LendInvest’s Investor insights is a monthly commentary by LendInvest Capital Managing Director Rod Lockhart, aimed at providing insight into the economy, the wider property investment landscape and LendInvest business strategy.
A positive outlook for the market
Markets are settling in well for the first quarter of the year. Compared with the outlook 12 months ago, the underlying fundamentals of the UK economy have significantly improved. Where investors were dealing with plummeting valuations, crashing oil prices and were pricing in the geopolitical risk of the UK leaving the EU and the US Presidential elections, today the investment environment is a very different place. Equities are trading at – or near to – record highs, bond yields are at their highest levels for some time and credit is more accessible than ever in recent history.
Inflation spikes in response to European woes
The investment environment is not without blemishes. In Europe, the threat of “Grexit” is fast becoming a greater concern as Greece prepares to request further debt relief. In the US, the Federal Reserve is working towards tighter monetary policy, which despite being a good sign for the US, will undoubtedly place further pressure on the UK, as consumers curtail spending in response to accelerating inflation.
At home, the pound’s devaluation and the subsequent rebound in oil prices are the leading forces behind the recent spikes in inflation. The 1.6% reading in December has been surpassed by January’s reading of 1.8%. While less than the 1.9% polled by economists, it is widely accepted that inflation will exceed the Bank of England’s 2% target in a matter of months. We see this as supporting evidence for the Chancellor to be more aggressive in the Spring Budget next month to support consumer spending.
Unemployment is at an 11 year low in the UK
The jobless rate in the UK continues to perform better than the long term trend rate, allaying concerns that the Brexit vote would prompt mass redundancies. Unemployment is at an 11 year low, confirmed this month by a 4.8% reading for the three months to December 2016, and the actual employment rate (i.e. those employed relative to those unemployed) is at the highest level since records began in 1971. The European Commission predicts that unemployment is set to rise to 5.6% within the next year, however we are broadly in agreement with the Bank of England which predicts an unemployment rate of 5% in two years’ time.
UK house prices exceed expectations
It was cheering to see the recent resilience in UK house prices affirmed this month by the Office of National Statistics (ONS). The ONS recorded annualised growth of 7.2% in December, as a range of factors continue to support asset prices. This reading easily surpassed analyst expectations of 6.7% and was up on November’s reading of 6.1%. This supports our unwavering view that UK real estate – and in particular real estate debt – is a leader among risk-adjusted asset classes. It reinforces our view that market price gains are highly unlikely to reverse course this year.
There will be no quick fix for the housing deficit
This month has proven that the demand-supply imbalance in UK housing will persist for many years to come. The government’s long-awaited Housing White Paper was published on 10 February (read our response) in which it was acknowledged that 225,000 to 275,000 homes must be brought to market every year for the next few years. This is significantly higher than actual completions last year of 190,000. The market is moving to confront the challenge and we’re seeing a plethora of new mortgage products emerging to encourage transactions.
Read other letters in the series: