Sunday Supplement – 04/07/2021

Jul 4, 2021

The 4th of July is here already and welcome to the independence day supplement! This week we will be taking a look at a detailed summary of the first half of the year with the figures that we have in so far, and also discuss how sentiment has changed this year.

The ONS figures have only got to April so far, and show an 8.9% increase year on year. This is to be treated with caution, because of the base year, although it was 9.9% March 2020-21 (probably the first base month to be treated with real caution). Of these figures Wales was charging ahead at 15.6% year on year (yes, you read that right). The point, however, is that this was the first month of slowing price growth since July 2020 – although, of course, the initial SDLT holiday deadline was set for March 31st, and historically this has always led to an appreciation in prices and a “cliff” – whilst the deadline has now “half-passed”, the intelligence on the ground suggests that already the market has returned to something that looks like normal, at least locally. The recent auction results are suggesting similar – as usual there are some ridiculous prices paid at auction, but in amongst them the occasional bargain and some sensibly priced stock changing hands again. The vagaries are interesting and may have influenced the YOY statistics amongst the devolved nations – Wales extended to 30th June but still had a “cliff-edge” approach (although their bands are different anyway and suggest there is no such cliff-edge anyway), Scotland ended theirs on 31st March but have a similar setup to Wales – the final impact on the England solution of the half-taper will only be known by the end of this year.

Worthy of mention from the ONS figures – London showed the lowest year on year increase, at around 3% – in the north east it was 17% (!). The base year is a problem, but nonetheless, this is a massive and overdue correction upwards after 12-13 years of underperformance as a region. You could make an argument around a brexit reality correction somewhere in there, because much of the analysis done between 2016 and 2019 suggested that the provinces would suffer much more than London, and the North East and Wales most of all. I invested heavily in South Wales after the referendum and the market was really quite soft until the world woke up to the toll coming off the Severn Bridge and the “Bristol Arbitrage” scenario that existed, with massive capital appreciation in Bristol and a soft market in cities like Newport and surrounding towns. This is, of course, speculation as these figures are flawed on many levels thanks to the pandemic!

Interestingly the average UK house price is now where London average house prices were in June 2006. If that trend was likely to continue at all (no reason why it should, of course) then in June 2036 the average UK house price would be up to 491,687 – perhaps not overly unlikely with a reasonable amount of house price inflation, in 15 years time……but of course, we are on the crest of an artificial boom right now so it isn’t really a fair point to make these observations (although, of course, the market was very healthy in London in June 2006 as well!).

It would seem likely that the ONS figures will stabilise in terms of YOY increases because when we consider June 2020, I would remark that things seemed “tentative, with a lot of people waiting for prices to go down” – but we just didn’t see it happen. The SDLT holiday was announced on the 8th July 2020 and that then took hold and we only went in one direction. April 2020 is probably the worst base month on record for many reasons.

The nature of the ONS (and the figures coming from the land registry) means that all we have is a lagged indicator which can sometimes be of more academic interest than it is of use. It is good for evidencing various wild claims that I have heard made, over the years, and it puts many a fairy tale to bed – I look at it as a dose of reality and compare it to what I think has happened over that period, and also what that period “felt like” from a business perspective/trading through that period.

The Nationwide live on the other end of the spectrum – with a limited amount of the data, of course, they always rush to produce their figures first. Sensible in that one of the prime purposes of the index is to get the name of the Nationwide out there in the ether – and cement their reputation as a large and proper financial institution. Nationwide announced a 13.4% year on year increase earlier this week, which is obviously gigantic. This will speak to the money lent by them in June; I would argue that there has been a real one-off in that even if house purchases have been downvalued, there has been more money out there to “plug the gap” (anecdotally, I have heard as much from agents – mum and dad have been there to find that extra 10k or more for FTBs or even those moving up the chain, and household savings balances have never been as high since records began which has meant that money can go in and has gone in to bridge the gap between surveyors and what they were saying, and the market reality of sealed bids and every house being sold subject to contract within 48 hours of hitting the market).

June 2020 would have reflected residential transactions agreed between December 2019 and June 2020 for the fast buyers – with a couple of months of no market at all, this again made for a poor base month for comparison, I am sure. June 2020’s nationwide index spoke of an annual drop of 0.1% (perhaps lower than I might have guessed) – so in a rudimentary fashion we could just see the past 2 years growth as 13.3% or just over 6% year on year, which is above the trend for the past decade but not ridiculous. For those who remember the 2019 market well, it was well characterised by being pretty sideways, which offered opportunity but also challenge.

Nationwide have identified Scotland as having the weakest Q2 of the devolved nations – given the shape of the Stamp holiday this should not be a surprise. The key from the summary is that June’s prices were almost 5% higher than March’s prices – according to Nationwide – so this would surely represent the peak thanks to the SDLT holiday in England, which of course dominates the overall figures due to number of transactions.

The trend of the low interest rate era also continues – the average mortgage payment is still on the lower side than many assume by historical standards – the deposit is the blocker for the first time buyers. One buyer at the average wage who saves 15% per month would take 5 years to save for a deposit (so, you would think 2 would take 2.5 years, which doesn’t sound ridiculous or unachievable!). Nationwide have Yorks + Humberside as the strongest performing English region, at 13% YOY. The West and East Midlands were not far behind at 12.2%.

Nationwide have actually reported only 0.5% growth in June 2019 – so you can take the argument above a little further. We have 0.5%, -0.1%, 13.3% over 3 years, or around 4% per year for the last 3 years. This is much more in line with my longer term expectations around a low interest rate environment – my own figures when modelling vary from 2.5-4% per region depending on the geography, and the time horizon we are talking about. So what? So, there is limited argument for a correction just because the last 12 months have outgrown our usual expectations for a year. I alluded earlier to the “impossible to parse” post-brexit effect that the market was expecting, but currently, to limited surprise, the situation is neither as bad as the most ardent remainers suggested, nor as rosy as the most enthusiastic brexiteers suggested.

The Nationwide also considers the “Outer South East” and the “Outer Met” – both of which have done considerably better than London as a whole. This speaks to an extremely flat market in Prime London. From the Knight Frank report in June 2021:

“Prices in prime central London grew by 0.3% in the year to May.

While it wasn’t a large increase, it was the first rise in five years and underlines how the recovery of the property market in PCL is not reliant on the re-opening of international travel.

The last time prices increased on an annual basis was in May 2016, the month before the EU referendum. Subsequent political uncertainty, combined with a growing number of taxes on high-value property, meant average prices fell 17% in the intervening period.”

This is worth bearing in mind. The past 5 years for PCL has been far, far worse than the 2008 financial crisis. In my simple mind I always expected Brexit to be far worse for London than the provinces although all the forecast data said the complete opposite, quite vehemently – on the strength of things not being as bad as forecast, there could easily be a relatively significant resurgence on the cards in the near future in PCL, if that is your geography of choice.

There are more factors yet to play out for prime central, and it is a market I watch for 2 reasons – one is academic interest but the other is the ripple effect, which has simply not been there in the past 12 months as forces driving people further into the suburbs/outer London have been stronger than ever before. It serves as proof that there are no bulletproof investments out there and decades of strong performance still can’t be relied upon to produce returns over every short term period. The long term trend will still be upwards, so -17% in 5 years might be the best buying opportunity that those interested in it will ever get.

So – that concludes what has happened, or the tale of the tape. How about the shift in sentiment?

We’ve seen an incredible rollercoaster in the past 16 months which has left many of us dazed and confused, to say the least. Very few were not bearish in March 2020 – the speed at which people reversed their bearishness speaks to how quickly they are willing to react to information, and challenge their own deeply held beliefs. I spent much time last year combating posts from utter doomsday sayers, and had backers, investors and business partners wanting to stop purchases – I wasn’t the first to be back to the party but was agreeing deals in May 2020 once funding pipelines had firmed up, straight back to “business as usual” (it definitely hasn’t been business as usual over the past 12 months!), whilst many were saying this would be the worst recession we’ve ever seen.

I’ve highlighted a few key points since then and it is worth re-iterating them:

Rarely do you see recessions coming, and even when you do, it is nearly impossible to see the reason or the trigger.
The single biggest mistake is to assume it will be “the same as last time”. It is NEVER the same as last time.
House prices, the stock market, and GDP are a long long way from perfectly correlated.

There is a reason why the Buffetism exists: “Be greedy when others are fearful, and fearful when others are greedy.” (Not sure Buffet did this himself, last year, at the time when the fear factor was at the highest!)
The key factors are the availability of credit (which has remained strong throughout, although there was a minor wobble in March – June 2020) and the interest rate (which has dropped). It took some time for this to start filtering through to pricing but we have seen some of it now, 12+ months into the lowest base rate of all time.

Would it be reasonable to expect a slowdown after the end of the SDLT holiday? Scotland’s figures are bearing that out as we speak. The quarterly change of 2.5% upwards still suggests a healthy underlying market, although month on month this has flatlined. A stabilising couple of quarters would be no bad thing, as the market consolidates on its new all-time highs.

There are, of course, many who still believe the end of furlough will see a fireball hit the economy and housing demand in general. It is impossible to see it as a positive effect, let’s face it. However – let’s just examine one important piece of evidence. A Conservative government have extended the moratorium on commercial evictions until March 2022. If that’s what they are willing to do to commercial landlords (some of whom are definitely struggling), then imagine what they are willing to do to stop the owner-occupier market from getting too hurt.

My thoughts throughout which are largely unchanged but have developed, are that the majority still on furlough are not the household major income earners, are much more likely to be renters, and indeed all of the news is around genuine supply shortages of labour, in both lower-wage/lower-skilled jobs and higher-wage/higher-skilled ones. The housing market impact I expect is minimal. There is every chance of a flatline or even a correction due to the SDLT mania ending – a few per cent would not be giving back much of the gains. We have the Scotland market to watch and forecast the impact on England, which is helpful for those of us mostly exposed south of the border!

I for one will be very pleased to see the end of an unsustainable boom without blood on the carpet. This is partially self-interested, of course, but booms and resultant busts do not help many aside from those with large piles of cash or access to large piles of cash, because credit becomes difficult or evaporates far too often at the key time (this is one thing that does characterise many recessions – borrowing becoming either impossible or overly expensive at completely the wrong time).

The prevailing unemployment figures are now forecast generally between 5.5 and 6.5% – if we get there to the higher end, that would be really significant given we have dialled back to 4.7% now and are at a low for 2021. My forecasts are still to the lower end of this range, or even lower than that. Month on month there are always possibilities of some strange numbers, so I would be more interested in quarterly figures as a rule. There are lots of reasons why the high level figures are not necessarily the most trustworthy, but they serve as a reasonable proxy for comparison of different time periods to others.

To bring this week (and the first half of the year to a close) – the title of the latest Bank of England report seems worthy of sharing. “Flexible inflation targeting with active fiscal policy” may not make it onto everyone’s bedside table for reading, but the language in itself should tell you what you need to know – in the same way that I have approached the last 3 years of the property market above and averaging out periods of over and under performance, the Bank are going to take the same approach to the inflation rate as it drifts above 2% for the next “who knows how long” – the reaction will depend on the rate and how much it exceeds the target by, and also to an extent on the replacement for Andy Haldane, the one on the committee who wanted to put rates up more than anyone else (perhaps more than anyone else on the bank’s monetary policy committee combined!).

There is an interesting arm wrestle to consider there. Some people see the Bank as prisoners to the Treasury overall, and are extremely sceptical of the “independence” claims. I’m not in that camp. In fact, currently I’d suggest the Bank have the majority of the power. The Treasury want low rates to cope with the gigantic debt pile that they have built up thanks to the “Covid War Debt”. They need them. The US has a wholly different issue with the amount it is costing to service their debt, which is more relevant than the percentage of GDP that is represented by debt (that’s just the default metric, and arguably isn’t that useful – although there needs to be some kind of headline metric, of course!) – The UK, not so much.

If the message from the Bank is (which they are hinting towards in this report) “sensible fiscal policy (i.e. government spending and taxes) means we can leave rates low and allow some inflation to play out” then in many ways that puts pressure on the Treasury. Austerity was pursued for years after economic think tanks worldwide debunked and condemned it. The message to me looks like “no return to that, please”. The unwinding, as we always knew, will be far, far harder than the first time reaction. It was several years after World War II had ended that it stopped absolutely dominating the economic headlines and the fiscal and monetary policy – and rationing continued until 1954 remember (indeed, 67 years ago to the day). So how do you even attempt to balance a budget this parliament? I’ll give you two pointers: 1) you don’t, it will be about optics not practicality; and 2) Boris doesn’t have a traditional Conservative attitude to spending, in case you haven’t already worked it out – just look at how much he will spend on a refurb!

Until next week…….