Following months of uncertainty in both political and economic markets, we hope for calmer waters ahead as the new Prime Minister settles into the role and the measures from the Chancellor’s mini-Budget begin to be implemented. But at the time of writing, such hopes are far from reality at least for the short term, and the fallout still to be valued amidst volatile bond markets.
Whilst reports of house prices continuing to rise have made headlines for the last two years, the thing that I always find is surprising to investors is that for house prices, current real (inflation adjusted) prices are still below the 2007/2008 peak and the same as 2004 levels. This is a true value perspective (that is not materially impacted by current inflation levels) and an important context amidst sensationalist headlines about house price growth that stir memories of (too) long property asset bull markets of the past that have been popped by extreme events.
All things considered (except for the full effect of market reactions as they play out right now), I personally believe that there are many medium-term fundamentals suggesting that it is unlikely that there will be a major market correction. Historically, major corrections have shared commonalities of a) decade-long bull runs of at least 100% real growth (300% nominal growth), b) a major macro-economic ‘pin prick’, c) resultant steep rises in unemployment and d) debt market fragility/failure. Of course, there is a limited sample size, but let’s look at the current situation with these drivers (and the caveat) in mind.
First of all, we haven’t had the major c.100% real growth run like we’ve seen in the 12 years before prior crashes. Whilst nominal prices are c.50% above the 2007 peak, real prices, (adjusted for inflation) are still below that level, while we currently sit at c.22% above the 2009 trough.
Secondly, unemployment is at its lowest for 50 years and job vacancies are at an all-time high. Companies earning price-driven profits can mitigate a tougher economic outlook through lower real pay rather than job losses when inflation is driven by pricing power.
Thirdly, if inflation is transitory, household balance sheets are more resilient post-pandemic to weather rainy days, propped up by c.£180bn of unplanned pandemic savings. The ability to dip into those savings, or saving less than the ‘new norm’, alongside good credit availability and reasonable employment confidence, should mitigate against extreme demand downside risk.