Budget Predictions and 2020 Housing Data – 28/02/2021

Feb 28, 2021

Sunday and already 2 months into the sequel to the disaster movie that was 2020. Where are we at and what’s going on?

Well, this week can’t roll past without a budget prediction, so that will take care of our macro overview for the week and go a little “off piste” and definitely beyond property. The other topic I wanted to address is the house price movement over the last year, as some are scratching their heads over it – I want to get granular on that one, so buckle up for a numbersfest.

Starting with “the roast of Rishi” which this budget will inevitably be. We’ve got yet one more Covid turnabout with the Conservatives looking to put up corporation tax (or having a strong think about it!) and Labour clamouring for that not to happen.

Yes, re-read it, that’s what’s really gone on this week! First let’s look at the speculation and how reliable it might be.

The one that has our attention as property investors is of course the SDLT holiday. The feeling amongst many investors is that this is a pain because it keeps the market “overly hot”. There were a few things thrown out there about 6-week or 4-week extensions to stop a hard deadline of 31st March and a cliff-edge, but then the Times put their reputation on the line by announcing it would be 3 months.

There are potentially a couple of wrinkles there though. Will that be 3 months on offers accepted by 3rd March (budget day?) – or 31st March? Or just a new cliff edge on June 30th (of course, 3 months is not long enough to create a similar amount of heat as the original holiday announcement – but it is still strangely long). Will this June 30th be the “new” end of Furlough in its current form? Possibly.

OR will we have seen the Treasury take the time and effort to finally put into place the stamp duty reform that is long overdue? We know Boris has never been a fan and this would have been an ideal time to announce an extension or tapering off into a new scheme. I understand the argument that there have been other things to focus on but we knew 6 months ago there would be a cliff edge and here we are. This government will have a permanent reputation as last-minute charlies if they are not careful!

The 3 month extension looks nailed on but the devil will be in the detail.

The other tax that has had major airtime is corporation tax as alluded to earlier. The Conservative argument since 2010 has been that lower taxes mean higher revenues, and conversely, higher taxes mean lower revenues, as decision makers within businesses find ways to mitigate tax, and the higher the tax, the more incentive to mitigate. There is some evidence for this (although the evidence they usually wheel out is anecdotal and weak as water – but it sounds like it could be true so it passes the political acid test). The two numbers banded around have been 23% and 25%. I see a rise of more than 1% in any year as quite unlikely, and I also see that pressure has grown since these headlines started appearing NOT to do this (including from Labour, as alluded to above).

There would be damage done if taxes go up a reasonable amount for one other reason other than mitigation. Investment has been woeful since 2010 in the UK. An increased tax rate basically makes investment decisions LESS attractive for shareholders because it means investing now (rather than taking profits and paying a lower tax rate) is less attractive because in the future your profits will be taxed more aggressively.

In my simple view of the world the role of the government should be to maximise the tax take – and then spend that money without conflict of interest on providing services that are not well provided by the free market (e.g. healthcare, education) – even if the private sector is used to provide those services (and ideally it would be), this typically leads to a much better allocation of resources and outcomes (research the Swedish model of education if you want an outstanding example of this).

This move would not maximise the tax take. It would also be disinflationary. Basically – it is too early. What I would do is wait for the boom that is coming, if Rishi doesn’t disinflate from the getgo, and then hit everywhere I needed to while the sun is shining. This is the most classic mistake that has been made over recent times and why QE and debt is mounting and mounting – there is no fixing the roof when the sun is shining. Right now we need to go to the pocket even more than before, stimulate, and ride the wave upwards. The US are an absolute mess when it comes to handling Covid but their economic response is mostly superior to ours. Furlough has been a great scheme in the context of everything (our employment laws, the benefits that people would otherwise have received, etc.) but other than that at this time the economic response has been insufficient. Choking this off before it gets started would be bonkers.

Stepping down from the soapbox onto the next relevant tax for investors – CGT. The argument has come from the Office of Tax Simplifcation (no kidding) that CGT should be set at the income tax rates. If this is the desire, and I think it looks possible – it at least needs to be given 12 months notice. That way there will be a selloff which means crystallisation – that means a bumper CGT take but also the flow of investment income and also consumption in the economy on the back of this. There will be more luxury holidays and over-expensive cars bought in the next few years than you’ve ever seen before as we have the same post-pandemic feeling that there was in the early 1920s around the world – they weren’t called the roaring 20s for nothing (of course, they ended in economic disaster – but that’s another story for another day). That would actually give the economy a bit of a shot in the arm, and also create opportunities – my personal plan is never to HAVE to crystallise, and create something that will outlast me and/or be run independently of me, and so CGT doesn’t really bother me. The argument for CGT NOT being at income tax rates is really no argument at all, so if you’ve ever paid CGT at the artifically low rates then I would just consider onesself pretty lucky to be honest!

The CGT tax take would spike if there was a 12 month notice period, and then drop heavily as the tax rise bites – then after the next election, should the incumbents stay in power, there would be the perfect argument to drop it right back again, because the argument would once again be reinforced by a false dawn or lack of one. Cynical? You betcha.

Another raid on pension tax relief has been mentioned on the personal level, although I think this lemon has been squeezed already as far as it can be during the 2010s.

What other penalty kicks are there in there? Surely a continuation of the VAT holiday for hospitality etc, maybe for 6 months? Certainly for 3.

Business rates are also likely to remain at zero for hospitality and lesiure. On retail – well done to the big grocers (not Iceland, interestingly) who repaid billions because they smashed it during the pandemic, because that money may well fund a continuation for those that really need it. Will it be “all retail” – not sure, but it might have to be because of the difficulty in implementation otherwise. This again will surely be 3 months but may well be 6. A year would be a gesture to the sector that has taken a hammering, but may cost too much to include retail too.

Grant schemes are likely to continue to help the truly beleagured in hospitality and leisure too, in some form or another.

The universal credit extension looks likely, as does a continuation of levels of LHA/HB/UC housing element, as 2020 1st April rents are clearly the new rent. If they are increased in line with rent increases which have been very high outside of major metropolitan centres, then that will be a feather in the cap for those with investments that derive their rents from the LHA rate, and an increase looks likely as this is “not the time for austerity” (Boris, 2021).

The biggie for the economy will be the infrastructure spend. £600bn was mentioned last year (no-one took any notice, because we had a pandemic) but that’s an incredible investment. 10 years too late as that’s what we should have been doing post-GFC but nevertheless, a great time to borrow to invest in infrastructure which will return greater tax takes for many years down the line. A lot of this will be lumped in with Green energy – will we finally see a proper, decent and sustainable grant scheme? Can’t believe I managed to type that without laughing out loud! No, we won’t – but we will see something new. Something BIG needs to be announced, particularly pertaining to last week’s EPC-related part of the article.

Here’s a joined up solution that I posted: Increase EPCs, allow sufficient capacity for charging electric vehicles, and get nearer to zero carbon in one simple go – SOLAR. We had a great scheme in 2010/11 with the FITs and had it been done and run properly you would see 20-25% of the houses in the UK with panels on now. Instead we are at about 3% and about 4% of Uk power comes from solar. Pretty pathetic to be honest. The tech has had the major price crash and is now very cheap (but still getting cheaper) but labour costs are going up like a rocket and will continue to do so when whatever schemes are needed to achieve these energy targets are implemented.

Rather than go into a full pro/anti climate change assessment – let’s leave it at this: This is happening, there will be huge opportunities in this, there will also be millions of jobs created – if this is done even remotely well, it will be a great thing. I can’t see a Conservative government truly being behind this (let’s just say – I’d bet 50p with you that the members of the 1922 committee/ERG/CRG wouldn’t be!) although Boris might well be, and while he is at the tiller, there COULD be a good scheme to be implemented. The record of ALL UK governments on green energy schemes is a litany of errors and as usual, we need to learn lessons from around the world that for whatever reason (national pride, potentially – certianly got in the way of Germany this week, so we are definitely not the only ones prone to this) we seem to never bother to learn.

Wednesday – 12:30 (or so) – we will hear Rishi’s Recipe for Recovery and expect a breakdown on it next Sunday in the supplement!

Enough budget – onto the numbers. So, The ONS (which really is the only source you should truly trust) released the December 2020 figures this week. Months, years and other timeframes are arbitrary constructs at best and to open this discussion we need to put things into context. December 2019 (i.e. transactions completing at that point) were either, realistically, auction purchases from November 2019 or retail purchases agreed in July-Sept 2019.

At that point we had “brexit fear” and parliamentary deadlock. The election wasn’t announced until the end of October and that killed the market in November for auctions. People pulled out of transactions, etc. etc. In any “normal” year (When was the last one of those please? Answers on a postcard!) December is a poor month as well. So there are ALL sorts of reasons why we can’t take this as a really fair reflection of what truly happened. But it is on the record books as what happened to the housing market in 2020, from the best source we’ve got – so let’s run with it.

We quite often get obsessed and make the mistake of looking at these things at the wrong level – so I want to try and take us down a path today that is relevant and worthwhile. To do that I want to focus firstly on property type, after the headline numbers.

The headlines were: Average price finally above 1/4 million: £251,500 to be precise. We say “house” but we actually mean dwelling because flats are counted. The annual change was 8.5% upwards (in context of a crappy December in 2019 and an unusually active one in December 2020 because of the SDLT break).
Month on month 1.2% up, and 31.9% up since January 2015.

This means that in total property is up 4.69% per year since January 2015, at this point. This has far outstripped interest rates and since it only represents capital growth, if you have yield, and sensible leverage – you’ve probably had a pretty good time. This is well above my 2015 expectations which I think if I recall correctly were about 3% p.a.

Great – but as usual, so what? What does it mean to you? If you live in a flat with unsafe cladding – not a lot. If you live in a semi-rural country pile that’s gone up massively in value since March 2020 – also, not a lot! That’s why we need to get granular and understand what to invest in, what’s done well or not, and why.

So onto property type. The ONS breaks things down into detached, semi, terraced and flats. Most investment stock of course tends to be terraced and flats, with a smattering of semis and the occasional detached.

If we look at the numbers when compared to the headlines above (these are England and Wales):
Detached – up 10% YOY and 35.4% since Jan 2015
Semi – up 8.8% YOY and 35.3% since Jan 2015
Terraced – up 9.2% YOY and 34.5% since Jan 2015
Flats – up 5% YOY and 23.5% since Jan 2015.

Interesting to note that flats, which overall I have quite a “downer” on (primarily due to leases, rather than anything else), underperformed so dramatically. Perhaps no surprise given the premium put on space, a nice 4 walls and the resurgence of the garden thanks to Covid and lockdowns. Interestingly, flats are the second best performers over the last 25 years (starting 1st Jan 1995) according to the ONS (up 416%) (terraces are the best – up 427%) – but of course this would NOT take into account the cost of lease extensions and leakages due to service charges and ground rents.

Investors – if you struggled to buy at sensible prices last year – that will be why! If you are new to the game, then it is always great timing but hard going since early 2020. If you have an existing portfolio, then take solace in the numbers that have been put on rather than what you couldn’t buy!

Obviously this level of increase is unsustainable but because the drive has been artificial, IF the balloon is well deflated by Rishi there should not be too much rowing back. When you start to see the headlines “House prices crashing” if and when they drop say 3% over a relatively short period this year, this will put all that into context!

I took a quick look at cash sales too as I’d seen some conflicting headlines. In the first 10 months of 2019 there was an average of 18277 cash sales a month in England, with 3 months with over 20k cash sales. In the first 10 months of 2020 (bearing in mind April and May were crushed by lockdown 1.0) there was an average of 12574 cash sales (a drop of 31.2%) and the highest number in a month was 17391 in October 2020. (data only available until October 2020 at time of writing).

Mortgage sales averaged 48092 per month in Jan – Oct 2019, and dropped to 30994 in 2020 over the same time period (a drop of 35.5%) – 2019 saw 3 months above 72500 mortgage sales in that period, 2020 (to October) didn’t see a month above 55000.

You simply CANNOT drop 30%+ of transactions out of a market in that sort of time period without there being a major impact. Supply squeeze means prices go up up up. There will be a demand/supply correction (alongside all the other things that will be going on) – likely in summer this year when people wake up, decide the pandemic is over presuming the roadmap goes ahead (is it? Not so sure about that one yet!) and think they wouldn’t mind cashing in on this new housing market with these new inflated prices. The downsizers, those who have stayed out of the market due to real Covid fears, those changing plans and jobs because of wanting to move to the country or having to move for work or a new business opportunity set up in the recovery environment – this will be equally disruptive.

We already know volumes will have been up up up also in the past 4 months, but the supply shortage may well soon be coming to an end and there will be a normalization/reversion to the mean during 2021 (ceteris paribus!)

As one further interesting thing to draw out of my trawl through the numbers: First time buyer volume:

10 months to October 2020: 38024 with a monthly high of 7761 (March)

10 months to October 2019: 88209 with a high of 14765.

Obviously an incredible difference with numbers down 56.9%.

This I thought spoke of a few trends observed during the pandemic:

The young stayed put, those in HMOs sometimes moved back in with mum/dad.

Lots of builds were not started or completed on time of course.

People hoarded money rather than spending it.

Large decisions got deferred.

The impact on existing stock was nowhere near as stark.

Of course – when we look again at these in 6 months time or so, another 6 months will be on the databases and the “catchup” transactions will have been captured. The last 2 months of 2020 saw strong activity and there were estimates from the portals that sales volume was only down 6% or so in 2020. These figures make that look very unlikely to me at this point (or a mathematical impossibility to be frank), and that probably speaks to how many transactions fell through but also how many people thought about selling and changed their mind.

A few trends that I would pull out of the numbers to make some evidence-based statements that might be of interest:

Investment stock looks solid but if you can, go for houses not flats.

Competing when stock is limited will always drive up prices.

Prepare for the pendulum swinging back around on pricing. There are likely to be wobbles and there will be fallout.
Rises like these are not sustainable.

The numbers help you see why govt are SO desperate to help first time buyers get on the ladder and the extension of the 95% mortgage/HTB to all properties not just new builds (which frankly should ever have been thus, it would have stopped £100m+ shooting into the pockets of 3 people at Persimmon, for low quality delivery that has only truly benefitted those 3 people).

You’d need to look at yield to get a really rounded picture, but sense tells you that yield will be higher on terraces than semis, and higher on semis than on detached.

The moral of the story – it isn’t always about what you see, the fact that terraces are the best performing type of house since 1/1/1995 is a lesson for me this morning for sure.

Hope it has been of interest and use, well done if you got to the end; likes, shares and comments are always very much appreciated!

And as always you must remember – past performance is no guarantee of future returns, but if we don’t learn from the past, what do we learn from?