We are teetering on the edge of “full summer” i.e. the 6-week school holidays, and the volume of activity really feels like it. Regular readers of the supplement will note that I’ve been highlighting the risk of a quieter than normal summer all year – first of all, concentrated/”brought forward” activity thanks to the Stamp Duty Holiday, then of course postponed holidays and flights from last year and people feeling they have a serious imbalance to right in the holiday/rest column having had, at the very minimum, a stressful year in 2020. Thirdly, there is money in the household coffers that isn’t usually there and/or credit card balances are lower than for many years – and fourthly, following a pandemic the feeling is normally that “life is too short” and all this leads to holidays abroad, and of course for those still unwilling to fly, a staycation boom.
All this language might be a touch negative for the property market in the next 6-8 weeks or so, although that could well be good news for the investors, not bad news; particularly those that have been struggling to pick up anything that looks like a deal since mid-to-late 2020 when they came back to the market (as did many retail buyers, and also those who found themselves with full satchels due to government stimulus in one form or another). However, it also may still be wildly optimistic. A quick check-in on the reality of the Covid situation is sensible.
The link between cases and hospitalisations is “broken” – I’ve noted the over-strength of this terminology before – but the reality is that it has been dramatically changed. There are still Covid hospitalisations, the patients are tending to be younger and the stays shorter. Cases are still rising – the past 7 days show positive tests up 40%, hospitalisations up 39% and those in ICU beds up 39% (cases aside, we are starting from a low base – but this doesn’t read much like a broken link).
There is a broader concern though, which is somewhat nuanced and, as usual, can be interpreted in a number of different ways. The two sentences from SAGE 93, the scientific advisory group for emergencies, that will have been very well thought through before being minuted, were:
“The combination of high prevalence and high levels of vaccination creates the conditions in which an immune escape variant is most likely to emerge. The likelihood of this happening is unknown, but such a variant would present a significant risk both in the UK and internationally.”
To the uninitiated, this looks problematic! We currently have high prevalence, and high levels of vaccination, of course. This is one argument in the locker for those who believe children should not be vaccinated, for example (alongside the argument that they are at extremely limited risk, although the real numbers on long Covid in the young won’t be available in detail until it is too far down the line, unfortunately).
The recent numbers mean that use of the phrase post-pandemic should be considered premature to say the least, and really the stream of consciousness that emerges in the supplement every week is just that – a forecast that updates and reacts to what is happening in the real world – not just the UK, but beyond as well.
The brutal reality for the 99.9% of us is that we are still watching and waiting – the phrase “freedom day” puts a few chills down my spine to be honest, because we are miles and miles away from free – there are lots to be said about masks, but one reason I have not been in opposition to them throughout and indeed suggested them at the beginning of lockdown 1.0 is “nudge theory” – that visual clue that you see everywhere you go reminds you there is something serious going on. It will never be possible to quantify what lives they have saved, particularly when you consider a nuanced argument like this. But for me, it has been worth the comparative inconvenience.
Anyway – enough Covid-19! Impacts of the possible scenarios from now on, we know, will be heavily dependent on governmental reaction to what plays out. We do know that this government has been willing to act big and fast, which has overall favoured the household and the individual over the corporate and the government (for a change, some might say). This might not have been the intention, but it has indisputably been the outcome.
In other news, this week, it will not have escaped those who read the Supplement that inflation numbers are unsurprisingly on the rise. If you watch the US as well, their figures are still much, much higher. However lumber prices are over their peak, which will please many, and the central bankers are holding the line. This is transitory. However, upside risks are now being recognised and thus there is volatility and uncertainty.
I couldn’t resist posting in one of our WhatsApp groups, when one of our members shared the UK news that CPI was 2.5% last month (polled expectations were 2.2%) – I said something along the lines of “If only someone had been talking about inflation upside risk in a regular digest, perhaps delivered weekly, on a Sunday morning”. There’s been no skill in predicting this – it has been mathematical inevitability. However, the skill is in predicting whether it is secular (i.e. persistent), or whether it is transitory (thanks to Covid), or something in the middle.
There are some indisputably transitory factors. Oil prices, lumber prices as discussed, used cars because there aren’t enough new cars to satisfy demand at new-low rates for finance on cars……..dozens and dozens of these factors will drop off. The one factor really torturing me at the moment is the point highlighted last week that post-pandemics, historically, we see labour gain the advantage over capital. This means higher wage demands (from the labour), but also limited upwards pressure on prices of goods, so either or both of lower margins, or greater share of existing returns going to the labour rather than the capital in the average corporation.
This is alongside lukewarm investment returns that tend to follow pandemics. However, this too often means that alternative investments and passive investments look less attractive – and active and traditionally low-volatility (with some inflationary protection built in, just in case) investments such as property ownership are even more attractive. Throw in the recent involvements of Goldman Sachs buying a PRS portfolio, and Lloyds looking like they are really entering the market rather than just talking about it – plus John Lewis looking to diversify their offerings (if that does happen, it seems likely that other supermarkets and department stores may well follow, they have talked about it before after all) – and if these are the early adopters, then the corporatisation of the sector that I’ve talked about since 2015 and section 24 takes another little step forwards, another press on the accelerator.
In the very short term, inflation also looks set to keep rising for the next couple of months. Oil is a big driver, there is a BIG drawdown on oil barrel stocks that is highly probable for August which will keep driving things forward – as will “freedom day”, no doubt (and money spent on leisure and holidays).
To keep abreast of the US situation, the number in the US was 5.4%. They tend to be more used to slightly lower inflation than we are, so that is really very significant at this time. The language of the Federal Reserve is being scrutinised harder than it ever is, every time they speak!
Always important to note – financial markets now see rates moving back to 0.25% by August 2022, rather than in 2023. I’m not altogether bought into this yet – because I see a more disappointing surge forward for the economy than the one predicted by Andy Haldane, outgoing Chief Economist of the Bank of England – although you’d expect him to know better than I!
Something that also slipped through the news net this week as I read it, however – UK furlough is down to its all-time low of staff, with 6% of staff on payrolls still on furlough. The bloodbath at the end of furlough looks near-impossible at this point, as discussed at multiple points this year so far – so if you are still sitting expecting such a thing, I think now in the face of the data you should adjust your expectations on that one. Net employment was up for the 5th month is a row, and whilst there will still be an end of furlough blip upwards, surely, it may well only be 20 basis points or so rather than the 50-70 points that were being talked about some months back. We could see unemployment have peaked already at 5.2% at the end of 2020.
The other data headlines this week include the ONS data for May having been published, and we are back to a 10% year on year rise in prices in the UK overall (which is where we were in March ‘21 also) – we still have the June figures to consider when they come, which one would expect to be higher again, thanks to the stamp holiday – but this is a lagging indicator based on a boom caused by stimulus conditions, and massive disruptions to supply and demand.
There are a few other, somewhat obvious points to consider from July so far. Exchanges in the first week of July only ran at 40% of their typical historical volume over the past 5 years (this was data from Knight Frank). This tells you how much was shoe-horned into June, and of course is what we would expect, probably for around 4-6 weeks if previous Stamp holidays are to be used as a guide.
Is this a cause for panic or a pause for consolidation? Seems like the latter. New buyer registrations for KF were up 31% on their 5-year average, and offers were up 59%. What they didn’t publish was listings data – but the point is, demand still appears to be strong in the KF section of the market – not as strong as it has been during the holiday, but stronger than the 5-year average (although bear in mind, it has not been an incredible 5 years for typical KF stock with Brexit, elections and then a pandemic!)
The Bank of England also published a financial stability report this week – and I wanted to pull a few specific sentences out of there which I thought would be of interest to readers. Firstly – what’s the affordability situation like at the moment:
“The share of households with high debt-servicing burdens has increased slightly during the course of the pandemic but remains significantly below its pre-global financial crisis level. Overall, the share of UK households with high debt-servicing burdens on their mortgages – ie debt-servicing ratios (DSRs) of 40% or higher – has increased slightly since March 2020. According to the latest NMG survey it was around 1.4% in March 2021, higher than its pre-Covid level, but significantly below its 2007 level of 2.7%”
This is good news – with around half the households tackling larger debt servicing issues as were doing so in 2007. You can understand why the Bank keeps a close eye on this!
The percentage of new mortgages that are at 90%+ LTV is at a low not seen since the aftermath of the financial crisis – and the percentage of existing loans at high (90%+) leverage is at a >15-year low, although prices going up 10% has a lot to do with that as well, of course. However it speaks to the fact that credit has not suddenly been made widely available on particularly risky loans – the price rises have not been a speculation bubble fueled by debt, although they have been driven by stimulus as discussed and structural factors, plus a larger move away from the economic equilibrium of supply and demand that we’ve seen since 2009.
The Bank also refers to price rises on housing in other developed/Western nations, and note that the UK has actually been relatively orderly compared to some others – they have no liquidity concerns, and extreme stress tests still see banks with more than twice the tier 1 capital that they had in the financial crisis. So, the Bank sees the house market, overall, stabilising following the taper.
To just draw this week to a close – I wanted to flag the Land Reg’s 136-page report released a few days ago – not to be missed, it isn’t as bad as it sounds (full of pretty pictures, to be honest) but contains some positive noises about reforming conveyancing, which will be music to many ears (although it has been years in the discussion, as well). This certainly sounds like a start:
“In May 2021, robots began moving approved fast-tracked applications, ensuring that 250 of the most urgent applications each day are completed as quickly as possible”
If you need a bedtime read – go for it! Otherwise, I highly recommend this month’s Property Investor News where I’ve written an article on whether to stick, twist or delay in the second half of this year when it comes to acquisitions – see if you can guess what I’ve said! Back next week for more data and analysis of the ever-changing market……..