Supplement 07 Jul 24 – Starmergeddon?

Jul 7, 2024

“I hope you realise that every day is a fresh start for you. That every sunrise is a new chapter in your life waiting to be written.” – Juansen Dizon, an author (who happens to have clinical depression……that bit was a fluke)

Before we get started, a massive thank-you to all that attended the Property Business Workshop on Thursday 4th July in London. Definitely the best thing that happened on Thursday……

Only joking. As you know I largely attempt to stay apolitical, and prefer to try and call it like it is. This week there has to be a quick post-mortem, in which I stick to “what is weird” about the election result, and then onto the new beginning and what H2 2024 and beyond has in store, since the excuses for the new government have already started, thick and fast.

Welcome to the Supplement, everyone. Thanks for joining me, and sticking with it after that election campaign. Let us list the strange features of said election:

Starmer comes in as one of the least popular new leaders of all time (but far better than where Sunak went out at, so this is relative not absolute)

33.7% of the under 60% (59.9%) of voters that turned out to vote, voted Labour – compared to 40% of the 67.3% that turned out in 2019, who voted Corbyn – 571,000 fewer people voted for Starmer rather than Corbyn in the end. This is the smallest percentage of any majority Government in British Electoral History.

The third most popular party by percentage of votes – Reform – got 14.3% – got 5 MPs, the fourth most popular (12.2%) got 72. That is not a typo.

The overall feeling (other than relief that the election campaign is finally over, even though it was a short one!) is that it is quite an incredible display of what “first past the post” truly means. Time will tell as to whether the system, where two-thirds of those who have voted have voted for “something else” and one seventh have fewer than 1% of the MPs, is a “triumph for Democracy” or not.

It is clear in today’s world, looking at the events in France where the parties are busy collaborating to shut out what is seen as the extreme (even if some of those collaborating are themselves somewhat extreme, at the other end of the political spectrum), that the system will do whatever it can to try and stop the middle being hollowed out – but time will tell as to whether that works or not. We, sadly, are the guinea pigs – but you’d have to rather be in the middle rather than the outskirts. The bigger fear is we will have not a Starmergeddon but a sludgefest for the next 5 years, leading to a “change” looking like a great idea in 2029.

That’s probably enough, for the moment. Starmer has promised to be boring, and in the absence of Spitting Image to portray him as such, he does seem to be doing it himself. There were whispers of John McDonnell being appointed to the cabinet which were enough to have me reaching for the valium, after fearing the appointment of a Marxist chancellor back in 2017 and 2019, but the surprises were limited to Patrick Vallance (who you will remember from such classics as “Lockdown 1”, “Lockdown 2 – judgement day” and “Lockdown 3 – this time it’s pointless”) and James Timpson (which, honestly, looks like a brilliant shout – for those who do not know, this is indeed the boss of Timpsons the key cutters and best known hirers of ex-cons out there). Straight to the Lords for Timpson to allow this to work – it looks like a superb precedent but will, no doubt, one day be abused (unfortunately!). This one looks a good one though.

OK – before we do move on we do need to spend a moment just lamenting those who lost their seats. You didn’t think I wasn’t going to mention the end of the lettuce, did you? Outgunned in her safe seat, Truss was the “Portillo moment” which refers to the surprise defeat of Michael Portillo in 1997, the last time there was a massive swing leading to a landslide. This time, though, the swing was all negative against the Tories, which led to these election anomalies. Others to lose their jobs were Rees-Mogg and Penny Mordaunt who definitely would have been in the leadership race for the new Leader of the Conservatives. (a far less poisoned chalice, but still not free of problems!).

Jeremy Hunt just held on – which was likely a fair result after a solid run as chancellor.

Ultimately, as you’d expect I had my eye on number 11 Downing Street and who would be incumbent. It would have been an incredible, and an unwanted surprise, to not see Rachel Reeves take up the mantle – and indeed she has. The bond markets – the ultimate bellwether – didn’t move a single tick as the results rolled in. This was all already priced in. Compare this to the movement in the rates in France over the past few weeks and I know where I’m glad to be – although the rates in France for debt are still far lower than they are in the UK or the USA!

Then, the excuses started straight away. No chancellor has ever taken over with the economy in such a bad position (apparently – I’d say that’s a touch subjective – but this won’t be easy). Labour have ultimately created their own problems, because there’s a whole number of surveys which are long-running (decades) showing that at this time, people as a whole would pay more tax for better public services.

Part of the Conservative downfall no doubt – pushing “lower taxation” policies when only a minority of the electorate thought that this was the time or it was more realistic. Also – it should be noted – whilst the tax burden is the highest for 70 years, the tax on the WORKING person as measured by income tax and national insurance is lower, in percentage terms, than it has been for 15+ years. The very strongest support for tax rises is for funds directly for the NHS – which is why the reversal of the national insurance position was a strange decision – probably Sunak’s biggest U-turn other than Rwanda (which has now already been scrapped, of course).

Really enough politics now though. Let’s pretend I wasn’t getting messages from people on Friday morning saying “See you at the airport” (they did tend to have smiley face emojis after them). The show goes on and we go real-time market, macro, and then a dive into the monthly reports.

The weekly shoutout to Chris Watkin and his real-time market data analysis – June’s SSTC figure ended at £348/ft after holding at £350 for the whole month, so it ends up looking like a flat month – which would be fair to expect with rates moving up and down, and also with the election in play. That number is still 5.1% ahead of December 2023 and so the 5% shout for 2024’s property market still feels pretty accurate to me.

Listings are still way above average – 7.5% – when compared to pre-pandemic.

Net sales in the last week measured (ending 30th June) were 20.8% higher than the same week in 2023 – which speaks volumes. They are still 4.7% above the pre-pandemic average.

So very little changed in the month, and the election seems to have passed through the property market without incident. In this coming month, I would expect activity to pick up for the first few weeks, but the summer lull is still likely to occur – there is not much in terms of reasons why not.

It would have been easy this week to have the eye completely off the macro ball, but there’s no excuse for that as the first week of a month. We always get the Bank of England money and credit report – which I will cover in the deep dive – but also Nationwide and Halifax prices for June, the final PMIs which are very important, and the Money Supply which I want to just revisit briefly. I round up the macro, as always, with the Gilt and Swap yields of course.

So – Nationwide and Halifax. Nationwide went +0.2 for the month, Halifax -0.2. In an amusing turn of fate, the consensus was that Nationwide would be down and Halifax would be up. You do get the feeling that sometimes it is a little more than a coin toss – if we went from the Watkin data above, June would be flat – so all 3 ducks look in a row. You could consider that a win for the market with the uncertainty of an election – although you could easily counter that by saying there was no uncertainty, and it turned out exactly as expected.

Nationwide led with a “broadly stable” headline. 1.5% up on 12 months ago – OK. They note there are 15% fewer transactions than 2019 thus far – although there are more sales agreed and that lag is due to the performance in the second half of 2023, which only completed in Q1 2024 of course.

I want to make a more technical point about a mistake I see compounded, again and again, in these reports. Here’s what Nationwide say: “Today, a borrower earning the average UK income buying a typical first-time buyer property with a 20% deposit would have a monthly mortgage payment equivalent to 37% of take-home pay – well above the long run average of 30%.”

The broader point – rates are much higher and so monthly payments are much higher – is of course correct. However – comparing the average UK income to someone buying the typical FTB property is silly. Owner-occupiers with mortgages in the last English Housing Survey were identified as having average household incomes of 59k compared to average household incomes for renters of 31k. That’s the scale of the disparity.

Forget the average income. Forget it as one person as well. It should be the average HOUSEHOLD of the particular age of a first-time buyer (which has stabilised between 31 and 34 for many years now, in spite of what the press say about this).

I almost didn’t use this image as this week’s image, because the grading they used annoyed me so much (we don’t need 5% categories in this market!) – but still, as always, a picture says 1000 words, so I did. The economic South is lagging behind the North in terms of house price movements, as the higher payments bite harder in the South and also as the investment possibilities in the South are constricted simply by the price of the debt.

Nationwide didn’t try to do much more this month. Halifax went with “stable” and is at +1.6% in the past 12 months (in spite of their -4% prediction for the year of 2024, which we now know is very wrong). They now expect “modest price rises for 2024 and throughout 2025”. Halifax also did very little more this month.

PMIs – we had the flash PMIs a couple of weeks back and the suggestion was that the election had slowed things down. There wasn’t a huge change on the numbers although they did improve a shade from the flash numbers:

Manufacturing at 50.9 – just moving forward slowly – noted a 17-month high in input cost inflation. That’s not helpful for rates overall of course – however, they do also note recovery in output and new orders, and business optimism close to May’s high. The report also contains reports of job losses as a result of the renewed inflationary pressures.

Services are much more important as far as the share of the pie goes – and the number (52.1) was the 8th month in a row above 50. The second quarter average is not far off the first quarter, though. The report still cites election uncertainty although notes it is over now!

Note this – which differed from the manufacturing report though and (more importantly) differed from some of the mainstream narrative on inflation: “Prices still continue to show a high degree of stickiness across the UK service sector, although input cost inflation once again trended lower in June. The direction of travel here is encouraging for the Bank of England, but our survey’s gauge of prices charged actually rose on the month as some companies noted their pricing power was strong enough to raise their fees.”

So – input cost trending down is good of course. However – there’s still room for even higher prices…..and companies are, of course, right now, very expert in using that power as they’ve got right back behind inflation (as long as it is of their bottom lines, of course!) Confidence in the future slipped and Services has a lower percentage of firms being bullish over the next 12 months, mostly citing potential uncertainty in Government policy.

You could perhaps reframe that as “We don’t mind what we’ve heard so far from Labour, but we will believe it when we see it.”

The composite PMI (which combines everything) noted slightly increased employment, although very marginal, and the lowest print of 2024 so far at 52.3. Still a solid number, but the jury will be out until we see next month’s figures and see how the election has “fallen out” of any stickiness in orders.

The construction PMI was also released – and the headline, once again, is a continuation of the current trend. “Total construction output continues to rise despite renewed drop in housing activity.”

Commercial is leading growth – employment has increased in construction more than it has for 10 months – and inflation remains “muted”. Overall, good news – overall, just remember that if you hear construction is doing OK, it is not in residential work as yet. Residential output fell “solidly”.

Commercial PMI remains around the mid-50s, civils activity around the low 50s, and housing activity below 50 as it has been for around 2 years now. The industry overall is optimistic – more so than the services sector, more in line with the manufacturing sector.

The future, therefore, looks OK. A poor H2 2024 looks unlikely at this stage.

The money supply then – which I wanted to revisit as a separate point. This has moved fairly favourably for the past 12 months in the UK now. The money supply – for some economists – is a much better predictor of inflation than other measures are. The past 12 months really look under control, which makes me feel a lot calmer about the current rate of inflation and the future numbers – I am now stuck predicting in a range of about 0.5% – 1%, which is much more typical of “normal” times than in early 2022 when I first said “this will be 10% now” and many thought that was laughable (11.1 was our top, in October 2022, and only held down there by the energy price cap).

The other point I wanted to make here is that it looks under control enough to not continue selling bonds that the Bank of England bought when rates were incredibly low, into the market right now – and crystallising a loss. This is slated to cost tens of billions still – as I have written about over recent months – and can be avoided at this point. We get to see whether the Bank agrees with me in September’s meeting.

To round up on the gilts and swaps then. As I said already, the markets didn’t miss a beat with the election result which was as expected. On the 5-year Gilt, we opened the week at 4.063% and closed it at 3.984%, and you know down weeks always make me happy. The psychology of being under 4% is good too. There were no big changes, just a small drop when the election uncertainty dropped out, and another small drop when US unemployment ticked up a tiny bit more than expected (making US rate cuts more likely). There was a massive disparity between two reports on the US economy this week around their services sector. One was very negative for everything other than prices – the other (the more widely respected one, the S&P one) still shows an economy that did very well in June. Time will tell.

So, Thursday’s 5 year gilt closed at 4.056% yield and the 5 year swap was 3.952%, preserving the 10 basis point discount that has now appeared. Expect that down a few more points as we go into a new week, and there is no reason for rates to go upwards (although the cuts we would expect have already happened, largely).

All looks calm enough on the macro seas. And it would – the debt squeeze is a slow, and painful process, that has not yet fully played out. This fiscal drag WILL continue to affect the housing market, and the wider economy as a whole. I want to make a couple of points before I get into the Bank of England Money and Credit Report deep dive.

Firstly – GDP over the past few years has, frankly, been a dodgier measure than ever before. One reason is the large population increase – so, GDP up but GDP per capita down. The result – people don’t feel better off, because per person they are NOT better off. The bigger reason, though, in many ways, is about a reminder of what GDP is the sum of.

The sum of – Consumption, Government Spending, Investments (business) and Net Exports (usually negative). Consumption – even before inflation – is down, or very flat (real-time figures are not out there, but Q1 2024 was 1.9% lower than Q4 2019 according to the ONS data). This is making the now-traditional comparison to before the pandemic.

The frugality that the pandemic forced and encouraged upon us is not gone. OR – the much higher cost of living, even just targeting shelter – whether you rent or own with mortgage – has sucked out funds that would otherwise be consumed – and, as noted in previous weeks, a meaningful savings rate is clearly encouraging some to save rather than to spend.

THEN apply inflation – and GDP is down hugely on its largest component (2/3rd of GDP). How, then, have we avoided a massive recession?

Simples. The answer is already obvious to you I am sure. Government spending. That is up 36.9% since pre-pandemic – even applying the generous rate of inflation since then of around 23%, you can see that’s made up for it! That’s of course unsustainable, but what do we take away from that situation:

Firstly – as discussed, people would pay more tax as a whole for better public services. The argument will always be – would more tax lead to better public services!

Secondly – there is plenty of room for consumption to bounce back in the UK. We should be really bullish about the future of UK consumption on the back of this – the population is more than 2 million higher than before the pandemic, and there’s a huge amount of room for consumption growth – BUT we will need the change in interest rates to continue to filter through without incident, AND a return to growth in GDP per capita incomes that is sustainable (which is at least a year away). We probably also need a lower incentive to save – so, geopolitical stability plus a haircut in the interest rates of 1-1.5%.

Thirdly – government spending needs to be controlled, in the absence of raising quite a lot more tax. There should rightly be a huge amount of inefficiency to cut out – because it has grown so very much in just a 5-year time span. Meteoric growth of something already massive always leads to inefficiencies. All the figures point these out – they will and perhaps can be ironed out over the next 5 years. We are still 1.2% worse off than pre-pandemic (using Q1 2024’s figures). The usual caveats around averages apply.

You see here, though, that there is a workable case for the UK economy to actually do quite well. A fair amount of it is predicated on getting the interest rate down, but it is folly to think the Bank of England sets the interest rate. It only sets the short term rate – and yes, the yield curve goes from there, but the market sets the interest rate and the market still thinks that a 30-year UK government bond should pay a coupon of 4.626% as I write this (which I think is ridiculously high – but there you go. I dare say the market knows far more than I).

We also need to remember – we’ve had a financial crash which we would expect to take 15-20 years to wash through the system. We had 12 before we had a pandemic, which we would expect to take 30-40 years to wash through the system. We’ve had 4. Still, the interest rate plays a massive part in all of this (which is the macro reason why I spend so much time on it).

Still – there’s a case for 2%+ growth to be available for the UK in the relatively near-term, simply in consumption recovery. Government spending is likely to be very sticky – particularly with Labour in power.

That should feed us nicely into the Bank of England Money and Credit Report for May which has been released in the past few days. The report always contains the mortgage figures – which is why it makes the headlines – but there’s so much in there which is why I like to take a good look – or this week, an even longer look.

Bullets first:

  • £1.2 billion of net mortgage debt was borrowed in May. That’s a very low figure (the total outstanding is around £1.65 trillion) – less than 0.1%.
  • Net mortgage approvals for purchases barely moved and stayed around 60k or just under. That’s still about 5-10k off a “warm” market.
  • Remortgages similarly barely moved and stayed around 30k
  • Consumer credit recovered and was £1.5 billion (so more was borrowed unsecured than secured, on the month)
  • Households pressed on with ISAs for the new tax year, depositing 4.2 billion in

Consumer credit’s growth rate is one thing I’ve been tracking, and it looks a little worrying. We do need to remember pandemic base effects – but 8.3% up on the year, and credit card borrowing up at 10.8% up on the year, is not a sustainable growth rate of course.

I’m still watching the gap between the interest rate on new mortgages (best buys last month around 4.3% for 5y fixed for those with lower LTVs and great credit, of course) – the average draw in May 2024 was at 4.79% (up from 4.74%) and the average outstanding mortgage is at 3.61% (up from 3.57%).

As a little refresher, things are still getting worse for households (all else being equal) while the outstanding rate is lower than the new draw rate – however, these are not incredibly far apart at just over 1%. 1.18% difference on 3.61%, however, is 32.7% more expensive.

A bit of a deeper thought on this exact topic, then. This might well be an obvious statement but the majority of people who remortgaged and re-fixed a 5-year rate in May 2024 – the month under discussion – last fixed a rate in May 2019. Only the majority – some will have fixed a rate in May 2022 which was still, likely, pretty low (below 4%, but above 3%).

Back in early 2019 the 5-year gilt yield was around 0.75%. Oh, the good old days, I hear you say! But, back then, for the lenders it WAS still the good old days, and because there was no margin on the savings (where they are currently making a nice couple of percent), all the margin was loaded on the mortgages. So – even the owner occupiers were paying around a 1.5% margin and drawing at about 2.25%.

So this month in question, the average dropoff will be from about 2.25% onto an average rate of 4.79%. Ouch. This differential, as well, continues to go up from here and we have a couple of years of this left with that trend being the case – depending on what happens to the 5-year gilt yield, of course.

What I’m saying is – that 2.25% draw rate in May 2019 went down more towards 1.25% or 1.5% in mid-2021, and so unless the 5-year gilt is 1% or more lower over the next 2 years, the pain for those households goes up, relatively, rather than downwards.

You can probably see why I am watching this closely. I talk a lot about wages, disposable income, consumption, mortgage rates – but we don’t get to see data about “disposable income after paying cost of shelter” for example. That’s the REAL data that I’d like to see collated right now – because the cost of shelter, as discussed, has got so much more expensive whether you rent or have a mortgage to service.

In fact – the true reality of the pain hierarchy likely goes like this:

Households with mortgage (much more average income though, as a rule, so more to cut out as well)

Households that rent from a landlord with a mortgage

Households that rent from a landlord without a mortgage

Households without mortgage.

Having said that – many without mortgage are potentially retired (the majority) and the cost of shelter has not stayed still for them with energy costs rising. Still – you see, hopefully, the perversity of some of that, and also the lack of data that there is in this space to truly shine a torch onto the problem.

However – we are likely to see a poorly informed and ideologically different government now tackle the problem of the PRS – which I now believe has another 20 years at least in transition to the institutional investor space, who will take some serious convincing to ever own any stock that is older than about 20 years……when 31.3% were built before 1919, 40.3% were built between 1919 and 1980, and only 28.2% have been built since 1980.

The danger is the mistakes they could make – the opportunity will be the gaping holes that some of their potentially misguided policies leave, like vast chasms in the ether. Who is going to be on top of that as quickly as possible? You, of course, alongside yours truly here who will be pumping out the content as quickly as things change on a weekly basis!

Stay strong – Starmergeddon is not yet upon us, and “Treaclegate” with a large helping of blaming the Tories and making excuses is much more likely.

Well done as always for getting to the end – now save the date for the next Property Business Workshop which will be Thursday 3rd October. We hope you can join us!

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