Supplement 08 Oct 23 – Real Data Revisited

Oct 8, 2023

In God we trust, all others bring data.” – W. Edwards Deming, American composer and economist (what a combination that is!)


Welcome to the Supplement everyone. This week my mind got very much stuck into the data, not least because I was asked to present at the Property Investor Show at the Excel in London, as part of a panel discussion to answer the question “Landlords and Property Investors – is 2024 your year?”.


I find myself at the moment regularly referring back to the Supplement from the 9th of July this year, which I enticingly titled “Cheapest for 20 years”. Not being a fan of clickbait – too much of an intellectual snob, which definitely holds back my self-promotion ability, but that’s just one of my many failings – this wasn’t about technology, or something else that tends to deflate as time goes on – but about the real price of property.


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Before we get our teeth stuck into the subject properly though, this is a week that demands a macro roundup. I’ve got to lead with Liz the lettuce and the ideological idiots supporting her this week at the Tory party conference – unbelievably, I watched as a speech from her was enough to put 12.7bps on the UK 10 year gilt yield. We owe a fair touch above £2.5 trillion, and an average increase of 0.127% on that is an effective cost of £3,175,000,000 PER YEAR – yes, that’s right – 3 BILLION, ONE HUNDRED AND SEVENTY FIVE MILLION POUNDS.


Sorry for shouting. As you can tell, the blood pressure suffered. The (seemingly surely impossible) chance that she could again become the leader of the Conservative party once Rishi steps down, and the sharks are circling due to the impending election defeat that isn’t here yet by any means, but is the betting favourite – is enough for the international markets to act in such a way. It’s quite unbelievable. Even more unbelievable is that 60 idiotic idealogues would follow her over that cliff, because “they believe in low taxes”. Precisely zero of them understand inflation. Precisely zero of them are willing to admit that these higher taxes are necessary to recoup the incredible generosity of the Government (their government, remember!) during the pandemic. I despise unflexible ideology on any side of the political fence and this is a perfect example of it. 


Anyway, after the Lettuce cost us all £46.69 per year (yep, really) in the longer run, some other noteworthy events deserve airtime. Let’s start on the house price indices – and a word as to why they look so bearish at the moment too. The Halifax (discussed later) and Nationwide indices are obviously from two large UK mortgage lenders. Here’s the chief problem with their data. It relies on a smallish (the market is crowded) percentage of loans – but not just that, it depends on mortgaged buyers (we don’t know this for sure, as they are not transparent with their methodology – secret sauce or smoke and mirrors, you tell me). That’s exactly what has collapsed this year, down 28% as I pointed out some weeks back (YoY comparison with Q2 2022). Cash buyers are down 1% – i.e. there really is no difference. So – mortgaged buyers have been crowded out simply because of the cost of debt, and so the lender indices make it look worse than it is.


So – you would expect the Nationwide and Halifax indices, in a similar market, to be the most bearish/reporting the largest falls. If we check – indeed they are. The only transactional source is of course the ONS which is totally comprehensive, but, in technical terms, pigging slow. So slow that things have moved on 3 months by the time we know what it says – much better for longer term historical comparisons. Nationwide this week reported a 0% movement for September – but 5.3% down year-on-year. This is probably about double the real drop – based on stitching the data together – so we might reasonably expect the ONS at the end of the year to look more like a 2.7% fall (my forecast in January was 3% to 5% drop) – we won’t know ‘till early March 2024, by which point we won’t care and will have other things to worry about.


The East, the South and Wales are the biggest losers according to Nationwide, which isn’t distinctly different to the Zoopla data discussed a couple of weeks ago. Some 30-year “green gilts” sold off (new issues) on Tuesday at a 4.93% coupon – the yield touched 5.11% this week in what looked an absolutely phenomenal deal – if I were a pension fund trustee, I’d have been tucking into that and then taking a 29 year holiday…….


September’s PMI numbers (purchasing manager indices) – which show the level of activity in a more real-time way – were well above their consensus, making August and July look like outliers. They were still under 50 – the critical number – but the story remains the same. The strength – or the failure to roll over – in the wider economy is creditworthy and continues to outperform expectations. This all feeds the “higher for longer” tapestry of rates, and all means that bond yields climbed more than we would like this week, although the charmed life we lead on the 5-year bond yield continues, as it is the cheapest debt on the yield curve once again. “Lucky” us.


The 2-year gilt sale this week was at nearly the exactly same number as the 30. This isn’t heartening – because you might think, if you’ve followed the story over the last few years, that a non-inverted yield curve is a good thing. Not really – once it has been inverted for a while, the historical tendency is for it to flatten out approaching a recession. The battle will continue – but the fact that higher bond yields lead to MORE bond sales, which lead to higher bond yields, is still a problem just as it was in the immediate aftermath of the Kamikwasi budget. Firepower is what is needed right now, as there are some deals there in the bond markets in my view.


Halifax released their index on Friday morning and printed a -0.4% for the month and -4.7% year-on-year. The BBA mortgage rate (the average rate that the banks are charging on variable rate) went from 7.85% (ouch) to 7.93% (please, no more). We are not far off some accusations of price-gouging, since yields looked better in September than they did in August – but of course, the lender’s attitude is “well, if people are paying”……..rates go up on the day and down after 3 weeks if not 6 weeks of a bit of calm. Just like the petrol station when oil goes up versus when it goes down!


So it wasn’t the busiest week on the macro front, but the news continues to look bearish for the interest rate. The economy chugs on. The house prices hold static even on mortgaged properties (although you’d expect that, because September normally means a pickup in activity, but the rates weren’t looking that attractive for most of September, and have only recently dropped below 5% for the owner-occupiers).


Back to the data, and the “cheapest for 20 years”. The conclusions from the 9th July piece are worth reiterating. Firstly – the largest ever average real (inflation adjusted) house price the UK has ever faced is £333,679 (in 2023 Q2 £) – that time was Q3 2007. To put this into context, it took until Q2 2021 to hit over £300k real average again after prices declined, but also inflation did what it does, quietly, in the background.


Real house prices in Q2 2023 (the most recent quarter, we are only a couple of weeks away from being able to replicate the analysis for Q3 2023) were back down to £261,995. This, of course, was at least as much about inflation as it is about nominal prices being lower than they were in Q2 2021 (they aren’t). That’s the power of inflationary times.


£261,995 was the lowest real house price the UK had seen for nearly 10 years – you have to go back to Q4 2013 before it is below that. The Q1 2013 “real bottom” was £247,354 – and a couple more flat quarters and some more 4-5% inflation (and we aren’t that low yet!) will soon get us there or underneath that. That is the same real house price as 2002 – and you’ll recall what happened between 2002 and 2007……(although badly-underwritten credit was the bloating factor there). 


The analysis needed to – and did – go deeper. Using the ONS AWE (average weekly earnings) index, we can look at multiples of salary, that a great deal of the whinging that goes on in the media seems to focus on. So we can also adjust for inflation – and look at real wages – I think the word “real” in this context is one of the best words in the English language.


1980 was a post-winter-of-discontent year where the early days of monetarist economics started to take hold via the Thatcher government. It was the start of a cycle where house prices TREBLED within the decade (I can hear the gurus getting excited from here!) – so, cherrypicking the START of a boom, not a peak.


In 1980 the real AWE was £259.03, making an annual salary in 2015 real terms of £13,469.56. The real house price of £130,218 was therefore 9.67 times the real average salary – and remember, the nominal house price at the time was £20,857 on average.  In 1989 the real AWE had moved forwards to £350.72 – an epic growth of 35.4% in 9 years – annualised, this was £18,237.44. The real house price of £203,122 was now 11.14 times average salary. A movement upwards – unwelcome, perhaps, but nothing like the nominal tale of the tape showed with the 191% increase in house prices. In plain English – houses got less affordable, but an awful lot less affordable than it looks. 15% less affordable – not great, but we are cherrypicking a peak in the market here and comparing it to a nadir.


By 1995 – with a combination of a sustained slump in prices and a massive increase in average wages – we were down to 6.4 times earnings in real terms. Supremely affordable, and good work from John Major, you’d suggest. Of course, it isn’t realistic to pick a “nut low”, nor would you want to replicate the economic conditions of the early 1990s, as close as we might be to that period (unemployment being the singular gigantic difference between then and now). 

In 2007 – at “peaky mcpeakface” for the real pricing – the multiple was back to 12.3.

Anyway – Where are we today? (or where were we in Q2 2023) – 9.96 times. Very, very close to 1980. The realists among us know that the conditions of the 1980s – huge gains in salary in real terms – are unlikely. However, the best guess from here is a flat market in the next 12 months, plus or minus a bit – and RICS surveyors are very much saying minus – whereas the best guess for inflation over the next 12 months would be a 4-5% average, with minimum wage already enshrined for April 2024 at 5.5% up. That is only going to improve the multiple (for buyers) – although we see just how low it can go, and has been, in certain conditions.


What’s the real point I’m making there? That, when we look over a 10+ year time horizon – as we always should in property or any investment, frankly – things don’t look anything like the media frenzy around house prices, and income multiples. Houses are not historically expensive right now – although they are not outrageously cheap either. There’s huge scope for major gains in the upcoming 5-10 year period – when, exactly? You know that’s a fool’s errand. 


Time for Uncle Warren. What would he say here? Time in the market, not timing the market.


I couldn’t go back to July’s “magnum opus” without mentioning the rest of my analysis, which focused on rents. Bristol rent is up 71% in 5 years, we hear. Rents are up nearly 25% in 2 years. The horror! The greedy landlords! Of course – maintenance is up 50%, interest rates are up 100%, and insurance is up 70% – but never mind that, just suck it up……..


Here’s where I got to on my rental “real” deep dive. Since Jan 2005, rents were up 46.5% across England (as of May 2023). Average weekly earnings (staying nominal) are up 71.6% in the same period. We can apply inflation to those figures – around 68.1% – and if we do, we see that rents are cheaper in real terms – £100 in Jan 2005 in rent is £87.15 in May 2023 – whereas wages have just about kept pace – £100 in Jan 2005 wages is £102.08. Following this logic on, rent is about 85% of the burden that it was to tenants in Jan 2005.


I hope you’ll agree with me that this is really unbelievable, but it just shows why you need to be so very careful with the media – in this case, particularly the left-wing media. In any time of inflation, you are ABSOLUTELY GUARANTEED a near-infinite stream of headlines (it is like Donald Trump being elected president), because in nominal terms nearly everything will hit an “all-time high”. To quote the Donald (not a habit I seek to pick up) – this is “fake news” of the very highest order. Pension triple lock means that pensions are up 8.5% next April – which will be more than the average inflation versus April 2023, by the time we get there. Other benefits payments will have a similar fate (although LHA is still likely to be frozen, as the system breaks that little bit more). 


The lesson here is to ignore that noise. Why did I pick Jan 2005 for the rental analysis – simply because that’s the ONS’s first year of statistics, unfortunately. There’s no cherrypicking there. Rent can move miles forward before it is back to the arbitrary point in early 2005 – and beyond that, frankly – so anyone crying wolf on affordability needs to see at least another 25% go on in the next 2 years (and a more likely figure is 10-12% over that period, in my view) before even being back to that arbitrary parity point.


Hopefully you’ll see why I picked the quote this week that I did. The puzzle goes on, and I continue to do my best to solve it – or at least make a coherent set of arguments. I’d love to get some comments and feedback as always. Be sure to tune into the 9am live on YouTube if you can (or watch on repeat) – if you don’t already know about it, just search up “Propenomix” – please subscribe to the channel, and like and comment on the videos if you enjoy the weekly content (or even if you don’t, but if you don’t, how have you got this far!) – and Keep Calm and Carry On, of course.