The Broader Economic Picture – 09/05/2021

by May 9, 2021

Sunday is once more upon us and despite April showers seemingly continuing well into May, the forecast at least looks a little clearer on the Covid front if nothing else (in the UK anyway!).

The supplement this week would like to explore some topics for discussion over the next few weeks and months. The broader economic picture will always remain the focus, but it would be great to hear from regular readers about what they’d like to hear and read about!

Firstly there’s the big macro indicators that take a good chunk of my attention – the number one risk to property investors and the one thing that has not worsened (but instead improved) over the past few years is the interest rate. It is easy to forget the risk that it does represent as we have gone into the 13th year of the bank of England base rate being below 1%, and not only that but we are a year into it being 0.1%, a new historic low on the back of what was already a historic low that we’d only crept back from. There is unanimity amongst the major UK economic commentators that it will stay at 0.1% for the foreseeable future (until end-22).

This forecast has recently improved in that it is no longer expected to go negative. Overall, I’d say this is good news because negative rates are at best unproven in their impact. They’ve been relatively broadly used in some developed western economies and the post-2008 world, and have run alongside anaemic growth rates, near-deflation, and sometimes persistent unemployment. Best left to the theoretical or observed from a distance, in my view.

Interest rates lead onto inflation which I’ve discussed at length over the past couple of weeks and indeed over the past few months. Traditionally interest rates are there to control inflation and tend to rise when inflation starts to rise in order to stop the economy from overheating. However the above statement around rates and inflation in negative rate economies is an observed fact. Negative rates have not been enough to allow even a remotely healthy level of inflation I.e. those economies just haven’t really got going in the mid to late 2010s despite money being dirt cheap to borrow and relatively widely available (although small companies always bemoan how hard it is to get capital).

There are many implications to the breakdown of this relationship which happened pre-Covid and with the tool removed from the toolbox, other, more extreme policies get used such as “helicopter money” which has been used in the US. The noises have started in the US about it being a problem to recruit because unemployment benefits are too generous currently – the bottom half in terms of incomes in the US have it a lot harder, overall, than the bottom half in the UK so the difference is more stark over there. Over here, furlough has largely replaced that situation apart from for some of the self employed who have not qualified for the scheme. As so often it will depend on the individual level – there has been recognition that a broad number of people have fallen through the cracks – landlords are more difficult to classify because they have indirectly benefited from tenants’ furlough monies of course (or higher universal credit benefits payments/increases in housing element/housing benefit), but had no direct help.

That does the job of introducing the third major macro topic of interest – unemployment. Many theories have emerged since furlough and the true number that would have been unemployed without it remains an unknown. The end of June represents another period where there may be redundancies as companies again need to start contributing to furlough payments rather than the government paying the full 80%, so we will soon find out what those numbers look like. My feeling is that they will be lower than many have expected throughout and we had a surprise month on month 0.1% dip in the unemployment rate on the most recent figures to be released, a few weeks back.

Depending on how much weight you give the voices in the US regarding the incentive to stay off work being too high, the US unemployment rate which is around the 6% mark versus the UK which is around the 5% mark, might be a truer reflection of where the market would be at with less direct interference in jobs (a real comparison between the true stimulus difference per capita between the two countries is very difficult, especially if specifically looking at job losses, for those reasons outlined). Job creation has seemingly slowed in the US back to “normal” although it is too early to use phrases like that – also commodities like lumber are shooting up in price because too many mills are closed in the US after the expectation last year was that demand would be lower not higher. Commodity extraction tends to work on longer cycles which is why supply shortages (and the current one is huge in many commodities) can be persistent and force prices a long way upwards if the demand forecasting has been incorrect.

Unemployment is very relevant because it is a drag on economic performance – in the ideal economy jobs are being created which are also highly productive and will push forward the macro performance of the economy – the political reality is that governments will accept pretty much any form of job creation because the headline number looks good and also it moves the unemployed from the liabilities column as far as the state is concerned towards the assets column. If job creation is low on quality then in reality people still need state support but it does of course decrease and also they pay tax into the system (rather than “just” VAT on a lot of things that they buy).

This works hand in hand with wage increases – harking back to inflation and unemployment as they work hand in hand, and of course in terms of sustainable increases in house prices, a healthy increase in the average wage over and above inflation is desirable. Affordability is a driver.

A bigger driver, in terms of correlation, is the availability of credit. This has started to be addressed more than it has been for the past 5 years or so. There have been niche schemes such as help to buy which have helped some first time buyers in the past decade (although the cynics would say that all that has achieved is to inflate the profits of the large housebuilders, and allow the prices of new build stock to continue rising somewhat falsely in a decade where house prices did not outpace inflation on average across the UK). This has become more mainstream with Boris and Rishi’s 95% mortgages for all – although until affordability is addressed then that remains mostly a soundbyte. It has been clear to me for many years that terms could be extended massively if there was an appetite to do so and a realistic term for someone in their early 20s could easily be 40 or even 50 years (as that’s the likely duration of their working life – I’m not as bearish as many on the state pension in terms of its complete removal although I do think it is likely that the qualifying age for a 20 year old today is likely to start with a 7 not a 6). Affordability and the “rent vs mortgage” argument is currently as hot a topic as it has been, and the smart money backs a review at some point in the next 12-18 months as it does seem fair to say things have gone a bit far on the Affordability front.

If you took a joined-up view though, this current market/bubble is no surprise. Everything is pointing to propping up the housing market/driving towards mania. For example:

SDLT holiday. The date on this is set for weaning off. You’d think this would already be having an impact on properties above (or well above) 250k, because completions on deals in the open market agreed on these are now exceedingly unlikely to complete in time for end June. Auction purchases etc. Can safely continue in May (and I note a major London auction house has held its own record breaking sale this week – the next one will be an interesting one to watch). Auction of course takes two to tango and to deliver record breaking sales you need willing vendors as well as willing buyers and perhaps you’ve had a fair few cash in on this existing market.

Overall strategy – a lot of the economic success of the 80s was built on the back of selling off government assets (or LA ones, such as social housing) and also meteoric rises in House prices (before the end of the decade). People remortgaged to get all the latest mod cons which at the time most certainly included double glazing, and spend on more accessible, cheaper holidays abroad. I’ve not ruled out Boris looking to access some of that “success” by repeating or propagating some similar policies. House price booms make Conservative voters after all – the figures will tell you that.

Relaxation and expansion of credit has already been covered.

Demand soaring – some because furlough has given a confidence (but it is a false confidence?) About job security, some because Covid is a really significant disruption to former working patterns and the necessity to be in certain locations. This wave is unlikely to disappear but more likely ebb away relatively slowly.

Supply crunch: this is the one I’ve struggled with the most in terms of explanation. Very few people are even talking about it (demand is much more exciting to talk about, and also much easier to explain). To really explain supply shortage you’d need to poll people about why they aren’t offering houses for sale – not an easy audience to target (would have sold if it wasn’t for the pandemic). So much of this remains theoretical at the moment. There’s no doubt in my mind that the pandemic has made a slice of the population – particularly those more senior in years – hold stock off the market. Again this seems likely to ebb away rather than there be a crashing wave of supply.

Then there’s the removal of the debt pressure. This is the other big one. But how many repossessions will we expect all of a sudden. 10,000? 25,000? Difficult to say and I wouldn’t rule out Boris et al. Attempting to deflect many of these somehow because the optics would not look good. Banks don’t like repossessions either and these are likely not going to be the wave that some might think – but they are the other major supply crunch.

There’s also a more nuanced problem than we are looking at when talking at the highest level. Oftentimes it is said there is no housing crisis in this country because there are so many empty homes – whereas the reality is that at the micro level, the market is quite dysfunctional. There will always be areas where there is a shortage of the right sort of stock that is in demand. Currently, that is suburban properties and even more so, sea view and coastal properties. The flip side is too many city centre flats that are not selling well, and are beleaguered with other problems. This exacerbated supply problem just works towards a bubble in certain stock.

That’s the second instance of the b word today – and those conversations need to start being had. Nationwide announced a 2.1% month to month price increase in April. Some of that is no doubt the lockdown bounce as confidence has really returned but it only takes a very quick glance at the calculator to realise that a 2.1% monthly increase is a >25% annualised increase. Combine that with the reports of sealed bids and you have classic bubble characteristics.

On the flip side you still have lots of deals falling through and coming back on the market. I’ve been told anecdotally a few months ago by an agent that you need to sell everything 3 times in this market……whilst the overall figures aren’t that bad, consider what might be an average situation at the moment. Buyer panics at sealed bids stage and goes 7% above asking price. Surveyor comes out and values 3% below asking price.

Plugging those 10% gaps can be done by some – and households have massively improved their savings positions since February 2020 – but not by all. House goes back on market. Cycle potentially repeats itself……

It takes 3 months to sell and 3 more months to see it on the land reg (although it has got a little faster in recent times). But call it 6 months before the overbought property in April hits the land reg in October, when the surveyor can finally hang their hat on it……just in time for the end of SDLT holidays, end of furlough and for the market to get ready for winter…….worth thinking about!

Too many variables have been pointing in one direction or another throughout the pandemic – when will this shift? It would seem sensible to not expect normality to resume until 2022 at least. Many may groan at that but it doesn’t mean you can’t transact, deal and trade at this point. There are fundamentals that point to a slower but rising market over the next few years as many previous supplements have addressed. If (and it is a big if at the moment) you can control materials pricing and labour pricing, it may not be the worst time to embark on a property development – although of course it depends upon what you are building. Nicely finished houses are fairly robust in any market and with the excess demand and the lack of supply also being felt because of projects delayed or not started in 2020, plus a rising market……

Historically I must declare I’m always off these trends too quickly. I still believe volatility is the watchword for the post-Covid market and there’s a few good reasons above for some wobbles but the tailwind of this market could persist for years (not at current growth levels, likely, but still persistent and strong). There’s still an argument for stimulus if the economy now doesn’t get going – my heuristics are telling me that whilst everything has been too bearish for the past 14 months, forecasts are now looking a bit bright and just as we’ve hit a new forecasted high for economic growth of 7.25% this year, I think we will miss that target for a variety of reasons. I’m going to muse over why I think that is the case and try to put it into words next week – at the moment it just feels like the pendulum might have swung too far, but I have stated before how much I am looking forwards to seeing productivity figures (particularly for Q2, which are not going to be around for months and months yet!). We need information now, not lagging indicators – and that’s one of the points of the supplement, and one of the goals!

So – back to the start. What would you like to hear more about? I did some research and produced a piece several weeks ago about furlough and the true economic impact and cost vs benefit. I’m genuinely interested in all of this stuff and it also gives me some release from the day to day property investment operation, and am much keener on the facts and the data than I am on being correct…..although I do try of course!

Answers on a postcard or instead, as a comment below please! As always, likes and shares are much appreciated and thanks to those who do so every week – every single one is noticed, none are taken for granted! Thank you