2022 was an uncertain year in many aspects - the UK’s recovery from the pandemic to enormous energy price hikes, and the disastrous mini-budget that led to Liz Truss breaking the record for the UK’s shortest-serving Prime Minister.
With house prices in turmoil after Halifax announced they had seen their biggest drop in November in 14 years, followed by a shock increase in January 2023 according to Rightmove – the housing market is facing turbulent times.
For investors, now more than ever it is vital to apply knowledge of previous events and ongoing themes to create a rock-solid investment strategy.
1: Massive wage inflation will push inflation higher
From energy bills to food, the cost of everything has risen rapidly, but workers in real terms have had a pay cut. A continuing shortage of workers has already forced many employers to raise salaries, yet the ONS still reported 1.2 million vacancies from August to October 2022.
The UK’s economic inactivity rate has also risen, with those not working due to long-term sickness hitting record levels. Therefore, the same employees who are working more for money that buys less, are also carrying the increased workload that comes with understaffing. I predict that this dangerous cocktail of circumstances will further escalate and continue industrial action.
The government will continue attempting to control public sector wages by only offering small increases, with the chasm between public and private sector pay growth widening further. The government may be able to restrict salary increases, but they cannot force people to take, or stay in, public sector jobs. Meanwhile, ongoing inflation is destroying the real value of cash savings.
2. Interest rates will rise, but stay negative in real terms
In February 2023, the Bank of England base rates sit at 4.0%. This rate is set by the Monetary Policy Committee (MPC), which the Bank of England forecast will raise rates to around 4.75% by the middle of 2023. But what does this mean for ‘real’ mortgage rates and ‘real’ savings rates?
Currently, the price of 5 and 10-year fixed mortgages are falling, although the markets expect a short-term increase. In the longer term, they expect interest rates to fall again during the period, so they are offering an ‘average’ rate for the fixed period.
Inflation is expected to fall from the middle of 2023 according to the Bank of England, and whilst this sounds positive, they were wildly incorrect in the predictions for 2022. We must always remember an important role of the Bank of England is to try and impact public thinking and through that, public spending behaviours. What they say is not always what they may think but rather what they would like to happen.
3. Property will remain profitable
The other side of property profitability is capital growth. A number of property commentators predict that in 2023 we will see a “cooling” or a “dip” in UK house prices.
Based on Savills’ 5-year forecast we will see a 10% drop in house prices. Of course, this is based on various assumptions and is an average across the UK. Halifax’s House Price Index from 2022 highlighted that house prices were still up 4.7% on average versus the same time in 2021.
It is also worth considering what has historically happened to house prices after periods of high inflation. Notice how after every rise in inflation, there is a rise in house prices. Even if there is a temporary dip, it is important to remember that this is just capital growth - property investors will also receive rent and the savvy ones will be getting tax breaks too.
4. The rental market
Many “accidental” or amateur landlords are leaving the market having been scared off by Stamp Duty changes and Section 24. Rental property supply was already massively short of rental demand, and this further exacerbates that trend. Added to this, pandemic-induced tenant eviction bans, and other measures have led to 50,000 landlords leaving the Private Rented Sector (PRS) between 2019 and 2021.
The UK population continues to rise rapidly, an increase of more than eight million people since the year 2000, which means ever more people seeking to rent and a dwindling stock of rental homes. Well-educated, supported landlords use techniques to nullify so-called “anti-landlord” legislation, which is not aimed at property businesses. Using limited companies, understanding tax, and benefitting from ever-higher rents is very profitable. The critical elements are the right support and guidance. Rental increases in 2023 will be subject to regional variation.
Due to the rise of hybrid and homeworking, I expect London and the Southeast to see the lowest growth and the regions the highest, especially with the likes of Manchester which saw a 20% rise in private rents to reach a record high.
5. Avoidance of investments in stocks
2022 was a poor year for global stock markets due to a mixture of problems, including high inflation, the ongoing war in Ukraine, and poor global growth prospects. Whilst some may argue that over time stock markets can give good returns so it is worthwhile staying invested, I believe in long-term value investment – waiting long periods with no growth would be of concern to me.
The stock market does not provide physical assets such as property, it is much more volatile and in the case of company failure, all investments can be lost.
Overall, the key to a successful investment portfolio is being well-informed and following a solid strategy.
