At the point of writing this week's musings, we are on the cusp of two major announcements: firstly, the Bank of England's August interest rate decision and, secondly, and perhaps as important to this sector, the Planning Reform Package, due to be announced in Westminster in the coming days. As we are yet to be in possession of the facts, in this week's bumper edition, rather than speculating, we will outline what we think may happen with a focus on the why, as well as outline the primary impact that will have on our client base.
The rate speculation isn't so much if they will come down, rather than when. A lot of media commentary focuses on creating a dramatic narrative around the MPC meetings, but what it doesn't really focus on is the reasoning, which is less talked about. Still, the macro picture is the same for countries across the globe. To position a very complicated chain of events in a digestible way, there is 10 trillion of US debt that needs refinancing and 100 billion of UK debt, and it all has to happen before Santa arrives, and to do that, you have to create global liquidity; you do that historically by cutting rates, bond prices go up, but yields go down due to their inverse correlation, this, in turn, historically stimulates credit markets, and the capital flows from them into businesses, real estate, and equities. We must caveat everything with "historically" as what has happened in the past may not happen in the future; we live in unprecedented times, but we can make educated guesses from successive business cycle data illustrating these past correlations.
There is an economic scenario where high levels of global inflation eat away at the real value of debt, making it easier for governments that create debt by issuing bonds to pay it back, but ultimately, the impact that has is incredibly debilitating to the population, who aren't interested in global macroeconomics, they just don't want to pay eight pounds for their coffee.
An example of this phenomenon would be to imagine the bond market as a field of cabbages; it's now time for the harvest to roll the crops over, and if insects have eaten a portion of the crops, it will be a lot easier in the short term to harvest what's left. However, you're still ending up with fewer cabbages than you need, so short-term positive, long-term negative, which would have been a great title for this piece in hindsight.
Will there be concern over the embedded core level of inflation in the UK? Yes. Will there be concern about the very high levels of food inflation in the UK? Yes. Does that detract from the fact that it would be beneficial to cut rates across the globe to refinance the debt pile? No. So think when not if. Historically, back when we had sustained decades of very high rates, the world was a very different place, and we didn't have the above to consider, a system of existence based solely on massive debt issuance.
Back to the exciting media narrative and looking at the runners and riders for the vote, the base rate has stayed the same since last August, and according to City AM, at least two members of the MPC are now backing calls for a rate reduction this week. The minutes of the last meeting published in the press show that the decision is finally balanced and could go either way. However, that hasn't stopped an industry whose bread and butter is financial speculation, speculating. The smart money on the tape, Deutsche Bank, Goldman Sachs and Nomura are all putting their chips down on an August cut, with Capital Economics and Pantheon Macroeconomics taking the other side of the bet and putting their marker on September. With weakening employment data signalling a potential case for a cut, the professionals have set the likelihood of a cut at 40% for August, but time will tell, and by the time you are reading this, I guess you may know more than we do.
Moving onto planning reform, the new housing secretary is set to announce a raft of changes this week that could potentially boost housing requirements in certain areas by 50%. Angela Rayner has been quoted in The Guardian as saying,
“We will reverse the damaging set of changes made last December when it backed down in the face of vested interests, scrapped mandatory housing targets, and torpedoed housebuilding rates.”
In a week of big reveals following the Chancellor's inaugural speech, the details we have been speculating on for several months will begin to be revealed. Rather than regurgitating those, one thing we would like to maybe add to our wish list is for a consultation to be held involving all industry stakeholders, and everyone who has a place in the process. As a result of working directly with SME home builders, we also see the broader picture of how many contractors, specialists, and different industries are involved in delivering large-scale housing projects. For the ideology to translate into practicality, we hope, at least, that all voices are heard in order to properly framework the challenge ahead.
These are two topics that will vary significantly in importance when it comes to capturing the public's interest, but they go hand in hand for the success of our industry; the topic that amalgamates these differing issues is removing the blockers from the nation's home builders' path to market, slowly clearing the way to allow the housing crisis to be properly addressed.
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