stop and think, we all know that to be the case anyway. The best time was 30 years ago, the second best time is now; etc. etc. Those are not sustainable, expected, or realistic capital growth figures in today’s world – they’ve happened, and for those of us with meaningful exposure to the market – that’s been great. Instead, what we always need to do in these situations is compare investment opportunities to whatever is out there today.
Do I still need to get out of bed? Looks like it.
This leads on to an interesting point. It is not hard to return around 4.5% per year buying government gilts at the moment. This is what we call the risk-free rate of return; the government never goes bust (until it does, of course, but I’m being flippant there – mostly). Thus, if we are taking extra risk, and/or making extra effort, then we need rewarding for that. We have to benchmark today’s investment decisions against what else we could do today – or else pay the price for doing nothing, which is inflation and opportunity cost. Forget what’s gone before – we expect house prices in the long term to move upwards at 3-4% per year, if we are sensible, accepting that many years will not see a return in that range but that will be the average over the 10, 20, 30+ years that we hold that asset. This brings us back to Mike Kovacs’ point around staying in the game – rule 1 needs to be staying in the game. Once you’ve stopped the ride, it can be difficult to get back on – unless you’ve reached your “enough”, and forecasted that you can live off the 4.5% from the government for the rest of your days, of course (the 25-year is 4.54% as I write this; the 50-year is 4%).
So, that’s a taster of behavioural science, why it is so important in my view in running any business, and a bit more on what not to do and how not to handle the upcoming recession and associated property market! Next week…….we will change tack again and I hope for limited government gaffes to write about……..although there’s no betting on that!