Blain’s Morning Porridge May 17^th 2024: Markets, and Labour Misses Housing from its First Fix List.

“The problem with housing is it reflects relative inequality – when the rich are too rich, the poor have nowhere they can afford to live.”

As the Dow pokes 40K, markets remain exuberantly frothy! Labour produces a list of 6 priorities designed to reassure voters they aren’t rampaging social-communist revolutionaries intent on overturning everything, (Keir Starmer? really?) demonstrating instead their intent to be better Tories than the Tories. Disappointing. They missed the critical issue, Housing, from their list.

As it’s Friday.. I am allowed to rant!

I know I really should be commenting on the Dow Jones briefly breaking 40,000 yesterday. I remember when another major stock index did that… A long, long time ago… when working in finance was fun, lunches where 4 pints and a sandwich in Taylors, and we wore stripey shirts and braces. The terrible programme “Capital City” was on the TV… gosh, it was dire….. When Japan’s unstoppable stock market topped 40k, Barry, Doug and I conga-ed around the office, expecting to get phenomenally rich as our Nikkei-linked bond business looked set to go stratospheric. Nope.. Japan’s stock market bubble bust mightily – and 35 years later it only just retouched these levels.

There are times when markets can’t but fool themselves. Stocks are high, driven still by enthusiastic expectations inflation is beaten which will allow Central banks to slash interest rates dramatically, fuelling enormous upside. Wake up. The World Has Changed! Inflation is sticky. Slowing economies threaten not just recession but markets are underestimating the stagflation threat. Central Banks wish to keep interest rates “normalised”. Global supply chains are looking fragile.

Yet markets and the models all predict unlimited upside… Doh! While I don’t predict a meltdown, a painful bump on the head is looking likely. Meanwhile, banks continue to bleat about being ordered to raise capital levels – which reminds me of another of my Blain’s Market Mantras: “There is nothing so dangerous as a bank with too much capital. It motivates them to do foolish things.” More on all this next week.

This Morning – Labour’s 6 Pledges miss the critical one:

I am disappointed in Labour’s 6 priorities, the first steps it will take if/when elected to power in the coming general election. The list plays to all the things the Labour party now seems to represent – their goal of being slightly better Tories than the Tories in order not to scare the horses or the electorate. We need something more to get the UK out its current cut – energy, dynamism and hope. I like Sir Keir Starmer – but maybe we need something more alongside his dull, boring, reliable, and predictable?

Labour promises 6 things: a focus on growth, keeping taxes and mortgages low, reducing NHS queues and waiting times, cutting people smuggling, and green energy. Yawn. These are all obvious, and I’m confident the new Labour ministers who will be responsible will prove less distracted than their Tory predecessors, and thus likely to deliver marginal improvements. They seem to lack the ambition to actually “solve”.

The 6 first steps are important issues – but they don’t cut to the fundamental problems at the core of the UK’s economic decline which include productivity, the dearth of manufacturing across the economy, the lack of a plan, a hopeless misaligned and bureaucratic planning process that moves only in reverse, the need to address and reform the NHS comprehensively before it consumes us all, infrastructure, and critically…. Housing!

In November 2023 the average house of UK 2 bed flat was £265,000, roughly 7.5x times the £35,000 average national salary. The average price of a London 2 bed flat is now £800,000, only 18 times the average £44,300 London salary! Good luck trying to find a 15 times mortgage… Alternatively train as a lawyer, and start on £160k at a leading city law firm, and it’s still impossible to get on the housing ladder. Imagine making partner in a golden circle firm and after 15-years hard graft, no social life or spending on luxuries beyond an occasional tin of beans, and you will be wealthy enough to buy that 3 bed 1970s semi on a Croydon housing estate with all the original Habitat features and fittings..….

Alternatively, you could go become a country solicitor and have a great time… which is a lifestyle decision more and more people are taking, another factor in the ongoing decline of London as the leading financial centre. Equally importantly – the City will die because not a single fully-trained barista will be able to afford to live within a 100 mile radius of London.

Housing should be one of the key battlegrounds for the coming UK election. In its 2019 election manifesto the Conservative Party set out a target to deliver 300,000 new UK homes per annum. It promised to deliver 1 million homes over the 5-year life of the parliament. It promised to reform the planning system to speed up home building and to make it fairer.

BBC Verify (Quis custodiet Ipsos custodes?) says the government has delivered less than 250,000 “net additional dwellings” every year since its election, and that includes conversions. Only 690,000 new homes have been built since 2019 – far short of the target. Additionally, UK housing charity Shelter makes the point: “There is no point building 300,000 homes a year if the vast majority are overpriced flats and houses that most people, especially those on average or lower incomes can’t afford.”

It says something about a government when Michael Gove is probably the most effective minister in the Tory bench. He is clever, speaks well, and even admits things haven’t been perfect these last few years. While it’s good to finally have a competent housing minister – and a high likelihood he read and understands his brief – he is not well liked. Any student of recent UK political history will know Gove is not to be trusted with anything sharp lest he inbed it in a colleagues’ back.

There is a perfect housing storm:

• Homes are completely unaffordable – 7-12 times salaries. Home ownership among people under 35 has fallen from 35% 30 years ago to less than 15% today. The largest cohort of homeowners in the UK are over 55.
• The “free-float” of private property has greatly diminished. Private housing assets in the BTL are owned predominately by the elderly and inherited wealth who perceive them as a safe store of value and were loath to sell. A significant part of the high-end market is owned by high-net worth foreigners and has been effectively removed from the market.
• A housing collapse to make them affordable would be seen as an economic catastrophe on the grand scale – and seriously crash confidence in the economy. The government would be blamed.
• Rents are increasingly unsustainable because of housing scarcity pushing them higher.
• Large swathes of the rental market are now institutionally owned by the private sector, with few incentives to act in the interest of plentiful consumers to maximise owner returns.
• Private Landlords are in pain – in an era of higher/normalised interest rates they can’t afford Buy-to-Let mortgages, they can’t sell, and they are being crushed.
• No one can find properties to rent at affordable rent – the consequences will be felt in jobs.

The issue with any housing policy is consequences…. How do you avoid policies to ameliorate  housing supply problems being arbitraged to fuel further rises in prices!  How do you redirect construction towards the construction of affordable and social housing, rather than the multi-million rabbit hutches developers want to sell at grossly inflated prices…

I have some ideas, including a National Rental Housing Fund which would use “Prop-Tec” to buy rental properties direct from private landlords. The “prop-tec” exists to do this very efficiently in terms of identifying properties, managing fair valuations and rentals, and managing and maintaining properties. It could give landlords a fair exit and create a pool of social assets. It could also be funded from the market, off the govt balance sheet. It could be managed publically or with private managers. It’s work in progress – the key issue is rules to ensure it isn’t simply arbitraged, but I’m more than happy to talk through the concept….

Have a great weekend… out of time.. off to take dog for walk, go to gym, and then work…

Bill Blain

Author of The Morning Porridge

Wind Shift Capital

www.windshift.capital