There’s a small sliver of a chance of ‘egg on face’ here. We may not be heading into a cataclysmic (UK) recession. We will soon have a new Prime Minister, and she or he may be the way, the truth and the light. From the build-up, hustings and campaigning, that seems unlikely. The new chancellor, we can only hope, does not share the PM’s view that Japan is an economy worth imitating simply because they have low inflation.
However, there’s a very strong chance that recession is coming very soon, and the only question really remaining seems to be the depth of it. Even worse, as property investors we may prefer a deeper recession since that cuts interest rates and sees government support and stimulus - talk about a conflict of interest! Either way, the current environment is rates rising, faster than anyone had really expected, and inflation rampaging, pushing up salaries, rents, and the cost of living as the spiral effects inevitably kick in.
“It’s all energy! It’s all Russia!” I hear them say…no, no it isn’t. Core inflation is now running at over 6% and that’s just inside the “out of control” territory. This is the story that I’ve been telling for the past 18 months, and we are now into what’s unarguably secular inflation - persistent inflation that will take a hefty amount of stamping out, and is best stamped out by…a recession.
Of course, politically that can never be spoken, but it is the truth. The easiest way is demand destruction. Without a proper, worked solution to the energy price cap and the incoming increases, consumption and spending on goods and services (including food) WILL be substituted for consumption of energy. This in itself (the shrinkage of consumption) leads to recessionary conditions. Wages are not keeping pace with inflation, nor can they otherwise the spiral really will take hold and become a tornado, risking hyperinflation.
Supply is constrained all over the place. Supply of energy (and not just by Russia, but by covid effects and poorly-managed ESG policies and the transition from fossil fuels to renewables). Supply of housing. Certainly, supply of rental property. The market is slowing (it has been summer, remember, but in reality, confidence is low and supply has increased from incredibly low base levels). The next round of rental property may have to come from properties that cannot sell in a slower/recessionary market - the interest rate will have a massive influence at this level, as will the affordability of credit.
So - that’s where we are. It doesn’t sound great - granted - but it needs to be borne in mind that when putting our investment hats on, this may not be bad news. If you are looking to sell your portfolio when your mortgages expire in 2023 or 2024 - it might well be then that you need to change those plans or take a potential haircut. If you are buying more - opportunity will knock. If you are holding a chunk of fixed rate debt, as I am sure many of the readers of this article are - inflation is not our enemy. None of us want social unrest - which is the next step after strikes - but at the moment not many of even the poorest of 2007 property investments are any longer underwater (negative equity). Technically, there are a few, mostly in Scotland, that I’m still coming across. Evictions are painful and expensive, and most of all emotionally draining, but an empty property will sell well, still, in the “new world”. Inflation is still capable of taking prices forward; it is just likely to be slower than it has been over the past couple of years.