by Piers Williamson

In the 3 months or so leading up to the end of 2009 there has been a growing sense of ‘wait and see’ amongst many Housing Associations (HAs) considering further development. There are clear question-marks around many things – the availability and terms of future grant -in particular.

Traditionally this is the week when we look to economic commentators for their predictions (and possible answers) for the year ahead. However, having had the opportunity to absorb other more erudite views in the last few days, I’ve been struck by the often wildly divergent opinions expressed. Here’s where I think I have been able to make (a little) sense out divergent views:

Inflation/deflation/stagflation

Period up to (a presumed) May general election: stagflation – energy, food prices, weakness of Sterling plus increased VAT feed through to short term price increases. Prices grow faster than output. However, Base Rate broadly predicted to stay very low, because the medium term outlook (depending on the outcome of the general election and the probability of a ‘hair-shirt’ Chancellor) still teeters on deflation. However, the nature of the combination of Quantitative Easing (QE) and very low interest rates is to deliberately stoke inflation.

Which brings us naturally to the timing of the withdrawal of QE et al……

Asset Prices and the ending of special government support for the Economy

Many commentators describe the revival of the last 6 months as that of a patient on powerful pain-killers i.e. the pain is still to be grasped. A crumb of comfort….this is not just a UK headache. However, Mervyn King will want the Bank of England to be at the intellectual cutting edge of the removal of these special measures and there is a growing concern that a subsidiary asset bubble, born of QE, is already forming. Most commentators see the UK stock market (which is less and less UK-centric in its makeup) advancing a further 10% this year. House price movements are still based on very low volumes and the average hides underlying still divergent trends. Nevertheless there is a growing sense of the worst of the correction is behind us.

Long term interest rates are still relatively low.

Source: Bloomberg

This chart shows the 30 year cost of borrowing for the UK Government (30 Yr Gilt yield) since 1991 (c. 11%) and highlights the relatively stable range since the Monetary Policy Committee was given independence in 1997 (between 4 & 5%). There is a huge question mark whether yields will just tick along (Japanese style deflation) or (as the majority of commentators think) how far they will break upwards in the lead up to/post an Election – particularly if the UK Government’s AAA debt rating looks like it may be adversely impacted.

Outcome of the General Election

For victory at the election, the Conservatives need an 8 per cent swing – larger than has been achieved in any general election since 1945 (except for 1997!). A smaller swing to the Conservatives, so long as it is over 1.5 per cent, would mean a hung parliament. In the last hung parliament, under Edward Heath in 1974, the Conservatives won more votes than Labour but fewer seats. The electoral system remains biased against the Conservatives. In 2005, they won more votes than Labour in England but 92 fewer seats. In 2010, for the Conservatives to gain the same number of seats as Labour, they need to win around 2 million more votes. In this scenario, market concerns clearly focus around a prolonged lack of direction in tackling the structural budget deficit.

Conclusions

If nothing else, this article is designed to highlight the number and complexity of questions surrounding us at the start of the decade. Markets don’t like uncertainty and the short term implication is volatility – not a healthy base for investment decisions. Nevertheless, coming through this part of the housing cycle we are absolutely sure that lack of supply will amplify the affordability issue early on in the recovery phase of the market. That will be upon us in the next two to three years- so tough choices need to be made to be able to buy development sites.

As ever, THFC is there to support HAs in raising long term finance. We will complete financial 2009/10 having originated record amounts of business and delivered some of the lowest financing costs. So in all your endeavours the whole THFC team wishes you a happy New Year, but in the words of Michael Conrad from the (much missed) Hill Street Blues “Let’s be careful out there!”

Photo credit: Courtesy BH Impact, via starpulse.com, with thanks

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