What caught my eye this week.
The surge in mortgage costs as millions have rolled-off barely-there fixed-rate mortgages has been a bit of an anti-climax, hasn’t it?
Sure the resultant property market is far from perky. And life is certainly tougher if you’ve had a higher mortgage – or rent – bill to pay, on top of the rest of the cost-of-living crisis
But we’ve not seen a massive nominal house price crash. Let alone a wave of repossessions.
According to an ongoing deep dive by This Is Money this week:
The Bank of England’s latest figures showed the value of outstanding mortgage balances with arrears increased by 9.2% in the three months to December 2023, compared to the previous three month period.
Arrears rose to £20.3 billion, which was 50.3% higher than a year earlier.
The proportion of mortgages that were in arrears increased to 1.23%, which UK Finance says is the highest proportion since the final three months of 2016.
These are leaps to be sure. But they sprang off a very low base.
Overall there are still only 107,000-odd mortgages in arrears. That’s roughly half as many as at the peak of the financial crisis.
Going nowhere
What’s the difference? High employment, I’d say. As long as people have their jobs, they’ll throw everything at their mortgage for as long as they can.
This Is Money cites evidence that savings are being depleted. Some of that may be going on mortgage payments, and that can obviously only go on for so long.
But equally it doesn’t really prove huge stress. Most people who have savings were probably running their budgets with some wriggle room in the first place.
Where I do see stress is in the buy-to-let market.
There’s not been a wave of selling there either, clearly. But I don’t see many people too enthusiastic about becoming new landlords today – and those that are keen are surely being swayed mostly by past performance figures.
Those earlier gains were achieved by a huge escalation in price-to-earnings ratios for property and a historic grind lower in rates. We might see a little of the latter, as rates dip over the next couple of years. But could multiples really go higher?
We’ll see, but right now the numbers don’t stack up – not in London, anyway, despite a population boom.
The flat opposite for me has been looking for a tenant for months. The rent set by the hard-charging Foxtons agency is likely too optimistic. But I still can’t make the yield work for its owner, compared to other places they could invest the money.
Nevertheless with interest rates much more likely to fall than rise following the encouraging inflation figures this week, the UK property market has once again proved to be a mighty end-of-level boss.
People would have – and did – predict carnage in 2022 when rates began to rise.
But the price crash has been in real terms only. And money illusion dulls that pain.
Article errata
I hate having to do this, but unfortunately we published two mistakes this week. They were immediately updated on the web site. But I don’t want to spam anyone’s email inbox with corrected resends, so this will have to do.
By far the most important is that bond funds pay income gross – that is, with no tax deducted.
With my co-blogger The Accumulator away, I took over updating duties for his bond tax article. And I totally missed a change in the legislation some years ago.
On the one hand, this is why we revisit old articles and try to keep them up-to-date. That original article was written in 2015. This tax change alone proves it was long overdue a makeover.
On the other hand, look what happens when the stock-picking guy is let loose near fund stuff. Please lobby The Accumulator to get his priorities’ straight!
At least the second error has his fingerprints on it. Because no, Japan hasn’t posted superior equity returns to the US over the past over however many years. Not even in real terms and after its recent rally.
I suppose @TA was writing under the influence when he let this gremlin through. But I should have spotted it myself, so mea culpa.
We consider getting nerdy investing stuff right a USP of Monevator. Apologies from us both.
Have a great weekend!
From Monevator
The contrasting fortunes of Britain’s European stock market rivals – Monevator
How bonds and bond funds are taxed – Monevator
From the archive-ator: My law of crazy big numbers – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Bank of England base rate remains at 5.25% – Which
March’s 1.5% rise in house prices largest in 10 months, says Rightmove… – Housing Today
…while rents are up on average 29% on pre-pandemic levels – This Is Money
How a Chinese takeaway worker led police to ill-gotten Bitcoin worth £3bn – Sky
Government wants flying taxis to take off in two years… – BBC
…even as the UK’s EV sector is rapidly unravelling – Evening Standard
An Anglo-Italian company says it has cracked bitcoin [Search result] – FT
Over 300 years of central bank interest rates – via Econbrowser
Products and services
First-time buyers: how to pick a mortgage and the best deals – Guardian
Isas: the nation’s tax-free favourite turns 25 [Search result] – FT
Home insurance costs surge 40% in a year – Which
Open an ISA account with low-cost platform InvestEngine and get up to £2,500 as a cash bonus (Affiliate link, T&Cs apply. Capital at risk) – InvestEngine
Uber-style pricing is coming for everything – Vox
The mutual fund at 100: is it becoming obsolete? [Search result] – FT
The top five best cash ISAs – This Is Money
Santander’s new £185 bank account switching offer – Which
RobinHood launches for UK customers – CityAM
Is Uber One worth the money? – Be Clever With Your Cash
Dream homes for first-time buyers, in pictures – Guardian
Comment and opinion
The man who knew too much – Morningstar
Four methods of reducing Sequence of Returns Risk – White Coat Investor
Why don’t we do what we want? – Young Money
Thinking anew – Humble Dollar
Is it best to keep a Junior ISA secret until your child turns 18? – This Is Money
Forged in the FIRE – Money with Katie
What should we do given we’re so bad at forecasting? – Behavioural Investment
Index providers are massively dull — and massively profitable [Search result] – FT
The best way to get things done – Of Dollars and Data
Proof of life – Indeedably
How to live a regret-free retirement [Podcast] – Humans vs Retirement
Global tracker worries mini-special
The pitfalls of a global tracker – Trustnet
Sticking with a passive Isa strategy [Search result] – FT
Why are US stocks so expensive? – The Irrelevant Investor
Naughty corner: Active antics
The cadence of alpha – Capital Gains
A deep dive into Renaissance Technologies [Podcast] – Acquired
Reddit pops 47% in a day on highly-anticipated IPO – CNBC
Thinking in probabilities – Systematic Individual Investor
Thoughts on diversification – Base Hit Investing
Landlord mini-special
Most landlords to pay more capital gains tax when selling despite Budget – This Is Money
The end of landlords: a simple solution to the UK’s housing crisis – Guardian
Kindle book bargains
The Success Myth by Emma Gannon – £0.99 on Kindle
Eat Shop Save by Dale Pinnock – £0.99 on Kindle
Lean In by Sheryl Sandberg – £0.99 on Kindle
The Making of a Billionaire by John Caudwell – £0.99 on Kindle
Environmental factors
England won’t adopt EU river pollution rules for pharma and cosmetics firms – Guardian
Anthropocene unit of geological time rejected – BBC
Persistent drought is drying out Chile’s drinking water – Reuters
How much have temperatures increased across the world? – Our World in Data
Weather presenter Sabrina Lee quits buying new clothes – BBC
How long should a species stay on life support? – The Atlantic [h/t Abnormal Returns]
Robot overlord roundup
Google’s DeepMind unveils AI assistant for football tactics – DeepMind
Chinese and western scientists identify ‘red lines’ on AI risks’ [Search result] – FT
Off our beat
Lane’s gambit – Slate
The London office where pendulums keep cyber threats at bay – Ian Visits
Brexit’s lasting damage is looking inescapable – Bloomberg
The couple’s guide to moving in together – Vox
When London’s Trocadero was the centre of the video game universe – Guardian
Don’t be the best. Be the only – Kottke
Daily habits from the Blue Zones for a long and healthy life – CNBC
The 89-year old woman traveling the world solo – BBC
And finally…
“Why is it always so hard to get started?”
– Phil Knight, Shoe Dog
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The Evening Standard article with the headline “The UK’s EV sector is rapidly unravelling” is nonsense. SMMT figures show that the BEV percentage of new vehicle sales has bounced around from ~15% to ~20% over the last 12 months (https://www.zap-map.com/ev-stats/ev-market). Not accelerating for sure, and Sunak’s rolling back of net-zero targets did not help, but not unravelling. Not even really a slowdown.
Poor journalism presumably designed to appeal to someone’s prejudices.
@old_eyes — My take was that the article was more focussed on UK EV manufacturing rather than sales?
(Unravelling would definitely be overkill there, I agree, but that said there does seem to be stress in the EV market, with companies dialling back production on lower demand and resumed talk of hybrids).
Of course I think the idea of the UK as some EV manufacturing powerhouse of own-brand cars was a long-shot anyway, to say the least! 🙂
Thank you for the diligence on error correction on the bond fund tax article @TI.
On error correction, the FT’s article on Quantum Blockchain Technologies in this weekend’s links doesn’t quite get across the gap between logical (i.e. ideal or effective) qubits and physical qubits.
XBT/BTC uses SHA-256 of which 32 out of 256 bits are the ledger address, giving a maximum difficulty of 2^224, which is a little over 10^67 (i.e. a number with 67 digits after the lead digit).
With only 4×10^81 nucleons in the observable universe, even a classical computer using each of those particles probably would not be able to crack the Blockchain at the maximum possible BTC difficulty level even in the lifetime of the stars.
But it would only take a quantum computer with a few hundred logical qubits to do so in seconds.
However, error correction & decoherence are such issues with quantum computing that the best guess to date for the number of physical qubits needed to crack SHA-256 encryption are of order 10 million.
Meanwhile, the highest number of claimed physical qubits for a quantum computer is currently only a little over a 1,000; so still some way to go.
And, of course, whilst many banks have switched to SHA-2048 encryption, if quantum computing does crack the Blockchain it won’t just be cryptographic tokens at risk.
On the housing market, I think Gary economics and Thomas Piketty has this nailed.
As long as the return on capital continues to exceed that on labour then we will continue to move further along the path towards becoming an asset based economy.
Accordingly, as an ‘asset class’, house prices may zig and zag with the rise and fall of rates, but the long term trajectory, as with equities, will be up and to the right.
Hunt’s Budget was carefully calibrated not to rock the disinflation boat. So with that done, seems the BoE might have finally woken up to the fact they cannot just wait for the Fed before moving. Probability of a May 25bp rate cut has gone from 15% to basically 50% in two days. June even more likely.
Get those mortgage rates on a downward trend, get Gilt yields down so the OBR forecast says we will pay less interest, and, lo and behold, another ‘fiscal event’ for Hunt just before Sunak calls the election. Won’t be enough but it’s worth another throw of the dice.
@TI #2.
Yes a lot of EV companies are struggling, but that was guaranteed as it is in any new market. Also, the significance of supply chains was appreciated too late by many companies. We will see very large numbers of Asian EVs on the market for very good reasons.
I guess I bridled at the comment on Sunak pushing back transition to EVs – “Aside from decimating EV investment, this short-sighted manoeuvre has already pushed consumer behaviour into reverse gear.” It hasn’t. At the maximum, it caused it to stall for a while.
I get tired of every aspect of the net-zero transition triggering gleeful and totally inaccurate explanations of why it won’t work.
* Heat pumps don’t work in cold weather! – tell that to the Scandinavians
* We can’t switch to EVs because the grid can’t cope – not according to National Grid and all the, you know, experts.
* Wind and solar needs 1:1 gas backup on standby – possibly the silliest argument of them all.
* Battery EVs are a dead-end. I’m waiting for hydrogen cars – totally bonkers. The round trip efficiency of zero-carbon electricity to hydrogen back to electricity in passenger cars is awful. Why would you do such a stupid thing? c.f. hydrogen for domestic heating – also bonkers.
* EVs never pay back the carbon debt incurred in their manufacture – yes they do. In about 12-18 months of typical driving.
We are in a substantial energy transition. They don’t happen often and when they do they cause chaos. Some businesses will thrive and some will fail to make the transition. This is normal. It is also normal for those who see their markets vanishing to fight to defend them. But I don’t understand why the press and political right has to support them so slavishly.
There’s this guy on YouTube, ‘Moving Home with Charlie’, who’s being saying since 2022 that nominal house prices will drop 35% and every week he cherry picks some data to try and prove his case. I watch it sometimes to challenge my thinking but more and more I just think he’s deluded. He has a lot of followers though, people desperate to believe what he’s selling.
On the other hand there’s Akhil Patel, author of The Secret Wealth Advantage, who is fully signed up to the 18 year cycle. He says we are in the middle of a boom and we’re about to enter the ‘mania’ phase where everyone piles into houses and stocks, which will push prices up until there is a crash in 2026. I do think there is a backlog of people who’d like to buy/move but have been holding off until interest rates drop. Akhil says we could see potential first time buyers, paying exorbitant rents and seeing house prices get away from them, panicking and taking out riskier and longer term mortgages to try and get onto the housing ladder. He points out average salaries are up over 20% since 2020 too. I can’t quite believe we’re in a boom though like Akhil says, a 15% real drop in house prices over the last 18 months seems quite the opposite. Maybe the pandemic has extended the cycle by a couple of years, or maybe it has softened the boom considerably. Only time will tell.
On landlords I saw that 300k more rental properties have been sold than bought since 2016. And rents are up 9% in the last year. Ultimately I think it just comes down to supply and demand, as supply drops then rents will increase until a new equilibrium is found. The investors that stay in will do alright over the long term.
Loved this potential ‘off our beat’ article in the Guardian:
https://www.theguardian.com/artanddesign/2024/mar/18/david-hampton-artist-98-a-colourful-perspective-pencil-tree-gallery
Around two decades ago, I was a dedicated following of the House Price Crash forum. The fundamentals were all wrong as argued by people much smarter than me, and so I agreed with them. Thankfully, part of me thought – “What does plan B look like if they are wrong?” Plan B turned out to be a crazy plan to use geoarbitrage and save as much as could to take advantage of a potential crash. So I spent much of the next decade saving, and eventually bought outright in a mini-dip around 2012 in a less expensive area. My Plan B undoubtably wouldn’t work nowadays (different context, prices even more insane than they were back then). But if you are waiting, some kind of plan B is worth considering beyond hoping things will return to some kind of sanity.
> dude, where’s my house price crash?
Lost in the noise of the value of money crash, at a guess. Otherwise known as inflation 🙁 Hence the second part of your one-two in the opening
Bit like when the train next to you pulls out while you’re at rest and you think “hey, I’m going backwards. at a terminus?“
@ZX, I still think the BoE is mindlessly following the Fed without applying brain.
Inflation is by definition the first derivative of prices. For convenience it is measured as the difference in price index over the last 12 months, but if you look at the actual ONS figures it is clear that inflation in the UK has been at around 1% since May last year. (The headline figure is dominated by rises in March and April 2023). The BoE should have responded by now. They can’t blame wage rises, while those have lagged cost inflation they haven’t exceeded it (apart from FTSE Chief Executives, who of course may be the only sample of the populace Andrew Bailey comes into contact with).
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7bt/mm23
Apologies, I see my link above goes to the long term graph not the page I was seeing when I copied the URL. If you click on “last 5 years” and on “table” you see the month by month figures.
@Jonathan B (#10, #11):
Re: Inflation is by definition the first derivative of prices.
To be extremely picky:
a) I think it is more accurate to say that inflation is a useful economics concept whose utility (pun intended) is generally well understood. Inflation is fundamentally a latent variable. That is, you cannot buy an ‘inflation meter’ and plug it in somewhere and take a reading.
b) And whilst I agree that inflation is, by definition, related to the rate of changes of prices the rate of change of inflation (what you highlight) is related to the acceleration of prices, which as you correctly observe, has most definitely slowed.
IMO, the BoE’s response is (or at least should) be about more than just school level calculus!
@wephway, I’d wager most ‘contrarians’ peddling stupidity online are not deluded, they know exactly what they are doing. Grifting. And very successful it is too. They know what sells.
To clarify my own comment (#12), I should have made it clear that I am talking about “inflation as measured” by the ONS, et al.
@Al Cam (12) Your point (b) reminds me of the inflationary times of the late 1970s and early 1980s. News reports were full of statements such as the rate of increase in inflation is falling. I remember that I and my engineer colleagues would quip that we wondered whether they were now talking about the second or third derivative.
@AlCam, I agree the task of the BoE cannot be simply reduced to calculus!
But the underlying index figures suggest that if nothing untoward happens to prices in March and April, the published 12-month inflation figure for May will be close to 1% i.e. undershooting the target. Those highly paid economists should have seen that coming and started the rate reductions so that inflation levels off closer to 2%.
The easiest conclusions are that either they are mindlessly following the Fed, or that they have been told by the Treasury to hold off and then collapse rates in the summer on the basis that might provide a convenient boost just before the election. (What’s that, are you calling me cynical?)
@Jonathan B (#16):
You could be right.
Faisal Islam makes a couple of interesting points about the prognosis in this chatter: https://www.bbc.co.uk/news/live/business-68581526
I particularly agree with his “Awful April” comment, and am still amazed that inflation plus plus increases are permitted for telecoms/technology services, which I have always understood to be de-inflators!