Supplement 25 Aug 24 - The Open Letter

“Your thoughts influence you, your words move others, but it is your deeds that will change the world.” - Matshona Dhilwayo, Philosopher

Before we get started, get those tickets bought for the next Property Business Workshop - Tuesday 1st October is the one! This time round we will be covering Exits - with two main objectives. Firstly, planning your own - which people do very poorly, in my experience - and secondly, so that you can understand other people’s exit plans (or lack of them) and assist with them when looking to buy a portfolio, or a business. Help the vendor get what they want, need and deserve - and work towards true win-win situations. 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 20%+ discount, are available now in limited numbers and it’s the LAST WEEK to buy one at the discount: bit.ly/pbwfour?

Welcome to the Supplement, everyone. It seems autumn has started a little early, with stubborn sunshine around significant wind! If it isn’t nailed down……

Lots to discuss this week and a sizeable deep dive including an Open Letter to the still-new Housing Minister Matthew Pennycook. I’d love as much support in sharing, liking, sending, and similar - copies to local MPs, tagging influential people into this on social media, etc.

Before any of that, though, I am going to get straight into the real-time market analysis. Kudos as always to Chris Watkin who delivers week in, week out on these. Plenty of listings still - 34k across the UK. Still maintaining that >7% difference from pre-pandemic.?

Net sales still also outperformed - 28% higher than the equivalent week in ‘23 and 12% higher than the pre-pandemic market.?

The average listing price also dipped below ￡400k, compared to the average 2024 listing price of nearly ￡440k. The market looks reasonable value…….and there’s a historically very small gap between the price of new listings and sales agreed (11%). That is often a bit symptomatic of August, though. It feels a busier August than usual at the coal face, that is for sure. More on the real-time market next week.

The macro, then. There was so much last week that there was no time to look at the retail sales figures - which are important to understand consumption and growth, apart from anything else - and that’s why we have to keep an eye on them. Then there’s the ONS Private Rent and House Prices indices that are a monthly release in a more timely fashion than before, over recent months, and are the “real truth” in terms of having all the data on housing sale transactions, and by far the best data set on rental movements as well.?

We’ve also got the flash PMIs for August already (released on 22nd) and everyone knows I’m a big fan - they’ve done us an absolute solid this year in terms of predicting growth in the economy, which seems to have surprised nearly everyone apart from readers and listeners of the Supplement! Now everyone seems to be climbing on that bus, the concern will be that Murphy’s law prevails and the wheels now come off - but we aren’t seeing signs of that as yet. We will - of course - round up with the gilt and swap yields.

Retail sales. These have been worryingly limp for - well - years. These are VOLUMES, not prices - to be clear. The tale of the tape is relatively simple - a panicked slump when the pandemic started. An absolute tear upwards when people were stuck at home, with furlough cash and nowhere to spend it (in terms of socialising/hospitality). A small resurgence around the end of 2021 in the “last hurrah” Omicron lockdown. Then - BAM. Down 6.4% year-on-year in April 2022 and below zero since then, but trending back towards zero. The best print since then - May 2024 when we printed 1.5%. Inflation since then (April 2022) - in terms of population increase - is also about 1.5% in terms of net numbers of people.?

Zooming out a bit more - volumes are still - after a +1.4% year on year print for July - 1.8% lower than they were in 2019 (with a population maybe 3.3% larger or so). Basic explanations - people want or need less stuff (initial feeling there would be “yeah right”), or they are still worse off than they were in 2019 (which GDP per capita would bear out). Plus - MUCH more saving is going on in 2024 than 2019 - people still have clear concerns OR when faced with an actual incentive to save, a positive real interest rate even after tax - they will save - and it is 2019 that was dysfunctional from a savings perspective, not 2024 - if we accept we are back to somewhere near “normal” rates right now.

So that’s about 5% less in terms of volume of consumption over a 5 year period. Value is a different metric - up about 18.5% since 2019. Inflation, in the same time period, is closer to 23% - so again, in real terms, value down about 5%. A sector growing cautiously but slowly - but reminiscent of construction, I think - has seen the worst of this most recent recession. A bit behind construction - which is now roaring according to the PMIs and has a big role to perform as far as the Labour government are concerned, in housebuilding (even if infrastructure projects at the moment look to continue to be put off from the initial Reeves foray - I’m still hopeful this will turn around, because it needs to).?

The average year-on-year growth is about 2% in volume or has been for the past 30 years or so. So - consumption repairing, which will help growth if Government spending is to be cut as promised (remember, Government spending and consumption are the two really major ingredients of growth, with consumption coming first by a long way). We need it.?

Onto the private rent and house prices report for August from the ONS. It covers rents for July, but house prices for June (pay attention!). It has, for the months it has been around (there were very few regular reports on rents before this year, which is typical of these situations - someone at Governmental level noticed we should be paying a bit more attention as a country and then the ONS was ordered to sort it out!) told a story of two halves. Rocketing rents, but tepid house prices.

Not so more - because, whilst rents remain at a pretty eye-watering level of increase - up 8.6% year-on-year for July; house prices also increased by 2.7% in the year to June. The average rent in England is now ￡1,319 per calendar month. Northern Ireland continues to surge with a 10% year-on-year rise.

The ONS still has London rents leading the charge, up 9.7% - and the North East lagging behind at what’s still a chunky 6.1%.

There is a note that by bringing things more up to the “real time” era (really - it is the bottom end of August and we are discussing June, as far as house prices are concerned, but there we go) that revisions might be larger than usual - particularly blaming new build prices.?

The record high rent rise of 9.2% was recorded in March - so, cooling but cooling slowly is the ONS verdict, which is absolutely symptomatic of nearly all the big percentage rises in inflation we’ve seen in other areas. Rents are “sticky”, economists say - they go up, when rising they calm slowly, and they will stay “up” when they’ve gone up, as a rule.

12 months ago - June’ 23 for the house price index, the year-on-year was zero - July ‘23 for the rental index, the annual increase was still 7.8%. That’s 17% in two years, which is an average figure - and must FEEL crushing for tenants, although we should remember wage increases of 13.4% over the same time period - so still a few percent upwards in real terms, taking a slightly bigger percentage of the disposable income.?

The price rises at a geographical level start to look really interesting. Yorkshire/Humber (4.7%) and the North East are both over 4% up year-on-year, perhaps as one of the areas where buy-to-let has STILL worked even at the newer mortgage rates (especially the higher ones which we have moved down from, a little, happily).?

The South East will be very pleased to be making a comeback into positive territory though - and the only real outlier is the East Midlands, lagging behind at 1.6% year-on-year as one of the cheaper areas but not really motoring forward. The North West continues to perform really well. London is at the bottom of the list with a 0.6% growth rate year on year - but nowhere has felt a bigger impact than London for leveraged buyers, because mortgage affordability has become a real issue. This is, nonetheless, London’s best print since May 2023.?

When we look at regional rents, the North West stacks up very well again - just behind London. 9.5% increases year-on-year. The East Midlands also does well here, 9.4%. Aside from the North East at 6.1% though, no other region has gone up less than 7% year-on-year. Regardless of rent “influences” in the upcoming Renters’ Rights Bill - what’s happened has happened, and there looks to be no unwinding of that.

London average rent is now ￡2,114 per month. Spare a thought for Kensington and Chelsea where the average rent is now ￡3,411 per month. On the full report there’s data by size, property type and plenty more - but that’s enough. We can see exactly where we are - still motoring much more than predicted by many, and so estimates of 6-7% rent rises over the next 12 months do not look unrealistic, probably towards the lower end of that (let’s make sure to check in next summer on that!)

The PMIs, then. The flash composite - the key number - came in on Thursday at 53.4, against a consensus of 52.9. 53+ is healthy economy territory which we’d usually associate with 1.75% (ish) growth per year, but the 53 average this year has done a little better (the fast cooling of inflation has helped the GDP figure, to be honest). The growth forecasts from the “experts” are still coming in at an average of 1.1% per year, which still really irks me given we are at 1.3%+ already after the first half, and the third quarter is clearly going quite well. Ridiculous, really. Get rid of them all (but then what would I moan about?)

The services flash was 53.3, better than expected - and the composite number means that the construction index was nearly as healthy as it was last month - we don’t know the exact number because there is not a flash construction PMI.?

The tale of the tape from the S&P chief business economist, Chris Williamson:

Stronger economic growth - job creation - and lower inflation.?

Business confidence elevated by historical standards

GDP growth should weaken compared to H1 but this is consistent with quarterly growth at 0.3% (I’m sticking with 0.4%, personally).

Services inflation has moderated (still at >5%, mind)

Policymakers will still likely move “cautiously” on rates.

I don’t disagree with much of that at all - a very good summary!

The gilts and swaps - the 5y gilt closed Thursday at 3.776% and Friday at 3.726%, and the 5y swap closed Thursday at 3.622%. We opened the week at 3.718% on the 5-year and so it was a tiny up-week with little news of consequence. The news of the Ofgem price cap being decided at 10% for October is mildly inflationary, of course. I prefer down than up - of course - but we will take it. Things have stabilised very much in the middle of my range, and I’m still hopeful for a waning of 0.1-0.25 around the end of the year on these rates.?

15bps of discount for the swap looks almost anomalous - between the gilt and the swap. Not what you’d think would be going on when you read the below - but this isn’t about mortgage money demand……….

As an aside here I did want to flag the “liquidity drain” that is going on after a regular reader sent me a very interesting message this week. This is an argument to slow down on quantitative tightening - reserves of ￡700bn or so do not raise MAJOR red flags but the trend in the chart - used as this week’s image - is very clear. ￡38bn for the week is clearly a little over 5%.?

This is record demand in the repo markets and whilst there’s some speculation that this isn’t just liquidity causing a concern, but also opportunistic Bank traders using some arbitrage strategies - it still needs to be flagged. The Bank’s OWN analysis suggests under ￡490bn would not be enough money - so this isn’t a massive margin of error (yes it is ￡200bn, but these reserves were ￡1tn in early 2022 and so are 30% down since then).?

The Bank of England has an important decision to make next month on Quantitative Tightening and the pace of it - I’ve said this many times, but they also need to STOP the practice of selling bonds at a loss into the secondary markets. All this achieves is unwinding the position MORE quickly and there looks to be an element of fragility here, even if at this point they are simply papering over the cracks.?

Great. Onto the chunky stuff for this week - two courses. For the fish course - a look at Zoopla’s research report published this week about rents, which flies somewhat in the face of the ONS report above (which is exactly why I want to dissect it. For the meat - I’m replicating a draft of an open letter I want (hopefully with support) to get put in front of Matthew Pennycook, the new housing minister. I’d love critique, support in sharing, and signatures from anyone brave enough to sign, too. Anyone with political connections - here’s where I need you. Directors of larger property companies - again, please can you help?

You’ll see it is written from a pragmatic point of view. Regular readers and listeners won’t expect much else. I take the view that Mr P et. al. will have little time or sympathy for standard landlord gripes, but instead focus on the high-level, big picture, if sorting out the PRS and the entire housing market of the UK is a real and true goal. All feedback is welcomed - I’m also aware I am positioning myself to be “shot at” here (not Trump style, you’d hope) and as and when, if we get any traction, I get some abusive messages I’ll be sure to share them in my good-humoured and broad-shouldered way.

Zoopla first, then - the headline - “Rents start falling in major cities”.

They report falling (asking, of course) rents in London, Brighton, Glasgow, Nottingham and Worthing, and one third of London Borough rents coming down. They also predict 3-4% to be the number for 2024 (again, for new lets, so we do need to be careful to make that distinction, although they should ALSO be more careful to make that distinction).

Here’s where I do agree - we are past peak rental inflation. Definitely for asking rents, and almost certainly for existing rents too. What could change that? A panic reaction to various bits being drafted in the legislation of the Renters’ Rights Bill, of course - if rent controls are to make a surprise appearance (even “rent stabilisation”, which I fancy to be included now, which would really not be that damaging).?

Zoopla points to a 39% drop in demand for rented homes over the past year. From a high base - yes - but that’s a very significant drop, of course. They categorise it as “red-hot” to “hot”. 17 people chasing every rental property is still double the number in 2017-19.

They are also reporting - unlike anywhere else - an increase of rental homes per estate agent of 17% year-on-year. Again from a low base. Richard Donnell and his team point to corporate landlord acquisitions, but also lower mortgage rates than 12 months ago allowing some to transition into ownership.

There are still one-third fewer rental homes than the pre-pandemic average - and I will, again, point out a 3.5% or so increase in the population in that time - a disproportionate amount of whom will be renters.

Zoopla’s figures are +5.7% for the past 12 months, but only +1.6% in the past 6 months for new lets. They cite affordability as providing the ceiling - I’m still not convinced of this, I just think inflation has worked its way through just like it has with many other goods. In the South and particularly London, this will be accurate of course.?

You can see in the report, if you want to check it out here: https://www.zoopla.co.uk/discover/property-news/rents-start-falling-in-major-cities/?

That the cities with rising rents are a mixture - North, South, expensive, cheap. Read the graphs carefully - because some are over a 6-month period, not a year.

Overseas student applications falling off has been cited as a significant factor - as has a weaker labour market. I’m not sure about the latter - there are still more people employed than there were 12 months ago.?

Zoopla has average asking rent in London at ￡2,172, 70% above the UK average. Zoopla cite more corporate landlords buying in London - I would like to know the source here, because the business case looks somewhat weak (although London capital growth has been anaemic since before Brexit, so perhaps there is a corporate view that London prices will be on the up and up as rates move downwards - and indeed I’d expect London and the South East to be more rate sensitive than other areas).?

Another quality piece from Zoopla with only a few pedantic points for me to disagree with - but hopefully a valuable share with some analysis from me sprinkled in.

Onto the Open Letter, then. Without prejudice - let me know what you think:

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The Private Rented Sector - Private Portfolio Landlords with >10,000 rental units total

Matthew Pennycook MP, Minister of State

2 Marsham Street,

London,?

SW1P 4DF

By Email

Dear Minister,

We would like to congratulate you on your appointment to this crucial role. As housing providers in the private sector, we provide housing to millions of people, as a fractured and often lambasted part of the system. Yet, we understand that we are a crucial part of that system, with roles and responsibilities that can make a real difference to our tenants’ lives.?

We have watched the Government’s plans with interest, and are very pleased to see coherent plans emerging. However, we also feel this moment is one of critical opportunities and must be seized now or forever missed.

The ideas around planning reform, housing target reintroduction, green/grey belt and social and affordable housing all make sense, and all have their own challenges in delivery. Last year, 192,000 new households entered the private sector from outside of the current ecosystem - with a net 22,000 going into the social rent sector, and a net 102,000 buying, this was 68,000 more households in a PRS which many analysts believe to be shrinking (source: English Housing Survey 2022-23). Hamptons International points to 163,000 rental properties disappearing from the market between 2019 and the end of 2023.?

The single largest factor has been the interest rate - commercially, the sector is unviable. George Osborne CH, former chancellor, made a significant tax change in 2015 (the amendment of Section 24 of the Finance Bill 2015) and was concerned enough to phase this in over 4 tax years - however, in reality, in that period interest rates continued to fall. They then rose, very sharply, over a much shorter period of time and the entire incidence of those changes became very stark. It is highly possible that landlords can be running an unprofitable business and yet still be liable for taxation on “profits” that don’t exist.?

The result is the same as in any market with supply, demand, and consumers. For emotive reasons housing is not considered thus - but it must be. When the cost of providing the service goes up - the price of the service goes up. Academic literature points to several estimates of the Price Elasticity of Demand for rental housing being around -0.6 - in plain English, if the price goes up by 10%, the demand only goes down by 6%. In tighter markets - such as the PRS in the UK right now - the demand reduction is even less, and much less in the shorter term (as low as 1% reduction in demand).

What does this mean? Because housing is a basic need, even when the price goes up considerably, demand remains almost the same. Then, when there are major increases in delivering the service, these are therefore in their near entirety passed on to the tenant.?

No-one wants a sector where tenants are becoming worse off. Rents taking a higher share of household income/disposable income. Rent controls have, wisely, already been written off as disastrous for the sector - and again the evidence for this is widespread. What’s needed is income growth, supply growth, and stability.

This is where the opportunity lies. The PRS has grown to fill a void started in 1980 by insufficient social homebuilding to replace right-to-buy stock, but has also always existed to serve those who need shorter-term arrangements than buying a house in our slow, outdated and heavily taxed conveyancing system. Those who move for work for a defined period of time. Those who choose to rent because they manage on a monthly budget, but have never saved the “buy-in” required for a deposit on a home, or simply don’t want to run the risks of needing to replace the roof, or fixing major structural issues.

The work of Mr Osborne and the previous administration drove landlords out of the sector through commercial means, and also through vilification to an extent. The interest rate and inflationary times - where construction inflation has vastly outstripped the broader measures, at over 40% compared to CPI moving a shade under 25% since 2020 - have done more damage.?

This private sector has choices. It funds itself on much more expensive credit than the Government has available. It takes sensible risks. It prides itself on its product, with significantly higher satisfaction levels than social landlords (82% vs 74% in the 22/23 English Housing Survey). Its capital also has a choice - and many are voting with their feet, and retiring from the sector, and putting the money elsewhere. Government bonds and similar now, once again, have a real after-inflation return - a phenomenon not seen for around a decade and a half.?

The early rhetoric is around support for EPC measures to be introduced. We would implore certainty around these comments and policy guidance - because loose lips will drive more out of the sector. The idea of a flat contribution required from a landlord, who has a property or small portfolio in the North-East for example, contributing the same to energy efficiency as a landlord in Central London is unrealistic and could lead to large sell-offs in already deprived areas of the UK which have very long social housing waiting lists. Many options will be considered including Government grant schemes, we are sure - if that is the case, early communication on this would be highly recommended. We actively want and need, for all concerned, to provide good quality, appropriate, flexible, safe dwellings for those that we house. We support rogue landlords being driven out of the sector, and wish that the myriad laws that already exist were enforced properly before introducing another raft. We would welcome the opening of a dialogue around:

1. Energy efficiency and carbon footprints - how and when
2. Sensible grounds for possession whilst providing security of tenure
3. Access to funding for improvement of existing homes
4. Methods to ensure tenants, where desired, have access to buy existing rentals without any of the stakeholders losing out
5. Taxation in the sector and the incidence on ALL stakeholders

We would welcome the opportunity to engage at your convenience,

Signed

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So - remember to let me know what you think, like, share, comment, print and send or email to your local MP - and feel free to tell me where I’ve got it wrong! Don’t forget you can now BOOK your Super Early Bird tickets for the fourth Property Business Workshop of the year at https://bit.ly/pbwfour on Tuesday 1st October!!

There’s only one way to deal with all of this continual noise and the unfolding chapters of our new dawn - Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!