Mar
2023
Heroes: An Englishman’s Home is No Longer Their Castle
DIY Investor
30 March 2023
‘Hold tight
Wait ’til the party’s over’
As the cost-of-living crisis continues to tighten budgets we consider the UK property market.
However, before we can buy or invest in property we need to eat and, with food banks becoming the bank of necessity for many, this a real issue. This month supermarket price inflation in the UK has hit another record high, raising the increase in average annual household bills to £837.
Year-on-year price increases for groceries hit an all-time high of 17.5% in the four weeks to 19 March compared with a year earlier, according to the latest figures from the data firm Kantar. The prices of eggs, milk and cheese are rising at the fastest pace. The latest price rises mean an average annual household bill for groceries is £5,617, Kantar said.
‘supermarket price inflation in the UK has hit another record high’
I will be blunt, when it comes to property I don’t believe that residential homes should be considered an investment class. A roof over your head, like food, heat, water, is a basic human need not a tool for speculation.
In addition, as the BBC’s ‘Panorama’ programme revealed this week, when housing becomes an asset class it can bring out the worst in investors, reducing their victims tenants to little more than cattle.
Should investors wish to speculate on property then there is the commercial market, although that comes with a warning, ‘caveat emptor’.
In the post-pandemic property world, phrases such as ‘hotelification‘ and ‘earning the commute‘ have become commonplace among executives trying to lure back workers used to working from home. Many bosses accept hybrid working is here to stay, whilst some smaller businesses have abandoned permanent offices altogether.
Allied to a seed change in people’s working habits, there is higher borrowing costs, and weak economic growth, leaving investors fearing a perfect storm in the property sector. This will impact lenders, too.
George Gatch, the CEO of JP Morgan Asset Management has warned that offices and shops could be the next casualty. ‘When the Federal Reserve hits the brakes, something goes through the windshield. Commercial real estate is an area of concern. We have higher interest rates for property developers, how does impact the real estate market and lenders in that space?’
The Monday to Friday office occupancy rate across the UK is 29% for 2023 to date, and slightly less in London, compared with typical pre-pandemic levels of 60%-80% according to data from Remit Consulting.
‘Monday to Friday office occupancy rate across the UK is 29% for 2023 to date’
About 40% of UK working adults work from home at least one day a week, according to the latest Office for National Statistics figures, compared with 12% pre-pandemic.
As a result, UK commercial property values are sliding; CBRE’s UK monthly index shows that in 2022 commercial property values declined by 13%.
Nuwan Goonetilleke, the head of shareholder assets at the savings and pensions group Phoenix Group, believes that Commercial property prices in the UK could fall by a further 10% this year amid a ‘downward demand spiral‘.
Why am I so anti-housing as an investment?
Aside from my comments earlier, it distorts property values, as a new class of buyer emerges to compete with those buying to put a roof over their head. I know from experience when our son was buying that he was competing against landlords who often had deeper pockets.
Anyone whose children have tried to buy in London / SE will know that the deposit required is a minimum £100k, more likely £150k. With rental costs sky high, the average monthly London rent is around £1,500 – £1,600 (1), first-time-buyers have little chance of saving a deposit of that size. I had lunch with a friend and former colleague yesterday, he tells me that his daughter and partner both have good jobs, but paying rent of £1900 pcm, leaves them with little to save.
The current bout of inflation and higher mortgage rates have impacted speculative private landlords, with many finding themselves facing higher monthly payments, on top of an increasingly hostile rental tax regime and regulations. As a result, they feel forced to sell or raise rents, although for some strange mathematical twist 10% inflation appears to justify rental increases of up to 32%.
‘for some strange mathematical twist 10% inflation appears to justify rental increases of up to 32%’
The only solution is parental gifts / inheritances, but all that does is restrict homeownership to the rentier class who, in their search for yield, have made residential property into a speculative asset in the first instance. As a result it shatters Thatcher’s promise of a home-owning democracy and returns us to pre-war Britain where it was the bastion of the rich.
Another factor that distorts the residential property market in the UK is a fundamental imbalance between supply and demand.
Compared to the average European country, Britain today has a backlog of 4.3 million homes that are missing from the national housing market as they were never built.
This housing deficit would take at least half a century to fill even if the Government’s current target to build 300,000 homes a year is reached. Tackling the problem sooner would require 442,000 homes per year over the next 25 years or 654,000 per year over the next decade in England alone.
One of the consequences of Thatcher’s ‘right-to-buy‘ was that no one foresaw the consequences of not replacing sold council stock with new. Social housing was one of the UK’s great triumphs, clearing slums and building homes destroyed in the war, successive governments built > 4.4 million homes between 1945 and 1980.
Since right-to-buy privatised social housing stock, the number of social homes built has crashed:
- Over 1 million households are waiting for social homes. Last year, 29,000 social homes were sold or demolished, and less than 7,000 were built.
- In England, there are now 1.4 million fewer households in social housing than there were in 1980.
As a result, millions of households have been pushed into the private rented sector, which has more than doubled in this time.
Source: https://england.shelter.org.uk/support_us/campaigns/social_housing_deficit
In addition to the impact of right-to-buy, the austerity policies of the 2010 Conservative-led coalition slashed funding for subsidised housing by 60% and redirected the remaining money away from social rent and towards more expensive ‘affordable rent‘ housing.
The cuts took a few years to feed through, as councils and not-for-profit housing associations completed developments that used money provided under the previous Labour government.
Data published by the Department for Levelling Up, Housing and Communities (DLUHC) shows that 40 local authority areas neither built nor acquired (either via councils or housing associations) any new social rent housing units between 2016-17 and 2020-21, the most recent year for which figures are available.
Supply was further diminished by the coalition government limiting councils’ ability to borrow to build housing.
Kate Henderson, chief executive of the National Housing Federation, which represents housing associations, said:
‘There is a chronic shortage of social homes in England. We know there are 4.2 million people in need of a social home across the country, and this is likely to increase rapidly as a result of the cost of living crisis we are facing.
‘Housing associations are ambitious to build much-needed social rent homes at scale and pace. However, over the past decade, government grants have prioritised affordable home ownership and affordable rent. Social rented homes are much more expensive to deliver due to the lower rents charged, therefore most housing associations cannot afford to build these homes without access to specific funding.’
DLUHC figures show that 122 local authority areas, which equates to > a third of all councils in England, each built or acquired less than 20 social rent properties over the 5-years. Instead they favoured the construction of housing at ‘affordable rent‘ levels, where rents are set at up to 80% of market rates, despite the fact that affordable rented housing costs nearly 40% more than social rents to build.
London has been able to build more social rent housing as a result of negotiating a separate deal with the government that recognised the regions higher housing costs. Even then some boroughs have struggled, E.G., Richmond built only 16 social rent units and 137 affordable rent units in five years. Perhaps this can be explained by the fact that homes in Richmond let under the national affordable rent programme cost on average more than £200 a week, over 50% higher than local social rents. Unsurprisingly the council’s social housing waiting list has risen considerably in the last five years.
‘Eighty per cent of an arbitrary market rent can be extremely high in many different places, so people who are in desperate need end up being insecure because they can’t afford it,’ said Charlie Trew, head of policy at homelessness charity Shelter.
‘Housing isn’t an object of speculation, it’s a basic necessity of life’
The government has now changed its funding programme to encourage more social rent housebuilding, whilst there are signs the rate of development is increasing, funding is concentrated in areas where the difference between average social rents and private rents is at least £50 a week.
‘The £50 rule flies in the face of ‘levelling up’,’ said Trew. ‘Areas affected will be locked out of social rent funding until at least 2026. Prices will rise, low-income local people will be priced out, homelessness will grow.’
The DLUHC said: ‘We understand how important social housing is and the secretary of state has been very clear that we must build more social homes across the country.
‘Our £11.5bn Affordable Homes Programme will help to deliver more of the genuinely affordable, quality homes this country needs and since 2010 we have built nearly 600,000 affordable homes in England, including 157,000 for social rent.’
Peterborough council said the low number of new social rented homes was due to government policy. Richmond, Dorset and Luton councils said they were developing new social rent homes. Spelthorne council said housing associations had failed to deliver enough social housing, and that the council had set up its own affordable housing firm in response.
Housing isn’t an object of speculation, it’s a basic necessity of life. If not, it becomes….
‘A cheap holiday in other people’s misery!’
Notes:
A deep dive into the UK property market, and specifically the housing sector; and some pretty shocking statistics that suggest the lack of supply is never going to be addressed.
Philip’s stance is that housing should not be a speculative investment, and certainly many rentiers are cashing in at the prospect of higher interest rates and a hostile tax regime.
However, that housing stock is not enough to make even the slightest dent on the current unaffordability index.
From the cutting room floor, here are some other stories that grabbed Philip’s attention this week:
This week was somewhat quiet in “big news” terms, therefore I have taken the opportunity to consider the UK property market.
As many investors are once again finding out, commercial property isn’t a one-way route to riches. There is natural illiquidity that always comes to the fore in times of market dislocation. The latest challenges are posed by the pandemic; in addition to the closure of half the high street as shopping moves online, there is working from home. The latter is seeing a collapse in the requirement for office space, a situation I regard as permanent not transitory.
Residential is another matter, it is a base requirement for everyone not an asset class for rentiers.
Both the private and social housing sectors suffer from a chronic imbalance of supply and demand. The latter has recently become an asset class sought after by more institutional investors. If the experience of care homes is anything to go by they are the very last thing that social housing needs. People are people, not numbers on a spreadsheet.
Moving on briefly to the news.
The PM is facing questions over a potential conflict of interest after it emerged a childcare firm part owned by his wife is to benefit from major changes in the budget. Specifically, Akshata Murty, is listed as a shareholder in Koru Kids, which could benefit from a pilot scheme offered by Jeremy Hunt to incentivise people to become childminders, with £1,200 offered to those who train to become one through an agency.
Earlier in the week Rishi had been posing as tough on law and order with a focus on anti-social behaviour and laughing gas! Whether rape and sexual abuse fall within this is unknown, but the statistics are shocking.
Home Office figures show that there was 199,021 sexual offences recorded by forces across England and Wales in the year to September 2022, as well as 70,633 rapes. Yesterday, during PMQ’s, Angela Rayner said 300 women will be raped today. And only 1.6% of cases are charged. Over 98% of rapists will never see the inside of a courtroom, let alone a prison.
Finally, there is the litigation Prince Harry and a group of other prominent individuals are bringing, which alleges widespread illegal behaviour by reporters at Associated Newspapers. In their claims they name 73 journalists and editorial executives who have worked at the Daily Mail and its sister titles over several decades.
In their defence, the Daily Mail’s parent company has successfully invoked the Human Rights Act to stop other media outlets naming its journalists in a phone hacking court case, saying it would breach the journalists’ right to a fair trial under the Act.
This is the same paper that has long used its editorial pages to campaign against the European-derived legislation.
Barrister David Sherborne, representing the claimants, said it was surprising to see a newspaper that has campaigned for press freedom object to the publication of the names: “They say different rules apply to their journalists suspected of wrongdoing, as opposed to others suspected of wrongdoing.”
A less charitable person than myself might think it’s because their defendants are white, whilst the others are just immigrants!
Lyrically we open with “Burning Down the House” by Talking Heads, we close with “Holidays in the Sun” by the Pistols. Enjoy!
@coldwarsteve
Philip Gilbert is a city-based corporate financier, and former investment banker.
Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s
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