News Updates - December & January
8th January 2021
Bank of mum and dad tightens lending
House buying funds supplied by the Bank of Mum and Dad has dropped dramatically over the last two years, shows government data. In 2019/20, the English Housing Survey describes 28% of first-time buyers as having received finance from family and friends to help with their purchase. This is down from 39% in 2018/19. Experts say there is reason to believe that this figure will decrease further. Funding from the Bank of Mum and Dad could dry up even faster now that parents and grandparents have to think more carefully as to whether they can afford to plunder their own finances to help their children onto the property ladder. It means the vast majority of people who buy a home of their own have to do so under their own steam, and with an average deposit of £42,433, that’s an awful lot to ask – especially when those who are privately renting while they save for a place of their own spend almost a third of their income on rent. The data shows that mortgage holder spend 18% of their income on their loan, whereas renters spent 32% of their income on keeping a roof over their head. Almost half of households have no savings (45%) but this is particularly acute among renters. Three in five private renters have no savings at all. This means not only do they have nothing to fall back on in a crisis, but that they aren’t getting any closer to owning a property of their own.
Tax fears trigger insolvencies
A flood of businesses are voluntarily closing down due to the economic uncertainty around covid-19 and fears over a possible increase in capital gains tax (CGT), according to analysis by Price Bailey. In Q3 2020 - 3,126 businesses voluntarily appointed liquidators, a 52% increase on Q3 2019, when 2,058 businesses voluntarily appointed liquidators. The number of voluntary liquidations in Q3 2020 represents the highest Q3 total on record. Price Bailey said that it has seen a surge in enquiries from business owners in the past quarter looking to close down their businesses in an orderly way and take cash out. In many cases, however, business owners are acting in haste and could take more cash via a trade sale or management buy-out. The firm points out there has been speculation that CGT will be increased to a maximum rate of 40% as the Chancellor looks to shore up the public finances in the wake of the coronavirus pandemic. Many businesses owners are currently eligible for Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief. This reduces the amount of CGT they are legally required to pay when taking cash out of their businesses to 10%. Many of these business owners are a decade or more before retirement age and their businesses are perfectly viable. Closing them down in many cases will result in job losses, which will have a knock-on effect on the wider economy. There is a large ecosystem of potential buyers with cash to spend, and many of these businesses will have built up intangible value, such as goodwill, which will be lost if they simply cease to trade.
What does 2021 hold in store for oil stocks?
BP (BP.L) and Shell (RDSB.L) rose in late afternoon trading on the on Tuesday, amid reports that the Organisation of the Petroleum Exporting Countries (OPEC) and its allies were close to agreeing a freeze on oil output. OPEC is nearing a consensus, according to Bloomberg, after rejecting Russia’s proposal for a production increase. If confirmed, any agreement would be a surprise to the market, which had been expecting an output increase of 500,000 barrels a day for February. The only outcome that could serious threaten prices is a total collapse but that's extremely unlikely, with another compromise likely to keep all sides happy for now, most commentators believe. The fast-spreading, newly-discovered variant of COVID-19 has led oil market players to be increasingly cautious about global economic recovery efforts, as most of the world continues to struggle to contain the spread of cases. Despite the dramatic rise in oil stocks, prices may not make much of a recovery in 2021 in light of the new COVID-19 variant and subsequent travel restrictions that will limit the use of gasoline-fuelled transportation, such as cars and airplanes. A Reuters poll of 39 economists and analysts conducted in the second half of December forecast Brent crude prices would average $50.67 per barrel next year.
House price growth at six year high
UK house prices climbed 7.5% in 2020, the highest growth rate for six years, building society Nationwide found. Prices ended the year 5.3% above the level prevailing in March, a resilience that seemed unlikely at the start of the pandemic, it said. Housing demand has been buoyed by a raft of policy measures and changing preferences due to the pandemic. House prices were 0.8% higher in December than November, with the average property valued at £230,920. The outlook remains highly uncertain though. Much will depend on how the pandemic and the measures to contain it evolve as well as the efficacy of policy measures implemented to limit the damage to the wider economy, including a possible extension to the Stamp Duty holiday. The current Stamp Duty time limit is creating a false horizon, which will see prices rise even higher in the first quarter of next year, most commentators believe. Though rising unemployment levels are an obvious threat to property values, demand should remain relatively strong as it still costs less to own than to rent and money is about as cheap as it gets. Predictions are that during 2021 people will continue to change their living arrangements as companies adapt their remote working policies on a more formal basis. However, housing market activity is likely to slow in the coming quarters, perhaps sharply, if the labour market weakens as most analysts expect, especially if the Stamp Duty holiday is not extended.
The benefits of active funds:
When allocating funds in a portfolio, one of the questions investors face is whether to use active or passive funds. Simply put, active managers try to beat their benchmark. They will try to pick the best countries, sectors or stocks, and gather them up in a portfolio with the expectation that their return after fees will be above their benchmark index. Active fund managers claim they can beat the market, i.e. they can interpret information much better than other market participants and generate superior returns. While some can deliver stellar returns, the reality is that very few active managers can achieve exactly what they claim. That was the case in 2019 and will probably be the case this year too. Yet investors often pay a hefty price for active management. The reason for this underperformance is simple, according to the tenants of Efficient Market Hypothesis: investors compete to exploit with a profit any available information about earnings, macro and many other factors that affect the value of public companies. Stock prices adjust so quickly it is almost impossible to find mispriced stocks and exploit it for a profit. The problem with this theory is that it claims that those few who do indeed beat the market consistently are just riding on luck. If that's the case, does it make sense to pay an active manager and when? If you're looking for asset managers who can beat their benchmark in markets that are not completely efficient or are not efficient all the time. this is a prime time to employ the skill of an active manager. Technically this should be the case for any market, including in the US, despite its reputation of being one of the toughest markets to beat over the long run. The coronavirus crisis, and other episodes of market volatility - the fourth quarter of 2018, the Euro crisis in 2010-2012, the financial crisis of 2008, to name just a few - show that there are times when being active and daring to act and be contrarian can lead to outperformance.
Brexit and house prices
On 31 December the post-Brexit transition period ends and, with or without a free trade deal with the European Union, the UK will start life outside the EU’s single market and customs union. That will, pretty much all economists tell us, have a substantial economic impact on our lives. But what exactly will those impacts be – and how will ordinary people experience them? The Times describe how the two varieties of Brexit are likely to impact house prices and mortgages:
Leaving the EU with a free trade deal would, according to the Treasury’s independent Office for Budget Responsibility be a long-term drag on the economy, reducing economic output by around 4% relative to otherwise. But it would mean any short-term disruption, above and beyond the huge coronavirus impact, would be avoided. Leaving the EU with a successful trade deal probably won’t have a short-term negative impact on house prices. In the longer term, the price of housing will be determined by the balance of supply of new housing and the demand for it and also interest rates. Moving from EU membership to a free-trade deal with the bloc is unlikely to directly influence these major structural determinants. As for mortgages, most borrowers’ repayments are indirectly determined by the main national interest rate set by the Bank of England. Leaving the EU with a trade deal would be a more benign economic scenario from the point of view of the Bank’s rate setting committee. It might bring forward the date at which the Bank raises rates, relative to a no-deal scenario on 31 December. And that could push up mortgage repayments for many households. Yet the Bank is mindful of the overall economy, which is still in the grip of the coronavirus emergency, and financial markets are not expecting significant rate rises from the Bank any time soon, whether there is a Brexit deal or not.
Some surveyors are nervous about the impact of a no-deal Brexit on the UK housing market. Several cite it, alongside the impact of Covid, in the latest survey by the Royal Institution of Chartered Surveyors (RICS) as a potential dampener on the market. If unemployment rises sharply next year because of the coronavirus crisis and a no-deal Brexit that’s unlikely to be positive for house prices. Yet it’s hard to say with any confidence that house prices would fall in the event of a no-deal Brexit, especially as they have held up extraordinarily well in the face of the coronavirus crisis, which has seen the biggest shock to the UK economy in some three hundred years. As for mortgages, financial markets are currently pricing in the Bank of England cutting interest rates below zero in the coming months to help support the economy. Many analysts think a no-deal Brexit could be the factor that pushes the Bank to take such a plunge into negative territory for the first time. While negative interest rates probably wouldn’t result in a fall in average mortgage repayments from their current ultra-low levels, it would ensure they didn’t rise. This could help cushion the financial blow of a no-deal Brexit for some households.
Will forced house sales pull prices down?
House prices were predicted to fall as soon as lockdown hit, but that hasn't really panned out. The stamp duty holiday is being cited as a potential reason, so it's definitely worth keeping an eye on prices when that ends. Commentators point out that we're seeing a lot of people who are reassessing where and how they live, with many looking to move away from busy city living into calmer, more rural settings. Time will tell, though, whether the trend continues. There's a lot to contend with in 2021 - before the stamp duty holiday ends there is also Brexit and the ongoing coronavirus pandemic to contend with. Now is, in some respects, an excellent time to buy as low fixed rate mortgages are rife and house prices are strong. August has, though, seen property values jump by%, according to David Price from 10ACIA Construction, in comparison to July - largest rise since 2004 when prices increased by 2.7%. September saw another increase of 0.9%, which was 5% up on the same month last year which was the biggest yearly rise seen since 2016. We’ve seen the fastest growth in UK house prices in more than four years. Some experts still maintain that they are confident the market will be strong in 2021 meaning you shouldn't hold off on buying a house - but not everyone agrees. The majority expect house prices to fall. They already have slightly this past month and unless the SDLT holiday +/ furlough period are extended beyond March most would expect slightly larger falls each month, followed by a larger drop if other measures aren’t introduced to fill the vacuum in April. Whilst the consensus is that we will likely have a vaccination for Covid-19 by this time, there are still many businesses that will not be able to recover their losses, leading to increased unemployment. This is despite the surge in start-ups, no doubt aided by the furlough period and the previously unattainable free time that many of us found ourselves with earlier in the year. Sadly, though, the success statistics for start-ups are still as galling as they ever were, meaning that the majority will still fail within the first year. Hence, we cannot rely on this good-news-story to bridge the gap come April 2021.
Inheritance tax bill warnings
The UK is in the midst of an economic crisis as a result of the coronavirus pandemic, putting the country in a double dip recession. The concerning state of the economy was once again highlighted recently as the national debt jumped to more than £2trillion. The budget deficit – the annual shortfall between spending and tax income – is expected to reach more than £400billion this year. This has led many to question how Chancellor Rishi Sunak will look to revive the economy, with many fearing imminent tax hikes. Mr Sunak has not yet revealed what tax policies he intends to change. A recent report published by the Office of Tax Simplification, commissioned by Mr Sunak, suggested rises in capital gains tax which could impact inheritance duties. But, as experts have highlighted, the number of families charged inheritance tax on gifts has climbed for three years in a row, and many are falling foul of the complex rules. Last week, the Office for Budget Responsibility projected that the number of estates subject to the duties will rise after the pandemic from 25,200 in 2019/20 to 30,400 in 2020/2021. Following a Freedom of Information request, HM Revenue & Customs this week revealed an increase in estates liable for IHT on gifts — up from 873 estates in 2015/16, to 920 in 2016/17 and 993 in 2017/18. The tax charged on gifts rose from £135m in 2015/16, to £156m in 2016/17 and £197m in 2017/18, the latest year for which data is available. Altogether, £5.2bn was raised in 2017/18 from 24,200 estates. Many families of older UK people who died from coronavirus could now face unexpected inheritance tax bills on their estates. Many of those who died unexpectedly will not have had time to plan their affairs. There are also the pitfalls of misunderstanding the rules. Many individuals who make gifts during their lifetime are unaware of the various available allowances and exemptions, let alone that their gifts could end up coming back to bite their beneficiaries in the form of a hefty tax bill. Mr Sunak has faced opposition from many within his own party over potential tax hike plans, many citing the plight faced by many self-employed workers who have been excluded from financial support during the Covid Crisis.