• Simon Deen

Market Update: Q3 2022

“It’s only when the tide goes out that you discover who’s been swimming naked”
Warren Buffett

And there’s been quite a lot of skinny dipping lately.


I wasn’t of course suggesting that you create a mental image of Conservative leaders past, marooned on the beach. It probably wouldn’t be the best way to start this week’s blog.


Though I do wonder sometimes with politicians. These clearly aren’t stupid people. Perhaps more book smart than street smart. Nevertheless, it never fails to amaze me how bad they can be at reading a room. And when I say a room, I mean the entire country.


When they concoct their plans, is no one else allowed to raise their hand and question the sanity of policies that will affect millions of people?


Is the culture of groupthink so pervasive that no one dares question it? Or instead is everyone secretly chuckling, hoping that common sense doesn’t prevail. And that sooner or later when the incumbent gets the sack, they’ll get a promotion?


As an old friend used to say, probably a little from column A, and a little from column B.


In any event, a third quarter which started with the market facing turbulence and yet performing reasonably well, ended with the pound at its lowest level against the dollar since 1985. Although, only just.


On the 25th February 1985, £1 would have bought you $1.054, which is ever so slightly worse than the $1.07 it would have bought you on the 27th September 2022.


Interestingly, the early 1980s and the early 2020s have much in common. An energy crisis contributing to double digit inflation, leading central banks to raise interest rates. In the US they reached 20% in 1981. Resulting in capital inflows, a strengthening of the Dollar and a weakening of the Pound (and a lot of other currencies, too)


So do we have a weak pound, or a strong dollar? And do we have high interest rates, or from a historical perspective, below the 5% which is considered neutral?


Will a combination of high inflation and high interest rates cool the housing market? Or are buyers undeterred, and determined to keep calm and carry on.


The answer of course, is yes. All of it.


When comparing the interest rate rises of the 80s and 90s to today, it’s easy to think that there’s almost no similarity between a base rate which currently sits at 2.25%, and the double digits that we previously experienced.


But actually, much like the property market, it’s more nuanced than that.


Because looking at the rate alone gives very little sense of how affordable mortgages actually are. Since a homeowner’s ability to pay their mortgage depends on a lot of other factors.


Like how much money you’ve borrowed, what you’re earning and the amount you’re spending on other non discretionary things. Like energy bills.

Average House Price to Average Income Ratio

In the early 90s, British households were able to offset some of their mortgage interest payments against their tax bills. Mortgage Interest Relief At Source (MIRAS) significantly reduced the effective mortgage burden for millions of households.


So adjusting for all other factors, what would historic rates look like today?

  • Well in 1979, the average was 11.3%. That would be 2.1% today

  • The average throughout the 1980s was 12.7%. Today that would equate to 3.5%

  • 15% in 1990? 7% in 2022.

Adjusted for affordability, 2.25% today is about the same level as the rates faced by homeowners in the late 70s. Then the official bank rate was 10%.


But despite all of this, 2022 stands to be the strongest year ever for London’s £5m+ market.

According to Savills we’ve had 461 transactions over that level so far, which is the highest number since they began counting, in 2006.


160 sales of this type were recorded in Q3 alone, a 33% uplift on Q3 2021.


And the combined value of 2022’s £5m plus deals has now breached £4.8bn, 31% higher than in the same period last year.

£5m+ sales in London

And whilst I appreciate that this is somewhat anecdotal, it still raises questions. Why (or how) is it that despite everything, the appetite for prime property seemingly shows no sign of slowing?


Well to start with, London is a very different city in 2022 than it was in the 70s, 80s or 90s. International money has always been drawn here, especially from parts of the world which at one time or another have been politically or economically unstable.


Whether it was Indians from East Africa in the 1960s, Iranians in the 1970s or Russians in the 1990s, the wealthy have always been drawn to our capital, and as a result the property landscape has changed beyond recognition.


But let’s leave the debate of foreign ownership for another day.


In the meantime the pound hitting its latest nadir a month ago, created a discount of 45% on prime London property’s 2014 peak. And there’s very little doubt that was extremely attractive to a lot of people with Dollars in their pocket.


Although, whilst it’s relatively easy to look back at Q3 and analyse what’s happened, it’s clearly much harder to predict what might occur next.


And if the ‘surprise’ banking crisis of 2007-2009 has taught us anything, it's that Richard Feynman was probably right.

“The first principle is that you must not fool yourself, and you are the easiest person to fool”

So strap in.


Maybe.


Unless you have Dollars.


In which case, crack on.


Data from PrimeResi, Savills, Sky News & Neal Hudson/ Built Place

 

Property News

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Things I’ve Been Paying Attention To This Week


There was a lot I wanted to suggest this week.


I’ve read a really interesting book about the psychology of money, listened to a great podcast with the founder of Pret & Itsu, and have been watching Peter Capaldi (as Malcolm Tucker) scream incessantly at slightly dim politicians in The Thick Of It.


But actually, social media’s ‘Big Tobacco’ moment is what I’ve been paying attention to.


And as a parent to a couple of “preenagers”, I’m really hoping that we start thinking about the algorithms that tech companies use in the same way that we now view smoking.


In the meantime this article in The Atlantic, and this podcast by The Guardian, are pretty essential reading/listening.


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