Sunday Supplement – 03/10/2021

Oct 3, 2021

So, Sunday is here again. And this is the week that “was”, it seems. Choices of where to go with the discussion this week – it is hard to ignore what has been going on in the markets, and also I believe the Labour Party conference deserves some comment, as I’ve had a few questions and messages about that and my thoughts on it……so here we go.

Sterling hit an 8-month low vs. the dollar, and the sensible way to interpret this seems to be that we are giving back some of the gains that were made on the back of considerable losses after the 2016 referendum vote. Some of what is playing out must be ascribed to Brexit – only the most hardcore idealogues would disagree. What everyone would likely disagree on is the percentage to which it is related to Brexit, and I see limited mileage (pardon the fuel pun) in exploring that question, so I will happily swerve it – the political side, whilst interesting, is a diversion. My view in such situations is much more “We are where we are, now – what next, and what are the implications for property and the economy as a whole”.

With the political side, it is hard to ignore the soundbites – one thing I know for certain is that governing over a pandemic is incredibly difficult. It has been the hardest challenge to navigate for many years. But that’s politics. It is so often a choice between a bad situation and a worse one. Things need to be prioritised. The real truth behind it, as well, from my perspective, is that markets and the world need confidence in what an individual country is doing.

It is worth reiterating – why is the UK so strong, given its size and population? A history of industrialising first, and a complex and chequered past of having an involvement of some kind in nearly half of the world, at the peak of the empire’s power – yes. But the days of sterling as the world’s reserve currency are long, long gone and there is a limited shadow of all of that these days. What attracts so much interest and investment from overseas? An education system with a long and illustrious reputation, a strong legal system where the rule of law (and the land registry) is one of the very most respected in the world – in really simple terms, a safe haven to put global money – and nowhere else has this been felt in the past decade more than in London, a truly global city.

At a simple level, to an observer, I’ve seen lots of this. How can you leave a house empty (with all the risks that entails)? Because it is far less risky having an empty house in the UK than a property in a country where the legal system is questionable at best, there is significant corruption at many levels, and the land register often does not properly record transactions. It is a world better.

Then you have to throw in the overall, relative, liberal nature of the UK. We have struggled as a nation over the past few years – division, referenda, the rise of nationalism – but the restrictions placed upon us during the pandemic are probably the most real, and have represented a clear and present danger to our liberty. We don’t seem to have been that quiet about it (which is good!) – but when you look at internationally what has been going on – we’ve not had it too hard at all on that front. Our death tolls have been terrible but arguably we have the best data – there are many studies and estimates of the “real death toll” of Covid that make a decent case for the figures in terms of deaths being 10 times as large as some countries have reported. On a personal level it is difficult to “trust” a government (I’m not sure I ever have) but it is very easy to distrust this current one. However, I still trust the ONS and other independent bodies and the transparency with which we share our data is one of the things that the UK still leads the world at, in my opinion.

So – if we accept that very few truly trust the government – it comes down to just how much you distrust them, on a sliding scale. Leaving personal opinions and potential insults aside, the real importance to all of us is the view of the aggregate, rather than our own individual views. This week has seen the markets take a vote against the incumbents, and look like they are losing confidence (or, more accurately, pricing in a higher probability of some policy errors). I’ve spoken over the past 18 months about a tightrope that we would be walking, post-covid, and we are wobbling around on it at the moment like amateurs, in my view and the prevailing view of the foreign exchange markets.

This isn’t good. The Bank of England looks ready to raise rates relatively soon and start on the road back towards a sensible base rate, although I still believe this is a 10-year plan and no-one wants to bankrupt the government and the amount of debt they are carrying. Again this will be a tightrope and needs to be done cautiously. However, this would normally see currency getting stronger, not weaker. The effects of the base rate rise that will come are almost countered before it even happens.

This isn’t a week for remainers to go “ha – ha – told you so”, it is a week where the reality of Brexit sinks in, partially. There is a case that it will be unfairly blamed when there are other issues (and – to be clear – many countries are facing a variety of different struggles). There does seem to be a huge amount of underpreparedness in this government, however – that soundbite certainly does ring true. There’s a lot of last-minute Charlie about the whole operation, it seems.

I’m a centrist by heart, seeing merits in both Keynesian and Monetarist schools of economics – seeing merits in conservatism and liberalism often – and seeing a big role for individuals and a big role for the collective. This also makes it easy to throw stones at both sides, which I will try to avoid. That’s where I would like to bring in Sir Keir Starmer.

I have not listened to the whole speech in its entirety. What I have observed is that finally the (hapless-seeming) Labour side have finally got themselves some press. What I heard was the sort of thing I expected to hear when Starmer took charge of the party – and seemed to hear nothing at all, for nearly 2 years. The clearout of the Corbyn era – which has to go down as a tone-deaf failure, whether you agree with their politics or not – was not a bloodless coup but a slow death. This really means a lot of the last two years have been politically wasted.

However, listening to the reactions on talk radio, you can see a direction of travel here. The further-left idealogues are tearing up their memberships, in disgrace. On the other hand, a raft of more silent, more central voters are seeing green shoots, joining the party, or taking an interest. For the first time, Starmer sounded like a challenger, and sounded electable (to me). So what does that mean for property owners!

Starmer has been vocal about taxing landlords. For those reading who have lived through the past 7 years or so as landlords, they may well say “well who isn’t”. The Conservatives of course have not necessarily been vocal about it – they have just done it. Section 24 taxation on individual property owners – the first tax closer to a turnover tax than a profits tax. CGT with its own “special” (read higher) rate for property. SDLT of 3% additional on property purchases of second homes. And there are more.

Starmer said in September, regarding the tax rise touted as being diverted towards paying for social care: “the money could have been raised by taxing the incomes of landlords, and those who buy and sell large quantities of financial assets, stocks, shares.” Probably easy political points scoring – I’m not sure it could have been. But still concerning. Increasing transaction costs and friction via taxes is quite dangerous – it could see a lot of business go offshore of course. You could say it could be raised by a turnover tax on what offshore companies that are supplying goods to the UK but avoiding VAT – or an implementation of the turnover-style taxes proposed by the Chancellor back in 2019 on the huge tech behemoths.

The only bright side for the landlords in the recent developments of Lloyds Bank and others entering the property market, and not just via Build to Rent but via purchasing second-hand properties (or, for John Lewis, building on their own sites) is that the lobbying power and influence of such organisations is at a completely different level to the existing landlord lobby, the NRLA, etc. Powerful organisations have a strong track record of deferring tax rises for many years, even when governments really should be seeing some areas as particularly “low-hanging fruit”.

I like to look at the betting markets in these situations. They got the Brexit referendum spectacularly wrong but have a good long-term record on politics and elections (Donald Trump’s election being another notable boo-boo). The current betting gives the Conservatives a 67% chance of winning the next election, and Labour a 33% chance. The more telling market is perhaps the overall majority betting – currently suggesting that no overall majority is the most likely outcome, with a 44% chance or so. I would view these just as they are – current probabilities, nothing more, nothing less. History normally reflects two things though – after the last world war, the incumbents were voted out rather than thanked – and also, after large majority governments, the next election is either a scrappy victory or a reversal of fortune, not another large majority.

At this stage, the real problem is to see where the friends are for the landlords, of course, and that’s why so many property investors feel politically homeless (and talk quite openly about this). Once again, I focus on the economic perspective – the reality is that when an industry or sector makes what the economists like to call “super-normal” profit – two things tend to happen. 1) They become a target for tax rises and 2) more entrants come into the market and drive prices down.

The returns simply on “basic” buy to let crushed every other major asset class between the 1990s and the mid 2010s. Tax grabbed a much bigger slice of the pie, and compliance is pushing up costs relentlessly since then – and so people are leaving the market. The sector is shrinking, but the demand is growing. This results in prices going up, on top of “corporatisation” of the sector pushing rents up anyway. The upward pressure on rents is likely to be huge over the coming years, and if and when the runaway capital growth train stops, I would still expect (outside of a recession – remember at this time we have a huge number of available jobs, and wages rising in real terms despite higher inflation) the upward pressure on rents to continue.

So – a difficult week to interpret, and some people’s minds will be more focused on where they fill up their car, although we are assured that the situation is easing. The danger is – where’s the next big problem – if you look at Britain that way, we run the risk of losing some of our attractiveness as that destination for investment that I’ve talked about above. Reputation is always a lifetime to build and ebbs away far, far more quickly – individually but also as a nation state, although goodwill is likely to be a lot higher. Back to the tightrope analogy – and putting it all into context, of course many countries are still having their Covid-related challenges (including key worker shortages of course). But we’ve been on top or near top billing on other countries “worldwide” news page because of the fuel and HGV driver situation, because our problems are bigger than theirs.

Until next week – where we will catch up on local data, pending the next big headline…….expecting a difficult and interesting winter!