Supplement 05 May 24 – Sideways and slowly upwards

May 4, 2024

“The simple act of paying positive attention to people has a great deal to do with productivity.” – Thomas J. Peters.

Before we get started, I’m delighted to say our next Property Business Workshop is already taking bookings and we’ve 16 places reserved already.

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. Super Early Bird tickets are now available – and thanks to the early bookers who make it viable to book a room and organise the event – we reward them with 20% off! There are a few of those tickets still available here: http://bit.ly/pbwthree

Welcome to the Supplement, everyone. We had a week where it felt like the gilt yield bumped its head against the very top of my range, and then dropped a fair amount due to two different offshore events – our onshore macro events were a little thinner than the typical week. Plenty of interesting reports to look at though as we are into a new month, so don’t panic!

Anyway – this week’s macro focuses on the Bank of England Money and Credit report release – mortgage lending, consumer credit and the money supply – the Nationwide house price index – the S&P Global PMIs as they were finalised for April, and also – drum roll – the gilt and swap yields, of course.

We will then take a look at the Zoopla house price index in some more detail for April, and also a couple of ONS quarterly and monthly reports that attempt to give us a slightly different take on real time information. So much more powerful than some of the longer term figures – I became embroiled in a small debate this week as a video I put up some weeks ago daring to critique the current “darling of the left”, Gary Stevenson (check him out if you haven’t heard of him, because his message is resonating with many at the moment) – mostly along the lines of “Gary is amazing, he makes so much sense, etc etc.” – I have raised issues simply along factual lines and provided some actual data that challenges what he has been saying and his chief “cause”, to which I generally get tumbleweed of course because to a worryingly large and growing segment of today’s society, facts and data don’t seem to matter or even “get in the way of what feels right”.

I also want to articulate something about interest rates today as we get another week closer to the election…..whenever it is called. It will go some way to answering that question “when will rates come down”, or at least provide some further insight into the way I am thinking about that question at the moment.

Just before kicking off the macro though, I also want to sneak in the headline from Christopher Watkin, the best provider of real-time residential property stats in the game. “Best week for house sales since July 2022” (that’s week ending 28th April) – speaks for itself? It has effectively repaired the Liz Truss bubble deflation; not necessarily a bad thing for the longer term, with inflation working its magic since then (CPIH is up 8.6% in that time period – and wages will be ahead of that). The highlights compared to the “old days”:

Total Gross Sales YTD – 7% up on ‘17-’19.

Listings still high – 11.7% above the 8 year average

Accumulative Net Sales YTD – up 5.3% on the ‘17-’19 average.

So – the market is functioning in an environment where the best priced resi rates are around the 4.6% mark, and people will on average be paying low 5s on newly drawn mortgage money in about 4-5 months time (in my view). Resilient is the word. Flying in the face of the analysts (or most of them, anyway – some of us have been pretty accurate on the price movements over the past 18 months, cough cough).

On with the macro, anyway. Firstly – the monthly Money and Credit report from the Bank of England. The headlines – net mortgage approvals stayed above 60k, and moved from 60.5k in Feb to 61.3k in March – nudging upwards. Not expected after Halifax’s March number which was -1%, although that is not compiled just on offers, of course – and as I said at the time, it looked a little anomalous. 60k has historically been a relatively healthy market – we’d prefer to see the number more like 65-70k, for a market edging forward nicely, although the market has been resilient as discussed, from a lower and more sensible base thanks to price developments through 2023 (and also thanks to inflation).

The newly drawn mortgage rate was down from 4.9% to 4.73%. £8bn was issued, net, in terms of bonds – and £10.2 billion was raised in total by private companies that are not financial institutions. The biggest number since May 2020 – is this because projects are stacking up at the rates in the new world – well, it really must be if it is NET bond issuance. Good news really. That money is likely to be invested over the coming months.

Households holding of money increased more than it had for around 18 months, with £8.5 billion going on households’ net holdings. The money supply continues to expand, a little faster than expected – a 0.7% move month on month, after a 0.6% expansion in February, is not something that fits with a 2% inflation narrative.

Overall – there’s still less mortgage money out there than a year ago, and a year’s inflation to consider on all of that as well. Net approvals for remortgaging was also down from 37.7k to 34.2k – so overall, fewer mortgages written for the month of March than in Feb. The very steady tick upwards on the outstanding debt moved from 3.48% to 3.5% (with new debt at 4.73%, new is still 35% more expensive than existing, if you are looking at benchmarking that). It gives us some idea of the individual impact of when someone drops off a fixed rate at the moment.

The money supply is the bit that still has me looking and saying “2% inflation? No chance, on a sustained basis, under current conditions”.

Nationwide’s house price index then – another negative print here, -0.4% – from the change in mortgage pricing for April I’m not surprised to see that, but the market data is not playing ball with this figure. Still. 0.6% up year on year they say – and this was accompanied by a recent publication from Nationwide which tells you about what’s really going on on the ground.

Essential costs spending was down 4% in March (this is based on debit and credit card data that Nationwide have, that won’t be a small number of transactions or volume) – offset by a 4% rise in non-essential spending. They attributed this to warmer weather and stabilising costs, although pointed out that rent, mortgage payments and supermarkets were still looking somewhat elevated.

That last sentence deserves to be dwelt on. Those who waste their time with ideology have missed the critical point here – the cost of shelter, whether that be rent or mortgage, has gone up considerably. Even for the 36% of households that own a property with no mortgage – council tax, bills, and the likes, are still up by a decent percentage. Worth repeating.

Some important detail was shared in the report too – some good insight around first time buyers. Over 50% of first time buyers delayed a first home purchase because house prices are “too high” (which feels like perception, and is not reality as I’ve been saying for some time) – 41% said higher mortgage costs were preventing them from buying.

55% said they were willing to buy in another part of the country where prices are cheaper, or where they could buy a bigger property. Half said they would move more than 30 miles from their current location. The common compromise (32%) is to buy a smaller property than wanted, and 28% would go for a property needing work doing to save money.

Of those who have bought in the past 5 years, 38% said they compromised, 40% bought a property to do up, and 34% bought in a different (i.e. cheaper) area.

Most interestingly of all – I thought – is that the 5th biggest reason was “cannot borrow enough” in terms of delaying first home purchases. Only 20% were suffering from this problem. So, the main reasons were both of perception (either prices too high, OR mortgage costs perceived as too high/buyers remorse for missing the low rates). That indicates to me that when reality REALLY kicks in for the fence-sitters, that there are lots of coiled-spring FTBs waiting in the wings. Headlines at the beginning of the year once again suggested prices will fall (about half as bearish as the headlines at the start of 2023) – so perhaps when that stops (which will take a 3-6 month sustained period of house price rises, likely not coming until after the election at this point as the election uncertainty always derails the train somewhat). The press will only call it when it has already been happening (and there will always be doom and gloom headlines, as you know – that’s the business).

84% of respondents said that the cost of living has affected their plans to buy. With wage growth now well outpacing inflation, this is bound to be coming down at a relatively quick rate, at this point. This survey was also done in March, before “national pay rise month” as April 2024 should have been known!

I went into the PMIs in some detail last week, and this week they have been confirmed for April. Marginally even hotter for services than last week as the 54.9 print for services PMI was stamped at 55 in the official figures. Where are the headlines from the report?:

53.1 in March became 55 for April – fastest activity growth since May 2023.

The input costs increased by more than any month since August 2023 (although with minimum wage up so much, I was surprised it wasn’t further back than this!)

Employment rose across the sector but only by a very small amount.

39% said that cost burdens grew, 1% said they shrank (!)

Charge inflation is at its lowest since April 2021 but it is still “robust” – although some reported that competitive pressures have led to some promotional discounting

54% expect a rise in business activity in the next 12 months and only 10% predict a decline.

That leaves the gilts. We went in the right direction this week, and reversed last week’s pain (just as the lenders have put prices up to reflect that, mostly, annoyingly). We opened at 4.225%, and closed Friday at 4.107%, with Thursday’s close at 4.178% (all on the 5-year gilt, our “favourite”). The movement down (and they were very small gaps down really when it did move this week) were based on a calm US federal reserve meeting, with no changes and no surprises in the rhetoric.

The Thursday night close for the 5-year swap was 4.112%, so preserving that discount below the actual gilt, where we need it to be – which isn’t changing until money gets cheaper, as I’ve been saying. There’s no premium at the moment, and while we stay above 4% for the base cost (or risk-free rate), there’s unlikely to be much movement in that premium here.

This week’s cost of debt, therefore, with no fee – 6.2% is about where it is at, and it could be 6.1% based on Thursday’s swap. Can this 2% margin be squashed is a question I’ve been asking myself for some time – not down to 1.5%, I don’t think, but historically margins have come from savers and a BTL rate in a limited company – where the majority of investment property transactions are now taking place – really needs to get under 6% (and really under 5.5%) to get buyers back to the market. You can play with fees and the likes but the only time people are going to swallow 5% fees, in my view, is when they think 5-year growth is 15-25%, because 5% is an awful lot to give away….and only saves you 1% a year, or so, on the rate).

Here endeth the macro, then, for one more week. Onto the reports of interest for this week.

Firstly – the Zoopla House Price Index. With prices still down 0.2% year on year, according to Zoopla, they do recognise that market activity is improving. If you don’t follow Richard Donnell, the exec director of research, on LinkedIn – you really should, if you like the source data. If you trust me to read it for you, that’s fine too!

They have April in the book as +0.1% month-on-month. Zoopla sees the Midlands and Wales as relatively flat in pricing, and drops to the south of this line including the South-East, ex-London, taking it hardest with a 1.6% drop year on year. Scotland, and the Northern regions, do well with 1-2% rises, and Northern Ireland is up 4.4% (whether there’s Brexit impact here could be speculated on, of course).

Zoopla says 64% of UK homes are in local authority areas where prices are falling on an annual basis (I think they mean “have fallen” rather than “are falling”, to be pedantic). In October 2023, however, this percentage was 82%. None of these are in the North-East, but in the South of England between 95 and 100% of homes are in markets with house prices that have fallen over the past 12 months (in the East Midlands, it is 93%, even though the East Midlands annual number is -0.2%).

Another way of interpreting this – the markets recovering the fastest according to Zoopla are Wales, the West Midlands, Yorkshire and Humberside, Scotland, the North West and the North East.

A sentence that brought a smile to my face from the report “The housing market is more balanced than at any time since before the pandemic. This is likely to give more people the chance to move home in 2024.” Affordability is “not worsening” they say as prices are static – again, being pedantic, I think this should say “improving” since wages ARE improving still at 6% per year.

Zoopla expects 1.1 million transactions this year, up from a million or so last year – probably a good stab given the election will get in the way, otherwise I’d think there might be more.

Richard predicts a 4.5% mortgage rate for 2024 (for resi) to be relatively consistent (not a bad stab at all, I’d say) but he equates that to plus or minus 1% on house price growth. That’s where we part company, because I don’t think he’s factored in wage inflation as a whole in that. I think it is more consistent with my 3-5% prediction for this year for price rises.

There are also some numbers (which are not representative, but still worthwhile) showing that mortgage costs are up 61% since March 2021. That’s cherry-picking the “nut low”, best possible month to get a mortgage product, bear in mind.

Across the South, Zoopla sees a £5,000 per year average rise in the cost of a mortgage, with that figure being £7,500 in London. This is a fair bit higher than the Bank of England’s £200 per month figure that was published in 2023 – that’s at the very bottom of Zoopla’s range for mortgage increases.

Richard concludes by saying that he sees no signs of an uptick in house price inflation – the SSTC figures disagree, as earlier – and that the growth will be in sales volume not price for the foreseeable future. We are about 4% apart on our figures for 2024, so not exactly a chasm – let’s see what happens.

So – the ONS also, on a monthly basis, releases some reports of interest that are more “real-time” than a lot of their information – and I wanted to spend a little bit of time just highlighting some stats from those as I think they add some real-time value.

The one that made the most impression – and generated a massive 5 likes on “X”, where the ONS has 355k followers – and zero headlines otherwise – was: “Public service productivity in Quarter 4 2023 is estimated to be 6.8% below its pre-coronavirus (COVID-19) pandemic peak (Quarter 4 2019)”

I appreciate I get more excited than the average bear about this stuff, but this actually (potentially) looks like great news. Covid cost us an awful lot – and not just in monetary terms. However, this suggests that a return to the previous levels of competency could actually see the considerable public sector cuts – that are in the pipeline for 2025 and beyond – not make a terrible difference to output. Overall I think that’s a massive positive.

Public sector productivity is down 2.3% year on year and 1% quarter on quarter – strikes won’t have helped but industrial action levels are actually down, certainly in the last quarter of ‘23.

Business demography is also of interest – business creations were 6.1% higher than a year ago (Q1 2023 was the lowest Q1 on record thus far) – the largest increase coming from business administration and support services (+28%). Business closures were also 17.2% down year on year. A parallel year would be 2018, on these figures for creations, which (frankly) would be just fine! Closures still look 10% or so higher than the pre-pandemic average (although they do look very similar to 2018 too).

These are trading businesses – if you don’t operate either VAT or PAYE, you aren’t included. This would also leave out a lot of one-person-bands as well as investment companies, of course – but it makes sense to make the figures more robust. On the flip side, it wouldn’t capture what’s going on at the very small end of SMEs.

The last report I wanted to cover is the Economic activity and social change report – updated weekly. Direct debits up 4% on average year on year (a good inflation proxy, you’d think) – very close to CPIH at 3.8%. Debit card transactions down overall – more for 55+ than for others. 11% more direct debits are failing than one year ago. Aggregate spend on UK debit and credit cards is down 8% year on year (that’s some consumption haircut, and MUST be helping with inflation). That’s a great real world example of an old cliche – “the best cure for high prices is high prices”. Still, with inflation still not down to target……..sorry, the broken record is on again.

Staple purchases were down 12% year on year, and delayable purchases down 9%, which suggests the rest was made up by people not compromising on non-essentials.

Consumption feeds inflation – or disinflation, based on these figures. Good news overall.

Job adverts (measured by Adzuna data) are down 20% year on year, with London job ads down 27% and Scotland job ads down 34%. The largest decreases are in “Domestic help” (which would be seen as non-essential, mostly, you’d think) – 52% – and also in “Construction and Trades” which is down 47% year on year.

The number of potential redundancies in the week was 14% below the level of the equivalent week last year, and the “quit rate” or the number of employees proposing redundancy was down 3% year-on-year.

Electricity prices also spiked massively – up 36% week on week – but 29% below the level seen in 2023. Some crazy numbers there though. Gas prices were down 4% and 20% below the 2023 prices. Whether the electricity spike there will affect the July price cap, we will see (depending on the overall volatility).

Attempting to draw all this together, then, where does it leave us as a “tale of the tape” style situation?

Consumption seems to have abated somewhat and people are preferring to save. That helps to cool inflation because companies then have to resort to discounting to tempt the pounds out of their pockets. This helps and will be helping get inflation downwards.

Money is out there. Currently flowing into savings which of course, actually exist as “a thing” again. 5% accounts are out there. OK, that’s 3% after tax, but still 3% when it was less than 1%. That all adds income to the pot (and tax revenue). Remember – the huge beneficiaries from the stimulus of 2020 – whilst we spend all that time worrying and talking about the debt that it created – were the households, primarily due to the rise in the value of land. Household balance sheets had grown at WELL above the rate of inflation, although it has caught up now. Those official figures are so far behind, with no real-time indicators, it is hard to say what has happened although we know 2022 won’t have been as good as the previous years, although property prices were still up 7.6% according to the ONS (compared to -2.2% for 2023), stocks did badly and inflation was also in double digits (so what we REALLY want are real household balance sheets, rather than nominal ones – but if we put the household balance sheets next to the national debt in nominal terms, the comparison works).

MORE money is out there. The money supply is rising, and has risen more than anyone would like in the past two months. That’s not helpful for inflation, and not helpful for rates.

The economy is doing fine on all real-time measures. Job openings are going to start to be a worry soon, but the positivity from all the surveys suggests to me that more hiring is going to start going on, not less, and we’ve had a wobble rather than seeing a continuing decline here. So unemployment doesn’t look in much danger at all of going above 4.5% this year.

A “fine” economy means no reason to cut rates (says the economist). One rate cut before an election would be very very very very helpful to the incumbent party (says the political cynic). The Deputy Governor for Monetary Policy is about to be changed to a Hunt loyalist. 1 + 1 + 1 = 3, does it, or does it not? The external committee members won’t play ball, Bailey will listen to the incoming new Deputy (Lombardelli), Dhingra wants to cut anyway…….it isn’t easy. I would rather frame it as:

We’d all love them to cut rates. There’s no good reason to cut them in the wider macro sense. That still doesn’t mean they won’t be cut, but a cut before Q3 I would now see as highly unlikely, and a cut before the end of the year probably shouldn’t be justified, but could easily happen for political reasons.

So – if you are hanging out for lower rates, don’t let that spur you into inaction. When inflation figures come out on Wednesday 22nd May – the figures will start with a 2 (on CPI). There could be an emotional reaction to that in the markets – but the consensus will have to form, and how far the print is from the consensus is the interesting part (either side).

As for inflation – another question that crops up on occasion – why 2%? Why obsess over it? Well, it’s the target. But it’s just that – a target. It can’t be controlled to 0.1%s or anywhere near. But – the job is only to have a forecast that shows we will reach 2% inflation in 3 years time. Every meeting for the Bank, that 3 years time is another month or two away. It comes down to the models.

On that subject, I’ve avoided a deeper dive into the Bernanke report on the Bank’s forecasting efforts over the past several years that’s been out for a few weeks. Not enough value for everyone to deep dive into it, just something for me to geek out on which told me what I already knew and have been saying, to be honest. Spoiler alert – they’ve been rubbish. Particularly on unemployment, but also on inflation, and not great on growth either. The hook they get let off – so have the other major central banks in the world.

The bones of the report – there’s too much fluff, not enough clarity, in overall Bank communications, and the models are rubbish and that’s why the forecasts are rubbish. They need updating. The Bank also has masses of extremely experienced PhDs and the likes that they don’t make enough use of. IT infrastructure is out of date and models aren’t talking to each other. Bit of a joke when managing a £1tn balance sheet, and an interest rate and bond portfolio that makes tens of billions of difference each time there’s a bad decision (more if you let a Lettuce anywhere near number 10, although you can’t blame the Bank for that – you can blame them for the way they reacted, as Peston does on the “The Rest is Money” pod that I highlighted a couple of weeks back). The Bank is accepting all of the recommendations in the report, and it actually looks a very robust piece of work with lots of sensible suggestions. Will they therefore get better at forecasting? Not holding my breath at this end.

Well done as always for getting to the end – remember the Super Early Bird tickets for the next Property Business Workshop on Thursday 4th July – http://bit.ly/pbwthree

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