Sunday Supplement 24/01/2021

Jan 24, 2021

Number 4 of the year already! Over the worst part of the shorter days and the damp squib of Christmas is a distant memory……

There seems to be a bit more positivity in the air. The broadcasting of the number of people vaccinated on a daily basis is a rare thumbs up for the media throughout the whole covid crisis. I’ve found myself increasingly frustrated with the media of late as they try to poke holes in the vaccination process rather than spread the positive news and the things that have been done well. So much has been done sub-optimally that it would be nice, for a change, to see some balance…..but alas, no.

On the same topic the headlines continue of the impending doom. I’ve been sick of this since the very start. Utterly unqualified opinions around how this would all be “worse than 2008”, “twice/thrice as bad as the great financial crisis”, etc.

The reality is that those doomsayers were the same people who have been pessimistic for the last 5-6 years about the property market, or are just pessimistic by nature. I prefer realistic! Their understanding of the economy and the global financial system is limited to say the least.

Putting into context the measures taken in 2020 and 2021 so far – it was faster and bigger than 2008/9. One of the real problems in the GFC is that it took 6 months really to do much of note. Compare that to a country surprised in 2016 by a referendum result – immediate measures were put in place the next day. Similarly, whilst the government have been “last-minute” they have largely acted quickly and, considering furlough, very generously. This might be an upside to populism that hadn’t previously been considered. (Not sure that’s enough to turn me into a fan of populism just yet…..)

This isn’t to say the market will just plough on regardless. My prediction for this year is still “volatile”. SDLT and the likely actions around March 31st still grabs a lot of industry headlines. You would think that after the mistake the treasury made around leaking the SDLT holiday they will be staying ultra tight lipped this time about what will happen. But let’s see!

Remember the big influences on the market: first population growth – figures won’t come out for 2020 from the ONS until mid-June, but most sources still forecast around a 0.5% growth in the population last year. This is in direct opposition to some of the headlines saying more people left the UK last year than ever before. I’ll wait until the ONS figures but the more sensationalist the headline the less I believe it.

Secondly consider supply of new units. I’ve seen figures up to 110k new builds NOT being delivered in 2020. Again I’d rather wait for official figures. It is clear though that there were significant delays on existing jobs but also units that didn’t even start, and sites that didn’t go into planning or took/are taking months longer than they would have done because planning is soooooo slow at the moment in the UK.

Thirdly, and a big one – the supply of credit. At a simple level the funds are cheaper than ever before at source. The pace of getting them out of the door has slowed gigantically thanks to covid (and let’s face it it didn’t start from a fast position!). When furlough is over and we are back to a completely competitive lending market – prices of credit will go down. This is inflationary for house prices.

Unemployment is the spectre that has been mentioned. Predictions were we would meet 11% or so when the crisis first hit. Now they are saying 7.5% and I still think that’s too high. One thing furlough has done massively is protect jobs. This has been a massive more blue collar impact than I first thought and that’s been a difference because the impact on economic activity has been much lower (isolating that from all the other noise such as the suppressed demand from being told to stay at home) than it would have been in a white collar recession. The overall number is a brutal figure because 10k jobs lost in financial services will have more impact than 100k jobs lost in hospitality. The bright side of this also is that when the jobs that require fewer skills turn over, they can hire and fire very quickly. If your induction takes a day or a few hours, there is a massive willing supply of labour at the moment as vacancies advertised are still down by a huge percentage.

The unemployment factor normally lags anyway in time terms. So whatever the peak number is, the impact is likely to take some time to see.

Let’s also remember that the bank of England only a few years ago considered under 6% as a time to tighten monetary policy, even though we got under 4% in the end. They did revise that but while we are still at under 5% it does put that into context.

So what of stock levels? I would say a couple of things. One big constraint last year was the lack of stock and just this week I heard from a business partner that the area he is looking to buy in has such a shortage of large houses that he bid 10% over in a sealed bids situation for one he really wanted and the winning bid was a further 7% ahead of his. One isolated example but large semi-rural properties are booming by all accounts.

There will be a number of people who have simply held their house off the market because of genuine fear of covid. This slice of the potential vendors could be quite large looking at various polls over time regarding just how scared people are or have been.

There is also a decent amount of stock to come when debt pressures come back to “normal”. There will be a large backlog. There would have to be some pretty incredible and unprecedented intervention to stop this from occurring.

On the flip side when SDLT returns in some way there will also be lower demand.

One or more of these phenomena could play out quite quickly and simultaneously. This is why I think this year will be volatile and why, as investors, we need to be agile.

Post-covid I expect a consumer-spending led boom, likely not to be sustainable. People have overall paid down household debt to its lowest level for some years. Travel will recover quickly as will leisure and hospitality. I remarked last year that after WW1 and the Spanish flu there was a significant boom and I expect something similar. At a psychological level people will feel “life is too short” after having had time “stolen” from them and will make up for it. In a big way.

The harder question is – when is post-covid! I don’t expect sars-cov-2 to go away. I’ve been bullish on vaccination speed since the early days and we see 26 more centres opening this week. This is impressive stuff so far. Key metrics are things like how many people are vaccinated versus how many new cases there are and new cases from 60k+ per day are down under 40k daily consistently. The R rate is clearly under 1 nationwide (even though the spread is 0.8-1, for reasons I don’t understand mathematically).

That is all very promising indeed but there is the spectre of the mutation. A rare feature is being suggested at this time – 70% more infectious and ALSO 30% more deadly. Horrific combo. The worry isn’t really this new variant or the current ones but the NEXT new one. However, the world’s scientists are still working on this 24/7 and I’m sure they will be up to the containment task of the next mutation!

We could see a significant unlocking in mid-March at this rate or even early March but politics, sadly, will get in the way.

Will winter 2021 be free of Covid? It seems unlikely. Eradication is a pipedream. So you can see a bit of the reasoning that’s driven me to predict a volatile year.

Don’t underestimate the pace at which things will happen. It will be a fast ride in an asset class that typically moves very slowly. This means massive opportunities for those who are ready to transact, and have a plan. Stick to the fundamentals and you’ll do well. If you haven’t re-geared to sort finances – yes you could hold out for lower rates but could easily miss deals that will make 10s of thousands for the sake of maybe saving a few hundred.

Keep calm, stay safe, be kind and carry on!