In this week's post-election blog, as the dust settles on a remarkable transfer of political power, we look at the immediate changes implemented for housing, discuss rates, and the impact falling rates have as an indicator of where we may be in the business cycle, and the impact that may have on inflationary assets such as housing.
At the time of writing, the tape is alive with talk of a 0.4% growth for the UK economy in May. It's beyond where we expected it to be, and it's a tentative step further up from recession fears. Hitting the ground running, the new Chancellor has already begun implementing some of the housing pledges issued during the campaign: 14,000 new homes across Liverpool Central Docks, Worcester, Northstowe, and Langley Sutton Coldfield. These decisive actions will begin the journey to the 1.5 million homes needed over the next five years. The first practical step has been the creation of a Housing Taskforce "to accelerate stalled housing sites in our country".
This problem-solving approach could be vital to unlocking things like sites bogged down in planning appeals and local bureaucracy. Many times in these pieces, we have said that a system-based approach alone won't work. The simple reality is almost all this growth will come from negotiation and compromise, so there has to be a system to enforce change, and there have to be empathetic human beings in that system negotiating with local councils and residents, trying their best to find the best approaches to regional development that have the smallest footprint and mitigate unnecessary impact. This divisive terminology of the "Nimby" must go, and in this new era of a balanced governmental approach, of a more grown-up debate around the issues, we must find ways to compromise. One key sector to target for growth is supporting the armies of smaller developers by creating the circumstances that will allow a return to some of these stalled regional projects.
These businesses struggle at points in a business cycle when rates are high; they have the smallest margins and the most significant risk outlay. The lending sector works incredibly hard to innovate its vast array of products and services during times of financial stress to provide that need for liquidity, but ultimately, most businesses around now weren't businesses pre-October 2008; these are businesses that have only existed in low-rate, cheap credit environments and have faced significant headwinds to get any traction in the market since spring 2023.
Here is the opportunity: historically, when rates are cut, the economy is in a recession, and rates are cut out of necessity once the market has been sufficiently deflated. In this instance, a large amount of the concern around inflation has been attributed to individual and resolvable global macro events rather than long-term fiscal mismanagement or the tentative nature of the fiat debt-driven system, so we may see a soft-landing narrative play out in which rate reductions happen at a point where the economy is flat, and inflation is more bearable.
The causality on display here is inflationary assets typically go up in value when global liquidity increases; it's a very basic analysis, but at this point in the business cycle, where global liquidity is injected, it becomes a more attractive environment for investors and market speculators. An example of this was the stock market boom of the 1990s, triggered by a decade of falling rates and strong economies between 1991 and the millennium. In layperson's terms, both people and nations borrowed more because they could, spent more because they could, values of assets and businesses went up, and for investors ahead of that cycle, returns went up.
The issue here is that an explosion in the value of inflationary assets would also include housing, and nominally cheaper borrowing for mortgage applicants won't get over that barrier to market entry as prices rise, certainly not with the way we structure debt products based on leverage, income multiples will permanently be misaligned. The opportunity here - is it will allow developers access to the capital they need to build, and that's what ultimately will save our housing market and recognise the targets the government is striving towards. It will mobilise fund managers to start looking at private and public housing as an opportunity; the smart money is under-allocated in both private credit & housing, and we are seeing more and more confirmation of that with announcements such as L&Gs recent £75Mil investment into the Cottsway Housing Association, and Investment Banks such as Goldman Sachs advising their clients that these opportunities are coming, as we reach this point in the cycle.
Obviously, speculation about a melt-up in inflationary assets post a rate reduction run is what's known in economic commentary as conspicuous advice; if you are paying someone for non-specific market insight, they may as well be telling you if it's cloudy, it will probably rain, they have a good chance of being correct, as it's information accessible in most econ-101 textbooks, and it's a fair balance of probabilities. However, we believe that the opportunity in a more junior asset class, such as P2P, isn't as obvious, and we really want to stress how rare it is that an opportunity comes along where there is such a precise alignment between both the political will and the market circumstances, and that's why our investors will continue to receive such solid returns.
Invest & Fund has returned over £200 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
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