Supplement 02 Jun 24 – The Damp Squib?

Jun 2, 2024

“A situation or event which is much less impressive than expected.” A damp squib, as defined by the Oxford English Dictionary.

Before we get started, I’m delighted to say our next Property Business Workshop is still taking bookings (despite being on election day – get your postal votes in, folks) and there are still tickets available with an Early Bird discount.

This time Rod Turner and I will be taking on: The fundamentals of property investment. Risk mitigation and control. Relevant investment metrics. Differing secured debt arrangements and loan structures – and – Scaling your property portfolio/business – why, when and how?

Thursday 4th July, in a Central London location (Blackfriars). Early Bird tickets are available – and thanks to the early bookers who make it viable to book a room and organise the event – we reward them with 10% off! There are tickets still available here:

Welcome to the Supplement, everyone. This week’s quote – or, more accurately, definition – is a throwback to the announcement of the election in the pouring rain, of course, but also applies in my view to how the campaigns have started so far, and also, potentially, to the pre-election property market. More on that later.

Last week was incredibly long and attracted few comments and little traction. I would think that was because of the length of it – so, apologies, that’s my one indulgence for the next few months at least. Promise. Probably. I am still pleased that I went into the level of detail that I did about the PRS “independent” report – couldn’t resist that one more dig.

Back to a more workable format this week. How’s the market – then macro – then a deeper dive into the mountain that the next Government needs to climb.

Watkin was BACK this week with a recycled headline – the best property market fortnight since May 2022. That’s 2 of these in the past month – which is promising. The tale of the tape:

May “sale agreed” prices moderated to £348/ft – 5.1% higher than the January sale agreed figure. Look out for that ONS index when those settle and this kicks in.

Listings are still racing ahead – so, you need to make sure you stand out when you are on the market.

Gross sales are 7.8% ahead of the 17-19 pre-pandemic market – healthy indeed on volume – Net sales, the best barometer, are 5.4% higher than that market (so, more has been falling through than since before the pandemic, still, even though that has calmed right down).

Don’t miss the nuances – but the 5.1% increase should play out from around June’s ONS figures to around October’s ONS figures which will be available in December or early January 2025. Let’s come back and take a look at that when we get to the end of the year. That’s based on completion times and solely on £/sqft achieved, which is not perfectly correlated but is very strongly correlated with the ONS.

Thanks again to Chris Watkin for his ongoing commitment to keeping us informed on the sector in real-time. Macro time – and it was a scrappy week, mostly down to the fact it was half term for many. We kicked off with a surprising Distributive Trades print, of +8, which was way ahead of consensus, for May – but April was so disappointing this was just written off as a bit of levelling out, and the damp squib here has literally been blamed on the rain – 200% more rain in February than average, and 155% more rain in March and April than average. Not ideal!

The Nationwide House Price Index was also out, printing a +0.4% for the month and a +1.3% for the year. Zoopla also delivered theirs (a day earlier) and saw prices -0.1% on the year – although they report one month in arrears, so that is their April figure. Month on month there was no change in the Zoopla index. They went into some detail around various cities and how they performed – citing the North-South divide – I’ve shared the image for this week’s Supplement because it was interesting, I thought.

Belfast I can write off as some kind of Brexit effect we are not necessarily privy to on the mainland, I think. Ipswich – at the other end of the scale – is East rather than South-East but also is not expensive as a rule, nearly smack on the average – so blaming higher prices isn’t the way forward here. Coventry also makes it into the losers over the past 12 months according to Zoopla – a city I’ve got slotted in for major capital growth over the next decade. In Coventry we are talking 1%, and there is always noise in statistics, and only a fool does not recognise that the market has been somewhat flat over the past 12 (or, down in the first 8, up in the past 4 if we are talking until April 2024) – but in Ipswich the number is 3%.

We have to be careful with data and not to take it too much to heart, or draw too many conclusions based on one month’s reporting, or similar, from one source. You could, for example, looking at the chart, decide that instead the best tactic has been to invest in areas beginning with “B”, since the 1-4 in order are Belfast, Burnley, Bolton and Blackburn. Manchester has also done well, and I’m sure that has a non-zero impact on several of those!

Zoopla also cut through the noise and led with the fact that we have the highest number of homes for sale that we’ve had for 8 years. Sales are up but not as much as new supply, as evidenced in the Watkin figures. They also mention the election and here’s another damp squib, certainly in Richard Donnell of Zoopla’s view – they expect a stall in sales agreed, but point to the fact that escalating rents are forcing action from FTBs – I’d also expect it to be forcing action from the Bank of Mum and Dad too, because there is SO much equity in so much of the UK’s property stock.

The conclusion from Zoopla though is that this election is likely one with less impact – mostly because of the lack of true policy divide between the two parties. They have revised down their 1.1 million completions slightly for 2024 though simply because of the timing of this election – just as the housing market was really gearing up for the early summer.

Richard still sees house price inflation to be flat over 2024 as a whole – and I still respectfully disagree with him!

Anyway – plenty there on the house price indices and some good discussion in the reports. Nationwide uses a different methodology to show that they don’t think elections have much of an impact – and their data seems to support that view, although it doesn’t really get into the granular detail enough to draw such a conclusion. The narrative from them though is that “the show must go on.”

Last week of the month also always sees the Bank of England Money and Credit report published – usually zeroed in on because of the number of mortgage approvals. As regular readers and listeners know, I like to go deeper. There was very little change in the number of mortgage approvals – down 200 is worse than up 200, but solely psychologically. The number stayed above that magic 60k and whilst we are chasing 65-70k for a more voluminous market (that was the healthy number pre-pandemic anyway), we are OK with 61,100.

Remortgages decreased to 29,900 from 33,500 which is a shame, of course, but the rates ticked up again in April if you recall after starting the year at a really generous low (given what I thought was obvious at the time, which seems to now be the conventional wisdom – higher rates for longer and more persistent inflation). Remortgage numbers also only capture those remortgaging with different lenders, so are not the bible by any means.

£11.7 billion went into ISAs – the most since records began (April ‘99). So, households had a very healthy net flow of money again – but the £8.4 billion that it was (healthiest number since September 2022) went into savings, and then some. Lending also dropped significantly from last month’s report (and this is April’s report, so the last report discussed was March) – but as I always say, one month is only one month so I am not going to conclude too much from that.

Net mortgage lending actually grew last month for the first month since October 2022 (Lettuce imagine what happened there….). Outstanding mortgage rate average is now at 3.57% in April, the newly drawn mortgages were at 4.74% on average. So – there’s still 33% more to go in terms of cost increases – although with rates likely to come down, that entire 33% isn’t most likely to have to be absorbed in its entirety (4.74% is 33% more expensive than 3.57%, just for clarity!)

Also remember most people pay repayment – the vast majority – and so that 33% looks more like 16% or so, on the average LTV of 42% or thereabouts, in terms of how much it increases monthly repayments, as it nudges forward month on month. Nationwide did run another article this week about debt repayments for households jumping up significantly according to their transaction data – which they aggregate and share. Of course, what they wouldn’t know from that data, is what percentage of that is capital repayment and what percentage is servicing interest – but it is on the rise, and they decided to lead with the headline “Spike in debt repayments as costs continue to hit household budgets”.

That leaves only one item left on the macro menu – the bonds and swaps. We had a short week of course because of the second May Bank Holiday – and so on Tuesday’s open we opened at 4.182%, had a bit of a climb until the ECB pretty much announced they were cutting next meeting even in the face of a higher inflation print (that might be very sensible – remember they are looking 6-12 months ahead before having any impact – there is also a currency decoupling that will play out here as the old “follow the Fed” narrative bites the dust in the following months and years, in my view), and there was a late rally to get us back from nearly 4.3% on the 5y Gilt to 4.211%. Still too high in my view, but still overly influenced by the USA as well and it will be a long time before markets swallow that pill (IF I am right, of course!)

Thursday’s close was 4.238% and the 5 year swap closed at 4.159%, still preserving that 8 basis points or so of discount. The higher it is, the higher that discount might creep, as long as major volatility is not back at any point in the near future (fingers crossed).

That concludes the macro report but I do want to go into some more detail about inflation, and central banks diverging in policy over the coming period – because it is happening. I then want to get into the problems facing the new Government and what they mean for property.

Just a slightly longer word on that situation. I have pointed in the past to the fact that the UK money supply swelled by around 22-23%, as controlled by the Bank of England, during the pandemic. That number is so suspiciously close to the actual rate of CPI inflation that I find it baffling that some make out that the money supply isn’t really related to inflation. But they do (some of them!). The US number is more like 37% – and their inflation hasn’t yet matched ours over the same time period. That money WILL find a home, and continue to chase prices up across the pond – we’ve dealt with ours momentarily, and absorbed it. That’s the BIG difference. We still have the lag effects – rents racing forward, because they started to increase late versus prices – wages also racing forward, for the same reason.

The ECB figure for growth in money supply (21.8% since Jan 2020) looks very similar to the UK figure – a shade lower – and their economy as a whole has higher unemployment to deal with, and a lower rate of interest to start with – but a prudent approach still stamped by the German influence of course with regards to deficits and they are overall adopting a much more sensible approach to tightening than in the UK, in that they are not (currently) selling their bonds into the secondary market (we are, and it is scheduled to cost the taxpayer many billions – how many is constantly underestimated while yields stay high). You can almost guarantee that yields will stay high until we’ve done most of the tightening we want to do, and then they will start to fall sustainably! (Murphy’s law in action, there). Their inflation over that time period? (CPI) – 21%. Another incredible coincidence, but that very rough measure suggests that their worst is definitely over, whereas the US is far from out of the woods in my view.

As a mini-summary – the ECB is likely to try and cut rates relatively slowly, in an orderly fashion, and is going first. This strengthens sterling against the euro. The UK is highly likely to be ready for a cut “soon” – with some recent disinflationary evidence, a higher savings rate, and the drag of debt – all brings consumption down and makes the worry of the one “Dove” on the monetary policy committee – the external member Dr Swati Dhingra – that consumption has fallen too much – a bigger priority for the rest of the committee.

Aggregate UK spending is down 10% or so from before the pandemic, and 8% down on one year ago. People have simply started spending less because they’ve got less to spend, and real household disposable income (much as I love the metric) is being disposed of on higher rents (above inflation), higher mortgage payments (above inflation), and more saving as already stated because of fears that situations could deteriorate (and also because saving is simply much more attractive than it was pre-pandemic, because you can actually get a return, and right now that return is REAL i.e. above inflation).

Remember consumption represents two-thirds of GDP – so this does leave you wondering exactly how GDP has increased at all? The answer is (almost singularly) a massive increase in Government spending, of course, pandemic sponsored. We have almost guaranteed growth if we can keep up with the ambitious (and, frankly, impossible) plans for real terms spending growth on the NHS alone (before I even start on welfare).

I came across a great chart on the Kings Fund website, an independent charity, on this subject. In real terms the annual increase on healthcare is shown by parliament (and colour of government). So – the tale of the tape:

Since 1955/56, annual NHS spending has increased by 3.6% per year in real terms.

Conservatives varied from 5.3% in their government of the early 70s down to 2.6% in the 1980s/90s. The coalition government of 2010-15 (which has to “belong” 90% to the Cons) increased spending by only 1.1% per year in real terms. For this parliament it is 2.8% (but this is an average, and the extra monies put in during the pandemic will have padded that percentage somewhat, of course).

Labour’s most notable contribution, as a contrast, is a 5.5% real terms annual increase in the years 1997-2010. Their other administrations tended to stick to a low 3s or so. Still not bad, you’d think.

Now – in one fell swoop, I’m going to tell you why I’d never get elected – and also why we have a problem coming at some point (or just simply bigger and bigger tax burdens).

This isn’t affordable. It can’t go on at anything like this rate. It might be the chickens from the 2010-15 period are coming home to roost – but it also might be that the pandemic has given the NHS a kicking, or that the dependencies in the system in terms of the sick and the elderly, alongside the expansion in other treatments/new drugs and the likes, have meant that 2.5% or similar simply has not been enough – and that’s not forecast to change, at all.

Do you see the inevitable problem yet? Growth is expected to run at about 1.6 – 1.7% in real terms going forward. A major departure upwards from this would be quite a shock (or in reality, the result of a significant leap forward in productivity). 2.5% doesn’t look like enough (bearing in mind the state of the NHS today, as reported, and the situation in 1997). Money doesn’t solve the problem alone but the 5.5% annualised real growth definitely made a huge difference.

So – we can’t afford to sustain even a level of growth that doesn’t lead to great outcomes. The ultimate ends here are 1) wholesale collapse of the NHS, perhaps over decades (arguably already started). 2) fantastic productivity improvements which mean that we can do more with less money (yet to emerge). 3) Draconian rules meaning that certain people are excluded for various reasons (sounds dystopian – will leave you to conjure up your own images there). 4) Funds are levied over and above tax – as they already are for dental and prescription services for some/many (missed GP appointments costs or fines would be one example, and there will be many more). Is it even worth writing 5) – a sensible conversation about how to grow the health service sustainably over the coming 10, 20 and 50 year periods? No breath being held. “No-one wants to smell the coffee”, the politicians would tell you. Personally I find it pretty insulting pretending we don’t have a massive elephant in the room – not sure how others feel.

I can’t resist a little indulgence – I might also consider 6) With the rise of literature and media around ultra-processed foods, do we need a tax based around the cost of this and our NHS – to combat type-2 diabetes for example, which is individually-driven (typically?). Sugar tax worked pretty well, to be honest, even though it wasn’t very “Conservative”. Tax the bad stuff and subsidize the good stuff…….that’s pretty radical and isn’t about tax revenue, it is about bringing the cost of treating T2 diabetes and related elements down from the current 10% of the NHS budget. Quite authoritarian, but nudges don’t seem to work here. There are indirect costs to the economy too.

Big food is a notoriously powerful lobby, and I’d wish the very best of luck to those who already try to tackle it (Jamie Oliver, Dr Chris van Tulleken, etc.). Anyway……

After that slight drift away to the end of my political career before it has started – without consumption growth, and without much government spending growth, we find ourselves on the shorter end. OR, the fact that consumption has dropped so much means it can and will come back, and there will be some growth there. Not until the cost of debt has been absorbed directly or indirectly by households, however – back to my 33% price increase in interest rates. When will that come? Difficult to say, but a proxy of when existing rates on mortgages match new rates is as good a proxy as any, I’d suggest. Growth in spending is needed of course as the population grows, although we are growing around the 1% level at the moment (or have in the past couple of years, mostly due to much higher net migration figures). That is the ONLY way our real GDP has really grown – with a meaningful increase in people papering over the cracks of a previously-dropping GDP per capita.

So the moral of the story – Government spending can’t carry on increasing at above the growth rate without raising taxes more (and income taxes are down significantly for the median earner since 2010, but we all know the tax burden overall is much higher – and the other thing we know is that the blend will continue to change).

How about the property implications of all of this? If we look at the classic household tenures in 2022-23 and their moves – 358k of 15.8m owner-occupier households moved (2.26%) within the sector. 109k sold and moved into private rental. 211k private renters became homeowners (so that’s a net loss of 102k privately rented households). 192k new households became private renters, however (so that’s on a rolling basis +90k new private rented households). A net 22k went into the social housing sector – 60k left, 38k joined the PRS from the social sector. 676k households moved in that year within the sector – 14.7%.

That all adds up to 20.6% leaving the sector or an implied average tenure length of 4.85 years. However – across ALL tenures (social, PRS, OO) there were 301,000 new households. That’s a growth of 1.23% – above population growth, and likely to continue for some time as we have a fair lump in our population pyramid of those most likely to move into a new dwelling (i.e. come of “age” and move out of home) in the coming decade.

What’s the point of all this? Well, firstly it answers a question regarding the private rental sector and first time buyers. Of new owner occupiers, 102k NET were from the PRS, -1k were from the social rented sector, and 77k were brand new (so either came to the UK and bought, or moved from mum and dad’s straight into an owned property, largely). So 57% of buyers came from rental.

Secondly, it tells us how many new rental units we need each year (although with somewhat lower immigration numbers, it would not be so dramatic, and the legal migration numbers are falling) – but for 22-23, that answer would have been 68,000 new rental units. Just in that year. The Government suggests that 35,000 new rental dwellings were delivered in that year (almost every other data source disagrees, but there you do) – leaving a shortage of 33,000 rental units.

The social housing constraint on this front was not far off. 32k new households, 1k absorbed from former owner-occupier to social, and 22k from the PRS – 55k new units required.

Owner-occupier wise, 178k new units would have been needed. That takes you to 301,000 new households created in that year – and obviously the stock has come from somewhere – but we know 234,400 net new units were created. The Government figures say 176k dwellings went into the owner occupier sector – so only a 2k shortage of “new stock”. 23k more buildings were vacant and 12.3k more buildings were long-term vacant – so that was another 23k shortage.

It is hard to put the figures together, from multiple sources, and many sources disagree strongly with each other – but it appears that c. 40.7k new social rent units were delivered in this same year, and c. 15.8k disappeared via right to buy. That net 25k units leaves a shortage of around 30k (just from that year). The Government even disagrees with themselves on their reported statistics – but to an extent, I do sympathise – we know that rental data is pretty weak overall.

It’s hard to see the truth, but all the shortage in truth does look to be concentrated in the rental sector, if we trust the best guess figures. If there was more stock delivered, it would likely be bought, you would think – or, you can’t buy what isn’t there. We also know we likely have a “bad number” coming for the 23-24 financial year, due to starts being 16% down at the last currently reported point (31 December 2023). NHBC registrations were down 20% compared to Q1 2023, but then also population growth would have eased – so it is tough at this point to see whether we, the nation as a whole, are better off or not.

However, what’s clear is that the PRS has the largest shortage in real time even if you do think it did grow in 2022-23, closely followed by the social sector. We know from last week where the Labour party want to focus their attention – on social housing – and we also know in the absence of manifestos, instead we’ve spent the week talking about Diane Abbott, partygate and other things that neither of the front runners really want to talk about.

So where does that leave us? Largely where we were after last week’s “rant” regarding that ridiculously partisan report, which isn’t going to help solve the housing problems in the UK. This is from a very different angle, and also has a slightly more nuanced conclusion.

The future seems to hold a relatively neutered Private Rented Sector, thanks to policy (mostly) and investment case (strengthening fairly rapidly, but damaged by the new/old interest rate environment). Social has actually moved forwards, but not quickly enough – the damage was mostly done in the early 1980s in the halcyon days of Right to Buy, but has never been fixed thus far. Taxes look set to continue to be high, as we listen to “growth, growth, growth” and other tropes with a lack of believable plan (in the defence of Labour, or to attempt to remain neutral, Wes Streeting to his credit has a number of times said that we have to reform the NHS or lose it).

The saying used to be “to the victors go the spoils” but it seems more apt, in the damp squib theme, to say something more like “to the survivors will go the spoils”. We’ve got 6 months more treacle (at least) before we know where we are, at least – or a year at least before leasehold reform is made more clear/the detail is filled in after the law has been passed. Since Covid so much seems to be “manana, manana”, we should be used to it by now I suppose!

Well done as always for getting to the end – remember the Early Bird tickets for the next Property Business Workshop on Thursday 4th July –

There’s only one way to deal with all of this continual noise and election claptrap, of course – Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!