What caught my eye this week.
Last week we talked about the infamously inverted yield curve [1] in the US. Meanwhile here in the UK the Bank of England has already hiked its policy rate to 0.75%. Now policymakers [2] and pundits [3] alike are mulling over how much faster and farther central banks will go.
There are various ways a higher Bank Rate could slow (or worse) the economy. Theories will lead you into a Spaghetti Junction of the money supply [4] – M1, M2, M3 and beyond – or down other half-forgotten cul de sacs.
In the UK though, it’s probably easiest just to think about the housing market.
For good or ill (okay, ill) the UK economy is still geared around property and especially residential homes. A sector that seemingly has been flying through the stratosphere on fumes for decades.
But I believe when something has been seemingly running on fumes for decades, it’s probably better to assume you haven’t properly identified the fuel.
In the early 2000s both politicians and punters blamed supply and demand for high house prices. And I did too, for what it’s worth. Not enough houses were being built to meet demand, we believed. Never mind that rents had failed to soar by anything like the same extent – even though everyone has to live somewhere.
About a decade ago I finally realized that interest rates were all-important. Along with the laxity of bank lending, rates decide how much somebody feels they can pay each month for a property.
Very many home buyers will pay as much as they can manage without totally derailing their lifestyle. They hope prices will rise in time, or if not that their income will. And most pay via a mortgage.
What could go wrong?
Something going up beyond the rent
Take a look at this graph from Capital Economics, as highlighted this week by This Is Money [5]:
[6]
The graph suggests that soon mortgage payments will become more expensive than rent. This should not normally be the case, because landlords want to make a profit1 [7].
As rates and house prices rise, the monthly payments required to own a home via a mortgage climbs further. The graph forecasts that monthly payments will soon be above their last peak.
Of course, a pound is worth a lot less now, and it will be worth even less by Christmas. But the pressure from rates shrugging off their torpor and struggling to their feet is clear.
Caveats abound. Many people are on fixed-rate mortgages nowadays. Affordability is stress-tested when you get a mortgage. The nice lads on The Property Podcast [8] reckon this cycle has several years more to run as regulations are loosened and banks go a bit crazy.
Also, would policymakers really want to provoke a housing market crash by raising rates too far?
Long ago I used to scoff at such talk as clutching at straws in the face of an elevated market. But actually, presuming policymakers will do all they can to avoid a repeat of the early 1990s housing crash has been a pretty good heuristic over the years. How much higher could Bank Rate go before roiling UK PLC and its stretched populace?
With vast government debt also looming large, you can see the appeal of inflating away these problems by avoiding real yields from climbing too far (aka financial repression).
In such a world, you might think you’re getting finally 4% from your savings account, but you’re forgetting inflation is running at, say, 5%. The real value of your money is still getting gently mullered.
Interesting times. Have a great weekend all!
From Monevator
Defusing capital gains: a worked example – Monevator [9]
The Slow and Steady passive portfolio update: Q1 2022 – Monevator [10]
From the archive-ator: the revenge of the latte factor – Monevator [11]
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2 [12]
House prices have risen more than 18% since the first lockdown – BBC [13]
Four-day week trial in the UK: which companies are taking part? – Yahoo Finance [14]
Covid infections at record levels in most of the country, figures show – Guardian [15]
One in four investors pausing contributions to ISAs and pensions due to cost of living crisis – ThisIsMoney [16]
[17]
The top 1% of UK adults received 15% of fiscal income in 2018–19. More than flows to the bottom 55% of adults combined [PDF] – Institute for Fiscal Studies [18]
Products and services
UK’s energy strategy may take years to bring down bills, says Kwarteng – Guardian [19]
Best cash ISAs for the new 2022-2023 tax year – Which [20]
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor [21]
Venture capital trusts raise more than £1bn [Search result] – FT [22]
Marcus Bank paying 1% again on cash savings and cash ISAs – ThisIsMoney [23]
Your rights if you are affected by travel chaos [24] or Covid – Guardian [25]
Supermarkets on Deliveroo and Uber Eats – Be Clever With Your Cash [26]
Should you buy a new-build home off-plan? – Which [27]
New no-fault divorces: an end to the blame game? [Search result] – FT [28]
Future-proof homes for your next stage, in pictures – Guardian [29]
Comment and opinion
A checklist for corrections – Compound Advisors [30]
Okay boomer, what’s your inheritance tax strategy? [Search result] – FT [31]
The world is waking up to autocracy risk – Morningstar [32]
Five things I know about investing [Fortnight old] – Ken French [33]
Lessons from ‘King Boglehead’ Taylor Larimore at 98 – AARP [34]
Stock options: why it’s not always a straight line from shares to cash – B2B [35]
The yield curve just inverted. So what? – Of Dollars and Data [36]
Seeking a new ISA platform – Simple Living in Somerset [37]
Testing the retirement waters – Humble Dollar [38]
A flexible retirement age increases income inequality – Klement on Investing [39]
Dependence – Indeedably [40]
Behavioural finance 2.0 [Podcast] – Standard Deviations [41]
Crypt o’ crypto
Government sets out plan to make UK a cryptocurrency tech hub – GOV.UK [42]
In defense of Bitcoin maximalism [April Fool] – Vitalik Buterin [43]
Naughty corner: Active antics
Nick Train: the patient optimist [Podcast] – Far From the Finish Line [44]
How to identify companies most vulnerable to surging energy prices – Maynard Paton [45]
Don’t panic, don’t chase – Howard Lindzon [46]
Four ways value investors can use momentum – Validea [47]
How one shareholder takes his voting duties semi-seriously – Humble Dollar [48]
Brexit screwing up UK trade mini-special
UK exporters are struggling, and it isn’t hard to see why – David Smith [49]
Lorries are queuing 18-30 hours on the M20 due to broken borders – via Twitter [50]
Sunak admits UK’s dismal recent trade ‘might’ be linked to Brexit [Search result] – FT [51]
Hopes of post-Brexit US trade deal fade away – The London Economic [52]
Kindle book bargains
Who Moved My Cheese? by Dr Spencer Johnson – £0.99 on Kindle [53]
The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle [54]
Why the Germans Do it Better: Notes from a Grown-Up Country by John Kampfner – £1.99 on Kindle [55]
Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies by Reid Hoffman and Chris Yeh – £0.99 on Kindle [56]
Environmental factors
Final warning: what does the IPCC’s third report installment say? – Guardian [57]
Can Norway’s $1.3 trillion oil fund actually give up oil? – Institutional Investor [58]
The race to rebuild the world’s coral reefs – Wired [59]
Scientists find microplastics in human blood for the first time – Guardian [60]
1,000-year old oaks used to create ‘super forests’ – BBC [61]
Off our beat
DALL·E 2: OpenAI’s new natural language to art incarnation – OpenAI [62]
The time hack we should all know – MIT Reader [63]
How everyone got so lonely – The New Yorker [64]
Do you have to like your job? – Vice [65]
Keep your waist to less than half your height, guidance suggests – BBC [66]
The current thing [A few weeks old, how ironic] – Stratechery [67]
No news is good news [Also week old] – The Commonplace [68] [h/t A.R. [69]]
And finally…
“To the extent that the world still doubts Elon, I think it’s a reflection on the insanity of the world and not on the supposed insanity of Elon.”
– Ashlee Vance, Elon Musk: Inventing the Future [70]
Like these links? Subscribe [71] to get them every Friday! Note this article includes affiliate links, such as from Amazon [72] and Interactive Investor [73]. We may be compensated if you pursue these offers, but that will not affect the price you pay.
- Although that’s yet another truism that’s gotten screwy in the near-zero interest rate years, as landlords in pricey parts of the country have banked on capital returns. [↩ [78]]
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [79]]