It’s been an interesting start to 2018. We’ve got the rising spectre of inflation, despite repeated assurances from the likes of Mark Carney, not so long ago, that what we really ought to be concerned with is deflation; a stock market wobble that’s given investors, politicians and just about everybody else the jitters; and the upending of the good ship Carillion—which turned out not to be such a good ship after all, rather a gleaming deck and mast on top of a rotten hull. Is this the sign of things to come, the beginning of the end, the warning tremors of a near-future recession earthquake? Absolutely not. But it is a sign that the economic winds are once again shifting. And top of the list of concerns already mentioned is that which affects everyone from the loftiest hedge fund managers to street level credit consumers.

Forget Carillion. Prevalent as the company has been in the news—mainly because of its politically sensitive government contracts—in the wider scheme of things, it’s simply another business that didn’t manage it’s affairs well enough to stay afloat. There has been slight contagion, but mainly it’s been confined to the company’s subcontractors and corporate partners, and therefore has remained mostly sealed within the construction sector. And while its demise has certainly been distressing for the thousands directly affected, its nothing like the subprime crisis of 2007 that punished millions. One good thing that has become apparent during the weeks of analysis following the collapse is that this isn’t the proverbial canary in the coalmine presaging wider economic problems. Rather, it is, to be brutally frank, a single vessel that unfortunately sank on the open sea of commerce.

The thing that does affect everybody, the thing that reaches the outermost capillaries of the ‘body economy’ and is therefore of far greater concern, however, is inflation. The effects of increasing prices putting pressure on central banks to increase interest rates is a real cause for concern. Not because, in and of itself inflation is a bad thing, but because of the context in which it will most likely happen.

A large proportion of the UK housing market today rests on a rather shaky foundation of many thousands of high loan-to-value mortgages, something the government encouraged (when the economy was in trouble, and money, thanks to QE, was cheap and plentiful) through Help to Buy. But now that the global economy looks to be in a far fitter state than thought, and calls for interest rate rises from various quarters are starting to become more strident, even a small move could put many borrowers (in particular buy-to-let landlords saddled with increasing tax burdens) in jeopardy.

Will we see a return to 1990s style interest rate hikes that saw many homeowners handing back the keys? Hopefully todays bankers and economists have more foresight than to allow such a thing to happen, but it is of course possible. Right now, the only thing we can be absolutely certain of is that nothing is certain, which is why investment decisions today should be made with eyes wide open, and executed with great care. From gilts to gold, from the dollar to oil, historically there’s always been an asset class underpinning the global economy. Today it’s real estate and right now, when benchmarked against other economic indicators such as wage growth and RPI, prices are too high to blindly expect a return based on capital gains alone.

But does any of this mean rate rises are inevitable? Last month’s sudden plunge in the stock market suggests it does. Following strong jobs data in the US, with record low unemployment and signs of rising wages—much of it the result of Trump’s recent tax changes and his gung ho approach to boosting the nation’s income—inflation looks likely. Which means interest rate rises, whether or not they are desirable also become more likely.

After a decade of loose fiscal policy set against a contradictory backdrop of austerity, it looks as though the next five years will be characterised by the steady winding down of QE. That means we’ll be heading into a new economic phase, one we haven’t experienced before, and it’s perfectly reasonable to expect that quantitative tightening (QT) will, in the long run, have the opposite effect.

The second longest stock market bull run on record may therefore be about to roll over from its quavering highs. We’re not talking about a nosedive here, most likely a slow swim down back to less heady levels, but the signals have started. If Warren Buffet’s saying the market’s too expensive, it probably is. The Dow Jones dropping 1175 points, the largest drop in history outside of a recession, was an investor tantrum, a reaction to the realisation (following the jobs report) that what the market giveth the market can also taketh away. Volatility returned with a vengeance generating the biggest VIX spike on record. If you didn’t know it, VIX is a measure of volatility, and that spike meant that when the sellers came in, they came in hard and fast. It was the sort of move Usain Bolt would have struggled to keep pace with.

Things have levelled off since then, and the panic is in the past, for now. But it was a move that shouldn’t be ignored or forgotten, a move that suggests inflation is at the forefront of the minds of those at the top.

So, if inflation is on the cards, what does that mean for UK property investors? Actually, quite a lot. And this is something we’ll be covering in more detail in our April newsletter.

If you’re looking for an inflation-proof opportunity that promises ongoing yields of 8% or more, with multiple revenue streams supporting your investment, get in touch with us at Shepherd Cox today.

Nick Carlile
Property Investor
23 years / £120 million HMOs / 474 Houses / 17 Hotels