There is something in the air that nobody anticipated towards the back end of 2022, a wave of cautious optimism, a reframing of the economic outlook; things may be, I say this hesitantly, looking a bit more optimistic? Have any of the fundamental indicators changed? Or have we finally priced in the woes, and the confidence is returning? Without being too erudite in our analysis here, in economics, 'reflexivity' is the theory that a feedback loop exists in which investors' perceptions affect economic fundamentals, subsequently changing investor perceptions. So, in layperson's terms, is it possible to talk ourselves into a down market, exacerbated by the belief that the cyclical nature of fiat-based financial markets demands constant repeats of the past? This week's blog looks at the changing picture and how that's reflected in the housing market.
At the time of writing, the FTSE 100 Share index was heading towards a record high; we are seeing what could be bear market rallies across all European markets and rallies in speculative asset classes, metals, and digital assets. The next UK HPI will be published in early February, so we don't yet have complex data on a slowed rate of growth; however, the property portal Rightmove states at the time of writing that the average listing is up by 0.9% for January, which is an increase on the two consecutive falls of November and December. At that time, the predictions were slightly more bearish; expectations were being met by letting agents, and perceptions were driving price, not demand, an example of economic reflexivity.
So why is this happening? Firstly, we want to touch on the global or macroeconomic issues and then focus on the micro UK picture concerning housing. Looking at the global economic picture, these are sizable topics, but to touch on a few, the CPI numbers in America now seem to have peaked in June of 2022; it's tracking down month on month, and their hawkish central bank strategy appears to be working, and most significantly the war in Europe hasn't had the effect on oil and gas prices it has here. Q4 earnings reports saw layoffs begin in the technology sector, but they exceeded Wall St expectations and didn't have the anticipated impact on the western markets that was initially feared. Finally, China has reopened post covid, to massive public health difficulties, but it's significantly brightened the outlook for global investors due to the size of their market share. So, what do these global issues have to do with housing markets? Global investor perception of the world drives all markets; hope breeds optimism, and optimism produces investment, another example of, well, you guessed it, economic reflexivity.
Moving onto the micro picture concerning housing, will we see the same level of cautious optimism in the next lot of figures published? At this point, we are speculating, but one of the driving factors we believe will be rising rental yield. In previous blogs, we have discussed how we think the correlation between rents/market value will become less and less intertwined; JLL has published that they believe the cost of renting will climb by 2.4% per annum up to 2026, given private levels of investment into the housing market are increasing year on year. The government will need to heavily solicit private investment into the development sector to deal with a ten-year stock shortfall. We believe that the yields on offer & the circumstances of the shortfall will be too tempting for significant global investors not to be lured into the UK housing market, and that will have a knock-on stabilizing effect on price.
If you have been on social media recently, you will have seen posts querying where all the 'doom-mongers' have gone. Was it just the media creating a story, or have things changed significantly? We have seen predictions ranging from 'the everything bubble' bursting through to a 5% retrace and everything in-between. So, where did all that noise come from? The definition of reflexivity refers to "the examination of one's beliefs, judgments and practices during the research process and how these may have influenced the research." It's important to understand how many financial services professionals across all sectors making these educated predictions were caught off guard by the 2008 financial crisis. The answer is most of us, aside from the characters in "The Big Short". It affects our judgement on the research; people don't like being wrong. Ultimately what happened in the past alters our view of the future; it's human nature; we quantify our existence by using the past as our frame of reference. A recession or a market retrace, perhaps triggered by specific global events, doesn't necessarily mean a crisis.
Markets often move very differently from how we expect, allowing for some ..cautious optimism.
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