Supplement 09 Jun 24 – Edward Scissorhands

Jun 9, 2024

“Plus ça change, plus c’est la même chose” – the more things change, the more they stay the same… Jean-Baptiste Alphonse Karr, French writer

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 the Early Bird discount is coming to an end. We only have 10 tickets left.

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). Let’s face it – there’s nothing else on that day apart from a rout. Early Bird tickets are running out – 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 is a 50/50. It might really be “different this time”. Always the most dangerous phrase in forecasting.

What am I kicking off by referring to? The European Central Bank cut interest rates this week. That’s the first time in 25 years that they have “front-run” the Federal reserve. There is a word you will keep hearing from me over the coming months, until I am proven wrong, or until I am proven right (in which case you’ll hear about it for years – that’s how it works, right?). That word is decoupling.

However – before I get into that, it will be the usual diet for those of us who take the Supplement on a weekly basis. The real-time market, the macro stats of interest, and then – and only then – the deep dive.

Real time market I look to Chris Watkin and James Forrester’s UK Property Market Stats Show – and the report is on last week, so it includes the second May Bank holiday. The tale of the tape though: SSTC figures per square ft are still 5.1% up on December 2023

Listings 21% lower (but 20% fewer working days remember)

Gross sales year-to-date remain 7.3% above 2017-19 levels

Listings are still 8% above the pre-pandemic market average year-to-date

Reductions are happening across more than 1 in 8 properties each month – the long term average is 1 in 10.

Market looks healthy, prices definitely look to be stabilising though in the past few weeks. Momentum is definitely lacking, but back from what might be remembered as “the doldrums of 2023” is how I would frame it.

So to the macro – The PMIs get another shoutout; retail sales also were out for May; The Halifax’s turn with their price indices; and finally – last but never least – the gilt and swap yields.

PMIs – a confirmation of the flash figures from last week, and for the first time in a long time, all 3 (services, manufacturing, and construction) were all above 50. This was calmer than April’s racing services print, but that’s likely a good thing for inflation! The word from the finalised services PMI report this week? Solid.

Also – hiring activity rises in services – snapping off the end of the unemployment moving upward trend, which we will see in the official figures in July’s release when May’s figures are included (the next release is next week, for April, and is expected to stay the same in terms of percentages – 4.3%).

The biggie though, really – the slowest increase in prices charged for over three years. What to take away from that? Firstly – prices are still going up! But secondly – services inflation should be coming down from May’s figures which will be released in a couple of weeks. Let’s not get carried away – it is one month’s figures and we never get carried away on one month’s figures. The direction of travel finally looks good, though.

Just as an aside though. If that’s reflective of May’s unemployment figures, released on Thursday 18th July – two weeks before the August Bank of England meeting, currently favoured for a cut… will cause a wobble. Inflation will matter as well, of course, and there are 2 prints between now and then. What we will see (that’s hard to see) is the impact of the wage rises – has it just been about getting heads back above water, and also putting some savings away for a rainy day, and have they not been consumed, largely? That could be the case. The real time data for that is weak or is a small sample size (Nationwide Bank debit card users, for example) – hence I am uncertain, much as I dislike that!

On the subject of the construction PMIs, growth was even sharper than last month and again employment is increasing (in a market with around 400k fewer workers in it than at its peak in 2007) – and again – input costs “only up marginally” (still up, but promising). Always look to that detail though…..”the expansion in activity on residential projects was only marginal”. Commercial work is where it is at, with civil engineering activity rising at a “solid” pace. Solid – a word we have been begging for for about 4.25 years, I think – twice in one day!

Retail sales I always like to look at as a proxy for consumption – two thirds of our GDP figure as calculated. Massive. Markets expected 1.2% growth and got 0.4% – year on year – which is not adjusted for inflation. Another drop in real terms. Food sales are up (there’s more people, and affordability has also improved where the people with the lowest household incomes were economising) – non-food are down. That’s the post-pandemic trend.

The British Retail Consortium who compile these figures point to the Euros and also the Olympics as reasons to get people spending over the summer. The commentary around the report is more positive than it has been for many months, and perhaps the sector is reaching a low point. It will take a reversal of the savings trend though – and it is hard to explain (without applying Occam’s razor – rates are up to 4%+ for people in the bank and so they’ll take that thank you very much) as overall, risks look to be abating (well, not for the better-off half of the population, because their extra-curricular activities are likely, one way or another, to face larger tax rises).

To Halifax, then. From a good S word – Solid – to a tepid one – Static. That was the headline. Annual rate of growth +1.5%. Monthly was -0.1%, consensus +0.2% – nothing really to see there. Deeper in the report, resilience in the market is mentioned. They also mention a limited supply of available properties – whereas the reality is that there’s plenty on the market, more than for many years. They might mean limited affordable properties – average asking price is 447k versus average sale agreed asking price is 370k. Although historically, that 16-17% sort of gap is very typical indeed (Rightmove is full of “Punters” who will sell at a ridiculous price – OR the culture of the corporate estate agency world is to overinstruct and then drip drip drip until the price comes down and down to a saleable one). That 16-17% is typical of pre-pandemic, whereas the gap in 2022 was 12.5% as the market was particularly hot!

Halifax sees the North West growing at 3.8% on an annual basis, as Manchester continues to drive the region forwards – they also agree with Zoopla about Northern Ireland (+3.2% annually). Scotland is +1.9% versus Wales +0.7%, and the East of England is doing most poorly down 0.8% annualised for May.

So – the gilts and swaps. They are too high. The end. Only kidding (well, not about the too high bit). The US jobs print moved the needle on Friday by 10 basis points – 0.1% – upwards. We should all pay 0.1% more for our mortgages because the US created 100,000 jobs more than expected.

It’s easy to see that that is Swiss Cheese. The technical analysts would point to the fact that we “follow the Fed”. But we don’t. We do, often, when there is a global event affecting every economy – they are intrinsically linked these days. In the aftermath of the pandemic, however, with different policy responses – here comes that word again – decoupling is more likely. There is more historical precedent for decoupling than for following the Fed, when we consider more localised situations or when both economies are not dealing with the “same thing”.

Ah – but they ARE dealing with the same thing, you say to me. Inflation! My argument now though is that the UK has dealt with the increase in their money supply by inflating accordingly. The US has only dealt with about half of their increase. That’s a big, big difference. This soapbox will be out, cleaned, polished and regularly used over the coming months, folks.

Anyway – they ARE too high at a close of 4.157% on the 5y gilt for the week. We opened Monday at 4.195% so it is still a “win” for the week, but the right price at the moment is – in my view – below 4%. In a week or two, the market will see the light.

Thursday’s close was a more realistic 4.075% and this compared with 3.995% on the close for the SONIA 5 year swaps. What a lovely number to start with – a 3. This was 3.948% a month ago, and 4.531% (uncomfortable or what) a year ago, as we ascended to the high point in the yield curve which was early July 2023. The 2 year was a massive 5.119% which is why rates were >7% this time last year on the 2 year – currently they should look more like about 6.5%, as that’s calmed right down although is still punchy at 4.564%. Remember – add on 2% for limited companies, 1% for personal names (just don’t forget section 24…..) – rough rule of thumb.

As I decouple from the macro, then, I wanted to use the rest of the space this week to talk about exactly that. Decoupling. This confident notion that the Central Banks all “follow the Fed”. Let’s see why that might make sense (or not):

  1. Central bankers are too scared to go out on a limb. I’m really not convinced it works like that. The members of the MPC who are members of the Bank of England – the internal members – are all deeply entrenched in the UK and its largest and most important financial institutions. The Chief Economist has had an international career – as has the Deputy Governor – but still with lashings of UK high finance. There is a public service element to the job for sure, and I would be surprised if any of the internal members didn’t want simply what’s best for the UK
  2. Individual votes are held to account. They absolutely aren’t. There’s the occasional Treasury committee after a meeting where someone like Therese Coffey slings mud without checking her facts, and gets roundly told off by the Bank’s officials. The committee votes with relative impunity (as they should).
  3. There’s groupthink – across borders? I doubt it
  4. The Federal Reserve is more assertive if not aggressive. They certainly seem like it – but what that meant in this hiking cycle is that the UK actually jumped first, not waiting for the Fed, but decided on a slower pace of hikes than the USA did. Both have “worked” so far…….they look more “culturally appropriate” than anything else, to me. So if the path down is slower and longer in the UK, and the Fed tries to come down as quickly as they went up (not to be recommended!), that would also be an element of decoupling
  5. The economies are in the same boat – the UK and the US. To an extent – there are massive similarities of course. The US has experienced far better growth than the UK for many, many decades now. The liberal nature of the laws protecting companies rather than individuals has led to a survival of the fittest and the market has done its best (with the inevitable fallout that is par for the course for some, and unpalatable for others – and that’s an ideological divide of course). However……the US can raise unlimited debt (or at least, that’s the prevailing wisdom – of course they can’t really, and the music only stops when it stops, and it looks like the band has plenty of puff left yet). The US is much more allergic to holding its own bonds on the Fed balance sheet. There’s plenty of nuances, though, to be considered which makes this true at a high level, but incorrect at a more granular level.

There could be 5 more, easily, but you can see those objections can be handled. History also backs this up – have a look at the tale of the tape from when the Bank of England became independent (and appreciate that, really, we have had 2 crises within a 13 year period after that time – really significant ones, which is historically rare). Those crises and the responses have led to this “urban myth” being reported as fact, and it isn’t. As reported by Reuters some years ago – just pay attention to the calm times (Credit to Reuters for this writeup from some time back): The Monetary Policy Committee took over the task of setting British rates in June 1997, and went about completing a small tightening cycle over the next few months that the Treasury had already started.

Thereafter, the Committee followed the Fed’s lead in each tightening and loosening cycle for the next six years.

  • Mid-late 1998 easing cycle: Fed led by 1 month
  • Mid-1999 to mid-2000: Fed led by 3 months
  • Early 2001 cutting cycle: Fed led by 1 month
  • Nov 2002: Fed cuts rates, BoE followed 3 months later
  • June 2003: Fed cuts rates, BoE followed 1 month later

But from late 2003 through to late 2007, things went out of sync.

  • Late 2003 to August 2004, the BoE embarked on a tightening cycle of its own
  • June 2004 to June 2006, the Fed began a tightening cycle
  • Second half of 2006 to July 2007, the BoE tightened some more — a period in which the trade-weighted sterling index rose to its highest since records began dating back to 1990.

That brings us to the start of the financial crisis.

  • September 2007, the Fed cuts — followed 3 months later by the BoE.
  • October 2008 — the Fed and BoE cut rates in a posse of global central banks as all hell breaks loose.

We’ve also seen other tightening cycles (or attempted) since, during Donald Trump’s first term as president – the Fed were right on their own there, and the ECB and the Bank of England didn’t even consider it (cite Brexit there – a great example of a localised/nationalised issue rather than a globalised one).

So, a cornerstone of my argument here is that when there are significant global economic events, the Central Banks will follow each other and the Fed is simply more assertive/less conservative (small “c”). When the events are more national and less global, this relationship falls apart. Forget following the Fed.

Why do we (or maybe it is just me!) care so much? Because of events like this week. My mortgages don’t need to go up 0.1% because the US creates 100k more jobs than expected in the month of May. It is UTTERLY irrelevant, and to pretend otherwise is bonkers, at this stage.

The prevailing wisdom in the middle of the 2010s was that the “natural” central bank rate of interest was about 2.5%. That looked pretty fair at the time – but there was no effort to get there (then there was the referendum, of course). The prevailing wisdom right now is that that rate is about 3.5%. The Bank never says this, although at the last regional meeting, the rep did wave the pointer between 3 and 4 per cent as his best indicator of where rates should be, in steady state. The market agrees with this – mostly – the key (for those of us who are impatient) – is how long that steady state takes to reach. At least 18 months, and less than 3 years, is the answer – it could be faster, of course.

So, just avoid a crisis and we are fine, right? Easier than it sounds, of course. Don’t create your OWN crisis is a good start (Truss me, it isn’t the way forwards). But – be happy that Rachel Reeves is a competent and, whilst somewhat ideological, intelligent human being. Kwasi and Liz couldn’t lace her boots. Rachel and I actually studied the same course at the same university – and so did Liz. Liz was a few years ahead and I guess they were short on applicants that year, or something. We never met – to my memory. It would have been hard – I skipped so many lectures (to my sadness, these days).

Where the ideology is still a concern is that Rachel won’t start from the place that I do when I consider likely policy impacts. “People will behave as they are incentivized”. Up the SDLT rate on second purchases – fewer landlords will join the sector, or rents will have to go up more to reflect that additional cost of business. Continue on the compliance train, cranking it up to make a political point – push rents up further. This isn’t to say DON’T do that, it is to say be honest about the consequences.

Bring back the EPC changes (once the EPC has been revised – the “Home Energy Model” if you haven’t heard of it was supposed to be coming next year, but the consultation that closed at the end of March 2024 was supposed to lead to another consultation on EPC reform, which has now been scuppered by the election, of course) – the changes being C as a minimum by X date – and there will be one more flight out of the sector, once that becomes law.

The reality that the money comes in the long term, not from the cashflow, for vanilla rentals, is denied – for mortgage holders. There are plenty of unencumbered landlords – between 38% and 55% according to various data sources – but still, not all would invest their own money in EPC changes. It is the new supply that you choke off most aggressively, and the replacement rate of a sector that I am convinced will be shown to have been shrinking in the past financial year, once that data is finally published by the civil service, is in danger. In 2 days we will have the mortgage data for Q1 2024, and that will no doubt form part of next week’s submission.

Anyway – we started with decoupling, went through our likely next chancellor and her (on balance) redeeming qualities; polling, D-day hiccups, Nigel “big lies, poor man’s Trump” Farage’s candidacy, soggy suits and overall tone-deafness (and it’s just hard to like him isn’t it – he’s clever, but not likeable – never was) means it’s time to wish Rachel all the best with the new job, and hope that Starmer stands up for 5 years – my bigger worries are what is behind him looking to wrestle that role away at the appropriate moment.

The polling – as an aside – is swiss cheese because they can’t model Reform. So – there are still surprises on the cards. Reform needs some more publicity stunts and also a manifesto that doesn’t go like this (they also could have done with Holly Valance, let’s face it – what’s next!!) (this is from the website):


Proposals will create 1 – 1.5% extra growth pa

Extra 1% pa GDP = £25 bn

Tax @ 40% spend = £10 bn

Total Extra Growth Assumption = £10 billion pa of extra tax revenues

Well, that’s that then, isn’t it. Let’s all just crack on and create 1% EXTRA growth because we say we are going to. Why didn’t anyone else think of that? If these jokers had got a real squeak when it came to the election, the bond markets really would be going mad. And that, folks, is how I met your mother (nope, that’s a different show) – actually, that’s how I get myself to be thankful for the Labour party.

Can Sunak get any worse on the PR front though? Or is this time to start betting against the massive spreads on a labour majority. Reform are expected in the betting markets to get about 7 seats, for reference – current midpoints: Labour 435

Cons 117

Lib Dems 45

SNP 18

Reform 7

There’s still 7% of children privately educated and I don’t imagine too many of those turkeys voting for Christmas (some will). There’s still the tax spectre to take on and I am not sure Labour are doing the best on that front by saying what they WON’T raise – their traditional voter base doesn’t pay anything other than VAT, Income Tax and National Insurance of course, but everyone pays council tax, and some of the middle live in high-banded houses, or have kids at private school, or – in honesty – have private healthcare and would absolutely use it if they needed to. They can still admire Starmer’s position, even if it isn’t their own – I appreciated Sunak’s honest one word answer more, I must say.

Anyway – enough. The train is hopefully decoupling and IF it does, AND the markets get the memo (these things take months, sadly), then our gilt yields could easily be 25-30 basis points lower, in my view. If we stopped our stupid Quantitative Tightening programme, we could lose another 10-15 basis points on the 5 year gilts. So – markets, and the Bank of England – get on with it!

Well done as always for getting to the end – remember the last few 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!