Supplement 140523 – Prepare for the “good news”

May 13, 2023

“If you don’t collect any metrics, you’re flying blind. If you collect and focus on too many, they may be obstructing your field of view.”

― Scott M. Graffius, Consultant

Welcome to the Supplement folks. We are ploughing through the year at exactly the same speed, of course, but as always it just seems to go faster and faster. I was reminded of a phrase this week: “Sell in May and Go Away”, an old stock trader saying, because the market tends to get volatile and find reasons to go down instead of up as the summer season approaches. Not as easy when your stock in trade is housing – of course – and the reasoning, when you drill down into it, is not necessarily the most robust anyway.

However, it did remind me of just how often we look at the wrong metrics, and, as usual, I was away to look at the data. I marvelled this week when I found a new statistic on the ONS website, and was immediately furious with myself about not using this metric before. That metric is called “net supply of housing”, but all the cool kids call it net additional dwellings (that means I call it “net supply of housing”, if you were wondering).


This is about as easy to explain as your typical Ronseal product (Other timber preservatives are available) – it does exactly what it says on the tin. Or mostly, anyway. It is a far better measure of just how many dwellings are actually being added to the housing stock every year rather than measuring new housing starts – just in case it isn’t self-evident why, this is going to measure demolition; conversions; and repurposing – so is much more likely to be more useful. Also, it beggars belief that the Government don’t prefer this metric, because it is higher than the new housing starts metrics – it makes me wonder whether they even know about the key metrics themselves, but with an average tenure of about 14 months for a housing minister, of which about 7 is inevitably spent in recess, maybe it isn’t that surprising at all. 


The same critiques would apply though; is it the right stock? Does this measure the units being used as short let and “take them out” of the stock (I don’t believe it does, under examination)? The answer to the first big question is inevitably “no”. PD is surely a necessary evil from a local and central government perspective. Needed to get new units and prevent derelict buildings, but not helpful for the planners to determine the right “mix”. It seems to me these days that only the bottom end and the top end really stack up particularly well for new build – more than I ever remember that happening before – whether the units delivered bear that out, I have not researched (yet).


This train of thought led me to consider my pet favourite metric – inflation. I feel I might not have done enough here to right what is one of the big wrongs of the media around this in general – watching the wrong thing. I’ve talked VERY generally about inflation, but tended to discuss CPI, rather than some of the other types which I am going to discuss today. This is exactly the sort of reporting that I object to – so I must apologise in advance. It is the neutered metric that the government wants us to share, because it sounds “less bad” (although you’d be right in saying – hold on – it is double figures!), and it isn’t in line with my average modus operandi.

It’s also come to my attention that I’ve likely made a mistake. I’ve confidently predicted that CPI will stay in double digits for April when the “print” comes out, the week after next (24th May). The consensus forecast however, from the overall geniuses who have been getting it consistently wrong forever, but even more so over the past couple of years, is that the drop will be to 8.6%. My feeling was that the price rises from April, alongside the minimum wage and benefits increases which themselves were pretty much in the double digits, would keep the fire burning hot. 


April price rises were opportunistic, but also from companies that “couldn’t go on without them”. Many SMEs are panicking about prices because they are feeling the pinch themselves and can’t cope with losing custom alongside driving prices upwards thanks to inflationary factors. There were lots more reasons for them. Consumption is, remember, the driver of two-thirds of the GDP of the economy, and most likely was driven up significantly in April.


So, why am I wrong, and how far am I wrong? I’m going to adjust and say that CPI will still start with a 9, which would be an exceptional miss for the consensus, but let’s see. What I’ve underpriced is what’s called the “base effect”.

April is always a big month – particularly in inflationary times. April ‘22 was a significant month in “price history” – because April and October always are. Energy price cap months. New benefits and pension month (April). New tax year. April ‘22 was particularly aggressive for CPI with it moving up 2.5% just from the month before – the biggest monthly figure for a long, long time. It moved CPI from 7% (March ‘22) to 9% (April ‘22). So, that net impact upwards is not expected to be as extreme and the base for April ‘23, which is April ‘22, had already seen a chunky price rise (cast your mind back – no energy price cap help from the government, but the price cap moved from £1,277 for the average household to £1,971 – an increase of 54%. 


Oil was actually fairly static in April ‘22 (It was already very high) but of course the very recent increases thanks to the Russian invasion of Ukraine were seen to be working their way through to the pumps and into the shops, as the second order effect took hold. So – this moved the base level upwards, and the “benefit” of that will be felt in this month’s CPI, since petrol prices are lower today (for example) than they were in April ‘22.


Great news? No, good for headlines. The whole conversation at the moment needs to be revolving around CORE inflation, and I regret not making this point more clearly (for those who have been following inflationgate through the supplement for the past 30 months or so, you will know I will soon make up for this error of judgement!)


This is exactly why this week I’ve dedicated the image to the UK core inflation compared to the US core inflation. There’s been “good news” on this front in the US for April as what tradingeconomics (my favoured site for the depth of data) reports the US “core core” (their framing, not mine!) down to 4.7%, the lowest level since December 2021. This is definitely losing pace, but, interestingly, is actually ABOVE the CPI in the US now (4.6%). What this tells you is that the volatile prices have actually come down (similar to the UK fuel price in April ‘22 at the pumps vs. April ‘23) but the core leaves those facts out and looks at the least volatile (and thus the most reliable) items in the theoretical “basket”. We’ve all seen food up 20% or so in the UK and more in certain segments/parts of the market, and we are all fairly sure that’s not going to repeat in the next 12 months (it better not, and I’m 99% confident that it won’t). 


The core tells us where we are really at. The US has seen basically a year and a half at a very elevated core, and in that interim period moved their base rate from nearly nothing to 5-5.25%. That’s a huge change with consequences – some seen (banking sector over there), some yet to see (swans of various colours, no doubt). 


The graph really tells you that the UK could have 6 more months before we really see a good reduction in core. Tradingeconomics do not report a consensus figure for core April ‘23 as yet; they do however do a forecast, and they forecast a drop from 6.2 to 5.7. I’m inclined to make my point of order being a disagreement HERE, which is more significant, and suggest that number will still start with a 6. It would be lovely to think this will be back under 5 by October, but the likelihood looks relatively small to me – stubbornness is the number one trait of this sort of inflation, at this point. 


This is the number that the central banks will be watching. It is a big win for the US, from where they have been at – and, as their governor has already pointed to, means a pause is possible. Overenthusiastic markets are reading a pause as a pause before a drop; 5-5.25 is a really very precarious position for the US based on the amount of debt they carry as the deficit economy of the world, but still there’s no guarantee of this. They may well carry on hiking until they really DO break something, simply because they feel they have to.


We are a week behind, as usual (only a week – that would be nice!) – and so our base rate went up to 4.5%, without the same guidance that we were “done” or at least taking a breath. The vote is also becoming a bit boring – anyone can forecast the 7-2 situation at the moment, with the same 2 doves voting against further rate rises just as they have done since base hit 3%. This is subject to change, I think, but the rise was clearly the “best worst” play and that’s why this time round I’d side with the 7, even though I have no issue in disagreeing with at least a few of them on a regular basis!


If you don’t already see it coming; the strong likelihood is another 0.25% rise in June (Thursday 22nd, another date for the diary). We’ve got July off and the next one – which is more of a 50/50 – is scheduled for August 3rd. I’d act on that basis if you have loans tied to base rate.


“Surely I can wait until the rates come down a bit?” – I get asked. I see the logic, but this is largely FOMO thinking. If I’ve missed the “obvious” and rates are really going to crash – well, if you make money by fixing last year before the Truss debacle, remember that if you follow my lead here. I’m simply reporting what I’m doing. If rates DID go back to the 4%, or below, days, then you’d be very happy paying some of these ERCs and feeling the benefits. 


The bond yields are stuck in a bit of a terminal high at the moment. We’d need terrible economic data (first chance would be Tuesday in this oncoming week, with employment data coming out – but I doubt there will be any particular downside surprises, although they might be a little more disappointing than forecast as some layoffs are bound to be minimum wage rise related). We will know quickly, but one month needs to be cautiously viewed anyway.


I’m not waiting, and I think there could be a couple of years of treacle here before some really material falls. As I say quite regularly on this topic – there are some very clever people that disagree with me here; then again there’s some clever people who’ve been predicting a property price crash since 2015/16/17/18/19 etc etc etc. – and it simply hasn’t happened. They missed a 25%+ bump in capital values if they were out of the market, simply between ‘20 and ‘22.


Halifax’s house price data was out and they showed a 0.3% move downwards (although they’ve shown appreciation since December), and a mere 0.1% increase for the entire year April ‘22 to ‘23. They also issued this in their press release:

“Alongside a market-wide uptick in mortgage approvals, these latest figures may indicate a more steady environment. However, cost of living concerns remain real for many households, which will likely continue to weigh on sentiment and activity. Combined with the impact of higher interest rates gradually feeding through to those re-mortgaging their current fixed-rate deals, we should expect some further downward pressure on house prices over the course of this year.”


It’s fairly easy to agree with this, although I remain unconvinced about the house price downward pressure when things like 100% mortgages are announced. This is a significant move, and the textbook economist answer is that “ceteris paribus, prices move upwards with an increase in credit availability”. This is disruptive stuff because it does not require a guarantor; more lenders are sure to follow suit, although the wisdom of lending to those who “don’t have access to savings” (bit of a watered down way of saying that a few other ways, I think) will be interesting, and at the moment the underwriting criteria looks shaky to me.


Ceteris paribus, not there just to delight the latin scholars who tune in weekly, means “all else remaining equal”. It never does, of course, which is just why it belongs in the textbooks; it does, however, provide a shot in the arm to the bit of the market that help to buy has not – new-build flats are excluded, but this stuff works best on lower-value properties which are inevitably outside of the South-East of England. Is this an exodus for the millions who can afford this but are trapped in rentals? I personally doubt it. I also doubt the shareholders of a bank that ISN’T mutually organised (remember, Skipton is a Building Society) are unlikely to adopt what is effectively the sub-prime market, at a competitive price like this. Let’s see how wrong I am, and how quickly.


I personally see more opportunities than challenges coming out of this, and holding up the price in low-value areas suits me just fine, thanks. There’s surely absolute foaming at the mouth going on in the private lobbying on behalf of the major housebuilders at the moment as well; they’ve taken action, cancelling sites, pausing works, and acting in their best interests (as we would expect) – almost forcing the government into the next “help to buy” arrangement which I’m sure is “coming” – but we must be close to some donations being cancelled, which always helps to grease the wheels.

Even the more aggressive parts of the left are seeing the rental supply problem as a major issue, and undergoing their favourite exercise – blame the government. The problem this time for their critics is that they are likely correct – the vast majority of the blame here DOES lie with the government. However – neither side are likely to address the problem in the correct way and there’s no better background for a good old session of ideological point-scoring than an incoming general election.


On that subject, the renters reform bill is back. Or is it? Or is it back, and forth, and back, and forth? There’s appropriate pushbacks to be considered but I get the feeling the core of the incumbent Tory party is seeing some votewinners in there by “helping” the tenants (by driving more landlords out of the market – go figure) – as always in these situations, the ideal situation – 6 companies owning 80%+ all of the rental stock in the UK – that was first (not openly of course) conceptualised when George Osborne released his 2015 budget – will not be reached overnight, and in fact is likely a 20-30 year endeavour, and the interim is likely to mean a bloodbath for the poor old tenant.


As always there’s lots to consider – and I could go on, but let’s face it, I do that anyway. Keep your ear to the ground for those who are paying base + margin, and go ahead and get them into your pipelines and provide a solution. I’ve seen more deals since Q1 2023 than I’ve seen for 3 years. Enjoy it while it lasts – standing on the sidelines waiting for a crash will mean you might be rueing the day when one doesn’t happen again, despite the doommongers predicting their 19th recession of the past 7 years (and the one we did have, they didn’t predict, nor did anyone else – and it saw a 25%+ bump in house prices!).


Or – framed another way – Keep Calm and Carry On!