Supplement 16 Jun 24 – Objects In The Rear View Mirror May Appear Closer Than They Are

Jun 16, 2024

The skies were pure and the fields were green and the sun was brighter than it’s ever been” – Marvin Lee Aday, better known as Meat Loaf – from the song in this week’s title.

Before we get started, it’s last chance time for the Early bird bookings on our Property Business Workshop on Thursday 4th July in London – we revert to full price next week, and there’s only a few tickets left.

This time Rod Turner and I are taking on: The fundamentals of property investment. Risk mitigation and control. Relevant investment metrics. Differing secured debt arrangements and loan structures – and – the biggie – 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. Thanks once more to the early bookers who make it viable to book a room and organise the event – those are rewarded with 10% off! There are tickets still available here: http://bit.ly/pbwthree

Welcome to the Supplement, everyone. This week’s quote (or the song title, really) reflects how I feel about the overall economic and property news at the moment. Mr Loaf is perhaps a little over the top as to how bright the future looks – but – there are two main challenges at this time in attempting to be a worthwhile analyst. One is noise and mixed messages, which is a relatively constant challenge although I try to highlight when the perfect storms are coming – the other is the TIMING of the data that comes out and the period it was measuring, which bleeds into further noise and mixed messaging.

I’ll give an example. I had a fascinating conversation, that was briefer than I would like, with a clearly very informed and accomplished developer this week. It continued via LinkedIn, and he supported his position (crash is coming, 18 year property cycle – any regulars will know I’m not a fan to say the least) with a chart – but that chart was nearly two years out of date. I’d agree that 2 years ago it very much looked like a bubble was on the cards, but that was 2 years ago. Then – cometh the hour, cometh the lettuce – and giganto inflation – and the REAL property price has had the stones kicked out of it, and the adjustment has been made – leaving us with a runway to prosperity.

The other point about said chart that was shared – it had a very cherry picked start to it. Always beware where the data starts – when I get into heavy duty primary research, I am always trying to use ALL of the data, rather than starting where someone else tells me to. Either way – I’m always interested in informed conversations, especially from those who disagree with me – we all learn something, and that’s the goal.

So, is there any chance of a property crash in 2026? In short, I really don’t think so. There’d absolutely, definitely, need to be a bubble of real significance first – and the only catalyst for that would be a massive drop in interest rates which wasn’t on the back of a real economic problem. I don’t know how that scenario would occur, so I can’t see it, personally.

So – on with the show. Real time market data – macro – deeper dive. This week I want to look at the quarterly release of the FCA mortgage market data, and draw together some of the points I’ve just made.

Chris Watkin delivers as always – in his UK Property Market Stats show. Remember this goes back to last Sunday – but that’s as real time as you are going to get, by a mile, in this game. So – we are 9 days into a month, and only 5 working days (well, 6, in agency terms). The tale of the tape:

June prices agreed thus far are 6.34% higher per square foot than January

Listings still very high – 8% higher YTD than 17/18/19 (the pre-covid bellwether)

Net sales 6% higher than the 7 year average (which contains some great, and some shaky, markets)

There are some snippets of deeper analysis that are worth reading as well, and I’ve replicated them here with credit to Chris: “Average Asking Price of this week’s Listings vs Average Asking Price of the Properties that Sale Agreed this week: 22.5%. The long-term average is between 16% and 17%. Over valuing in the whole of the UK, higher valuing properties for sale (downsizing) and a lower propensity of London & SE properties to sell causing this.” (this one is interesting – the gap was 12.5% in 2022 as I discussed, so this is a massive departure).

Alongside this – one in every 6.21 properties being reduced each month (long term average basically one in ten). All part of the rich pattern of the market having plenty of stock.

“Sale Fall Through % Rate: Slight dip from last week good news) to figures seen in the last few months, to 22.5% for week 23. (Comparison – 21.82% for the last 3 months, whilst the long term 8 years average is 24.8% & it was 40%+ in Q4 2022 – that budget!)” (not much for me to add to this – but keep that figure in mind. Generally 1 in 4 deals fall through).

And one more:

“House Prices for June MTD are £352/sq.ft (a record). For comparison – in May ’24 in £348/sq.ft, April ’24 – £344/sq.ft, March ’24 – £339/sq.ft, Feb ’24 -£339/sq.ft & Jan ’24 to £331/sq.ft).

Therefore, house prices are 6.34% higher than Jan ’24. For those wondering why I look at £/sq.ft, there is a correlation of 92% between the change in £/sqft at sale agreed and the Land Registry 5 months later.

Therefore, by following the £/sq.ft figures, we know what will happen to the Land Registry 5 or 6 months in advance (The Pearson correlation coefficient (rr) measures how strongly two variables are related.

This score of +0.92 (ie 92% in laymen’s terms) indicates a very strong positive relationship, meaning as one variable increases, the other also increases significantly. This is close to the maximum value of +1, suggesting a nearly perfect linear relationship)”

That one really is worth reading again. A 92% correlation really is very, very, very strong indeed. A dream for analysts. We need to be cautious because June on these figures was only 9 days old, but this isn’t congruent with the RICS house price balance (which I will discuss later!). I expect this figure will calm down during June, but that week shows absolutely no signs of being “election-affected” of course.

Thanks as usual anyway to Chris for doing what he is doing. Best real-time stats in the game, as I always say – I salute you, Mr Watkin.

Into the macro, then. In a way, a tough week to choose our big 4, but in a way very easy. The 5-year gilts and swaps choose themselves, as you know. The labour market report needs a once-over. The growth report we can’t omit – and as already discussed, the RICS house price balance ruffled a few feathers, so that gets airtime too.

The ONS labour market report, then. We always hear about the unemployment figure, we know that. The inactivity has also started to get more airtime. The thing that amused me this week is that 100% of the media seemed too scared to suggest that the largest minimum wage rise ever might lead to some jobs being shed. It’s pretty basic economics folks – it might be politically difficult, but this isn’t a broadcast against the minimum wage, or any kind of ideological position – it’s just accepting a fact. If the minimum wage went to £1000 an hour – there would only be 0.1% of people left working – so, rises cost jobs when that number is “in” the market – above the floor as the economists would say.

Of course, with lots of other genuine cost pressures, it is just a straw breaking a camel’s back. Good for those who have kept their jobs (the vast majority) – sad for those who then have to rely on benefits whilst seeking new employment. Overall, we should also be interested in whether the government is better off or not on the back of it, although that’s hard to measure because it depends on so many variables, including how long-term, or not, that resultant unemployment might be.

What were the big figures though? Unemployment to 4.4%, which was a tick above the consensus which saw it remaining the same at 4.3%. 140k jobs shed, wages still up 6% (I prefer excluding bonus to give a more accurate picture, although the Covid bonuses really should have washed out by now, apart from those given after industrial disputes). 50k more claimants (that’s a May figure, not an April figure like the rest of these are). Last month’s “real-time” estimate was that 85k lost their jobs and it ended up being 140k, this month the estimate was 3k job losses – so it looks like the trend has been snapped off, and the PMI data for May would support that as well, as they were very positive about employment.

Over the past few months, about 50,000 more jobs have been “found” in between the real-time estimate and the following month, so if that continues, May will be a positive month when we get those figures next month.

The breakdown – which is more informative – is 74.3% employed, 4.4% unemployed, and 22.3% economically inactive (this is of 16-64 year olds, remember). We now have employment down 1.9% since the pandemic, split 0.3% into unemployment being higher and 1.7% into more economic inactivity (and no, that doesn’t add up, but that’s typical in the ONS and is due to rounding, but also due to the fact that if you are 65+ and seeking a job, but not employed, you are counted as unemployed, which doesn’t help the figures add up either!)

It’s a pain for a Government. Of course, blame them, to an extent. The 2.83 million people of working age on NHS waiting lists are not all off work sick because of it, but that’s a LOT of people, of course. The pandemic has to take the majority of the blame, but blaming the doctors for taking industrial action is pretty unpalatable and hasn’t gone down well in this election campaign. The TRUE COST – aside from anything else – is difficult to measure but there seems to be no appetite to do it.

You can go right to the other side of the argument. Online-assessed benefits and the use of PIP as a “catch-all” as a benefit outside of the cap, has been a disastrous failure and led to a system that can be gamed. I don’t have a position on that because I don’t know enough about it, aside from anything else. I always believe people behave as they are incentivized, and systems are used and worked out as time goes on. Not everyone who has used a section 21 has used it at a time of no-fault, for example!

Back to my soapbox of “put pay up a lot, shed jobs in sectors” – here are the sectors that have lost the most jobs in the past 12 months:

Accommodation/food service activities: -60,302 (the poorest paid of all sectors, as well)

Information and communication: -41,286 (AI argument here, you’d imagine, overall it is a well-paid sector)

Repair of motor vehicles: -26,593 (4th poorest paid)

Manufacturing: -23,037 (been shrinking as a sector though)

Construction: -19,031 (been shrinking as a sector though)

We can’t blame minimum wage rises for all of that of course. At least two of those sectors have been in recession. What are the growing sectors that have balanced that out:

Finance and insurance: 21,222 (the best paid sector)

Arts, entertainment and recreation: 21,789 (I don’t think a year’s data is much use here. Is this just post-pandemic recovery after huge layoffs? But poorly paid overall)

Public administration and defence; social security: 45,494 (well paid, but also defence expanding of course)

Education: 89,577 (average on pay scales)

Health and Social Work: 154,728 (just below education, but right near the average)

You see a pattern, I think. The largest shedding sector is the poorest payer. With 2 x 9%+ minimum wage increases, this can’t be a fluke. Secondly, the growing sectors appear to be primarily Government funded jobs. Sure enough, three of the top 5 “losers” in terms of numbers of jobs are the 1st, 2nd and 5th in the table of how much wages have grown. The top 3 most growing sectors are the 3 that have had the lowest pay increases in the past 12 months.

This nuance around minimum wage will no doubt go undiscussed for the next 5 years, I’d imagine – but it does need to be recognised that this administration has done more for the lowest paid than anyone before them, with no political capital to gain from doing so. There’s plenty for the Conservatives NOT to be proud of, or even ashamed of, from the past 14 years – but what they’d done for low pay isn’t one of those things. That’s the base level – but if jobs disappear because business models stop stacking up at certain wage levels, the retraining and job creation of minimum wage jobs (if that’s what you are replacing) needs to be strong, of course – and I’m not convinced that it is.

Interestingly, the only age categories to go backwards in the past 12 months are the under 25s – and there’s been a MASSIVE increase in over 65s on payrolls of over 70,000 – as the cost of living has forced them back to work, perhaps? Or simply retirement is less affordable. Youth unemployment from a societal perspective is bad news, though – and can have significant costs.

There we are anyway – the deepest labour market deep dive for some time, with the overall conclusion that the objects in the rear view mirror don’t look great, but the real time information looks OK – although remember, if supporting the red team (interest rate cuts) then, perversely, bad economic news is good. I find it hard to support bad economic news, personally, as I want the nation to do OK (well, actually, I want it to do fantastically well, of course).

Onto the growth – and another rear view mirror moment. April was a bad month for weather (like June is great?). The April figure was zero – zip – nada – which was where the economists thought it would be. The 3-month moved from 0.6% to 0.7% (because a negative January dropped out of the figures – you’d think – but that wasn’t the case – this remains a mystery to me) – and industrial and manufacturing had a bad April too. Construction output year on year was particularly weak. All of this, though, has been reversed according to the PMIs, in what was a very healthy May, so there are limited causes for concern.

The annual growth rate for GDP is now 0.6%. Bearish forecasts for this year are only 0.5%, and at this time it doesn’t look like we will see no growth before the end of this year. Inflation figures come on Wednesday next week and the consensus is 2%, and I have no strong conviction that we will overshoot this given that April was such a poor month for consumption, apart from anything else. That helps growth quite significantly (certainly compared to early 2023 months with 10%+ inflation!).

This will help with the OBR forecasts when the next administration is in power, but their forecasts over the next 5 years are what matters, and we will see exactly how Rachel Reeves manages the OBR and whether she uses the same skills that Jeremy Hunt developed very quickly. NIESR (the national institute of economic and social research) sees Q2 GDP as 0.5% at the moment, which doesn’t look unreasonable and is in line with forecasts I’ve made over the past couple of months. I expect May’s growth print to be pretty healthy.

In more granular detail, a 0.2% increase in the mighty services sector made up for production output dropping 0.9%, and construction dropping 1.4%. It’s been a bad year for construction, but (outside of resi) that currently, once again, appears to be in the rear view mirror.

The last 4 months of services growth: 0.32%, 0.21%, 0.4%, 0.19%. That’s 1.1% growth in 4 months – if production and construction start contributing positively, tell me why we can’t achieve 1.5%+ growth this year? I have quite literally no idea why other forecasters are not saying the same.

New work in construction is still 15% below the 2019 figure – and manufacturing has just about kept pace over the past two and a half years. Inflation has taken its bite from those cherries, just as it has from real property prices – and now looks, finally, as though there is progress in all sectors at the same time.

OK – growth in April limp, growth last month probably decent enough, June – the jury is out as weather won’t help the traditional summer activities. That’s the summary.

RICS next – what did that miserable bunch say? Back to a pretty bearish print of -17 after a number of good prints over the past few months. From August 2023 – with those bond yields up at 5% for the 5 year, the high in this cycle – we had come all the way back to -5 in March, to print -7 in April, and a disappointing -17 in May. This certainly does not agree with the Watkin analysis that I’ve been featuring more over the past couple of months.

Into the report, then. Their bullets for the report on May:

Demand for rentals continuing to rise alongside lack of supply (shock)

Near-term sales expectations still suggest recovery, but they are calling for policy support

Longer term thinking is needed to fix current market issues (no kidding)

Not much news there, really, you’d think. They describe affordability levels in the rental sector as “plummeting”. The tenant demand balance came up from +10 to +35, in a return to significant demand levels. New landlord instructions were at least flat (rather than declining).

RICS also suggest that the impending drop in interest rates is making buyers wait. That’s interesting – perhaps those buyers should read the supplement and follow the gilt yields instead, since it is those that set their mortgages. Imagine the disappointment if (when) the first 0.25% cut in base rates isn’t matched on the 5-year money, and everyone is left dumbfounded……

+43 see a rise in sales activity over the coming year, compared to +33 last month. RICS are, however, suggesting that prices fell in May. We will wait to see how it turns out – the reality can be that cheaper houses are the only ones selling, but they are selling at higher prices – and so the “national house price” goes up. That’s how RICS and Chris Watkin can both be correct. This is the danger of averages and aggregating figures, of course.

What we might be able to take away from this, though, is that there is some pent-up demand building up. If you are waiting for lower rates, does the first cut then make you rush out and buy, though? Do you change your mind when you realise that the base rate cut doesn’t necessarily cut the gilt yield money…….do you look at everything closely enough to know that a 0.25% cut in the rates only saves 0.05% in the gilt (that’s a made up number, by the way, not a prediction)…….or, do you just keep calm and get on with it? I think most people will be in the latter camp, but an interest rate cut at base level cannot harm the market, unless the bond markets thought it was a terrible idea.

Talking about the bond markets…….I was delighted to see that, after we opened the week at 4.172% on the 5-year gilt, we closed at 3.95%. The big drops were – unemployment up, which shaved off 5bps, and then US inflation looking under control (I’m skeptical, and I’ve got my stake in the ground there, but the figures were unexpectedly good – perhaps the consumption in the world’s greatest consumption machine is slowing down!) shaved off another 9bps very quickly, and yields then continued to trend downwards.

This looks a much more realistic price, although still in the higher side of my range. I was very surprised to read a Reuters piece this week which suggested 40% of economists think the Bank will cut in the meeting that’s coming next week. It’s unlikely because of the political side of things – although either decision, in a way, can be spun to prove their independence, but also unlikely because it isn’t a “full report” meeting, those are only once every 3 months – so they will still be operating from last meeting’s data as a rule, plus some mixed messages (hot economy according to PMIs, bit disappointing on unemployment) – and, of course, they will have had next week’s inflation figure by then as well. I still feel this is 90% likely to hold, 10% to cut – and am happy to go on the record to say the vote will be 6-3 hold/cut, with Huw Pill crossing the floor. You couldn’t make a more detailed and therefore stupid prediction than that, so there you go!

The 5y gilt closed at 4.003% on Thursday (what a tease) with the SONIA swap preserving that 8bps or so discount at 3.937%. 4 bps cheaper than a month ago, and 80 bps cheaper than a year ago (yay). These little reminders help us understand we’ve seen the worst of this cycle.

Consider the macro rounded up, then. That leaves a dive into that rear-view mirror in the mortgage data, and with no spoilers intended, I will get on with it.

The quarterly data is released about 2.5 months after the quarter has ended – which is why we’ve just got Q1 2024’s data in. The lending market will tell you, 2023 was a recession for it as a rule. Larger lenders, big brokers – bad years. Plenty of smaller and more agile companies growing, as always – but that’s where we got to.

The chief bullets chosen by the FCA:

Total value of loans outstanding down 0.1% to £1.6549 trillion. 1.4% down on a year earlier. (People have paid down debt or not taken new debt, as a rule)

Gross mortgage advances (so mortgages completed) down 2.6% on last quarter to £51.6 billion, the lowest since 2020 Q2, 12% lower than 2023 Q1 (which would have been in the wake of Truss, of course). It’s a shame they even consider 2020 Q2 as part of the figures, as the pandemic paralysed the country and quite literally froze a whole number of businesses, especially those related to property.

The value of NEW mortgage commitments (mortgages agreed) increased by 30.8% from the previous quarter to £60.1 billion – 31.2% up on a year ago. A year ago, agreeing new loans was tough in the wake of Liz – and last quarter (Q4 2023 in this context) had some higher rates and usually the last quarter of the year also displays suppressed activity, of course.

The devil, as always, hides in the detail. High loan to income ratios are down to their lowest level since Q1 2016. Owner occupation purchases went down as a percentage compared to last quarter (54.6%). Remortgages made up most of that gap, and are up on last quarter but down on last year. Buy-to-let’s share moved to 8.3% of the gross mortgage advance – £1 in every £12, roughly – still 1.6% below a year ago and well below the longer term average (and well below the share of all properties that are in the PRS, of course).

New arrears cases also decreased, so 11.4% of total outstanding balances with arrears are new – that’s the lowest since Q3 2022, not out of the woods yet but the trend is in the right direction. Arrears balances (the total amount) is still up from the previous quarter and dramatically up on a year ago – this is suggesting that those struggling are holders of larger mortgages, which makes sense given everything else we know about the current situation!

1.28% of total loan balances are in arrears – £21.3 billion. 1.75% would be where warning alarms start to go off, sounding loudly at 2% (that was the Q1 2007 figure) – which developed to over 3.5% by Q1 2009 (by which time it was too late to do anything about the problem of course). The average since the data started is 1.78% but the data only starts in Q1 2007 and the GFC left a long scar. It isn’t worrying in itself but the trend needs to start to reduce (which I personally think it will when we get Q2s figures in three months’ time).

When you get right into the granular detail in the spreadsheets, the growth is in 5%+ of arrears (which is the worrying one of course) – below 5% is actually shrinking. This is reflected in the lower percentage of arrears cases being new, which you would think may well be a leading indicator for an improving landscape, but there are still a whole number of possession cases more likely on the horizon. Of the total mortgage balances, how many are in 5%+ of arrears – 0.59%, or one in 170 (that would assume all mortgages are equal, which they aren’t, but it is OK as a stab).

Those in 10%+ of arrears, 0.28% of all loan balances – that’s as high a number as the data has seen since end 2010/early 2011, when it reached 0.29%. You’d expect more possession cases on the back of that, although note just how long after the GFC that was. The possession stats, for comparison, are still only one seventh of what they were in Q1 2009 – which offers some useful context.

The calming in the new arrears cases level will have quelled many fears in the regulator, I am sure, and is congruent with what we’ve seen and are seeing – people have battled through the cost of living crisis, when you get a rent increase or your mortgage drops off you take a kicking, but for the rest it is month-on-month improvement, steadily, at the moment. On average things are OK but at the extremes – cases are bad and are comparable to previous recessionary moments or economic crises.

Anyway – I hope that those deep dives into what’s going on in the big bad world of macro and property at the moment help to tie some things together – they should help to clarify, not serve to confuse – but here’s my take, for what it’s worth, in mid-June 2024:

  1. Prices are up, recovering, but they won’t hit the land reg much until the end of the year, although expect upwards ticks from July’s prints onwards at the ONS

  2. There’s a ton of stock out there – be intelligent when you sell. Stage. Do what needs to be done to stand out. Think. Be better than the competition

  3. There’s a ton of stock out there (yes, I said it twice) – use it as a negotiating weapon when you buy. Don’t overpay right now – it would be crazy to do so

  4. Base rate looks very close to starting to come down, now. This won’t affect mortgage rates massively, although our gilt yields have been too high and they are 20 bps down this week alone. There’s another half a percent or so that could come off before the end of the year. Nothing to write home about, nothing to freeze your activity for, but you can have confidence in the direction of travel

  5. Stock in the PRS is still shrinking, and the scars of a fast increase in rates will leave a hole for years. It will be years and years before this recovers. That window of opportunity is wider than it has been for some time

  6. You might need to knuckle down and accept limited cashflow in the now, with a realistic plan of increasing cashflow over the coming years with rents likely to move upwards

  7. HMO future looks bright, if you are flitting between “strategies”. It’s not how I do it, or how I look at the world – I do deals. If it’s a deal, I make it work regardless of the use class. Why so good for HMO? Pay rises are concentrated at the lower end of the pay scales, and that is the HMO market for professionals as a rule. Just beware those tenants are more likely to lose their jobs if wages continue this tear (although they are slowing, slowly, and when the April rise drops out of the figures things should look more reasonable)

  8. The rental market will be left with survivors of a difficult period with a long tail here. Labour will need, if they can step away from some of their ideology, to be quite careful with the PRS unless they want to shrink it even more before they work out that they won’t be able to get all the social homes built that they want

  9. The new Government isn’t going to change a lot, even though that’s their word from their manifesto – the withdrawal of section 21 when it does come will look more like Scotland’s existing policy of 7 years or so

  10. The rental market will continue to get worse for tenants before it gets better – strong, fair, realistic solutions will continue to be needed for private tenants

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 – http://bit.ly/pbwthree

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!