After the recent ‘climate crisis’ of an ‘extreme’ summer, there’s a definite chill in the air and it’s not just the weather. Economic data screams out ‘recession’ (though hopefully not its uglier twin, ‘depression’) as the country heads inexorably towards the bottom of the financial Marianna Trench. Portents are ominous – the BoE has yanked interest rates up from around their ankles, mortgage providers are increasing their lending rate and pulling some of their historic fixed-rate products, and ONS figures showed inflation hit 10.1 per cent in July – up from June’s 9.4 per cent.
Over in Europesville, the crisis is even more shocking.
Gas prices are still rocketing higher, up an incredible 600 per cent on the year, which has delivered a severe wallop to economic activity. Although what goes up must eventually come down, at present the prices are staying aloft. Pessimists are staring into their half-empty glass and deeming it the biggest economic threat to Europe since 1939.
Residential Market Performance
In terms of the Residential Property market here, I wouldn’t exactly be breaking out the champagne, even though some supermarkets do a reasonable £18.99 bottle of ‘gut rot’, which in its first function, will get those tarnished coins clean, in a jiffy. However, unemployment is at an all-time low (although this means that there are still 10 million inactive people in the UK) and there’s no sign of an increase in the supply of properties, which means that the market could still be in good form although for how long, who knows.
Supply is the factor that’s the critical measure of a change in sentiment in the market. When demand and supply are in equilibrium, values remain static. If the former reduces and supply increases, then batten down the hatches if you’re a seller and prepare to move into that compact and bijou garden shed you’ve never had your eye on.
Although we don’t really know what’s in the Treasury’s purchase ledger (apart from the fact there’s no money) consumer demand seems stable. Having hoarded cash over the Covid period, people are not overborrowed, as they were in 2008.
Maybe the protestations of the BoE, IMF, and OECD about the paltry UK economic prospects across the next two years are becoming as reliable as a Czechoslovakian watch (tick-tock twang!) When august publications come over all ‘Cassandra-like’, then perhaps we should ignore the doom-laden prognostications of our over-paid elite?
Remember the ignominious apologies from Christine Lagarde, after she had to retreat from the negative predictions of the post-Brexit era? They’re all clueless, but it doesn’t stop their pseudo-intellectual pontifications, as if they have more crystal balls than Thomas Goode.
No 1929 Scenario
While the present inflation rate may be on a vertical trajectory and interest rates in hot pursuit, this doesn’t necessarily lead to another 1929 scenario.
You only have to look at the US economy, from which we usually catch a cold. The good news is that inflation is actually falling there, as the energy hikes from the Ukrainian war are dropping out of the calculation.
US Economic Consequence of Ukrainian War
Please don’t mention this to anyone that you don’t meet, but I have a feeling in my ‘Ampulla of Vater’ that even that old duffer, Captain Creepy gaffe-prone Joe Biden, realises that whilst Ukraine may be far away (they call it a ‘foreign war’), its economic consequences in terms of higher debt service, inflation, energy bailouts for the under-privileged and a one to two per cent discount on GDP, in aggregate, is an unaffordable price for them to pay.
This should galvanise the doddery quasi-octogenarian (or his carers) to bully Zelensky via the interlocutor, Mr. Erdogan of Turkey, to accept ‘the subject that shall not be mentioned’, i.e. the division of Ukraine. Putin could sequester the Donbas region (where 80 per cent of the population voted to jump into bed with Russia anyway) and leave the rest to the Ukrainian people, who can then wallow in lashings of American foreign aid which will regenerate their country to greater heights than they could ever envisage. It’s also cheaper for America to stand in as the banker, than suffer the ravages of a domestic recession.
Although it is de factor handing a territorial prize to the Moscovian, land-grabbing despot, the net benefit of this on the US economy will be more irresistible than having the keys to the Smirnoff distillery.
If this scenario were to materialise the stock markets will go wild, interest rates here, and over there, will plummet like a concrete aircraft and it will herald the shortest recession in history as the markets take-off.
You heard it here first, but I predict we are closer to this solution than the nattering nabobs in the meejah would have us believe.
Property Advice
Meanwhile, back at the domestic ranch, if you are selling and buying then it is only the difference between the two that matters – whether values go up or down shouldn’t matter.
My advice to first-time buyers is to delay and then delay some more. Sit it out and try to purloin a property at the lowest point of the cycle to protect the limited amount of cash you have for a deposit.
At the other end of the scale, developers are also taking a hit (not always a bad thing, according to some). Activity has stagnated since margins are under threat from rising build costs. This is thanks to the post-Covid disrupted supply chain and the present horrendous inflation rate.
However, as demand recedes, they will be quick to discount their product to generate cash as the lending market is also becoming more discerning and loan to values ratios are moving south.
Property Great Hedge Against Inflation
My constant mantra is that residential property is a great hedge against inflation because debt shrinks in relation to values if they rise. If you are in secure employment then go for the largest loan that you can reasonably afford (with your spouse if relevant) particularly as the lending institutions are becoming more relaxed with the formal multiples of earnings to borrowings, unlike the past. The 50-year mortgage is now a reality and there will surely be many takers.
The next three months will be very revealing. We will have a new Prime Minister by then and the way forward will be clearer for us all, crystal ball or not.
Whether it is the light at the end of the tunnel or the light from the oncoming express train, only time will tell.