Sunday Supplement – 02/01/2022

Jan 2, 2022


Here we go again – that mixture of excitement and trepidation as we embark upon a new calendar year. The logical side of my brain reminds me that dates are a relatively arbitrary construct, the intuitive side tells me to stop being so miserable and embrace the opportunity to make some changes and drive things forward!

I thought we could start today with a roundup of 2021, with the data we have at the moment anyway. Nationwide have delivered and the headline report is not surprising – 10.4% annual growth, continuing to show strength beyond the stamp duty holiday “cliff” which has disappeared from any mentions in dispatches, mostly because it didn’t cause any of the turmoil was predicted. As so often, some of the “on the ground” info ascribed what they saw to a believable factor, without understanding that the structural problems that have come to the fore in the marketplace were not solved on September 30, 2021.

Supply always tightens coming up to a new year anyway – leading up to the famous boxing day surge on Rightmove. Rightmove have remained tight-lipped this year on Boxing day browsing figures – perhaps because Boomin’s new campaign put a dent in their figures, or perhaps because demand is officially now a decent chunk lower than 2020 – we will need to wait for more info there. This time last year we were full of articles about how there were over 50 million hits on Boxing day 2020, up 50% from 2019 Boxing day, the most ever, etc. etc. Radio silence this year…..

Nationwide reports the strongest year for house price growth since 2006 – which can’t do anything other than make the hairs on the back of the neck stand up a little bit, of course. To calm some of those fears, if you put 2015-2021 side by side against 2000-2006, you get a bit more context as to which one was looking like a bubble; 2000-2006 saw a 109% increase, 2015-2021 is 40.7% (and the years in-between 06 and 15 saw a mere 7.8% increase, UK-wide – so much for doubling every 10 years eh?).

Of course, we are all obsessed with nominal prices, when ultimately, real prices (inflation adjusted) are much more relevant as a long term investor. This is timely of course with inflation running, in the headline figures, at over 5% currently (with 6%+ pretty much locked in for early next year, and we could easily see north of 6.5, possibly 7). Those figures show that in real terms, prices have done pretty much nothing since 2006 (remember we are talking on a nationwide scale) in real terms. This should be good news for those concerned about the sustainability of any price increases, there’s been the usual 2022 clickbait videos around next year’s property crash from those who’ve predicted 12 of the last 2 recessions.

Transactions are up 30% on 2019, and in a market with that much demand AND supply constraints, prices are one-way traffic. Prices are up 16% since before the pandemic, according to Nationwide. It would take a brave person to predict a hotter year than 2021 in 2022 in the market, but it also seems reasonable to assume that this heat that still persists will run into 2022 before it subsides; whether that it is in the second half of 2022 or in 2023 or beyond is up for debate. My prediction some weeks back was in the 5-6% region and I am sticking with that, not because I am incredibly bullish but because I see the structural problems in the market being more difficult to overcome than some are thinking – just as the global supply chain issues thanks to the pandemic are longer-lasting than some predicted or realised. With some covid uncertainty still remaining, and record-breaking case numbers still making headlines, any who have been hesitant to sell in the last 22 months are unlikely to change that right now, and will be months into 2022 before changing their minds, you would think – so I’m comfortable in being more bullish than many of the other predictions (which seem to be averaging around 4% from what I’ve seen).

Wales has had an unbelievable year – although it is a long time in the making. Nationwide cite their 15.8% figure for Wales for the year, but point out that it is the first year since 1973 when they started producing figures that Wales has been the top performing part of the UK. England has performed the worst of the four, with a mere 9% increase year-on-year.

The South-West has dragged the Southern vs. Northern England figures up, although Northern England has outperformed the South in a rare coup. London impacts these figures heavily of course, and is the worst performing region in the UK at 4.2% (still, not to be sniffed at, I’m sure owners in the capital will agree). The North West, Yorks and Humber, East Anglia and the East Midlands all made it into the >10% bracket.

They also make a feature of the affordability stretch, which they are highlighting over recent months. The point still remains – raising the deposit is the hardest part – but rising rates will make payments less affordable of course. The mix of rising prices and rising interest rates will of course force a squeeze at some point – my above-average prediction is partially based on rates not going up at the rate that the market thinks, because pandemic recovery is not with us just yet in my view. As so often though, the headroom is all in the North and the Midlands (on paper) – arguably, London is much less affected than it should be here because there is much more international money, and house purchases are based on more than incomes (and lots of cash transactions as well, of course). Affordability of mortgages and rents remains a key metric and that will be the case in perpetuity, of course

The ONS figures, my favourite for accuracy but least favourite for speed, are still only up to the end of October 2021. They show the East Midlands as the top performing region of the year (11.7% to end October, year on year) and London as the worst (but still 6.2% year on year).

Onto rents, then – Homelet show (to end November) an 8.6% increase in rents nationwide, although if we exclude Greater London which had a huge rental bounceback after coming back a great deal in 2020 due to pandemic effects, that drops to 7.4% which is still obviously significant and well above inflation, even at current rates. Crucially it is also above wage increases (which are 5.4% private sector, 2.7% public sector based on the most recent ONS figures), so affordability gets squeezed slightly – alongside squeezes based on energy prices which are still hitting headlines, although the extremely mild weather thus far must be helping a touch on heating bills, you would think. The forecast for the back end of January sees temperatures looking like the current weather, so hopefully this above-freezing winter will persist for those who have to make choices between heating and eating.

The DPS index is yet to be updated for Q4, and the ONS still show much lower rental increases than this at 1.7%, as individual landlords stick with their policy of generally not increasing rents during a tenancy, even in the face of higher costs. Then they wonder why their margins are being squeezed…..

So – that’s where we have been this year. Not too much that will surprise in there. But where will we go?

Capital growth I’ve already spoken of, above. For the use that it is, predicting UK-wide figures. I see the regionality persisting, generally – with a squeeze together. I still see a post-brexit lag on the international attractivity of London which is keeping prices down, plus the world still not figuring out quite how much remote and hybrid working is really going to persist post-pandemic (when we finally get to post). We now know that covid won’t be gone, but it may well be decided by majority that we are at a place where we live with it out there, and scale back testing and isolation requirements. That feels 6 months away at least though, sadly.

The attractiveness of the south west is likely to persist, and I’m personally hoping to make more of an impression down there in my own portfolio. The north west also remains attractive with some great infrastructure, investment and regeneration projects on the cards too.

Rents I expect to continue with their gigantic upwards pressure, but, like capital growth, not at the same rate. I wouldn’t be surprised to see 5%+ again on the homelet index though (new tenancies) – the pandemic-inspired shortage of rental supply should have worked its way through the pipeline by the end of ‘22, but incentives remain poor for landlords to deliver new stock, many are likely to also cash in on the price rises there have been in the past 12 months, and demand is likely to continue to increase (particularly with an affordability squeeze on buying, although the affordability squeeze is not far behind on rents). What will change in the affordability squeeze is mortgage rates – although with a mooted change to credit availability for some renters, it may ease some of that pressure in the South East market, which might keep rent rises down to a more sensible/palatable level.

Saving for deposits also will be tougher than ever before with inflation ravaging cash in the bank. Meaningful savings rates are unlikely until we return to an era with the base rate at above 2-2.5% which is still many years away in my view.

What about the other macro factors? We know we are seeing inflation at 6% at some point next year, and I expect an overshoot on this number still. Unemployment looks to be heading in the right direction, but I would expect an economic wobble as we persist with raising rates – around the time when we go from 0.5% to 0.75% on the base rate, I’d say, which should be next year although this is not guaranteed.

That then leads us to growth. The Bank’s projection is 3.75% in 2022, and I am going “unders” here. I would be surprised if we didn’t have a disappointing year which looks more like 2.5% than 3.75%. Productivity remains a puzzle and the figures are untrustworthy with all the pandemic disruption – the sum of the conventional wisdom at this time is that productivity is up thanks to remote working, but more because of there being extra time saved from not commuting than some mythical boost in productivity thanks to working from home. I also see consumer confidence staying relatively low, as people worry about energy price inflation and overall inflation in the economy with a pandemic backdrop. Saving is the new spending, thanks to the pandemic, and even though it makes little sense to keep it “under the bed” in this environment, saving is more about hearts than heads, and gut feel (in my view).

That moves me towards my more sensationalist predictions for 2022. I think there will be a stock market downturn, particularly in the US. This bull run makes limited sense, and the Fed are threatening to taper. All metrics under the sun are pointing to overvaluation, and whilst it felt too early to call it in 2021, I’m going to call it now for 2022 at some point. I think the S&P will have a down year, and lose between 8 and 12% of its current value compared to new years day 2023. This is an insane prediction in terms of its attempted accuracy, but there we go.

I’m sticking with 0.75% to be the base rate by the end of 2022.

Tax burdens have been increasing but not bitten as yet. Some of that starts to bite in 2022 – large minimum wage increases, national insurance increases on employer and employee. Tax drags economic performance and this isn’t a strong backdrop to be raising tax rates in. This is another reason that will impact confidence, spending and GDP and just isn’t being factored in enough to predictions, in my view.

We will see more political pointscoring attempted via taxation, as well, in my view in 2022. For that to happen, the 1922 committee will need to be off Boris’s back at some point – but when disappointing figures for Q4 2021 and Q1 2022 come out, and perhaps there is pressure to take VAT OFF domestic energy for a time (although if we get through the winter, that likely wouldn’t be needed until Q4 2022) – and also we will of course start to see the groundwork laid for an election. There are of course whispers in the Conservative party about the next leader, although the candidates look relatively weak (and the silence from the Sunak camp is absolutely deafening) – Liz Truss being the most recent “name of the week” – which would be interesting, because it would alienate a lot of middle-of-the-road blue voters (in my view), handing an opportunity to Labour (but would it be an opportunity they would take under Starmer? Jury still out on that one!). In honesty the political landscape looks bleak because the leadership is weak on both sides of the fence at this time, and the candidates on both sides waiting in the wings also look very weak indeed. I think there will be letters of no confidence submitted to the 1922 committee chair at some point in 2022; whether it will be enough for anyone to mount a serious leadership challenge, I would say likely not.

One prediction I can make with 100% certainty is that there are 51 supplements to go for 2022, and I will no doubt wander over the topics of the day, week and month with no boundary – I hope to talk less about the pandemic, that’s for sure, although I fear there will be more to say on the back of 200,000 cases per day, regardless of severity or apparent severity…….until next week all, happy new year (and please don’t forget to like, share and comment!)