Sunday Supplement – 12/12/2021

Dec 12, 2021

*****Today includes the impact of the infamous Downing Street Party, a dose of Omicron reality and its impact on the 2022 property market, and some further thoughts for next year including growth and inflation, and how many houses we won’t build in 2022!*****

Welcome to the antepenultimate supplement of 2021! Will it be a year we are sorry to see the back of? This week has had to take a diversion away from where I did intend to take it, because it has been such an eventful week there are news items that cannot go without comment, because of their likely influence on the economic factors that I watch so closely, alongside the inevitable impact on the property market for 2022 and beyond.

For the best part of 12 months I’ve, in a move that is far less impressive than it sounds, predicted the direction of travel on the major economic variables, GDP growth, unemployment, inflation and the interest rate. Not impressive in the main, because thanks to the economic mania that constituted 2020, certain things have been as near certainty as anyone could imagine. Inflation being a particular example, but also GDP growth of course. The nature of the “speed” at which these things are measured and published has also been much more of a factor than in previous years – simply because the pandemic moved so quickly. Last year, after all, we had the worst recession for many hundreds of years (on paper), and the doomsayers were out in force telling us we were approaching economic collapse (with no qualification to do so, but there we go). We then had the fastest period of economic growth for many hundreds of years – all this basically meant is that a graph got very steep all of a sudden, went down and went back up. This does not take a PhD level economist to comment upon, let’s face it.

However, there are some areas where I have been vocally against the direction of travel. Unemployment, throughout, I have spoken with clarity and confidence on – as I predicted, we never hit the heady heights predicted, and also the end of furlough was an extremely damp squib indeed (which is no bad thing). Regarding GDP growth, I also called the stuttering of the economy as we approached winter 2021, from months ago when predictions started to emerge that we would grow the economy by perhaps up to 10% in 2021 (The Bank of England never got quite as enthusiastic, but still felt on the high side at 7.25%) – remember we started the year in a miserable lockdown which hurt GDP significantly in January. Didn’t take nostradamus as it was clear that covid wasn’t “going away” anytime soon – but this chicken has started to come home to roost this week.

October’s figures for GDP are out – and they show a 0.1% increase in October 2021. They also contain some more granular detail that is of more interest, and we are going to take a look at that, first of all – but when you put the recent restrictions/plan B/whatever you want to call it into the mixer, you know that this period, which is always challenging for GDP because of other factors including weather constraints, is likely to see a negative move in GDP rather than a positive one.

What constituted that smallest of rises? Services sector did well, but primarily driven by the rise in face-to-face GP appointments returning (a trend that will now of course be in reverse again). Consumer-facing services also did well, thanks to a retail boost which is inevitable to continue to an extent in December, although bound to have the shine taken off it by Omicron. Construction also took a huge contraction of 1.8% – the largest since April 2020 – as the “summer building season” ended and certainly on an anecdotal level, we’ve found contractors far more available in Q4 of this year than Q2 and Q3, by some way. Normality has almost resumed, at a higher price base of course. Construction output is still 2.8% below its pre-pandemic level, which, aside from anything else, gives us an early insight of just how far we might miss next year’s increasingly optimistic house-building figure by. Further scrutiny shows that repair and maintenance work is up 3.9% since pre-pandemic whereas new work is down a massive 6.2%, still. I guess this doesn’t hit the news since everyone expects us to miss our new homes targets as a matter of fact! Chances of 2022 GDP rising by nearly 5%, which is the forecast…..well, depends how much it falls before the end of ‘21 I suppose, but that’s obviously a false measure – I’d be closer to 3.5-4% for 2022, personally.

The covid “long shadow” on the economy is another part of my argument for interest rates not going beyond the 0.5-0.75% range that I’ve predicted for the end of next year. At this point, for the first time, it feels like 0.5% might be a better stab than 0.75% – but things can change on this front and we daren’t forget inflation. November’s number in the US is out – 6.8% year-on-year, but 0.8% month-on-month, on top of 0.9% month-on-month in October. This had been expected, and some commentators had suggested it would top 7% – but this will start to stabilise and fall back organically in the US from here, because of base effects and the time of year.

Still, for those bemoaning extra restrictions, which on the face of it are really having a limited effect on people’s behaviour (keep it simple – those who are fed up with restrictions and rightly disgusted at the “number 10 party” debate of this week are not going to modify their behaviour – some are aggressively NOT modifying their behaviour – and those who were hesitant and nervous, the vulnerable and those who have been shielding are drawing back a little on the back of recent guidelines and changes). I’m talking there about the individual level. At the group level, there are changes that will be costly to businesses, many of which have had a limp couple of years – hospitality being the primary one. Companies “need” to cancel Christmas engagements (or, more accurately, some of them feel they need to) – it only takes one virus pessimist in a leadership team to nearly force this outcome – and anecdotally I’ve heard venues bemoaning 50% of Christmas functions being cancelled.

Number 10 has sought to “lead by example” (can’t type those words without a snarl coming across my face) by cancelling this year’s Christmas efforts, even when the media and the country are much more focused on last year’s events, which of course, didn’t happen but they obviously did. Again this won’t be helpful for their cause (which we will get into in a moment), nor for businesses. One of the economic phenomena that we observed last year is that when in fear of a pandemic, people will hoard cash at all costs – slowing down economic activity. Expect this in a much more minor way than, say, April 2020 of course but as already alluded to – when winter comes, Christmas aside – things move more slowly – and retail is bound not to get the boost it was hoping for on the back of all of this news.

Something approaching fury is likely some business sectors’ response to the enaction of Plan B, which can surely only be seen as a distraction tactic in the middle of Boris’ worst week in charge as of yet, in my eyes. Those who have it in for him (including but not limited to Dominic Cummings) should surely be very pleased with their timing of releasing the hounds this week – just as he was pummelled by the (albeit manufactured, but as so often, it just doesn’t matter) Stratton video, then the flat refurb reared its head once again. It seems there is a way out of that, but it looks like another weasley way out, and not just that, it reminds us yet again, if we need reminding at this stage, that this government believes one rule for them and one rule for us perhaps more than any other administration I can remember.

I wrote in the week of weak leadership – and this is the consequence. The culture, at a glance, appears utterly rotten and of course the other consequence of a weak leader is that there are always those waiting in the wings to replace them; Gove still hasn’t got the memo that he is utterly unelectable, Hunt is likely wondering what would have been had he won the leadership election back in 2019, and Sunak is silent and nowhere to be seen. I have to say, if I was Starmer, I’d be enjoying this but not making many efforts to actually remove Johnson, because there’s plenty of fight in him and from a politically selfish standpoint, a long and protracted demise would be ideal for the Labour party. It won’t be ideal for the country, that needs leadership as much as it has ever done, and that’s just one of the problems of politics.

So – that’s the whistle stop of the political week and the macroeconomic news – what of the market’s opinion on Omicron? Markets have recovered significantly; more than seeing my point around stimulus money being there if truly needed, they have more reacted to the positive news that Omicron, whilst being incredibly easy to transmit and more so than ever before, is seemingly less likely to cause severe illness, hospitalisation and death. On the broader point that I’ve raised around civil liberties several times since the pandemic began, I’m as usual highly disappointed with the mischaracterisation of England’s efforts towards vaccine passports – and that is a related point, so I want to spend a paragraph on it.

There have been changes to the law that are “temporary” (but nowhere near as temporary as advertised) since the Coronavirus Act from March 2020. Some of the powers that the legislation enshrines are frankly horrifying. To the credit of this administration, they also haven’t been used – but alongside many others, I fear mission creep. The freedom in our society (compared to many others in the world) is a true privilege and one of our last remaining bastions of greatness. Austerity knocked too many of them for my liking, but one chief role of government in a post-industrial society is to make life better, and freedom of choice is better than any alternative – this much has been proven many times, costing many millions of lives in the process. I would also point out that in my view, whilst the pandemic management has been far from perfect, civil liberties have hardly been touched. I’ve had several screaming in my ear for months that they WILL be touched, but I’ve still not seen the evidence of it. In a week where the government is getting pilloried, they’ve actually once again handled the vaccine passport issue better than many of their oppo in other home nations and beyond. One drastically under-reported part, disappointingly, is the allowance of a negative lateral flow test instead of the actual passport. This is absolutely critical – IF you accept the vaccine passport approach, the negative lateral flow stops the start of the creation of the two-tier society. The two-tier society that Ardern in New Zealand cares little for (and I’ll close this door before we go into Austria and Germany, amongst others).

Long paragraph – but if people could focus their energy on one thing (beyond the safety of their own families and themselves, of course) when it comes to covid – it would be the civil liberties debate. I can’t get hot under the collar (well, perhaps I can if not talking metaphorically) about masks – a minor annoyance, just get on with it – that’s the stiff upper lip, right? But freedom curtailing – that’s a totally different kettle of fish. I’ve read precisely zero praise for the governmental approach thus far – but in a week where I’m feeling more negative emotion towards them than at any point, I thought a bit of balance on that front might be ideal, and I believe they should be praised for putting civil liberties first. This actually seems to percolate down from Boris as well, so I might even temper my critique on his leadership – but, like Trump, he presents as a pretty grotty human being, so it’s difficult to be too sycophantic.

Anyway – quite a segue there. The matter at hand – the economic and property market for 2022 and what will happen! I mentioned last week that the nailed on certainty of an interest rate rise was at risk thanks to our new variant, and the political instability/the beginning of the end of Boris is not going to make anyone at the central bank more hawkish for the meeting coming up on 16th December. It now feels like “wait and see” is the prudent approach – and we all know by now, I hope, that that is the default approach of the central banker. The calendar for the week coming is – inflation figures released 7am Wednesday 15th (with a forecast of moving to 4.7%, but some feeling it may come out on the higher side – the psychology of breaching 5.0% will be something, so reactions will depend to an extent on that) – and then the Monetary Policy Committee meeting on Thursday 16th which will take inflation numbers into account of course, but looks unlikely to act unless we saw a number well outside of forecast.
Considering they have already been expecting 5% in spring 2022, it will need to miss by some way on the upside to get too many votes to raise the rates – and the news between now and then on Omicron is unlikely to be positive, because there simply isn’t enough time for it to be positive – we are still in the “feeling out” stage, regardless of the probability of outcomes because people just aren’t listening to that quite yet. Compared to the American numbers in general, the UK response to covid, which I’ve said many times looked superior to the US response, is bearing out to be far stronger. I am not sure of the effect of a $1.75tn stimulus bill on an economy with an inflation rate of 7%, but it is hard to see that being disinflationary – and secular inflation in the US looks a certainty at this stage, up from a “strong guide” earlier this year in the supplement. The UK, not so certain just yet – but it would be foolish to presume inflation will drop to low 3%s in 2022, which is the current central bank forecast……

Markets are still maintaining their 1% prediction for the UK base rate by the end of 2022, although it has been curtailed down from just over 1% (remember, it is an average of the futures markets, not necessarily the exact number). That curve has flattened a little more, and long-term rates are still looking likely to top out at 2.5% – 3%, and how long it takes us to get to that long-term is no-one’s business (more than a decade would be my view, but 10 years is a long, long time). Meanwhile, I have seen more products starting with a 2.xx for limited company, 5-year fixed rate products, rather than fewer – and this is an excellent time to be raising secured debt against property. Margin squeeze alongside low 5+ year bond yields make cheap debt look here for some time to stay, just yet.

If and when interest rates on property debt do take a lurch upwards (and that isn’t guaranteed, of course) – and I’m not just referring to the end of the ultra-cheap pandemic debt that saw a price war on owner-occupier mortgages – it will have an impact on investment property values. Retail, owner-occupier property – not so much – but it won’t help. The control of a sudden hike in rates is crucial to our long-term stability.

Credit expansion looks more likely, however, which pushes prices further upwards. The takeup of the 95% mortgages as lauded by the current administration – you might be wondering why there haven’t been any headlines on that? Very few have been taken out, and less than 1% of mortgages are written at 95% at the moment, which is not necessarily a bad thing – but won’t be a factor in pushing prices upwards. Since the mooting of relaxation of lending rules last month by the Bank of England, however, there have been further noises that have hit the media this week on that front. Current affordability guidelines are stress-testing at the bank’s Standard Variable Rate plus 3% at the end of the term – but the Bank have accepted that the probability of exceeding the current SVRs (which are high, of course) PLUS another 3% is extremely unlikely indeed. I’d suggest if you ran a monte-carlo simulation 10,000 times you’d see fewer than 10 scenarios where this played out, if your modelling was in any way realistic, from today.

Doing this while house price inflation is running at or around 10% is very brave, of course, but the 95% mortgages aren’t getting people on the ladder, and they want to get people on the ladder. Against a backdrop that in 1989 51% of 25-34 year olds owned a home, when the 2019 figure was 28%, which has received some coverage this month – there’s a clear want to at least make that demographic believe that they CAN own a property. The reality so often in many parts of the UK these days (ex-London and South East, really) is that the issue is around saving the deposit, rather than the affordability – but this will still constitute an expansionary attitude towards credit, which is positive for prices (alongside the inflation backdrop, which pushes wages up as well of course, which is also positive for prices).

The news on the ground from this week is that nationally, we’ve really started to see a dichotomous auction market – those houses that have performed well during the digital era and the pandemic, and those who seem to have nearly given up the ghost. We managed to snag one lot post-auction and are concentrating on another, and there were definitely bits of realistically priced stock – however, I have seen plenty of performance that would be better than the average December auction, and some larger catalogues than expected of course. The buying pressure is still out there, but the stock is improving still. The nugget for the week would be – you should be paying 100% attention to your stock pipelines in December, it is the best part of the year to be a buyer. Don’t say I never give you anything!

Agency-wise, stock levels still look low – but of course they do. Agents are holding stock off for a Boxing day or New Year launch – which is sensible. It is a thankless task listing in the week before Christmas, and largely a waste of the opportunity to make that first impression.

Next week I want to get back to the micro-markets and also I’ve promised some rental analysis – one of those will inevitably be pushed into the new year but this week could not go without significant commentary on the most relevant issues, I hope you will agree!

Please like, share, comment and also tag anyone in that you think might be interested in the supplement – and, as always, stay safe and seek out the source data! (#Ineedabetterstrapline)