Market Comment

Property does not live in a world of its own. This is not always obvious in industry commentary that focuses on stamp duty, sales figures from dodgy developers and the purchases of the glitterati. In the last two years the macro world, particularly in the form of Covid and inflation, has moved centre stage.

Over the last thirty odd years the general direction of property of all sorts has been up, inversely tracking the decline in interest rates and inflation and punctuated by moments of shut down while buyers and sellers digested the crisis of the moment - the Asian crisis, 9/11 and the events of 2008 to name the most prominent. There is a feeling in the air, though, that the economic climate is now changing - which may mean we are now heading into a different world that may not be so benign.

The question du jour is about inflation - whether it is transitory or set to be endemic - and the effect that this will have on property prices which are now so important as, for so many, it is their primary financial asset. Will it be protection from inflation or will the interest rates that might have to be employed to contain it be the handbrake that halts the ever-upward progression? The unloved decade of the 1970s is where many go for a steer on what might happen. The problem is that the circumstances then were rather different - polar opposite in some ways. Then, interest rates were at levels up to 15% - that millennials find it hard to credit when they can get fixed money for under 2%. At the same time property prices were very low - a country house that would now cost £3m could be bought for £200,000. The discrepancy in London would be even greater. In real terms (taking out inflation) prices are between two and three times higher than in the dismal decade.

This begs the question as to how residential property could match any upand-coming inflation when affordability is already stretched. One of the problems with ‘affordability’ is that most people focus only on the interest rate - and ignore the repayments that are now the lion’s share of any mortgage payer’s monthly bill. If living costs rise in a stagflation environment, it is hard to see from where the property price inflation to match the rise in the cost of living is going to come.

There are, of course, many parts of the property market where cash is king - and where affordable debt backed by a decent rent is the beneficiary of inflation eating away at the value of the debt. These may do better — but the corrosive effect on society of inflation is something that Keynes (who so many wrongly regard as a loose-money inflationist) saw well. “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but also at confidence in the equity of the existing distribution of wealth.” Those who welcome inflation as a panacea to the explosion of public and private debt over the last decade should be careful what they wish for.

Back in the immediate market in which we operate, it is still the country house market that is making the running for all the same reasons as it has for the last eighteen months. As Zoom has come of age, distance has shrunk, as has the need to be in an office for five days a week. Even the likes of Goldman Sachs and Morgan Stanley have rowed back (slightly) from the uncompromising ‘get back to the office’ message of the early summer and a consensus around partial working from home now seems to be pretty universal. This has had three consequences. The first is that demand continues to outstrip supply with predictable effects on prices - dramatic for the very best. The second is that the differential between the really good and the flawed has narrowed - as it always does in these circumstances. People have to get on with their lives and they make compromises that they would not have contemplated two years ago. The third is that distance is now less important than a solid phone signal and full-fat broadband. Where neither of these is in good supply, buyers hold back. It is extraordinary - and disgraceful - that nearly thirty years after mobile phones became universal there are still parts of the country where a phone signal - let alone 3G - is intermittent or non-existent. Why does Ofcom allow this to happen in a rich, developed country? Yorkshire, Cornwall, Wales and Cheshire are all now in the sights of those whose work is in London and prices in all those areas, though still short of the Cotswolds and West Sussex, are moving up sharply.

With the lack of tourists and much of Asia still locked down, the London market has been quieter. Footfall seems to be returning to the West End in the last couple of months and the rental market in all the prime areas is strong. At the very top end, where private jets fly above the turbulence below, there have been some spectacular sales and the communal gardens of Holland Park and Notting Hill remain as popular as ever. It is a sellers' market and new stock is in short supply. This is not the case in the massed towers of Nine Elms where a perfect storm of rising building costs, Asian buyers stuck at home and a Chinese government bringing down the shutters on their citizens, is producing a glut of monotonous flats - with views only of their neighbours’ laundry and a long walk to a newspaper and a cup of coffee. This has been priced, in the past, at a premium to the surrounding area. What few buyers there are, are beginning to question why - a question that will become more acute as more new stock piles onto the market. The poster boy for this is the Damac Tower - decorated by Versace in what will be the best possible taste - overlooking three lanes of traffic and a dozen railway tracks opposite Vauxhall Station. Is this really prime London as the blurb claims? The next couple of years will provide an answer.

As the pandemic moves to being endemic, and hopefully we avoid any winter relapses, the recovery trend is likely to continue. The big question is whether the current shortages of labour, goods and energy is a temporary blip or a structural fault-line that is going to be with us for the foreseeable future. If it is the latter, then the property market overall will find it more and more difficult to shake it off - particularly if rising inflation is met by rising interest rates. The top end is always going to be about supply - and an avalanche of that is unlikely.

Source Property Vision

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The value of the world’s real estate assets rose 5% in 2020 to $326.5 trillion, making it the world’s most significant store of wealth and more valuable than all global equities and debt securities co