Sunday Supplement – 19/09/2021

Sep 19, 2021


Sunday is here again and the balmy September weather seems to be rolling on. For those with portfolios, boiler season has nearly reared its head……make sure you are doing everything you can in terms of preventative maintenance and informing tenants how to manage their boiler, this is far better than reacting to the inevitable calls if boilers go on after 5-6 months of relative inactivity in the heating system side.

Today we are going to go on another macro inflation journey to update about the ongoing situation, and then talk about the state of the union (well, the market) in various areas as stock has not yet seemed to be easing/coming in stronger supply – and why not?

I can’t let another week go by without a significant discussion of inflation – once again – because those who are watching carefully are seeing predictions from earlier this year start to play out. They were perhaps the easiest predictions of all, because of the inevitable confluence of a weak base year/base year effect (where the year you are measuring from has extremely suppressed economic activity – the example in August’s official figures would be the difference in eating out in August 2021 where many restaurants have not only raised prices, but were also offering suppressed prices in August 2020 thanks to “Eat out to help out” – you’ll all remember that one I’m sure!).

One of the many problems (as I have stated before) is that it is easy to therefore write off all this inflation as “transitory”, the technical term – without any good reason. It is hard to strip these effects out, and harder to predict when some of these transitory effects will actually end – as the discussion last week on lumber prices hopefully demonstrated. I have a more high-level, cynical concern also. All historical data of previous recessions (what recession I hear you say), but also previous pandemics and wars (really significant demand and supply side shocks), leads to the suggestion that the best way forward to cope with the debt that has been created is to inflate it away.

This is difficult to argue with – but it does need qualification. “Healthy” inflation – as a symptom of a roaring economy, cracking along at 2-3%+ per year in terms of GDP growth, can happily be absorbed in the 2.5% region. “Inflation at any cost” – and we’ve seen some alternative inflation in the past several years, once because of a referendum result that the markets didn’t like and as the result of an overnight currency devaluation in the region of 20% or so – “fakeflation” as I would term it – is quite attractive to many in government, considering inflation as the important thing, rather than the underlying reasons why that inflation has occurred. If I was a policymaker, I would have inflation at most costs as a high priority right now, and be fully aware that I couldn’t explain or expound that position in public at all, and therefore I’d be saying all this was transitory even if I didn’t really think it was. So, regardless of the true thoughts, the ONLY thing that can be coming out of government and high-profile central Bank economists right now is that this is transitory – and that largely needs to be ignored.

The base effects argument can be taken out as they have been in other figures we’ve discussed in the supplement before – by using the 2-year figures rather than your base year as 2020. In the US, this figure is higher than it has been since 2008, where the astute will remember that other than the global financial crisis, oil was around a whacking $145 a barrel (which has a significant impact on inflation, of course, because almost everything transported uses oil to get there!).

The US also use some great metrics (a lot to do with the state system involved in the central bank) and one that is worthy of note here is the “trimmed mean”. This throws out the major movers in the inflation basket in order to have a sensible conversation about the real underlying direction of travel of inflation and a realistic rate. The trimmed mean is still trending upwards in the US (in the UK, our core numbers are still going up whereas in the US they may have peaked already), showing that this “transitory” period is not near a peak-end just yet.

There’s just no way to look at inflation at the moment that shows it is falling or at the point where it is under particular control. The lack of a “ceiling” is one thing that makes analysts (including myself) particularly nervous. It has been said before but worth repeating – we have very few if any economists or central bankers who have presided over a period of significant inflation, short memories and can’t remember how damaging it can be, and with all this in mind, upside risk is not great! We want to be protected against it, and it could also be argued that unlike those invested in stocks and shares, we are quite comfortable with real wages rising since it helps with rental affordability (which is key) and so if there is REAL inflation thanks to a healthy economy, and real wages rising in a typical post-pandemic economy, then it could lead to a longer and more sustainable crack-up boom in house prices and rents alongside that. Count the “ifs” and the “coulds” in all of that but what we do know as investors is that we want inflation to inflate away debt, at low interest, and this will increase the long-term returns from property.

The summary is my fear of longer-term (likely the investment horizons of almost everyone reading this piece!) suppressed asset returns from truly passive investments (e.g. ISAs etc.) which would be typical of a post-pandemic economy and the “decade of the investor” (or decades, more likely) could be at the end – this means property becomes more and more the answer than it has already been, but concentration and then lowering yields (yields are already lower of course, because even if you take the rents figures recently released of 8% annual rises, this is comparing to around a 13% rise in house prices, which still sees yields falling overall) make interest rate sensitivity ever more fragile – and we can’t build houses (or portfolios) on sand, of course. Property compares so favourably to stocks and bonds at the moment (the latter of which will simply have to move at some point, unless this inflation really does calm down quickly) – so it is, as usual, a case of keeping calm and carrying on.

So – onto the smaller micro-markets and the ongoing project to bring together some meaningful figures to discuss around real-time demand and supply. Historically we would expect stock to lower over summer as pipelines complete and then refill (partially) in a small autumn rush before battening down the hatches. One of the things that makes it relatively difficult to be overly bullish about stock levels is the bearishness of the “winter wave” or whatever it is going to be called – with governments setting out their winter plans for Covid and statements around “unlikely” lockdowns (please, no) and facemasks etc……this is not the chat that will get the UK public who might have held their moving plans up, not seduced by the stamp duty holiday and instead interested in self-preservation, to suddenly put their houses up for sale. If you’ve waited this long, it stands to reason that you may well wait for March/April and wait to see how winter plays out. The other factor, the trap that we are in at the moment, is that there is potentially nothing attractive to move TO – and so, with nothing on the market, how can you then sell? This is of course a self-fulfilling prophecy and needs an event to occur to shock it back into action – or, at least, a reason for those who have been nervy to suddenly be positive. The language from Westminster and 10 Downing Street in general simply isn’t that, at the moment!

The figures for our chosen locations are in the image, and what we see is more of the same. The bracketed figures are the difference since our last update, and we are seeing even lower stock levels across locations, with SSTC percentages going upwards – i.e. an even tighter market with percentages with sales agreed being squeezed ever upwards due to lack of choice and lack of availability. Agents are anecdotally telling tales of their “old stock” (this usually means properties that have hung around for more than 4 weeks, in a market like this!) being sold, because there’s just nothing else. A terrible customer experience tale was told to me this week – one of the large Solihull agents had agreed a sale on a property, and had progressed deep into conveyancing – then without the purchaser even being informed by the agents, the house appeared back on the market at a price 20k higher! It is THAT sort of market.

London once again proves why it is its “own” market – moving in the opposite direction to the vast majority of the provinces monitored, there is a little more stock, and SSTC percentages are down rather than up. Other than that, stock levels across the board are trending down (other than Ilkeston, but the numbers are so small that we are talking the difference of half a dozen houses, so not to be read too much into, I would suggest).

Remember – if you’d like to add or suggest a town or other metropolitan area for monitoring – drop me a comment or a message!

This sees us in a market that is no easier than a couple of months ago, and if anything, the jacket is tightening. Perhaps there are reasons to be slightly more cheerful though. After all, economics is the driver behind the supplement, and at a simple level, if supply is not playing ball, perhaps demand will do! We are 2 weeks away from the end of a stamp duty holiday which guarantees at least a couple of quiet weeks of activity in the lower end of the market (which, by numbers, is still where all the volume is, certainly when considering the provincial markets). In 2016, whilst it was “only” the investor market, there were 6 weeks or so of real quiet for the conveyancers – IF it was to be the same (I don’t think it will be – just imagine how many people have missed out on houses so far/are in chains that can’t go forward because a deal falls through and someone can’t find another property) – then that 6 weeks takes us into mid-November, which is traditionally a time when very few people are listing their houses for sale. There are lots of people still out there just looking for an excuse to be bearish, and the media will also play a part – what I’m saying is, we don’t need a “crash” to trigger the slew of headlines that journalists simply can’t wait to write.

Figures lag on furlough but at the end of July (figures only recently available from the ONS) 300,000 of the 1.9m who were on furlough had come off (leaving 1.6m in there) – so the pace of drop in terms of those coming off it had slowed significantly. There may be a few more on there that won’t be back to work in October – let us see. I still maintain this will have limited effect on the property market, because these jobs still furloughed are low paid, second or third household income earner jobs or jobs belonging to generation rent – there are figures around how many people have been staying home with mum and dad instead of even renting (let alone buying) – but the rental market is suffering from the very same lack of stock that the sale market is. Travel will be the big change too – with the traffic light system (which had 6 “lights” at some point – go figure) scrapped, winter sun bookings are booming by all accounts. They will need operators, airline capacity, and all the rest of it to fulfil these bookings of course, a sector which has had many people on furlough.

Others will be moving jobs – some have preferred the number of people on a payroll as a measure, although I think this is a little bullish, or perhaps the red herring is the better analogy – the public sector has absolutely ballooned, and also the want to be self-employed has decreased significantly, you would think – but also, IR35 must have had a considerable effect, forcing some self-employed onto payrolls. The number is higher than pre-pandemic, but unemployment (whilst it has been moving in the right direction) is still 75 basis points or so adrift of where it was at the end of 2019.

The other factor that will also smooth the end of furlough, especially given the types of jobs that have appeared strongly in figures, will be the Christmas rush for temporary staff. I’d be surprised (assuming a Christmas that isn’t disrupted by lockdowns etc!) if Xmas 2021 isn’t the “make up for lost time” Xmas, more spending, more going out, the Christmas party that didn’t happen in 2020, etc. etc. Many companies are already announcing that they are hiring 50%+ more staff than they did in 2020 (of course, this is base year effect again, because they were trimmed numbers last year – but it shows that they are bullish on their outlook compared to last year – and given these decisions are being made around now, whilst numbers were on the rise at this point last year, the summer had still been a time to be positive – if you pardon the use of the word – about Covid, with eat out to help out schemes and all the chatter being that Christmas would go ahead as normal, which of course it really didn’t…….).

Until next week – and if you didn’t at the start, please like, comment and share – and tell me what you think of the supplement!