Sunday Supplement 11/10/2020

Oct 11, 2020

Sunday and that means it is supplement time… on steroids!

Extended furlough looks to be a good place to start. Many have been confidently predicting Rishi would tweak his prouncements of a couple of weeks ago and come out with something more juicy. It should be said that the original scheme at 80% of wages up to £2500 was one of the more generous in Europe/the world and has doubtless protected many hundreds of thousands of jobs. It has been abused by some large companies – not in a fraudulent sense but to hide behind, lenders would be a good example. Not wanting to lend much at all over the last 6 months, it has provided something to hide behind. Seen similar in large utility companies. Covid has been a great excuse for cutting costs and cutting call centre staff.

The new tweak which has only been announced at 3pm on Friday is 67% of wage up to £2100, but thr wording seems to suggest that this is only for industries/businesses that have been “forced to close due to Covid”. As always the devil will be in the detail but this sounds far more restrictive which is probably not a bad thing for the economy. It also sounds like a hundreds of millions of £££ scheme not billions. Other companies need to make do with the modified scheme which sees them pay workers 55% of their pay for 33% of their time (ratios adjusted upwards accordingly) and 22% made up by govt.

It seems more smoke to 90% of businesses than help, but the battered sectors such as nightclubs/hospitality generally can make use of it. Seems a bit harsh if airlines can’t….but let’s see the details.

The real unemployment spectre has not yet raised its real head and we race towards the end of the year. The end of October looks less like a cliff edge as we approach it.

I find it useful in these situations to check out what’s going on in the US. The US has some value as a proxy for the UK because of the similarities of the economies and the similarities between the tax systems. However there are lots of nuances and differences too. The US addressed covid with oversized unemployment benefits for a few months and also a helicopter money cheque (or check as they would say) for $1200 a household. April was in fact the greatest month for household disposable income ever in the history of the US despite many states undergoing some form of lockdown.

Unemployment spiked to over 20% but is back down now already to under 8% based on September’s figures. The BoE’s last prediction was 7.5% by the end of the year but we may even remain on the shorter side of that, which would indicate a very successful job retention scheme in comparison, at a cheaper rate than the US. This would be a significant departure from the financial crisis, where hindsight and history indicates that US fiscal policy and overall policy was far superior to the UK policy (other than on home repossessions – we did a far better job of protecting homes in the UK). I’m solely talking about it from an economic growth standpoint where poor policy selection placed a gigantic drag on growth in the 2010s.

The US election also looms and our only role is as observers but I see significant market turbulence for stocks and bad news stories from the US for months, regardless of the outcome. The worst outcome for the rest of the world is Trump wins the popular vote on the night and Biden wins the whole thing once postal votes are counted. No idea why they can’t just run it properly as we do in the UK where we also have many postal votes. Of course this also suits Trump and reform is impossible at this point. If you are invested in equities – buckle up I’d say. Volatility will be king and with where social unrest has been in the US of late – it is difficult to imagine a scenario without massive ramifications (perhaps a landslide victory for either side, but that seems incredibly unlikely).

Uncertainty is not liked by any markets and property is no different. My fear is an early “winter” – I.e. the market goes into hibernation as it normally does in the second half of December, but it does it earlier this year due to tighter local lockdown restrictions and uncertainty. That’s a fear for vendors but might mean opportunities for buyers as it will switch to a buyers market, just briefly.

I think the desire to kick the can down the road is still clear but Rishi has sent a message that the belt is very much tightening, which has to be positive from a fiscal responsibility perspective. As mentioned above around hospitality – I’m not sure that enough is being done to protect jobs and the industry in general….but with much of it being relatively easy skills to train compared to other industries, this may well be a decision. Travel will potentially look different on the back of it and airports and their surrounding areas are still very fragile at this point for the next few years. Jury is still out for me on all of that.

Onto pricing – having an interesting discussion on our business retreat last evening/night about different parts of the country – even in Birmingham micromarkets where we’ve got stock for sale we are seeing significant differences – I’m seeing the bottom and the top of the market (say bottom 20% and top 20%) absolutely flying, with a weak middle – starting 2 weeks ago – others are seeing things fly across the board with a feeling of quiet (or slight softening would be more accurate) just in the last week or so.

Buying therefore remains difficult but there are some realistic vendors out there. You need to be starting with aged stock at the moment, many are itchy and we are now definitely in the zone where for some, completion by Xmas will be a very attractive opportunity. People are nervy and continued Covid news/the Scotland approach will have people getting more and more concerned. Your fundamentals of a deal are more important than ever.

I’m also hearing of success on development sites on some who thought their initial offers, hundreds of thousands under asking prices, had “no chance” – but the ability to perform and offer certainty is attracting a larger discount, which is sensible by any stretch.

I’ll end with a brief thought which I will build on next week. We have “guaranteed” ultra low interest rates for 5 years (and potentially 10+). We have money pumped into the economy which has already inflated asset prices. We have a much larger debt bill which, as there is historical precedent e.g. post WW2 and there’s been lots of chat of “war debt”, is easiest to try and inflate away – that’s far less painful than the alternatives. The way to inflate is to CUT taxes, not to raise them. There’s also significant pushback likely as Covid has highlighted and accelerated inequality and social cohesion is genuinely precipitous at this time, but I expect tax policy that looks like it hurts the top 20/10/5/1% without really doing so that much at all…..smaller taxes may be tweaked for effect only, but huge hikes that stifle economic activity I see as unlikely. What does this mean for house prices? More next week……have a great week everyone!