Supplement 10 Nov 24 - Eyes to '25

“It is always darkest before the day dawneth” - Thomas Fuller, author, 17th Century

Before we get started, get those tickets bought for the next Property Business Workshop - Thursday 16th January 2025 is the one! This time round Rod Turner and I will be covering productivity, planning and financial accounting and bookkeeping. Why? Because we constantly see property businesses struggling with appropriate financial reporting, accounting and bookkeeping and making the same mistakes time and again. Help get a complete handle on the financial performance of your company/group when you aren’t at a level yet where you can afford a CFO or financial controller. Set up CORRECTLY - once - and then just iterate from there. As always it will be an action-packed, content-filled day which will stand alone in helping to advance your understanding as a Property Business Owner!

The link is LIVE and Super Early Bird tickets, with a 25%+ discount, are available now in limited numbers here: bit.ly/pbwfive??

So - another quiet week in the world. Or, maybe not……but let’s stick to what’s relevant to the macroeconomy of the UK going forward, and the likely shape of the UK property market. That’s what you are here for, after all!

Getting down to business - Chris Watkin asked himself “that question” one more time - What is currently happening in the UK Property Market? This report was from the week containing the budget - next week’s will be for the week containing a base rate cut (although that’s all been lost in the melee of headlines, of course).?

Chris - property stats guru - analyses the UK portal data which is aggregated for him by TwentyEA on a weekly basis. I love real-time (or as real-time as possible) snapshots and pictures of the market that we can piece together. Nothing better for staying informed.?

Listings took another dip - but nothing that doesn’t follow seasonal trends year after year. Only the more motivated are listing at this time, the tyre-kickers have had their pot shots. Reductions still look good (for buyers) at 13% compared to the 5-year average of 10.6%.

SSTC dipped from 26k last week to 24k this week, but it remained far higher than 2023 (17% higher for the same week) and the pre-covid averages (7.4% above 17-19).?

The fall-throughs ticked up a little - just over 1 in 4 sales at the moment, compared to just under 1 in 4 last week. The budget didn’t have a catastrophic effect by any stretch. Let’s keep monitoring - the fall through rate was 40% for 2 months after the Truss/Kwarteng mess of 2022.?

Net sales moved ahead of 2022’s number at the same point in the year last week and are set to stay there. Remember how bad those last 2 months of 2022 were! A healthy print on the year - and 5.8% above the pre-pandemic average of 2017-19 now.

The real-time expectations at my end are fewer investment transactions because less stacks up at 5% HRAD SDLT compared to 3%. Fairly simple economics. Behaviourally, I already know on the ground that agents who are more “honest” are telling my business partners that “buyers have evaporated”. Time to press those advantages.?

However. Investment transactions were already really low - looking at 9% of mortgage monies on Q2 figures being used for investment, and one in 10 houses being bought for investment purposes according to Rightmove’s most recent article on the subject (they don’t share their source data in any meaningful way, unfortunately, so we have to “trust” their commentary, but it doesn’t look out of line at all). Bear in mind the sector is 19% of UK housing, 10% (or 9%) is about 50% of where the replacement rate might need to be (mortgage data excludes cash buyers, of course). So suppressing these yet further - even if it moved them from 9% to 7% of mortgage lending - would be a minor point.

On the flip side, these newly re-created stamp duty “bumps” (rather than cliff edges) at 125k-250k, and 300k to 425k, will nudge behaviour the other way around in the first-time and secondary markets of course. EVERYONE paying over 125k is paying the extra (FTBs aside) in the 125k-250k band, and FTBs will likely be the most motivated because the marginal band between 300k and 425k is 5%, and so 7.5k of extra cash to find (or borrow from bank of Mum and Dad) will force some transactions through before April 1st 2025.?

You would expect (from the point at which we are starting) the impact to be more volume before 1st April, and then less volume after (as the market adjusts to the transition), with future volume dependent on the pace of rate changes.

So what, as I always try to ask myself? List your sales sensibly. List now or soon. Certainly prepare to list on Boxing Day (and get carried away with the usual hype) OR make an impact on the first weekend of the new year after the kids are back to school - depending on what you are selling. Line up decent lawyers on your side as well! If you are selling “investor-only” stock, you might need to sit on it until 2025. I think the auction sales will be tumbleweed in November for the vendors - there’s still the same money out there for the right lots and bargains, of course, but many buyers are going to be looking to load the entire “new” extra 2% onto the vendor, to make already tight margins hold up. December looks again very likely to be very quiet, and a week further on from the budget, it is exactly what we are hearing and seeing in terms of numbers of people at auction viewings, etc, and numbers of calls we are getting from agents desperate to move stock on.

Macro, Macro man, then. The retail sales monitor needs a slot, because there are budget implications I didn’t have room for last week on that front/industry. The PMIs are finalised, and let’s discuss them. Halifax’s house price index was also out. You know we aren’t avoiding the gilts and swaps - this section is slated to be retired at some point after 2027, at this stage, I’d say - if ever.?

The British Retail Consortium sales monitor, then. Up (non-inflation-adjusted) a massive 0.3% on the year, for October. Better than a drop, but below consensus. The reasons cited - half term being a week later, making a difference downwards for October. Budget uncertainty alongside rising energy bills. Fashion took the biggest hit because mild weather delayed winter purchases as well.?

The cost solely on the retail sector is pegged at ￡5bn in the Chief Exec’s summary (employers’ NI, Business Rates and the National Living Wage uplifts). With “just” M&S and Sainsbury’s between them quoting a quarter of a billion in extra costs for 2025, you can believe it.?

The KPMG head of consumer, retail and leisure sees increased confidence in households post-budget having “escaped” tax rises - but I’d take issue with this. Some employees will realise that next year’s pay rise (those far enough away from minimum) is likely to be very mean indeed - as it will all be going in increased NI. Some won’t but the news has hardly welcomed the budget positively as far as business is concerned, and jobs are likely to be much more at risk than they were - so I’d take issue with a sudden uptick in consumer sentiment. Perhaps before Christmas, before Q1 2025 cuts are announced?

We will find out on Black Friday, of course. Households on minimum wages might well feel more confident with a big rise coming, as long as their jobs are secure naturally. Without a lot of spare cash anyway though……it is hard to say. Those households do have a tendency to consume 100%+ of any pay rises, economically speaking - but that rise isn’t coming until April, of course.

My own take - retail businesses, buildings, and associated jobs are likely to have a very tough time in 2025. There will be closures and job losses. The quantum of them may not move much of the needle nationally - but if you have exposure in the sector, as a commercial landlord - or are looking at opportunities in the sector, to convert buildings or similar - action will be needed and the time is now. There will be some streamlining and ever more empty property across the UK.?

Onto the PMIs and the related Jobs report that S&P also produce. October - you know what this is going to say for jobs. A fall in permanent placements. Further slowdown of salary growth. Vacancy numbers falling again. Why? Reduced demand, hiring freezes, and budget uncertainty. The fall in vacancies was described as “at an accelerated rate”. The direction of travel is unnerving here, and we are getting close to a more negative employment environment - I’ve certainly updated my forecasts for unemployment by a few percentage points for 2025 and beyond (I see us at risk of going above 4.5% now, whereas we had just made it back to 4% and I was clear before that 4.5% was really the ceiling unemployment level without a shock).?

On that note perhaps we will “backdoor” our way to higher wages and higher skilled jobs, but because unskilled jobs cost so much in comparison that the incentive to automate them is higher than ever before (both relatively and absolutely).?

Where this will attract attention amongst Supplement consumers is the fact that weaker business, and weaker employment numbers and directions of travel, influence the Bank of England committee to cut rates further. However, there’s a trap here, and I’ll get into it in the deep dive.?

The PMIs, then. The slowest rise in business activity since November 2023 - but still a rise, just about. Export sales growing - but how long can that hold up? US tariffs are bad news on a couple of fronts for the UK, by the way - directly, due to simply affecting how much we can export to the US, our biggest single buyer of exports (we export more to the EU in aggregate, of course) - a little over 15% of our exports go to the US. Then indirectly - tariffs will provide SOME help to the US economy but will inevitably be inflationary - but harm global growth. 20% extra tax put on everything not from China changes a lot - even domestically “produced” goods if they are made up of more complex component parts (think “cars”) as a lot of parts in the supply chain even of American “appearing” manufacturers are made all over the world.?

Someone in the incoming administration will be explaining this to Mr Trump, in appropriate language, and we will see if the tariffs go the way of the Wall. On the Wall, by the way - a quick precis if you are interested:

“Trump’s administration built 52 miles of new primary border barriers — the first impediment people encounter if they’re trying to cross the southern border with Mexico, that can block access either for people on foot or for vehicles — where there were none before.

The administration built 458 total miles of primary and secondary border barriers, U.S. Customs and Border Protection data shows. The majority were replacements of smaller, dilapidated barriers.

Replacement barriers and secondary barriers that are behind primary barriers don’t add additional miles to the southern border’s total coverage.”

So - he doesn’t always do what he says he is going to do - but he has a go, would be my simple summary. (I think with Mr Trump, keeping it simple is the dominant strategy).?

Back to the PMIs, anyway, after that segue. The services print was 52 - so, still growing, but at a slower pace. There’s no point lamenting the budget uncertainty one more time - because now it feels like looking backwards, rather than in real time. The key takeaway from the services print that we didn’t have before though - 52% predict an increase in business activity. 11% predict a reduction. The rest will fall into the “about the same” category. Now there’s no quantum of “how much of an increase” of course, but overall - if you subtract 52 from 11 which is how a lot of the confidence markers work, you’d be looking at a print of +41 which would be seen as very positive whichever angle you come from. Services - as a whole - look robust in the face of the budget and that ultimately defines our economic success as a nation.

So - we are working towards a conclusion that the budget batters certain sectors a lot harder than others. We are, of course, more interested in construction than the percentage of our macroeconomic output that it makes up, and the construction PMIs are also out. The strapline - “growth eases in October”. Civils are still dominating the category, followed by commercial work, with resi still in last place. A “renewed decline” in house building; and optimism to a ten-month low.

54.3 was the print - which on its own is a solid number. It was down from a massive 57.2 in September, though. House building slipped to 49.4, back under the magic 50 level though as contraction crept back in. Elevated borrowing costs, uncertainty, and constrained demand were the reasons cited.?

This is much of 2024’s messaging. “Construction is doing well” - GREAT! It isn’t really house building though, it’s the other sectors. Oh. The current run-rate as explored a couple of weeks back at around 150k new houses/year is going to embarrass Angela Rayner in a year’s time, unless the starts have really moved forward by an incredible amount (rather than about 25-50k, which looks like the correct range to me just now). Optimism is subdued in the sector with the lowest growth expectations since December 2023 - a 10-month low, which will be a self-fulfilling prophecy of course.

The Halifax House Price Index, then. They made the headlines this week (everything seemed to be navigating budget fallout and US elections, of course) with them being the first major index to claim a “record high” print. The broader inflation rates since the last high, of course, are never mentioned - even though whichever measure you use, we are comfortably in double digits.

Halifax saw +0.2% in October, and +3.9% year-on-year. With the new number - according to them - at ￡294k - passing the June 2022 peak. Northern Ireland is also still winning the devolved battle of the fastest rising market as its comparative Brexit dividend continues to yield.

They finally seem to be seeing the overall error of their ways despite some incredibly bearish predictions since late 2022 - “perhaps more noteworthy is that house prices didn’t fall very far in the first place.” The +0.2% from the past 2.5 years is then, rightly, compared to the 21% rise from January 2020 to June 2022. 21% over 5 years, nearly, then.

They cite steadily dropping mortgage rates. We need to have a word, here, because they aren’t watching the gilt markets in real time before they write these reports (which is a bit unforgivable, to be honest, but their analysis honestly doesn’t seem up to the task). Our gilt and swap section is going to get heavy, this week, folks - fair warning.

Halifax sees Northern Ireland up 10.2% and Wales up 5.6% year-on-year. The North West is up 5.9% year-on-year too, with London up 3.5% year-on-year. None of the rest of the report told us anything we didn’t already know.

So - to the beefed-up gilts section. What a few weeks - things have gone consistently against the borrowers for 5 or 6 weeks now. It would be remiss of me not to do what I always try to do - break ground, not be influenced by what others are saying, be impartial, and share everything I’m considering strategically - and so I make no apologies for this section being longer than usual.

I start with the 5-year gilt. The path has been upwards for the yield (and downwards for the price) over the recent weeks because there was speculation over the budget, nervousness over the change in fiscal rules, and also a spectre of an election hanging around over the atlantic. Let’s start there.?

America sneezes and the world catches a cold, they say. Everyone “follows the Fed”. There’s some truth in these sentiments, and the US interest rate decision this week (cut 0.25%) barely made the headlines because of election mania. What were markets speculating or worrying about? A disorderly election, of course. Either way, political affiliations aside (a luxury I don’t consider myself able to afford), a clear win in either direction was the best result for the world. That leads to a little calm.

Mr Trump, however, is not someone who lenders think a lot of. There’s a fair amount of blind rhetoric celebrating his “second coming”. Everything is up! Up up up! Let’s look at the reality for the week:

The S&P 500 is up 4.7%

Bitcoin is up 13% (using GBP prices)

Tesla is up 31.5% (remind me why Elon is so keen on Mr Trump again?)

The US 10-year note is down around 9 basis points - but up around 20 basis points on the month

Not a bad set of results at all, for markets. It strikes me that Musk has done what previous media barons have done for centuries, but more brazenly and arguably with more skill. I remain unconvinced that this is much of a long-term pair of bedfellows but with his form at Twitter (axe 75% of staff) without the issue of commercially “ruining” the brand (because the US government doesn’t really have one) - his methods in leading “government efficiencies” might be brutally effective, and will have some fallout on some pockets of American society.?

To think the US 10-year yield is down is fairly mind-blowing. You could say - well, the base rate has been cut 0.25% by the Fed, so it has dropped less than that - but that was already priced in. What - I would think - would worry lenders more is firstly the Donald’s appetite to not pay his creditors (6 bankruptcies, remember) and secondly his rather loose approach to controls when it is regarding one of his major objectives: “no price tag on safety” when it comes to border controls and mass deportation plans (which remain to be seen, of course - but I refer you back to the Wall - the bare minimum here is that he “has a go”).?

So - I don’t see a smooth path downwards for US interest rates from here, particularly. The Donald also has his own ideas about the Federal Reserve - he subscribes partially to the Liz Truss school of political control where you don’t want independent organisations “getting in your way” - even if you are an incompetent - because those “checks and balances” “aren’t needed”. The ultimate check and balance is the international bond markets - even for the mighty US - because of the size of the debt, and the deficit. It is a really serious concern in percentage terms, and if spending continues unchecked (especially with more tax cuts, which with Republican control of both houses look like a penalty kick) - just servicing the debt becomes a big problem.

I honestly think Trump thinks default is the way forward, but it won’t be up to him to do it. He has a similar approach to climate change, etc, which is why he will “drill, baby, drill”. This is economically a great approach for the US if they don’t care about the externalities of what they do, but they will be absolutely embarrassed by China and the likes for their renewable efforts (which are more strategic, and less driven by climate concerns, being honest - they just want to be world leaders in the future tech that will drive the developed world - and they have made all the right moves to do that).?

So - I have not, there, painted a picture for particularly quickly declining yields, in my view. If the economy DOES take off - and on paper, it will - more likely than ever to avoid a soft landing let alone a hard one - the issue will be the trickle down, or lack of it, to the people come next election. Goodness knows whether Trump will still be trying to stand after proposing a constitutional amendment (once that’s also been explained to him). A hotter economy doesn’t want lower interest rates, please remember, even if the deficit servicing is coming at an insane cost.

Import the relevant amount of that logic over to the UK. The - again dispassionate - economic analysis of the Rachel Reeves’ budget is that it will create some extra unemployment, and under the current plan, the growth in Real Household Disposable Incomes over this parliament will be miserable (the most miserable one since the last one).?

There’s a departure, there, then. There’s a much higher probability of growth stuttering in the UK compared to the US based on the events of the past fortnight. That means the UK may need to cut rates whereas the US might need to keep them higher, all else being equal. However - another little segue here.

People struggle to stay politically neutral. I get it. I come from a school of “you don’t get it unless you work for it, and I mean really really hard.” There’s no point relying on others, or the state, to give it to you - you have to earn it. Doesn’t mean there isn’t luck - luck is massive, both good and bad - but you can really make a lot of your own. You never get lucky at a networking event (ooo-er) if you never GO to a networking event, for example.

However, some of the commentary that has come out since the budget hasn’t been helpful. “You don’t tax your way to growth”. Not technically correct, of course. If you tax 40 - and you borrow 40 - and spend 80, that 80 is growth. It is IN the national income figures, in the GDP calculations. Now let’s zoom out that little bit more.

Consumer spending HASN’T been growing or grown over the past parliament, once inflation has been taken into account. This is the single biggest component of growth. So - how have we had ANY growth, then? Government spending.

This isn’t a sustainable way of growing, of course. Spending a bigger and bigger percentage of the national income on Government can’t go on, but there are plenty of developed nations who spend a bigger percentage, still. This “method” of growth is what allowed us to still grow (not per capita, but overall) over the past parliament. The pandemic was a huge, huge part of that of course.

What’s also been happening, though? People have been saving, because they have been concerned. Much more than they were before the pandemic. If they save - they don’t consume, so consumption continues to struggle. IF people - not business owners - start to get more confident, they will loosen their belts and consumption WILL grow, alongside Government spending. So there IS a path to growth, at 2%+, which is the OBR forecast for 2025.

Will we get there, straight away, in 2025, with major changes which will hit some sectors more than others? Combined with new employment rights? Unlikely, you’d think. Although, with the corporation tax question already answered, perhaps that’s enough for SMEs and bigger businesses to get on with it. Look at the confidence figures from the services PMI - not to be sniffed at.

So there’s some short-term “wins” for growth that those shouldering a big part of the tax burden won’t like, but they are factually correct. This has all got a bit theoretical, but don’t get too bearish on the future of the UK. Unemployment going upwards never stimulates confidence, and a movement upwards looks 95%+ certain to me, leading towards next April. After that, it could easily flip back as the business world keeps calm and carries on. A lot will depend on your margins.

I have - at this point - to also shout out to inflation. Food inflation, particularly. That’s hit consumers very hard in the US, and to a lesser extent (but still a big one), in the UK. Retailers will suffer - as discussed - from these changes and cost base increases - and MUST pass on a decent chunk to their customers, or hit their suppliers who will have their own absolutely equivalent cost increases to consider. You’d expect this must go up - but are we in economic shock territory or not? North of 3% once again looks on the cards when this risk has calmed down a fair bit, north of 4% looks unlikely. I’ve started to believe more and more that the “real” target these days is 3% anyway, in both the UK and the US. So I remain relaxed, but we do need to accept that the budget changes are inflationary. This counters the case for putting interest rates down particularly quickly, of course.

One more thing on that front, though, that I have perhaps not mentioned enough over the past months. The yield curve - many will have seen many references to the inverted curve, and I’ve spoken of it in fits and starts over the past couple of years. Normally a recession indicator. There is a theory, here, that the yield curve has instead simply reflected an artificially high base rate of interest, which was put into place as a risk-management protocol when supply prices for commodities and other goods spiked massively in 2021.?

So - as basically as possible - the shortest term interest rates were set by the central banks. The risks did not really emerge - we did have an inflation bulge that WAS transitory, but the transitory period was much longer than the central banks and the economists predicted (apart from some - ahem), and there were also some secular, trailing effects (this is my “real world 3% inflation post-pandemic theory). This is in line with previous pandemics in history.

Now the longer term rates are higher and the yield curves are flattening out a bit. The short term rates are still artificially high, higher than the “natural rate” (the rate at which the economy doesn’t expand or contract based on the base rate), but the gap has been closed. The problems really start, to pick a number, at around 4% - which is the high end of the natural rate estimates at the moment, but also my estimate (I’m sitting in the 3.5-4% camp).

My interest in the natural rate is limited. I’m interested in the 5-year UK gilt price, and the swaps, because it defines my debt rates, and by extension, my entire business model. That 3.5%-4% has also been my estimated range for the 5-year yield this year. That’s had to be bumped upwards in the past fortnight by the events discussed - Budget/Trump - so as of today, I’m sitting at more like 3.75%-4.25% as a sensible trading range for the 5 year UK gilt for the next 6 months.

In that time period I’d expect another 2 base rate cuts of 0.25% each. Probably February and May. They won’t change much at all in the gilt markets, because the 5-year will still be trading around or below that rate.?

What’s really happened in the past couple of weeks is that it seems that I might have been right again with my predictions for this year, but once again not for all the right reasons. I have been told off, corrected, criticised and scorned for my mortgage rate predictions which have been a bit bearish. A drop of perhaps 0.5% this year, is what I said, on the rates. I looked at a post from 2 years ago - in full “Truss repair” mode - and the Paragon mortgage rates were back to 5.69% (no fee etc.). We are still higher than that today, folks.

Patience is key in this game, as you know - but rule of thumb investment grade yield - today - based on a 30% cost base - is 8.5%+. There’s a vastly increased (from nearly zero, to “low”) risk of rates actually going up from here, not down - I still don’t think they will, but I think you should be on your guard and if you are “sitting waiting for lower rates” I wish you all the best, but don’t hold your breath.

Anyway - back to the nitty gritty of the gilts and swaps - hoping that segue was useful at least. It might be my record longest one so far. The 5-year UK gilt opened the week at 4.306 and closed at 4.329. Nothing happened then, eh? Well, it closed Thursday at 4.373 having trended up to the election announcement and then down after the base rate cut announcement, which I’ll cover in the deep dive. Still waiting for that down week to come back (which, in honesty, I think it now will as we come back towards the middle of my range for Xmas).?

Our discount, which has been an inexplicable 30 basis points for some weeks now, was preserved and even increased on the swaps. 4.01% was the last 5-year SONIA swap traded on Friday afternoon, and that’s 32 basis points lower than the gilt close. Long may that last - it still compares very favourably with the numbers from a year ago that were 0.2% higher (but only 0.2%.....without wheeling out the “I told you so” again).?

So - those with net yield are OK. Those without - prepare to keep subbing your portfolios if you want to hold onto them, OR get active with your asset management to force yields, restructure, sell, etc.

Well done for sticking with that part. It got heavy. I never apologise for that; it is needed to get deep under the surface of the trends sometimes to work it all through, and keep a balanced picture of the macro environment. I’m always keen to hear from readers and listeners - ESPECIALLY if, as and when, they disagree - I must make one anonymous shoutout to one proptech CEO listener who stands out from the rest by remembering where we have disagreed previously and where my predictions look to have outperformed his - you know who you are, and it is part of what makes you the thought leader you are as well, sir. I don’t expect to keep up that track record, but I’ll try my level best.

Goggles and SCUBA tank on, then, for the deep dive. We have no choice but to get stuck right into the Bank of England meeting notes and full report, because the output is so important for the future. I won’t spend a long time on the outcome of the meeting:

Cut rates 0.25% in the least surprising meeting for some time. 8 out of the 9 voted to cut - NEAR consensus - with the only member dissenting being Catherine L Mann, who I have described in the past as the Hawkiest of Hawks - perhaps Hawky McHawkface would be better - unsurprisingly not conceding.?

Onto the report, and our relevant parts. Disinflation is upon us (not prices going down, prices going up less quickly). The Bank expects CPI back to around 2.5% at the end of 2024, as energy price drops have stopped, and indeed reversed, from 1st October, as far as households are concerned.

Earnings inflation and services inflation are cited as “below 5%”, but only just (4.9% and 4.8% respectively). The Bank expects 0.25% growth for Q3 and Q4 respectively, which would put the annual figure to around 1.75% - not bad in today’s world, and that looks about right (you’d hope it would be, there’s about 7 weeks left in the year!)

The Committee thinks that the labour market will continue to loosen (not directly mentioning the budget at this point) - so this suggests that all else equal, they would rather cut rates and stop employment going backwards. Inflation remains the “one thing”, however.

They look at three potential cases for inflation from here. Fast dissipation thanks to shocks being (largely) over (aside from the budget shock to jobs - several non-partisan economists are using the word “shock” about it). The second case is some slack in the economy to allow this unwinding - so longer/larger unemployment, for example. The third case is structural shifts in wage and price setting behaviour - inflation becomes the norm. You could argue right now that this is VERY clearly the case for rents - although those actively asset managing, if you speak to a “typical” landlord - the modal landlord, 1-2 properties, they are still not putting rents up OR seeing rises as a one-off or possibly a “two-off” (a rise spread over two years).?

The OBR, and therefore the Bank taking note of this, have boosted their GDP growth forecasts by 0.75% in about a year’s time. To simply explain this: (simply - heh):

Hunt/Sunak took from the future by freezing the personal tax allowance thresholds for so very long (and some other trickery)

Reeves has bought some boosts FORWARDS into year 1 and 2, at the cost of years 3 and 4 of this parliament

Reeves has laid the groundwork to provide a bribe in year 5 for re-election

Reeves will need to change things in year 3 and 4 when we get there, and will do it by stealing from years 6 and 7 which TODAY are not there for consideration, but WILL BE by the time we get to year 3 and year 4.

I hope that makes at least some sense! That’s the game that they play, or part of it anyway.

The OBR, and again therefore the Bank, see an inflation boost of 0.5% based on what’s been done in this budget - and that then has calmed down the rate at which interest rates are expected to go down, to look more like the path I’ve been concerned we’d be on for some time now. Don’t forget the assertion that Real Household Disposable Income is going to limp up by only about 0.75% per year over this parliament (also from the OBR).

The Bank continues their assessment sensibly, from an economic viewpoint. What they don’t know is just how I framed it last week - some of this national insurance rise (plus minimum wage rise) falls on the employer - some on the employees - and some on the customer. How much? Depends on the price sensitivity of the customers (their willingness and their ability to pay) and the labour market conditions, and the fixed and variable costs of the employers and their alternative plans/homes for their capital. This also costs jobs. They don’t know how to model this - being blunt - and so they need to wait to see how it plays out!

Then - one of those sentences: “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further”

In plain English - this isn’t going to be quick. Time to heed that if you haven’t already!

The Bank sees the balance of demand and supply in the economy as a whole being about right at the moment - which would be borne out by an “OK” economic performance which has actually been far better than about 95% forecasted at the start of the year - and that to “emerge during” 2026 thanks to the budget changes. Gives you an idea about what their models say in terms of how long this takes to play out.?

They’ve got inflation back to 2.75% in the second half of 2025 - which looks a fair shout at the moment, if not higher - and they see pay growth falling to 3% per year at the start of 2026. I was expecting somewhat more of a shock downwards in April 2025 based on the budget - so let’s see who is right on that one when we get there.?

The key key key number in all of these quarterly reports - and why we dive into them in detail - is the forecast inflation number for 3 years time. This is based on the forward curve for interest rates (which sees, at the moment, us getting down to 3.75% in 1 year, and then staying there - ish - over the forecast). I’m concerned we’ve even slowed down on that pace, BUT whilst we are above anyone’s estimate of the natural rate, perhaps not. It is what happens when we get to 4%, or 3.75% (not going to argue over 0.25%) that really matters. Staying there is NOW the Bank’s base case (rather than getting back down to 3%, or some of the recent primary school analysis produced by some of the major investment banks saying base would be 2.75% in a year’s time - which now looks even more stupid than it did a few weeks ago when it was published).?

Forecast inflation in Q4 2027? 1.8%. The 3-year-forward number was down to 1.5% last report (August), so this isn’t positive, but it is under target and within tolerance. If anything, the message this sends is that Bank Rate could actually be more like 3.5% by the end of the period and all still be OK. It’s very theoretical, this stuff, but it REALLY matters.

They’ve adjusted unemployment downwards (in spite of the budget news) because growth in the near term is better than expected - thanks to the “shell and pea” game played by Rachel Reeves in the budget - and now they look to be about right, or underegging it. They get to 4.4% by the end of the forecast; will they be right about the pace of change, and the scale of change? We are going to find out.?

The Bank still sees growth as 1.75% max - and I still disagree with this. There IS a path to 2%+ - but we are not currently on it. No, it wasn’t Liz Truss’ path either, although some of her ideas were the right ideas at the wrong time; more by luck than judgement, in my view.

It’s really this more permanent shift in inflation - structural, is the technical term - that I’d like to just spend a little more time on here. I have said over some months now that I think 3% is the new 2%, as far as the “real” inflation targeting goes. This favours the property investor, although while we pretend 2% is still the target, it does mean higher rates.?

Why? Wages go up. Debt decays more quickly when it is nominal. Rents go up more. House prices go up more. This isn’t a huge difference - but if this effect lasts decades - which it could do - even 0.1% per year on each of those is a gigantic shift over time when using leverage intelligently. The miracle of compound interest.?

I’ve said that from studying previous pandemics, this 1% extra inflation tended to persist for up to 30 or 40 years after the event. Now - the world was different then, and the inflation reasons were different - but with some similarities. “Supply side” shocks. In the old days - people were dead. In the new days, they are sick, don’t want to work any more, handed a lifeline by Covid that enabled them to retire, and a mixture of all of the above. They are psychologically different and are finding ways to avoid work, some of them, from what I’ve observed. It changed people - and of course it did. None of us had ever been through such a bombardment of negativity ever before, unless we’d grown up in incredibly difficult and persistent circumstances. None of us had ever felt so at risk, or lonely, or scared, at some points - I’m sure.

So - the more it changes the more it stays the same. What do the Bank say about the “concertina” as I’ve taken to calling it - the pushing up of minimum wage jobs towards more skilled or more senior positions, meaning only a small uplift above the minimum for much more responsibility or importance to a company? The more formal commentary:

“some contacts of the Bank’s Agents report that they are coming under pressure to maintain pay differentials between scales”

People aren’t stupid and will vote with their feet, but I suspect will be pushed even harder before they vote. Some of these redistributive measures - noble in theory - are often addressed by taking something from everyone’s pockets. Most are all for redistribution until it is their resources, compensation, or money that is being redistributed!

The other side of the same coin is that price increases become more of a habit. Rent is a great example as I said earlier. From the default expectation being rent staying the same in a tenancy, to the expectation that rent goes up each year (and indeed, that is even being legislated as the maximum number of rent rises per year - one).

This all forms part of that secular inflation I’ve referred to, time and again, since February 2021. The mistake - as so often - was people getting into a “City or United” argument, where it had to be transitory OR secular - the reality is always the same. It is both. It’s just how much of one, and how much of the other (and then how long is a transitory period - as was flippantly said 3 years ago, if it takes 5 or 10 years to pass, it is still transitory).

If this case DOES play out, and I see it as a much more likely outcome than the Bank of England do - then here’s another phrase to consider:

“Alternative cases would necessitate different future monetary policy stances to ensure that inflation is returned sustainably to target”

E.g. - more secular inflation, longer higher rates…….OR a change in the inflation target, of course, which is the RIGHT solution - although that needs collaboration with the ECB and the Fed at a minimum. On the bright side this is a very similar set of circumstances to the US - the Eurozone, on the other hand, has fewer of those problems and less need to move the inflation target upwards. Perhaps it will never happen, in the best circumstances at the pace these folks work at it would be 2030 at least anyway - so I won’t spend lots of time talking about it until nearer a realistic time for it to be considered!

The bond markets wouldn’t like it - by the way. Inflation means bonds are less attractive. So - we do need to be careful what we wish for. What we need to wish for more than anything is a competent chancellor - like a Reeves - even if we politically and ideologically disagree with her. She’s credible, and the bond markets won’t be going wild with her at the helm. When I shudder at Reform’s economic policies and the lack of nouse - who, by the way, I see as a real force at 20%+ support for the next election, almost inevitably; or remember back to my favourite lettuce of all, blue plaque herself - I remember my affirmations and my gratitude that we have a competent team in number 11.?

The Bank then goes through the new fiscal rules - I’m not sure mega detail adds value here; really, you want to know that Reeves found a way to invest without causing too much upset, and that’s good for the country in the long term - very rare for a politician. The game I suspect she is playing here is that the next parliament looks quite good in her final budget of this parliament, and so she can nick a bit from there to get re-elected - but perhaps that’s too cynical. I doubt it is.

The key conclusion - the Bank expects this higher growth rate (+0.75% compared to before the budget, for 2025), which helps with near term forecasts but doesn’t strengthen the case for rate cuts at all. The only “help” is job losses, perversely, for rate cuts.

One more item from the report I just want to focus on before the wrap-up. Developments in Household Savings.

I spoke earlier of the difference in consumption attitudes compared to before the pandemic. If there is one real skill that Boris Johnson had, or has, it is to make people feel positive. Optimistic even. Wildly optimistic. Donald Trump shares the same ability. The reality is, neither deliver on their promises - mostly because their promises are so outrageous. Some are happy shooting for the moon and settling for the stars, so they are OK. Some just want to feel hope in their lives, and to feel like their hard work may be rewarded if they make it to be rich - the American Dream etc.

Starmer strikes me as the polar opposite on this front. All I seem to pick up is negative vibes - even from his very appearance. That’s a terrible thing to say, in a way, because we shouldn’t judge books by their covers - but in the real world, people do. If I’m not alone in that, that in itself is worth -0.25% per year in GDP, if not more, and I’m deadly serious when I say that.

If people feel negative, they will save. People also - for the first time in forever, it would seem - have an incentive to actually save - and “stronger for longer” rates, yet again, will preserve that incentive.?

Savings rates are REAL, in real terms - and staying there for years, it seems right now. They are ahead of inflation. Post-tax? Well, it depends what you earn, but there’s plenty of ISA allowance (￡1tn per year in the UK - a lot). Half of it is this battle, but half is the psychology. Do we need to be concerned over the next crisis? If we think we do, we save at 0% interest rates.?

When we save we don’t consume. When we don’t consume, money has lower velocity, creates less economic activity, less bang for buck, and the economy suffers. It is a negative spiral, or vicious circle. We need to inspire that confidence in the UK consumer to come back to where they were, 5 or 6 years ago. Pandemic scars don’t heal immediately. Once we have a fiscal statement in Spring that is NOT a budget, with no tax rises (that’s what we’ve been promised after all), perhaps that will inspire some confidence.

I’m not optimistic about Labour's weak communications strategy being able to boost the economy as per Boris’ Boosterisms (arguably his only redeeming quality). Anyway - that’s all my view, what do the Bank think?

The Bank - as more pure-blood economists - explain it all thanks to the interest rate. They recognise the savings rate is way above the pre-pandemic level. There might be an extent of rebuilding reserves that were used at the bottom of the cost of living crisis. The Bank also points to research around the savings ratio and the likelihood of demographics to play a part - and so income growth itself will not change the savings ratio much.?

The Bank shares some interesting survey results - those who have answered indeed confirmed the higher rates were a big part of their decision making process, but also that future increases in housing costs were a significant part - one-sixth of all households who were saving more than before were doing so in preparation for a rent or mortgage increase. That factor goes away, but only over the next 3 years as rents calm (probably!) and all the old cheap debt expires.

The number - that the Bank has quoted before - is that around 30% of the future cost increase has been “found” by a decrease in household consumption. Some will then come from interest, and presumably the rest will come from higher income!

Those whose payments have already gone up have cut back more, by about 60% of the cost of those payments, from their household disposable income. Quite a dramatic shift.?

The “new” prediction is a drop in the savings rate from just under 10% (9.8% Q2 2024) to 8.4% in Q4 2027. The interest rate path will make a big difference to what plays out - that much is very clear.

The wrap-up, then, and my favourite part of the report. No, not just the end - but the other forecasters’ expectations. I’ve been an outlier for a long time on these, for the past nearly 4 years, but have come a bit closer back to the pack in recent reports.

There’s limited mileage this time out, because this was all pre-budget. This time round, though, note that the Bank is outside of the forecasts on inflation by some amount - although they’ve had the benefit of doing the budgetary analysis. I’d be near the top of the bars on growth, mid-top on unemployment, and still above the bars on the inflation side of things (which is a long-held position which I’ve wavered on at points, but not seen enough to move away from).?

I’ve included that as this week’s image, as there were just SO many to choose from - but ultimately it is a reminder that we are in the game of trying to predict the future with some accuracy, in order to run a profitable and sustainable low-risk property business - regardless of what the external environment throws at us.?

And remember. If the events of the past week got you down at all - if you are anxious about Trump, for example - be objective. He did it once before. Things went OK. Some things even went well. Some was luck, some was judgement. The US, democracy, the Western World and the rule of law will survive. There will be some hairy moments. There will be some comedy too - “they are eating the dogs”, etc. etc. Roll with it. We are safe, housed, enormously wealthy by worldwide standards, filled with opportunity, unshakeable, unbeatable, indefatigable. Stay strong, keep it real, and put it into context - and, most of all, channel it.?

Before I call it one more time, a reminder that tickets for the next Property Business Workshop are OUT - Thursday January 16th 2025 (Yikes), with some great subject matter - planning, efficiencies, and also financial accounting and bookkeeping - not “how to use Xero” but how to ensure reporting is SET UP correctly and how to monitor it on an effective, ongoing, monthly basis. Come along and also get your strategic planning sorted out, and your January kick up the backside comes as part of the package as well!

SUPER Early Bird tickets are available with a 25%+ face value discount on them - once they are gone they are gone, more than half are gone already. Rod and I hope to see you there. Buy one here: https://bit.ly/pbwfive

There’s only one way to deal with all of this ongoing noise and excitement - Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!