JP’s Journal: Housing and football

Is the UK heading for a housing crash? Last week saw the Halifax house price index decline by 2.3% in November, confirming the fall reported earlier by Nationwide.

The Halifax data indicated that prices were falling at the fastest pace since the financial crisis of 2008. But take a closer look: this still means that the annual increase in property values is +4.7%. Compared with some financial assets this is a great result. If we look at index linked gilts over the same period, we can see that the return is -35% (this is not missing a decimal point) whilst the S&P 500 equity index is off around 10%. Despite the headlines around the UK, the FTSE100 is one of the better returning indices – but still is only broadly flat.

So where do house prices go from here? The bull case is around latent demand and the resilience of the UK labour market. In addition, successive government have taken steps to support the housing market through a desire to encourage home ownership or to prevent a fall in consumer confidence. This is unlikely to change – even if the consequences are perverse. Governments talk about getting people on the housing ladder but tinkering with incentives has pushed up the cost of starter homes – and made the aspiration of home ownership more difficult to achieve. Actually, it’s a great example of short-term tactical thinking and strategic incompetence. The bear case is relatively straightforward. Mortgage costs are going up, disposable income is under pressure and the UK is heading into a sharp slowdown and possibly prolonged recession, if the Bank of England is correct. My view is that real property prices need to adjust downwards next year, and that this could happen through a further 10% fall in prices and economy-wide inflation. I don’t see this triggering a financial crisis as banks are in relatively good shape but it will act as a dampener on consumer confidence. Negative housing equity will be hitting headlines in 2023.

China difficulties

One economy that has faced a property crash has been China. And the news appeared more positive last week. Whether it was signs of moderation in Covid, efficacy of the vaccination programme or a response to demonstrations – you choose – there was a clear pivot in policy: lockdown restrictions have been eased with testing requirements and constraints on internal travel being reduced. Whilst this gave a further boost to equity and debt markets the impact was muted – another example of markets moving ahead of events. Now China has to face new challenges. Covid cases will rise, there will be strains on health services, death rates will climb – just as seen in other economies as restrictions are lowered. Longer term the policy pivot should be positive for the global economy and may cushion the slowdowns expected in 2023. However, it will be an uncomfortable transition.

UK financial sector

Closer to home, a Brexit dividend was announced in the form of Big Bang 2.0. Freed from EU restrictions UK plc is going to be unleashed, driven by funding from a reinvigorated financial service sector. There are several things wrong with this narrative. Some of these changes were not dependent on EU – it reflected our own choices. More fundamentally, I don’t think they will make much difference. Post the financial crisis, the UK has taken an implicit decision to reduce dependence on the financial service sector. Given the low public perception of bankers in recent years perhaps this was inevitable. But we have to be clear on the implications: the UK is poorer without vibrant financial services. This is not me protecting a vested interest – it is a recognition that welfare, health, education, and defence spending is ultimately dependent upon successful businesses. We don’t have many world-leading areas and we have been wilfully careless with this one.

Markets tread water

Bond markets were not much changed last week. Yields on 10-year US treasuries hovered around 3.5% whilst the UK equivalent was stuck at 3.15%. Real yields did push higher, resulting in a fall in implied inflation in most areas. This re-enforces the trend that we have seen through the quarter with 20-year implied UK inflation, at 3.3%, approaching the year lows seen in July.

Credit markets, similarly, were broadly unchanged. Sterling spreads were a touch lower and are now around 35bps tighter than the wides seen in early October. New issuance and bond buybacks continued to be a feature with supply generally being met by strong demand. High yield spreads have moved a bit lower in recent weeks, being 150bps tighter from the July peak. I remain of the view that both short duration investment grade and short duration high yield look attractive; for choice I prefer investment grade bonds given the compensation offered for default risk.

I cannot finish without commenting on the football. A good effort but the game is about scoring goals. In the second half England should have created more chances given their domination. Saka to me was the outstanding player and I think the future looks bright, if we can bring through younger talent. It’s a bit like fund management.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.