Weekly Digest 25th May 2021

Hello again,
This week our Director Adam Lawrence looks at the data behind current trends –
Monday – widely recognised, of course, as the greatest day of the week! And not just because of the supplement, although hopefully it helps.
Our collective enemy at the moment is noise. Not the “environmental health” kind, but the data kind. It is just so very difficult to know what to listen to – I wouldn’t confine this to economics, social media, or anything – that does just sum up life in 2021. Reading graphs, eating data, looking at year on year trends, quarterly trends – I asked the question yesterday, “What is the base level?”. Trends mean very little without context, although arch-traders would likely disagree with me.
In fact, some of the wizards of trading would say that the trends you can’t explain are the most powerful ones and the ones that are most worth following. Something to consider if you are involved in fast-moving commodities, in things that can be liquidated very quickly – to liquidate property quickly, you almost always need to take a significant financial haircut, so applying a lot of traditional stock market trading logic to property is quite dangerous. Instead, property traders tend to be self-taught, and the most often observed transferable skill that I’ve seen is experience in sales-heavy environments. Throw in some other talent such as a background as a qualified or chartered property professional, and some understanding of how the human psyche works, and you are close to the total package.
For those of us mere mortals who take a slightly more sedentary approach – or perhaps I should call it – buy fast, optimise, hold long, sell high (HODL maybe, for the crypto fans) – there is one massive skill that is so relevant this week that is vastly undersold. Spoiler alert – it really isn’t sexy. But the stuff that delivers the returns rarely is. The sexy developers burn twice as bright but seem to burn out 4 times as quickly. The true pedigree is alligator blood – hanging around, every environment, every twist and turn, every market, every fallthrough, every disappointment. A friend and business partner has his tongue firmly in his cheek when he describes himself as an overnight success of 30 years, but there’s so much truth in that.
So what is that skill? It is best encapsulated by a famous Rudyard Kipling quote from the poem If–: “If you can keep your head when all about you; Are losing theirs and blaming it on you.” I’ve seen plenty of that this week. Lost bombs on crypto? Blame Elon Musk. I’m by no means his biggest fan, but start with the mirror, folks, I’m afraid. At least learn a lesson if you have lost money. The real tragedy here would be to lose money AND not learn anything. My favourite of all time, “Uncle” Warren Buffett, the Sage of Omaha, encapsulates this slightly differently and of course has more of an investment focus: “When you buy an investment (stock, in his case) plan to hold it forever”.
What does that achieve? It sets your mentality correctly. Crypto destroys it because in theory, all these people are getting rich quick! Then you are missing out, FOMO sets in, and the carnage begins. Bad decisions – people put in spots they’ve never been in before, not realising the volatility that brought things up so quickly acts so much faster on the downside. Chasing losses. Every single part of the gambler’s fallacy comes true before their eyes.
Does this mean you HAVE to hold every property or investment forever? No, absolutely not. Reviews are an incredibly important part of a long term investment strategy. The one single quality of Uncle Warren’s that I’ve tried hardest to emulate is to maximise the probability of significant success. My argument would be that in a million possible universes, Warren Buffett has a great life, a great pedigree, and puts himself in an incredible position without taking a lot of risk in over 99% of them. Look at the other famous billionaires – and tell me that they share that same quality? I think not. In some worlds, Warren would be a little-heard-of investor who has no public profile and $800 million to his name. His life wouldn’t be a lot different. In some, he would be the first trillionaire.
That’s what needs to be learnt from. Despite endless gurus spewing mindless BS about your mindset, it really is the anchor from which everything comes. You need significant strength to do what others won’t or don’t want to, surround yourself with the right people, ignore the wrong people, and make good decisions, consistently, day by day. Not easy. By no means do I position myself as someone who has “cracked it”. But – back to mindset – every day is a school day. I love learning and education is one of my highest values – both for myself, and for everyone. Why otherwise would I take a view, post critical responses on social media to often get sharp or troll-like replies – and write 3000-4000 words for a Sunday morning each week! Your values are embodied in what you do, not what you say they are. What you say they are is just marketing.
Before I move off my high horse, and while Uncle Warren is front of mind – another great Buffett secret to success (that of course, is not a secret, thanks to the number of interviews, biographies, etc. etc. that there are out there) is very relevant here. “Most news is noise, not news.” This is no joke, and after a week like this, is well remembered.
I’ve also been asked whether I’ve “invested” (I take exception to the use of the word here – there is a very fine line at the best of times between investment and gambling, and it has been breached here!) in crypto at all. The answer is no. I’m solely a voyeur and a learner at the moment. But I will say this much – at some point in the following months, I will be thinking about starting. Not via direct investment, or any of the somewhat convoluted schemes – because I’ve heard some sad stories this week about people losing money to hackers, and then of course you have to look out for the fraudsters/small time ponzi scheme players – but via an ETF – there have been a few indices launched early this month by the S&P – one for bitcoin, one for ethereum, and one for both – I will be looking at a more diversified basket but only betting (sorry, investing) via an ETF operated by a global player via a tax-efficient wrapper!
So I’ve no dog in the fight (or should that be no doge, for the aficionados?) – I got tired a few months back of posting warnings about the bubble, and called the top far too early (although I didn’t actually call the top, I just told people to be careful) – and just 2 weeks ago posted warnings all over a thread on one of the property forums when 80% of the replies were telling people to take their £20k life savings and punt it on crypto – a classic sign of being near the top of a market before a big blow-off. “When the taxi driver is giving you stock tips, get out of the market”.
This is the frustrating thing. We’ve seen it all before. If you want to look at someone who has a spectacular knowledge and also application of economic history, then look no further than Ray Dalio. And still, he definitely doesn’t get it right every time. But this stuff is more about avoiding events that can blow you up than making money every day, hour, week or year. That’s what gets missed. Very few people don’t want to get rich quick – but the path to do so, aside from anything else, takes an incredible amount of luck. Back to my million possible universes and Warren Buffett – in how many of those is Elon Musk vying to be the richest person in the world? In my view, only a small percentage of them.
OK – so crypto is done to death. But so what? Why is it even getting airtime? Well, aside from the inevitable lessons about bubbles and downside risk, it is wise to think about where the money has gone.
Back to Buffett once more. He and Berkshire Hathaway are realistically the enemy of the broker. The broker wants you to transact, whatever they broker for you. This is straightforward self-interest and also a simple rule of business. A really good mortgage broker will give you great advice across a portfolio, because they understand the longer game – customer acquisition is hard and expensive, and if you have your broker stepping in as part of your overall financial strategy, you will ultimately transact more and offer more opportunities for that broker. That’s joining the dots and is a thinking at a level that many are not capable of.
If you sit on your hands, the broker has had their fees, and they are getting nothing. But on the other side, there is no money leaking out of the transaction. The 1%s here and there can be the difference between a good long-term portfolio strategy and a great one. I hesitate to mention the British Cycling Team and Dave Brailsford these days for a few reasons, but the logic still applies. If you can get 1% better on a regular basis, then the miracle of compound interest will have a gigantic effect on your edge, and ultimately, your returns.
My point here is that the transaction costs in Crypto are incredibly high. No-one balks at it when things are moving up 10% a day and ridiculous numbers like that. But it is like the casino…..have you ever been and played, or seen someone else play roulette? What happens when they hit a number with a lot of chips on it? The casino slips in a few larger denomination chips, and pays as much as they can in “colour” as they call it – so all the colour can go back on and stay in the machine. The broker effect when the transaction costs are so high is the same for Crypto – so an awful lot of the money swishing in the system has gone to the brokers, and platforms. That’s business – they are charging what the market will stand.
So, significant leakage to the platforms. What about the rest of it? I’ve now heard 5 different independent stories from 5 people about crypto megastars/big winners that they have met. All 5 had liquidated the majority of their holdings over the past month and were going to plough the proceeds into investment property. In one instance this was over £50 million.
What those 5 people did was brilliant, of course. They were early adopters when people like me were struggling to get around the idea of investing/gambling in something without intrinsic value. They rode the waves, but most importantly, somehow they saw the top, or near the top. They were realistic. They hit the big number at roulette with a “beast”-style bet (my misspent youth once again shows its true colours) – I learned this phrase from a large payday loan provider CEO who loved to gamble big money at the local casinos, one chip on every bet possible (straight up, splits, corners, streets, 6-lines) and then hitting that one chosen number (8, black, in case you are wondering). More importantly, when those people hit the beast, they walked away….some completely (for now), some just mostly.
So, some profits that ultimately in a few months time will look like they came from air, will be in the property markets. More demand! Uh oh. However – I’d wager there will be at least as much supply from people who’ve got themselves into trouble and need to sell assets to pay margin calls. I’ve heard a few stories of people trading on margin this week who don’t understand margin – and that’s incredibly expensive and dangerous. Big volatility down, quickly, means that people are likely to get smacked in the face. A reminder of the old Mike Tyson quote “Everybody has a plan until they get punched in the mouth.”
As an aside, I do wonder what the anti-money laundering (AML) treatment of all of that will be like! And as for the HMRC investigations – CGT is due, ultimately, as it is on forex, unless betting is used as a “shield” (forex traders tend to use contracts for difference or CFDs to avoid capital gains tax – I am not even clear if the same or similar has been available for crypto) – but there will be a very profitable seam of investigations for those that have made over their annual CGT allowance from Crypto. HMRC have already hired another 1000 investigators which is “nothing to do with Covid” (ha ha) but I’m sure the recent bull run will not have escaped them. This usually means more disposals (and/or more remortgages, bridges and personal loans) as the unexpected catches up by January 31st, 2023. If you’ve made decent coin (see what I did there?) and not looked after your tax, do it before they do it for you, if you take one thing away from today!
So – has this influenced me feeling a touch bearish (yes, I am)? Not sure. I was feeling it before all of this really kicked off, so I don’t think it is related at all. I’m just open-mindedly carrying on listening to lots of YouTube content on economics (I know, rock and roll, right?). I heard the best deflationary argument (to be clear, that is after a period of inflation – that this commentator insisted would be transitory) this week that I’ve heard for at least 6 months, which I will quickly summarize, and then translate to the UK:
QE has largely been deflationary. It has held down GDP growth and inflation rates and stifled “proper” investment. There are shortages at the moment in many markets which are leading to inflation and also temporary demand spikes (the position of the commentator is that aggregate demand, on the whole, will not hold up – because the underlying economy is so weak). Prices will correct once supply shortages ease. The competitive nature of markets (especially commodities) will look after that. Once stimulus has worked its way through the economy (been gambled on Crypto/on RobinHood) then a lot of the household savings balances will be kept just where they are. People will remain cautious for a long time post-pandemic.
The first bit I didn’t agree 100% with and I think it misses the larger fiscal policy backdrop (this is UK relevant now particularly). Policies of austerity were the suppressors and the architects of the flat as a pancake 2010s in my view – and the view of some large apolitical or right-leaning economic think tanks and international organizations (e.g. the IMF). QE was a secondary part of that and of course has led to significant asset inflation. It has also created a fairly significant issue in countries like the US and to a slightly lesser extent the UK who depend so much on a healthy stock market to give consumers confidence (and money) – and fund pension obligations etc. With a bigger state (more governmental control/central planning), the stock market is not so important. So what’s the problem? The problem is that when QE unwinds and cheap money is no longer, the stock market will experience a really significant selloff. This has been seen by what are called “taper tantrums” in larger and smaller forms – the wording and emphasis of everything that comes out of the central bank influences the markets significantly. A taper tantrum is when QE is scaled back and the stock market sells off, aggressively.
There definitely is temporary demand at the moment – you would expect the pent-up part to work its way through. I also know a lot of people that are sitting on more cash at the moment than they otherwise would because they have not been able to find deals – this works its way through in a 3-12 month lifecycle (or even longer for development). The supply constraints are also likely to go the other way, simply because so many suppliers don’t understand the pandemic and its impact, and the pendulum almost always swings back too far. This would be early 2022 or late 2021, in my view.
If both those things happen at the same time, the see-saw swaps positions and the bearish headlines will start. The thing that definitely resonated is what is effectively the velocity of money argument – still lots of people I know who won’t go abroad this year, and won’t be spending what they have hoarded (or accessing the cash in their newly-inflated houses that they own). A slice are still considering the winter and believe there may be another lockdown then – and I think will only be convinced when we get there and it doesn’t happen (colours to the mast on that one!)
My view is that a long, hard, drawn-out psychological battle will take time to get over. Habits take 3 months to form (broadly) as I’ve said before. We’ve had plenty longer than 3 months. You have to look at so many things – the age of the people that are relevant to your business/asset/chosen investments. Their spending power and how they’ve been impacted – what sort of pandemic have they had? They might want to go out and spend but haven’t got the job or the money!
So this means caution, and it means volatility. You can buy in this market at haste and repent at leisure. I still feel early July sees some chains fall apart, and some more deals. Massive refurbs will soon stop being attractive as even the slowcoaches get the message that a) materials are up 15%+ and b) you can’t always get them even if you will pay for them! That ultimately forces the price down of the building/asset/land.
So where does that all leave rates? Well, in a deflationary or limp inflationary environment (The UK “benefits” – and I think it is a benefit – from a long-declining former global reserve currency situation which is unique to the UK) rates stay on the floor. For a long, long time. However, asset prices also stay pretty slumpy and rents also don’t move forwards. Wages stagnate. No growth, much harder to pay down the “War debt”. Not good, overall.
To be clear, though, I’m yet to go away from the inflationista side of the equation. I am questioning my role as a secular inflationist, though – this feels a lot less likely to me than it did 2-3 months ago. A lot also depends on fiscal policy – as I have said before, Boris is the Antichrist to austerity – he wants to spend money on big stuff with his name on it! I don’t see this as a bad thing as long as it isn’t “bridges to nowhere” – the antiquated infrastructure of the north of England (and much of the midlands) means there should be plenty of sensible projects before there are too many red herrings, but Boris has form in the Red Herring department too remember, if you examine some of his failed projects as the Mayor of London.
So this inflation could be transitory. Ultimately, though, I have respect for the markets – peak inflation prediction for 5 years time came on 7th May in the UK, and we have calmed a very small amount since then, about 4 basis points or just over 1% – the expectation is still 3.5%, which is too high. This doesn’t fit with a “transitory” stance. The 3 year is at 3.2%, the 4 year at 3.36% – the 2 year is at 3.07% which I believe the bank would swallow, but will be watching closely.
Let’s bear two other things in mind too. One is more worrying than the other. That’s the plan to actually get out of this rates hole. And I don’t mean just a base rate increase – I mean getting back even to 2.5% which has long been the BoE mid-2020s target (pre-pandemic). I don’t see much of a plan or a way to get above 1% as we speak – I see a need to do it, potentially, but a real Hobson’s choice and there is now lots and lots of form in the economic history books about what happens when Central banks crank rates too fast and too soon (the reality is, before the independence of the BoE).
The other issue is that 3.5% is actually what I think the Government would want (I first mentioned a range of 3.25%-3.5% as desirable a few months back) but the fear of that level is a breakout to the upside, because that could be very dangerous indeed. So they could flirt with it, but not NOT take action if they approached it, in my view.
I am maintaining my position that they will not act as quickly as would traditionally be the case. However, there will have to be a rise at some point as they have to reload the gun. Boris’ desire to invest will have an inflationary effect – and austerity is utterly out of the window. It’s the Tories, so there will be continued faux pas around some causes that will capture the hearts of the nation and it will still be on the Marcus Rashfords of the world to set them straight – but until things really are “over” in the minds of the very most bearish, and SAGE is no longer hitting the headlines, the brakes are unlikely to go on.
What does this really look like? PROBABLY (I’ve moved from definitely) no base rate rises until the end of 2022. A road back to 0.5-0.75-1% at a bit more pace (by 2026 though, most likely, because some of the sluggishness in the economy put forward by the deflationary argument does hold some water in the UK). After that – well, who can say? Will Boris still be in charge – I find it unlikely. If aggregate demand stops being stimulated by such an active government, will a “small state” party/leader of one of the traditional parties be at the fore?
Will the chunky investment in infrastructure (rather than the multibillions invested/gambled/wasted on track and trace) do its job, quickly? That’s unlikely – it is normally a longer term investment.
Is a really sudden uptick from here likely in terms of interest rate or inflation expectations? Possibly. There’s really significant tail risk at the moment in the economy. At the moment it is difficult to discount any prediction that doesn’t contain overtly false assumptions in it. The US had some horrific jobs figures last week, but further investigation reveals that there are elements of a “pandemic hangover” – many people, and of those people mostly women, rightly or wrongly, as the chief bearers of childcare dependency which bled into home schooling, still could not seek employment as recently as mid-March, so are unlikely to have been hired and working by April, in all fairness – we need to stop quite often and appreciate the pace of change that’s been going on!
What does it mean? Fixing debt at these low rates still looks attractive! The downside on rates has disappeared, we can say with 95%+ confidence that we won’t be going negative (black swans aside), and ultra-low savings rates have not discouraged savings at all – the lack of things to spend them on but more importantly the fear created by the pandemic has meant that it is more about storing something than the return you get on it. Return of investment rather than return on investment, and inflation is the biggest silent killer of all, economically – people can hear about it, see it, read about it but it isn’t every day, or week, or even year sometimes – it just ploughs a hole through badly-invested or non-invested cash piles over the course of 5 years and longer time horizons.
Are trackers therefore very dangerous? Well, with the price of any insurance (and ultimately, that is what a fixed rate is) there is usually healthy margin for the insurance provider. However, with these continued tail risks, it might start to look like unusually good value. I’d be looking at 80% fixed 20% floating right now if I was deciding today, versus more like 60% fixed 40% floating if I’d answered that question 3-4 months back. (I’m quite conservative, small c, so 50% fixed 50% floating would be an “all in” bet for me on falling rates.)
I realise that even by my standards this has turned into an epic tome – so I will save a couple more snippets for next week, and just want to say as usual, thanks for the likes, reads, shares, comments and particularly if you disagree PLEASE comment because I work quite hard to read and listen broadly across the spectrum of news/noise and economic commentators, and I always learn something from those with slightly different or completely contrary opinions!
We hope you look forward to next week’s topic.
Source: Adam Lawrence, National Property Auctions Director
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Weekly Digest 10th May 2021

Hello again,
This week our Director Adam Lawrence talks about many different variables and what effect they are having on the market.
Another Monday is once more upon us and despite April showers seemingly continuing well into May, the forecast at least looks a little clearer on the Covid front if nothing else (in the UK anyway!).
The supplement this week would like to explore some topics for discussion over the next few weeks and months. The broader economic picture will always remain the focus, but it would be great to hear from regular readers about what they’d like to hear and read about!
Firstly there’s the big macro indicators that take a good chunk of my attention – the number one risk to property investors and the one thing that has not worsened (but instead improved) over the past few years is the interest rate. It is easy to forget the risk that it does represent as we have gone into the 13th year of the bank of England base rate being below 1%, and not only that but we are a year into it being 0.1%, a new historic low on the back of what was already a historic low that we’d only crept back from. There is unanimity amongst the major UK economic commentators that it will stay at 0.1% for the foreseeable future (until end-22).
This forecast has recently improved in that it is no longer expected to go negative. Overall, I’d say this is good news because negative rates are at best unproven in their impact. They’ve been relatively broadly used in some developed western economies and the post-2008 world, and have run alongside anaemic growth rates, near-deflation, and sometimes persistent unemployment. Best left to the theoretical or observed from a distance, in my view.
Interest rates lead onto inflation which I’ve discussed at length over the past couple of weeks and indeed over the past few months. Traditionally interest rates are there to control inflation and tend to rise when inflation starts to rise in order to stop the economy from overheating. However the above statement around rates and inflation in negative rate economies is an observed fact. Negative rates have not been enough to allow even a remotely healthy level of inflation I.e. those economies just haven’t really got going in the mid to late 2010s despite money being dirt cheap to borrow and relatively widely available (although small companies always bemoan how hard it is to get capital).
There are many implications to the breakdown of this relationship which happened pre-Covid and with the tool removed from the toolbox, other, more extreme policies get used such as “helicopter money” which has been used in the US. The noises have started in the US about it being a problem to recruit because unemployment benefits are too generous currently – the bottom half in terms of incomes in the US have it a lot harder, overall, than the bottom half in the UK so the difference is more stark over there. Over here, furlough has largely replaced that situation apart from for some of the self employed who have not qualified for the scheme. As so often it will depend on the individual level – there has been recognition that a broad number of people have fallen through the cracks – landlords are more difficult to classify because they have indirectly benefited from tenants’ furlough monies of course (or higher universal credit benefits payments/increases in housing element/housing benefit), but had no direct help.
That does the job of introducing the third major macro topic of interest – unemployment. Many theories have emerged since furlough and the true number that would have been unemployed without it remains an unknown. The end of June represents another period where there may be redundancies as companies again need to start contributing to furlough payments rather than the government paying the full 80%, so we will soon find out what those numbers look like. My feeling is that they will be lower than many have expected throughout and we had a surprise month on month 0.1% dip in the unemployment rate on the most recent figures to be released, a few weeks back.
Depending on how much weight you give the voices in the US regarding the incentive to stay off work being too high, the US unemployment rate which is around the 6% mark versus the UK which is around the 5% mark, might be a truer reflection of where the market would be at with less direct interference in jobs (a real comparison between the true stimulus difference per capita between the two countries is very difficult, especially if specifically looking at job losses, for those reasons outlined). Job creation has seemingly slowed in the US back to “normal” although it is too early to use phrases like that – also commodities like lumber are shooting up in price because too many mills are closed in the US after the expectation last year was that demand would be lower not higher. Commodity extraction tends to work on longer cycles which is why supply shortages (and the current one is huge in many commodities) can be persistent and force prices a long way upwards if the demand forecasting has been incorrect.
Unemployment is very relevant because it is a drag on economic performance – in the ideal economy jobs are being created which are also highly productive and will push forward the macro performance of the economy – the political reality is that governments will accept pretty much any form of job creation because the headline number looks good and also it moves the unemployed from the liabilities column as far as the state is concerned towards the assets column. If job creation is low on quality then in reality people still need state support but it does of course decrease and also they pay tax into the system (rather than “just” VAT on a lot of things that they buy).
This works hand in hand with wage increases – harking back to inflation and unemployment as they work hand in hand, and of course in terms of sustainable increases in house prices, a healthy increase in the average wage over and above inflation is desirable. Affordability is a driver.
A bigger driver, in terms of correlation, is the availability of credit. This has started to be addressed more than it has been for the past 5 years or so. There have been niche schemes such as help to buy which have helped some first time buyers in the past decade (although the cynics would say that all that has achieved is to inflate the profits of the large housebuilders, and allow the prices of new build stock to continue rising somewhat falsely in a decade where house prices did not outpace inflation on average across the UK). This has become more mainstream with Boris and Rishi’s 95% mortgages for all – although until affordability is addressed then that remains mostly a soundbyte. It has been clear to me for many years that terms could be extended massively if there was an appetite to do so and a realistic term for someone in their early 20s could easily be 40 or even 50 years (as that’s the likely duration of their working life – I’m not as bearish as many on the state pension in terms of its complete removal although I do think it is likely that the qualifying age for a 20 year old today is likely to start with a 7 not a 6). Affordability and the “rent vs mortgage” argument is currently as hot a topic as it has been, and the smart money backs a review at some point in the next 12-18 months as it does seem fair to say things have gone a bit far on the Affordability front.
If you took a joined-up view though, this current market/bubble is no surprise. Everything is pointing to propping up the housing market/driving towards mania. For example:
SDLT holiday. The date on this is set for weaning off. You’d think this would already be having an impact on properties above (or well above) 250k, because completions on deals in the open market agreed on these are now exceedingly unlikely to complete in time for end June. Auction purchases etc. Can safely continue in May (and I note a major London auction house has held its own record breaking sale this week – the next one will be an interesting one to watch). Auction of course takes two to tango and to deliver record breaking sales you need willing vendors as well as willing buyers and perhaps you’ve had a fair few cash in on this existing market.
Overall strategy – a lot of the economic success of the 80s was built on the back of selling off government assets (or LA ones, such as social housing) and also meteoric rises in House prices (before the end of the decade). People remortgaged to get all the latest mod cons which at the time most certainly included double glazing, and spend on more accessible, cheaper holidays abroad. I’ve not ruled out Boris looking to access some of that “success” by repeating or propagating some similar policies. House price booms make Conservative voters after all – the figures will tell you that.
Relaxation and expansion of credit has already been covered.
Demand soaring – some because furlough has given a confidence (but it is a false confidence?) About job security, some because Covid is a really significant disruption to former working patterns and the necessity to be in certain locations. This wave is unlikely to disappear but more likely ebb away relatively slowly.
Supply crunch: this is the one I’ve struggled with the most in terms of explanation. Very few people are even talking about it (demand is much more exciting to talk about, and also much easier to explain). To really explain supply shortage you’d need to poll people about why they aren’t offering houses for sale – not an easy audience to target (would have sold if it wasn’t for the pandemic). So much of this remains theoretical at the moment. There’s no doubt in my mind that the pandemic has made a slice of the population – particularly those more senior in years – hold stock off the market. Again this seems likely to ebb away rather than there be a crashing wave of supply.
Then there’s the removal of the debt pressure. This is the other big one. But how many repossessions will we expect all of a sudden. 10,000? 25,000? Difficult to say and I wouldn’t rule out Boris et al. Attempting to deflect many of these somehow because the optics would not look good. Banks don’t like repossessions either and these are likely not going to be the wave that some might think – but they are the other major supply crunch.
There’s also a more nuanced problem than we are looking at when talking at the highest level. Oftentimes it is said there is no housing crisis in this country because there are so many empty homes – whereas the reality is that at the micro level, the market is quite dysfunctional. There will always be areas where there is a shortage of the right sort of stock that is in demand. Currently, that is suburban properties and even more so, sea view and coastal properties. The flip side is too many city centre flats that are not selling well, and are beleaguered with other problems. This exacerbated supply problem just works towards a bubble in certain stock.
That’s the second instance of the b word today – and those conversations need to start being had. Nationwide announced a 2.1% month to month price increase in April. Some of that is no doubt the lockdown bounce as confidence has really returned but it only takes a very quick glance at the calculator to realise that a 2.1% monthly increase is a >25% annualised increase. Combine that with the reports of sealed bids and you have classic bubble characteristics.
On the flip side you still have lots of deals falling through and coming back on the market. I’ve been told anecdotally a few months ago by an agent that you need to sell everything 3 times in this market……whilst the overall figures aren’t that bad, consider what might be an average situation at the moment. Buyer panics at sealed bids stage and goes 7% above asking price. Surveyor comes out and values 3% below asking price.
Plugging those 10% gaps can be done by some – and households have massively improved their savings positions since February 2020 – but not by all. House goes back on market. Cycle potentially repeats itself……
It takes 3 months to sell and 3 more months to see it on the land reg (although it has got a little faster in recent times). But call it 6 months before the overbought property in April hits the land reg in October, when the surveyor can finally hang their hat on it……just in time for the end of SDLT holidays, end of furlough and for the market to get ready for winter…….worth thinking about!
Too many variables have been pointing in one direction or another throughout the pandemic – when will this shift? It would seem sensible to not expect normality to resume until 2022 at least. Many may groan at that but it doesn’t mean you can’t transact, deal and trade at this point. There are fundamentals that point to a slower but rising market over the next few years as many previous supplements have addressed. If (and it is a big if at the moment) you can control materials pricing and labour pricing, it may not be the worst time to embark on a property development – although of course it depends upon what you are building. Nicely finished houses are fairly robust in any market and with the excess demand and the lack of supply also being felt because of projects delayed or not started in 2020, plus a rising market……
Historically I must declare I’m always off these trends too quickly. I still believe volatility is the watchword for the post-Covid market and there’s a few good reasons above for some wobbles but the tailwind of this market could persist for years (not at current growth levels, likely, but still persistent and strong). There’s still an argument for stimulus if the economy now doesn’t get going – my heuristics are telling me that whilst everything has been too bearish for the past 14 months, forecasts are now looking a bit bright and just as we’ve hit a new forecasted high for economic growth of 7.25% this year, I think we will miss that target for a variety of reasons. I’m going to muse over why I think that is the case and try to put it into words next week – at the moment it just feels like the pendulum might have swung too far, but I have stated before how much I am looking forwards to seeing productivity figures (particularly for Q2, which are not going to be around for months and months yet!). We need information now, not lagging indicators – and that’s one of the points of the supplement, and one of the goals!
So – back to the start. What would you like to hear more about? I did some research and produced a piece several weeks ago about furlough and the true economic impact and cost vs benefit. I’m genuinely interested in all of this stuff and it also gives me some release from the day to day property investment operation, and am much keener on the facts and the data than I am on being correct…..although I do try of course!
Answers on a postcard or instead, as a comment below please! As always, likes and shares are much appreciated and thanks to those who do so every week – every single one is noticed, none are taken for granted! Thank you
We hope you look forward to next week’s topic.
Source: Adam Lawrence, National Property Auctions Director
For further information, do not hesitate to contact us on:
0330 094 0100 or

Weekly Property Digest

This week we’re looking at inflation and answering some of the questions around what’s going to happen.
If you’ve been looking for a simple guide this is it and we’ll share Adams findings weekly now.
The last supplement for the first third of the year – it seems ridiculous how quickly it is passing by! I thought today would be a great time to focus on inflation – because a few other really interesting posts on my own timeline have highlighted some really enlightening concerns, questions and debate points around inflation.
The idea here is that once we’ve covered inflation in more detail it will allow us to understand and perhaps forecast the effect of inflation on property prices, debt and what we might expect during the 2020s – although this is a massive topic, and will likely take a few weeks to get through!
I was challenged during the week on a forum and accused of wanting to talk property prices up in order that I could dump stock, when really I MUST believe that prices are going to crash at some point in the future! This made me chuckle – the “opponent” if you will was a new member of the forum and has not been seen since, and adopted the style that you see from many in the new world – there were a few good points, around a sea of “non-data” which was what the poster thought was happening, and thought had happened, without bothering to look anything up. However, it is always good to be challenged and it made me ask myself whether that could be the case.
The answer I came back with, on that front, was no. I’m a stickler for data – to a “dinner-party snoozefest” level, as regular readers of the supplement will know. If I think there’s a tough time coming, I will absolutely say so. I’ve also said, of course, that I see a couple of “wobbles” in the near future, but that they will be wobbles to knock fresh highs/peaks off the market, rather than the start of a true spiral downwards. So a “melt-up” (large increase in prices) over the next 5-6 years as I’ve pointed to a few times, is not necessarily going to look like a straight line upwards.
The overarching trend we have seen since Covid is “all graphs are rubbish” – inasmuch as you will point to historical graphs going back 40-50-60 years and the amount of volatility seen within 2020 makes the y-axis just look utterly meaningless. Things that had not moved more than a few % suddenly move 30 or 40%, or even more. You could include in this: GDP, unemployment, houses coming to market, new build stock, oil prices – the list is seemingly endless. This is the manifestation of massive volatility, and whilst it isn’t a daily or weekly event any longer which it might have been 12 months ago, it is still a phenomenon that comes from the back of Covid.
The other thing to watch out for is something I have touched on before – year on year (YOY) numbers. We are now at the ultimately dangerous point for these, because 12 months ago was something approaching the slough of despond in large parts of the Western world. China were already in recovery, but the rest of us were looking at historic falls in economic output and predicting some significant misery in general in terms of jobs, house prices and the future economy. When you see YOYs compared to March or April 2020 – BE CAREFUL! These are not good trends to be reading into. The 2020 figure is a false one, compared to the 2021 one – because the 2020 one wrapped in a lot of future pain that, as yet, has not occurred, and may not occur (or more accurately, may manifest itself in a different way somewhere down the line). Why? Primarily the level of government stimulus, but also the response, and then the uncertainty of whether there would ever be a vaccine which was a hot debating topic in April 2020 has already been answered.
So – onto why I am one of the “inflationistas” that is out there at the moment. Firstly – a little trip down memory lane. I want to look at nominal interest rates (the number you will see talked about on the TV) but also real interest rates. Real rates (and real yields) are likely to be an incredibly hot topic. Some positive news firstly which affects the whole debate – the stuff that doesn’t make the headlines. The future expectation now for the Bank of England and also for every significant economic predictor and commentator in the UK is that rates will NOT have to go negative. This is a plus. Negative rates have been used for 7 years in the Eurozone, and for longer in Denmark particularly where they are nearly in their 10th year. Indeed in Denmark they have now filtered through to negative rates on deposit accounts, and negative rates on mortgages.
I see that as particularly dangerous territory. It may not feel right that putting money in the bank will cost money (although, it is sensible to accept that banks have operational costs of running deposit accounts – a fact we have yet to accept in the UK but that will surely be coming someday soon). It is even stranger to understand that you might borrow money to buy a house and benefit from a negative interest rate. This doesn’t mean of course that you are ACTUALLY getting paid, because in a repayment situation, you will be paying more capital than the interest you are getting paid. Interest-only would be an interesting feature! Buy-to-let is unlikely to explode in Denmark for several reasons, but it is interesting to note that there is also a very strong set of laws in favour of the tenant (in case you think the UK is pro-tenant/overly biased, check out the Danish setup!).
What you can conclude, without an economics degree, is that when a system is doing the reverse of what it is meant to do, that the system is broken. And that’s absolutely the case. The global financial crisis of 2008 broke the system in many ways in several countries, and it had a very good go at doing that in the UK too.
Negative rates were first posited in the UK when the Bank of England changed their language on this, something they had always had a strong position on, in October 2020. As recently as early February ‘21, the BoE announced that deposit-takers had 6 months to consider the operational and pragmatic impact of negative rates. Due to a solid enough re-opening so far, the prospect has currently melted away. The current consensus between the central bank and the 50 top economic forecasters is that interest rates will remain at 0.1% into at least the middle of 2022.
I wouldn’t panic too quickly if holding variable rate debt – the market now feels that the likely base rate by the end of 2025 will be somewhere between 0.75% and 1%. If I was a gambler, I would still be selling at this price – purely because of the desirability of inflation, and also the nature of the pendulum – we were too bearish at the start of this year, in a long lockdown, not knowing whether a vaccine would work – we are now too bullish and have forgotten that we are coming out of this on the back of an economy which was stuttering at best in 2019, and have fresh problems to solve that are significant. The beauty is that time will tell.
There are some figures that it is worth considering right now however. The property world loves to look at cycles, and trends, and “selective history” I think it is fair to say. Here are some figures on interest rates: The 10 year BoE base rate average has been 0.48%, 15 year is 1.7%, 20 year is 2.44%, and the 25 year is 3.22%. Worth considering when the PRA perform another mortgage market review and what stress testing rates should be, I would suggest – although I don’t think they will want to change the buy-to-let stress tests on terms shorter than 5 years because it helps to keep a lid on the market. You could of course use the argument that the rate has been affected by 2 one-offs – a massive recession on the back of a credit crunch, and then a “once-in-100-year” pandemic. I’m not sure that the market volatility won’t be really significant on the next “event” when it comes along however. Remember Gordon Brown’s famous words around the cycles of boom and bust being over, just before a massive bust…..the raw amount of money in the system, plus the algorithms that cause “flash crashes”, plus the alternative asset classes that now exist that are seducing giant cash injections (e.g. crypto) just mean more and more possibility for prices to move more swiftly, and more to the downside – downsides happen around 6 times faster than upsides tend to in terms of duration, and the last 14 months has certainly shown how bearish things can get so quickly (and arguably, how overheated they can get on the upside!)
So what are the “other side” talking about while all this is going on? The contention from the inflationistas is that there is 1) A giant desire from the governments and central banks to inflate away this debt fireball, in the same way that it was inflated away in the post-1945 era in the UK, after WW2. 2) A massive increase in the money supply. 3) A mechanism enacted in 2020 to actually get cash into the hands of the people, rather than just the banks. Not quite helicopter money, because it tended to substitute for wages (furlough), although bounceback loans and grants would certainly be very close to helicopter money for small businesses! 4) Big government is BACK! It is now desirable (I would argue, from what we have seen and heard so far) to expand government and spend big on infrastructure and other projects. This is a return to the approach of the pre-Thatcher years, and where there is a significant policy differential between Thatcher and Johnson.
Let us “steelman” the other side of the argument. Very low interest rates or ZIRP (A zero-interest-rate policy suite) lead to sluggish growth and deflationary environments (this is what we’ve observed in Denmark, Switzerland, Japan (although there are other challenges and nuances in Japan), and the Eurozone in general since negative rates have been in use). Deflation is a bigger challenge than inflation, and keeping above 0% has been harder (and not always achieved) in that timeframe. That is a statistical fact. What we have seen is asset inflation on the back of the many billions that have been pumped into various financial systems, via quantitative easing. This has been criticised for only helping the small % lucky enough to own financial assets (although in reality, of course, many do within their pension schemes they contribute to or draw down from). Massive extra QE does not change this and QE is deflationary from a consumer price point of view not inflationary. The central point of the argument is that QE shrinks net margins for banks, caused by lower government bond yields.
Again, I think this argument is dangerous and misses the point between relative and absolute. Just because this is what HAS happened following QE does not mean this was caused by QE. We would have to consider whether QE was successful in preventing actual deflation from occurring, and thus did the job it was supposed to be employed to do. This is actually quite likely and QE (in other forms) has got plenty of historical precedent in use, contrary to popular opinion. We had sluggish growth and low inflation throughout the 2010s, but was this just an elongated recovery period from 2008-9 rather than taking all of the pain then and having much better growth figures, but from a much lower base because the first crash would have been much harsher? This seems very probable to me.
So what’s different this time, since there is once again gigantic QE in play? The helicopter money piece for a start, or the more broad application of stimulus. The scale of the money printing is also another “off the chart” graph to behold. What’s also different? The US is broaching its all time high in terms of national debt (not just in nominal terms, but measured as a % of its GDP). They have never been above 120% but they will be fairly quickly. The UK is somewhat different having been around 250% in the post-WW2 years, and at 110% which is where we will be at in the next few months, are not looking in anywhere near as bad shape in historical relativity terms. Or framed a different way “We’ve done it before, why can’t we do it again”. There are of course the considerations that 90% has become the “key number” (for no really good reasons apart from data mining) even though the internationally agreed number around 30 years ago was 60%. Of course, what’s also changed is monetary theory in that time – a good part of it built around what has happened and is happening – but that’s of limited use I would argue because we need to know what WILL happen if X and Y happen, not what has happened and then extrapolate that going forwards (which is basically what Modern Monetary Theory does). MMT is a dangerous antidote, although the choices really are limited.
So – even if we buy the inflation argument – what is the figure that we need to consider? Is it RPI, or CPI? Is it the stock market as a proxy for asset inflation? Is it house price inflation that is actually more serious? Is it the cost of a Big Mac, or a Netflix subscription? All of these things are potentially valid. There is a Harvard Business Review approach which actually uses data from Visa and Mastercard, to see what people are ACTUALLY spending money on, which one would think is the absolutely ideal approach to RPI or CPI. The figures tend to come out a bit higher than the headline numbers, but not to the sorts of numbers that some commentators claim is correct – they were in the 2-3% region last year, versus headline rates of 0.5% to 1%. This is where it gets confusing to draw conclusions.
Any investment-led metrics would have to be adjusted by a rate of return or “risk premium” – it is worth bearing in mind. For example if you said the stock market performance of the past 25 years was 8.25% a year and the base rate was 3.25% on average during that period, the differential would really be the equity risk premium. You would THEN need to examine that premium and determine how much of that was thanks to QE (or, you might prefer the “too big to fail” argument which has reared its head in the past decade). Another approach might be to look at building materials – I have seen some robust figures suggesting a 12-13% increase in raw material pricing, and some commodities are absolutely through the roof – the US looks closely at lumber pricing because they use so much more wood in construction than we do in the UK (although that is changing of course) – our equivalent would be looking at brick pricing (a lot of which is determined outside of the UK!). The lumber mills in the US made a bit of an error last year because they cut production dramatically, wrongly calling the effect Covid would have – then the resultant lack of supply (still fewer than half the major producing mills are back open) has forced prices up massively. This is the danger in a pandemic – some things can react really quickly, some things take 6-12 months or more to get back online because they are supertanker operations, not lean operations.
It is hard to get away from the rise in commodity prices also being linked in inflation expectations. Where does money go when people expect inflation? Gold (and substitute crypto in here, not instead but as well – while there is belief in crypto as a store of wealth, there are lots of seductive arguments for this over gold – one being the storage and holding costs are nothing like as high – there are of course plenty of counterarguments and I remain a sceptic). Hard assets – i.e. property! Gold is like a bond with no yield, the only money made is on its price (same as crypto) – property can yield in the interim and is very strong in a low-interest rate, higher-inflation environment – the perfect storm for property prices, hence my bullishness. And also – commodities. Hard stores of value. If there are other uses (in renewables would be a really good example) then this is extra insurance. Of course you have the Musks of the world who are looking at asteroid mining but it is quite difficult to influence the supply of commodities too much – as prices go up, more expensive methods of extraction become viable but they are not incredibly quick things to do, it is not just the case of pressing a button and getting more copper, or whatever. So in times of massive price volatility (as we are in right now) it is not necessarily easy to exercise the option on a mine and double output in the next quarter – it is more a year-on-year basis and that needs stability that breeds confidence, rather than volatility that breeds fear. In the interim period, which is where we are right now, we just see prices going up and up on commodities.
If commodities are up so much – why doesn’t that filter through into pricing in a much more severe way? Simply because of the supply chain and the costs of it. The raw material may be only 10-15% of the final cost the consumer pays (sometimes less) – there are the logistics costs, the people costs, the overall cost of retailing something – So inflation has a lid kept on it. It should also be remembered that at the moment we have 5% VAT in a sector that is about to have a big bounceback – hospitality – and when that 20% VAT comes back in (which is being tapered, because the inflationary effect is known and is anticipated by the treasury) that has an immediate inflationary effect.
As promised at the start of this article – this will go on, and into next week I will seek to get further into real rates of return, real interest rates, and look at the historical figures around inflation versus equity pricing versus property pricing, and (spoiler alert) I already know there will be some surprising results from that analysis. As always, likes, shares and comments are much appreciated, well done for getting to the end (Or the end of part 1, anyway…..)
Source: Adam Lawrence, National Property Auctions Director
Partners in Property Sue Sims
For further information, do not hesitate to contact us on:
0330 094 0100 or