Economic Update October 2022

This week, we were once again privileged to hear the latest thoughts from our friendly behavioural economist Roger Martin-Fagg, and given everything that is going on at the moment (not least the various announcements coming out of Downing Street), his quarterly update has come at a very opportune time!

Those of you who have read his updates before, will remember that Roger uses his study of human behaviour to predict economic trends, and the impact they will have on UK industries.

Regular readers will remember me saying that Roger describes himself as being “…broadly right, the majority of the time, rather than precisely wrong, all of the time”. He is being modest of course, and the list of his ‘predictions’ which have come to pass is impressive.

His forecasting and predictions over the last couple of years or so have followed his amazing record, despite many of them being made months in advance, and quite a few of them contrary to the mainstream media and widely held views at the time.

I think it is fair to say his latest update was perhaps one of his trickiest, coming so soon after the mini budget, the subsequent u-turns, and volatility of the markets!

In reality, it is too soon after Kwasi Kwarteng’s announcement to analyse the full impact it has had, and it is certainly true Roger wasn’t quite as certain as we have come to expect recently!

The Mini Budget & A little history…

According to Roger, and more importantly the data he utilises in his research, despite the media telling us otherwise (those saying we were already in a recession were wrong!), prior to the mini budget, the country was in fact heading back to a state of normality, both in terms of interest and inflation rates, following a period of unsustainable growth earlier in the year.

There are of course still a number of factors influencing these rates, including the Ukraine and energy prices, meaning they are not quite where they should be, but the Bank of England is trying to keep the country on track for a growth rate of around 2-2.5% per year, and all things being well, an accompanying interest rate 2-3 % higher at around 5%.

Given what is happening, the Bank of England (with its primary objective of 2% inflation and a secondary objective of not crashing the economy), is therefore trying to keep the interest rate low in the face of increasing inflation.

Unfortunately, the government would appear to have a slightly different goal in mind, with the mini budget announced on the 23rd of September suggesting they are aiming for productive investment.

In effect the Bank of England has its foot on the brake, while the government has its foot firmly on the accelerator!

The two opposing approaches, and the accompanying uncertainty, have caused a big disturbance in the global markets, and in particular the currency markets, resulting in the pound plummeting, and increasing the long-term interest rates!

As mentioned above, the mini budget, and accompanying tax cuts, was the government’s attempt to stimulate investment, but there is in fact no evidence that cutting taxes for the top 1% and large corporate businesses has the desired effect of increased investment.

In fact, (and apologies for getting political for a moment), Roger highlighted that it has been tried before by previous Tory governments, with chancellors Barber in 1972, and Lawson in 1988 and both failed!

The result, in both cases, was that the money was not invested in business as hoped, and in fact ended up in property! (it also has the effect of propping up house prices as a result)

Might we see the same again this time?

The simple fact is, that as a nation, we prefer fixed property assets.

Mortgages & Interest Rates

Beyond the pound, one of the major casualties of the mini budget was the mortgage market.

Mortgage availability fell by around 20% following the mini budget, thanks in large part to the uncertainty of where interest rates would end up after the markets settled.

This has started to calm down again over the last couple of days, and it is expected that we will see an increase in the number of mortgage products available, albeit at higher interest rates!

There are around 600,000 fixed rate mortgages which are due to end this year, and 1.8 million next year, and if we assume a new interest rate of 6%, it represents a 70% increase in the cost for the average person refinancing!

Coupled with the expected increases in energy costs, and it will certainly be a squeeze on people’s budgets, but in theory, any mortgages taken out after 2014 are required to have been stress tested with a 3% increase to rates, which is what has happened.

The reality is that it shouldn’t cause the whole market to crash as many doom mongers are predicting, as only 1/3 of homes are mortgaged (with another 1/3 being owned outright by those over 65 years old, and another 1/3 being rented).

As a side note, in addition to false talk of recession, there are also several media outlets trying to report that first time buyers are paying 7- 8 times their income for property, when in fact the data shows it is around 3.6 times (with movers and those re-mortgaging paying around 2.8 – 3 times income). 

Talk of Recession & a Cold Winter

As Roger points out, we are not technically in a recession (two quarters of negative growth) as many media sources have been trying to tell us, but we will probably end up in one in the not too distant future.

A mild recession, as Roger is forecasting (perhaps 1-2% of negative growth), will not be a bad thing for the vast majority of us, as most will be unaffected by it, and it will have little or no impact on what we do.

Instead, it will perhaps offer a bit of respite to the unsustainable prices increase we have seen over the last couple of years.

The depth of the recession will instead perhaps be linked to the coming energy cost rises, coupled with how cold the winter experienced by the northern hemisphere is (many meteorologists are predicting a cold one!!).

In a worst-case scenario, it has the potential to consume the excess savings many have accumulated over the last couple of years due to the restricted activity levels brought about by the pandemic, and potentially lead to energy rationing as some have already reported.

It is more likely that this will be aimed at high energy consuming businesses rather than households, but it could lead to shorter working weeks for some.

What next?

Despite mainstream media trying to tell us otherwise, bank lending (for mortgages) and transaction volumes have actually returned close to normal levels.

Assuming the markets settle down a little and mortgage lenders are able to get a proper idea of the base rate (set by the Bank of England), activity levels within the property industry should continue to stabilise back to their pre pandemic levels of around 100,000 transactions per year.

According to Roger, what the country needs is to do if we are to get back to our ‘normal’ levels of inflation and interest, is for households to cut back slightly (only around 10%) and consume less. That is not in regard to food, but instead to fewer new phones, cars, meals out etc

Roger predicts the most likely outcome is for prices to stabilise, but this will be heavily dependent on the media not spooking the country with silly and misleading headlines such as the ‘house prices to fall 15%’ which was seen recently, and actually refers to 2008 which was caused by the banks being insolvent.

Sadly, the media do hold the power to create such a downturn, but in reality, it is the banks are far from being insolvent, and in fact are currently awash with money to lend, only hesitant to do so because of the uncertainty caused by the mini budget!

If they do spook the market sufficiently, it is likely it will stall until common sense can take over and transactions pickup again.

Whether Roger is once again “broadly right” remains to be seen, but to end on a slightly more positive note, his outlook for next year, prior to the mini budget, was that house prices would be up by 3-5%, with wages up around 4%, although as mentioned uncertainty from the budget and the potential of media commentary has the potential to change this).

Only time will tell!

As ever, if we can be of service, whether you are looking to buy, sell, let or rent, please do not hesitate to get in touch with one of the team.

Hackney & Leigh

Caring about you and your property.