Supplement 040623 – What’s changed?

Jun 4, 2023

“Nothing can be changed by changing the face, but everything can be changed by facing the change!! Just think about it.” – Jane Austen, who needs no introduction.


Welcome to the Supplement folks. Whilst society definitely doesn’t live by today’s quote, it has aged remarkably well in my view. I want to spend some time today talking about “the change” as I currently see it.


I wanted, firstly, to spend some time talking about the good news. It is easy in relatively volatile times to forget there is any good news – the news media is focused on us only seeing the negatives, or the downside risks. That isn’t that helpful for anyone’s mental health, nor is it reality. So – a quick break to look at some positives and then into the deeper analysis of what has changed, and what is changing, on the inflation, interest rate, and house price landscape.


The debt ceiling has been lifted in the US on what was the Thursday night session. This has done a job in shaving down the bond yields a touch, and will help to stabilise things. There was confusion as the jobs data once again showed a more robust economy than expected, and more job vacancies rather than fewer, alongside larger job creation last month than expected. This is counterintuitive remember – the economy looks stronger, so the rates CAN go up more – it looks further away from recession, so up goes the price of credit again (most likely).


The inevitable vote has been sorted though, and this helps calm bond markets worldwide. Alongside this, on this side of the pond, the week’s data was positive as consumers seemed unflappable and footfall and debit and credit consumption purchases moved upwards in the UK this week, perhaps buoyed by the good weather and half term in a good proportion of the country. Fuel is down 64% on its average price in the July 2022 peak. Gas is 87% cheaper than its price in August 2022. (you won’t see or feel the full effects of these, of course, because of the protections that were put in place – but still, you’ll have noticed the price coming down). Job adverts in the UK were up 2% this week, but still 15% below the peak of last year – but the real time info suggests we might be similar to the US job numbers for the month (which, remember, empowers rates to go upwards yet more).


Comparing to a sensible base – pre-covid – there are still 16% more job adverts online, and 23% more company incorporations. There are also 16% more voluntary company dissolutions, but new business still seems to be outstripping those giving up/liquidating an SPV or similar. 


Overall (and listen – this is only one week, but it is one week where anyone watching a lot of the economic news and thinking about the interest rate on their debt after last week, would have been bringing their horns right in) this doesn’t feel like a recession. I’ve said before – we aren’t great at forecasting in advance and changing behaviour, but good at adapting to conditions changing (not proactive, generally, but good at being reactive). Still, it feels like a week of “recession? What recession?”. 


It’s been an important week for the Bank of England, as well, of course. Calling an emergency meeting just because of bad inflation figures would have been a bridge too far, but it was time for “proper” central banking this week, the sort that our old pal Mr Carney would have been up to were he still in the job. Some forward guidance. Chat, and not action. 


Bailey isn’t Carney and don’t we know it. There’s a case for the rate to go up 0.75% this month, to really send a strong message that we WILL act hard to kill off inflation. This, rather than the likely path which is 0.5% this month, and 0.25% at the early August meeting, would end up at the same destination within 6 weeks, but send a much stronger message. It would take some guts, and also the willingness to swallow pride and cut if 5.25% is a bridge too far (ask me 18 months ago and I’d have laughed in your face, saying that of course it would be – but I’m not overly convinced that it would have an immediately negative effect overall). We always have to remember it takes 6 months or more to feel the real impact of rate rises, so we are still really dealing with the impact (as an aggregate) of rates being below 3%, although bond yields are approaching 12 months in to their much higher cycle, and much more debt is based around bond yield prices than base rates, in today’s society.


So, how have the bank used this important week? Well, the press have continued to tuck into them, and it is hard to defend their allegiance to the “transitory inflation” story, which I’m still unconvinced that they ever believed anyway. Bailey has been more a politician than an economist, and that reminds me of George Osborne, the truly unifying figure amongst all landlords – less popular than Rachman. Largely, they’ve been silent this week which is testament to Bailey’s weak leadership – instead of steadying the ship with words, and talking about the decision for the next meeting being between 0.25% and 0.5%, they’ve just had half term instead!


Most economists are still predicting 0.25% at the next meeting, but I can’t see how they can’t send the message at 0.5%. The bond market overall is in line with what I’m thinking, and they favour 0.5%. The economists will, overall, be worrying about the long-term impact…..the US have shown real steel and in my view did go too quickly, but are not yet apart at the seams despite slowing growth. In the UK instead we are at the same growth rate as we’ve been for the past year – zero. We always prefer to smooth out the pain and kick the can, but another year of zero growth would be quite easy to see and THEN we could easily have a recession, which feels like the worst of both worlds. Time will tell of course.


The rest of the analytical world is still stuck in the wrong conundrum – watching CPI. The guarantee of this going down (not least because of the fuel price drops as outlined earlier on) is not so important. THIS is the change that people are not getting their head around, and the point that has underlined my entire argument for the past 2.5 years now around inflation.


It started with a kiss…….no, it didn’t. It started with supply chain disruption thanks to the pandemic. Goods that operate on long cycles (lumber a great example – how many trees do you plant for the next x number of years? How many do you chop down this year?) were massively disturbed by Covid. Remember, oil even went to a negative price at one point. This was extremely disruptive. That, now, is all irrelevant. Markets clear and business has a brain, and righted its errors. But, the spanner that all this had put in the works could not just be lifted out. It started to entrench inflation, really quite quickly. Workers reacted. Business owners reacted. They then continue to react to each other, and to everyone else. 

Also, people had cash. They had saved up. They had been given cash by the government, in an unprecedented volume. This, alone, is very inflationary on its own. Ergo, they could afford higher prices. People took price rises on the chin like they had never done before. It was ridiculous, and to an extent still is. Opportunism also reigns. Labour is tight, giving workers more power than usual, but as wage demands go up, finished product prices also go up to attempt to maintain margins and profits. 


This is the very core of the core inflation. The real number that is critical. This week, the eurozone announced a downturn in core inflation which is positive, and also heaped even more pressure on Bailey. US core turned the core-ner (sorry) around 10 months ago. Europe may well have done, although there are plenty of EU members struggling with double digit CPI and as per last week’s analysis, core is not so different in the UK as a lot of parts of the EU (including Germany, as it goes). My hope is that the truly skilled and qualified economists on the MPC – not Bailey, a history graduate and PhD, whose thesis sounds about as useful as Kwasi Kwarteng’s economics PhD on the recoinage crisis of 1695-1697 (the proverbial underwater hairdryer, I’d suggest) – will have their eye on the right metrics and do what is economically correct, not what is politically expedient.


Bailey is with us (unless dismissed) until March 2028 (yes, really. What a gig). I wonder if they will reconsider the length of term of a Bank of England governor after he’s gone – and also what the betting is on an early bath?


Overall, though, the week ended with the yields moving downwards somewhat. Pressure was relieved and we didn’t need an intervention from the Bank in a similar fashion to the one in late September 2022 to relieve the pension fund pressure on such a volatile bond market. Whilst we have been near the highs in terms of yields to that point, we did not start from such a low level, of course – things were already elevated because of the nature of what’s played out in the inflation and interest rate landscape since October.


This should allow enough lenders to come back to the market, at around 0.5% above where they were before rates were pulled. We have limited data coming out next week to unnerve things too much – the PMI indices including construction, all of which are still expected to be above 50 (i.e. expanding not contracting – a reasonable economic positive), and the Halifax house price index which is expected to again be a minor negative, as the Nationwide number was this week (-0.1% month on month, -3.4% year on year). Halifax won’t agree with that level of drop year-on-year either, but the peak looks like it was around August 2022 combining different sources (yep, thanks Liz), and so the August 2023 number will be the interesting one.

Last week’s withdrawal of mortgage products will have a “shadow” effect of course that will show up in August 2023’s numbers, because the 3-months or 100-days is roughly the impact timescale. Some of that will bleed into September ‘23 and beyond, mostly because things are so damned slow these days, but brace yourselves for that – potentially – being the peak time for negative headlines (and perhaps the best buying opportunity for some years, on that basis). 

So – what to do? Ever the pragmatist, the bullet points list is getting more and more regular in the supplement; generally well received, but improvement points are always welcomed.


  • Time to be picky. Some are always picky – and there’s nothing wrong with that, as long as it doesn’t kill activity altogether. Criteria have been tightened – some because 0.5% has gone on the debt cost forecast for 6 months time (which we use extensively in my group)
  • Accept certainty. Re-gear or sell, don’t sit on variable rates. This could take years to play out – property lags anyway, and we are in the middle of the “slow death” approach whilst everyone tries to pretend there’s no recession whilst almost everyone is poorer in real terms. You might need to wait 2-3 weeks for the product mix to come back – but not 2-3 months, is what I am saying.
  • Negotiate hard. What’s happened in the past few years is irrelevant. The landscape going forward is what is relevant
  • Sweat assets harder, consider repurposing. Rents are up massively – primarily in the vanilla market, although HMO are also moving upwards. SA – nightly rates are moving, but lagging the other two from what I’ve seen, although this will be highly area-dependent.
  • Cut dead wood. This isn’t a time to carry non-performing assets. Eat the frogs and do any sweeping up that needs to be done.
  • Be decisive. Smaller and more robust will serve you better over the next 12-18 months than big, sprawling and inefficient, or worse, over-geared
  • Cashflow is king. Cash is trash, usually, in inflationary times for obvious reasons, but cashFLOW is what will always keep your business going. 
  • Follow up your old leads. By anyone’s criteria, things have deteriorated and there’s plenty of evidence to back up that narrative, should you choose to use it. Just this week I was offered a block of flats at 10% cheaper than a 2021 price that was rejected, because the interest rate on the flats at the time was so low it was too good to sell. Now they look unattractive at 10% below that 2021 price (which isn’t truly reflective of what the market has done since then).
  • Expand your horizons. There’s an argument for looking at social if you haven’t already, or have only dabbled. Providers are having to get into the new world and pay above LHA rates, or market rents. They should be well capitalized and in a recessionary event are much more likely to be able to afford rents than the average private tenant in a recessionary sector job.
  • Seek yield. Many (very sensibly in my view) are seeking to go a bit further North or out of area to continue reinvesting turnover, or to put new money to work. This makes sense more than ever, as long as you are looking at net yield after running costs, not gross yield – and if you have good agents to look after properties for you. 
  • Keep calm and carry on……..yes, you knew it was coming.


See you next week!