Do you get blasted with adverts or recommendations on YouTube for ‘creators’ discussing their buy-to-let (BTL) property empire? Usually swiftly followed by a time-limited invite to their course on how to become a BTL magnate yourself? The course which costs >£50, and covers easily google-able things. Yeah those chaps/chapesses. Well they are my new canary in the economic coalmine. They still seem to be tweeting (hawking?) but for how much longer?
How do I distill this view?
Right now things are economically bleak. Here’s a thread from Prof Richard Murphy, who is far more dour on this than me:
Also available through thread reader (if you don’t have Twitter) here (2).
It’s a fairly erudite consideration of where we are headed. To summarise the summary, inflation is going up due to food, fuel and shipping price rises. Supply-side inflation. This is pushing up the cost of everything due to knock-on effects, at a rate currently ~10%, with an expected peak next year of 18% (3). A lot of people are cutting back on discretionary expenditure (stuff and ting) as they are worried about affording their essential bills like food and heating. This will trigger a recession, if we’re not already in one (4). The due energy price cap increase only protects residential bills, not commercial (see tweet below) (5). Leisure, hospitality and retail companies are likely to fail, triggering unemployment, in turn triggering further poverty. People default on rent and mortgages, worsened by increased mortgage interest rates. The cycle of debt, unemployment, lower spending and higher interest continues until interest rates are higher than inflation and people begin to believe positively in the economy (6).
What’s interesting here is the media optics. Inflation means that people’s wages don’t go as far, so their ‘real pay’ falls. It’s fallen like a stone over the last decade (7, 8). As a doctor I earn about 30% less, accounting for inflation, than I did in 2008 (9). There’s open talk amongst colleagues of striking, which would see us on the picket lines alongside the RMT, barristers, port workers, Royal Mail staff, council bin men, and many others. The focus from the government is on preventing pay rises ‘to stop inflation’.
This is a classical tactic of changing the Overton window. If enough media sources tell the people a wage increase will cause them pain through inflation they will believe it. It categorically ignores the fact this is not demand-side inflation caused by lots of people spending lots of money from high wages. It’s supply-side inflation caused by increased costs from… well… let’s start with the pandemic, shipping/ just-in-time supply chain changes, easy fiscal policy, the Ukraine-Russia war, our old friend Brexit, the list goes on. Repeatedly talking about demand-side inflation keeps supply-side inflation out of the public consciousness. It sounds like things politicians can do something about, and plays nicely into the conservative ideological agendas. It avoids the painful fact most of what’s causing this inflation is down to past (sometimes poor) choices, or just shit chance.
What could fix supply-side inflation? Increasing interest rates, decreasing taxes, increasing wages or capping essential costs at much lower levels (1, 11, 12). Basically putting more money in people’s pockets so they can spend, whilst simultaneously trying to sort the supply side issues so that you don’t get demand-side inflation.
There’s an interesting possibilities fork that lies in the ongoing Tory leadership election. Wonderful that it’s happening at a time we need clarity of vision and leadership. Truss and Sunak are talking a big game of anti-wage inflation and anti-union legislation. There’s the suggestion of banning strikes (13, 14). Laws have been implemented over the last decade which make it harder to strike, and easier to break strikes through the use of agency staff – see P&O events (15). Liz Truss, who looks likely to win the vote and be the next PM, has outlined further laws to limit unions (16). This may be posturing for the Tory internal vote. It plays well into the party ideology. It will win her blue votes, and Liz swings with the wind more than a weather-vane.
I worry that she will carry through though. Does she envision herself as a new Thatcher? An economy for economies sake government may argue that the removal of barely profitable zombie companies, just about hanging on with low interest debts serviced, is a good thing. A big ole recession will sort the economic wheat from the chaff. A more open market, with plenty of economic opportunities and less pension/ debt/ commitments to meet. Sod the employees. Sod the unions. My mate wants to buy those assets at 3 pence on the pound, so burn it all down. Build back better. Northern Powerhouse waffle. Further nonsense slogans. For two years until another general election.
You can only cause people so much pain before they revolt. In the 1970s this played out as strikes and the Winter of Discontent, which ironically led to Thatcher’s rise to power (17). Trade union membership has been falling for years, and they are now limited by the laws passed by Thatcher and BoJo (17, 18). There’s an interesting balance here, as with the fall of the red wall and the general shift of political alignment across traditional class boundaries, traditionally unionist working-class individuals have been voting Tory recently. BoJo’s 2019 majority was former labour voters who are those likely to be hit hardest by the ongoing recession, and most likely to unionise (18). Unions are again pushing for higher wages, and we may see a resurgence of membership ahead of protests against government policy (19).
But still, how do people hawking their BTL courses on YouTube figure into this?
First, a final bit of background. Over the last few years the Government have introduced a load of new laws and rules on buy-to-let landlords ostensibly designed to ensure financial stability and protect renters, but practically designed to make it more expensive to be a BTL landlord, get more for the treasury, and drive properties back into private ownership or bigger commercial rental firms (20). This is causing some landlords to raise rents, and forcing other smaller mum-and-dad type set-ups to either inadvertently break the law, or just plain sell up (20, 21). This in turn is driving down the number of properties available to rent (as a lot are selling to residential buyers), and when combined with an increasing population and very limited housebuilding, means the rental market has gone bananas. We’re talking bidding wars, massive rent hikes, queues to view, etc (22).
Now step in our future interest rate hikes. Our current 1.75% (already!) BoE base rate is predicted to hit 3.75% over the next 6-9 months (3). BoE gotta do what it gotta do to deal with that inflation, natch. Some economists are estimating the base rate will need to hit 7% to beat down this inflation round (3). Practically it’s just a reversion to the mean, but it’s a shock for millennials like me who entered the job market in the last couple of decades. The FireShrink household stress-tested our mortgage interest rate in my budgeting spreadsheet up to a theoretical 12%, and then locked in 5 years at 1.65% with a big bank 12 months ago. Excessive maybe, but we were budgeting going from dual income to single whilst still meeting all bills, and various other financial rearguard actions. Monevator advocates a similar stress-testing policy (23). How many did that, especially on BTL mortgages, heavily leveraged or interest-only?
I am much more cynical on the inflation/ interest rate outlook than Monevator or BoE, probably due to my plan-for-the-worst, aim-for-the-best attitude. I don’t think they’re pricing in just how many people are living paycheque to paycheque, or just how many properties were bought at large salary multipliers on 2 year fixed deals during the pandemic. There’s a lot of people out there who were encouraged to max out their borrowing (Location Location Location). What proportion checked their mortgage repayments at a theoretical 5%?
Which brings us back to BTL. The hawkers tell us that returns from BTL are (a) steady rent, and (b) capital appreciation (the house value rises). Your sums shouldn’t just be about (a), because (b) can bail you out, and house prices always rise, right? So don’t worry that people won’t be able to pay their rent in the recession, you can sell your house for more than you bought it for, and get your capital that way. Except if you can’t, because people can’t pay their mortgages at an unexpected 5+% interest and default/ sell up, and house prices fall.
One of the old adages about investing is you know you’re near the top or in a bubble when your barber or taxi-driver is telling you about the asset. You’ve missed the most profitable climb when you see it advertised on the tube. You’re near the bottom when all of that goes away, and media stories are predominantly negative.
The property market is still rampant, though with signs of exhaustion. The BTL Youtube content creators are still producing, and selling their product. When they stop advertising, it will be a sign of BTL investment capitulation. Beyond that, there be dragons.
Checking the assets and liabilities:
These are taken, as always, from my Beast Budget spreadsheet. I saved 14% of my salary in July, as I was repaid some owed cash. Still not great, but starting to return to form. My net worth actually sank as I paid out on credit card for some work expenses which will (unusually for medical work) be expensed in the next few months. For now I’m down about 0.5% and hovering around the £90k market (excluding NHS pension).
As compared to my four year back-calculated mean monthly spend:
- Groceries: June £270, July £186, budget £220
- Eating out & Takeaway: June £3, July £60, budget £50
- Transport: June £711, July £210, budget £330 – Much improved
- Holiday: Jun £0, July £0, budget £40
- Personal: Jun £10, July £0, budget £120
- Health: Jun £50, July £52, budget £150
- Misc: Jun £141, July £67, budget £215
- Work fees: Jun £150, July £323, budget £265 – Sigh, this is stuff that won’t get paid as expenses or re-reimbursed. Do other professions spend >10% of their monthly salary to be able to work?
In the garden:
It’s been hot, most things are dried up, but at least my tomatoes, squashes and potatoes are surviving.