UK RMBS: New Year, Old Worries?
Ending one year and starting another creates a totally illusionary backdrop against which the declaration “this year will be different” is often heard. Sadly, if my annually renewed gym membership is anything to go by, declarations on the 1st January rarely carry much weight beyond March.
The UK housing market, like my gym usage, seems equally resistant to following the path laid out at the start of each year. The start of 2021 saw forecasters predicting tough times ahead, rising unemployment as the Covid-19 furlough schemes finish, combining with the end of the stamp duty holiday to drive down demand. The result? UK HPI would be down 8% (the Treasury’s OBR forecast), or down 4% (Halifax) while the “bullish” Rightmove predicting a rise of 4%. As the chart highlights, the actual pace of HPI growth defied every prediction, Nationwide reporting a peak annual growth rate of 13.5% back in June and calculating a final year-on-year gain of 10.4%, the highest annual growth rate since 2006.
As 2022 gets underway, we again see a slew of negative economic forecasts being mixed into a heady cocktail of economic calamity; the most relevant to the UK consumer being surging energy costs, rampant inflation and rising interest rates. This undoubted pressure on household budgets is being put forward by many as the precursor to a property market collapse although the UK’s top mortgage lenders, taking a more balanced view, are suggesting more a cooling than collapse.
Our own view is probably a little more bullish, yes we expect lower HPI growth this year, but not negative, whilst the slowdown in momentum does not really appear until later in the year. Why do we say that? Two key points stand out: (1) The “race for space” bought on by work from home dictates will only ease as people return to the office full (or almost full) time which will be a gradual process for many, and (2) the current demand : supply imbalance should ease as rising interest rates cause buyers to re-evaluate how much they want (or indeed can afford) a property, but realistically not until a third (or even fourth) rate hike which will be much later in the year.
So what about consumer spending and the squeeze on household budgets? Firstly, it is important to look at this in the context of securitisation performance, specifically transactions backed by consumer loans, car finance and mortgage loans. Why is that important? The vast majority of consumer debt finding its way into securitised transactions comes from households where one or more adults are in employment. Yes, a spike in utility costs will unduly negatively impact those on benefits, but harsh as it is to say it, these borrowers are not typically a demographic to which securitisations are exposed.
Recent data from the Bank of England highlighted that, in November 2021, credit card borrowing reached its highest level in more than a year, over 30% higher than the monthly average for the previous 6 months. This may well mean households are placing greater reliance on unsecured borrowing to make ends meet but, when considered alongside the widely reported uptick in general retail activity over the same period, it seems more likely that the general public are actually less worried about their future finances than the media headlines suggest. Similarly, the immediate impact of rising mortgage rates will be tempered for those already borrowing given the increased use of 2 – 5 year fixed rate deals over the last few years. Such mortgage deals protect households from the immediate impact of rate rises, even if history has shown that they also come with their own risks by heightening “rate shock” if base rates rise sharply over time. Throw in a resurgent employment market ripe to support higher wage growth and household budgets for the majority of the working population may not be as “squeezed” as some suggest. Average earnings growth had already risen to +4.9% in the year to October.
One final factor to consider is the strong HPI growth previously mentioned. UK consumers have in the past proven to be very comfortable relying on the store of wealth which builds up in their property as justification to support consumer spending. Given the last few years, many households will have built up a decent level of additional equity which, in extremis, they can tap to clear debts accrued.
By Andy Burgess. Sr. Portfolio Manager