Sunday Supplement 13 Jul 25 - We is broke, innit?

“There comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must take it because conscience tells him it is right.” - Martin Luther King Jr., no intro needed. This week’s quote is one about politics and courage - and you will see just why in the deep dive. It compares and contrasts (deliberately) to this week’s title, which is instead best read in the voice of Sasha Baron Cohen in his OG character, Ali G. Before we go into this week full hammer - Rod Turner and I will be running our next Property Business workshop on Wednesday 1st October, in London - subject matter this time is Investment, with an emphasis on what metrics you really need to be considering to run your property business properly, and building your business to scale. How have we done so many deals? We’ll tell you! Book the SUPER EARLY BIRD tickets with 20%+ off, now: http://bit.ly/pbweight Onwards into Trumpwatch. Tariffs were front and centre, as expected, given the 90-day expiry……June’s tariff revenue was $30bn which was 3x the March figure. Canada was in the firing line with a 35% tariff especially for them on goods, with 15-20% being imposed on nations that have not secured a deal yet. The double down before the end of the expected extension, which is August 1. This is the last extension. Honest. 60 countries to go, can’t see any problems here. The markets really can’t - or certainly the stock market. The bond markets adjusted after the Fed’s language was not congruent with the Trump administration’s 3% cut in interest rates that was suggested. I just can’t fathom what will happen next year when a Trump stooge is appointed as the Federal reserve chair - but next year is too far away for the markets to worry about, clearly. There’s another reason for businesses to wait for any important decisions already deferred to July, until August 1st and beyond. Volatility remains the watchword depending on what deals are done. The dollar had a strong week, however, which has been lacking in H1 of the year - is safe haven demand back, yet? Not sure why it would be, to be honest. The colloquial call in the markets is the TACO trade - Trump Always Chickens Out. Not a bet I’d want to be making, personally. I would prefer TINA (Trump is Nutter Always). Good luck predicting the Donald. The economic strategy overall, of course, may well be to weaken the dollar deliberately (certainly been working in general) in order to rebalance trade imbalances. It isn’t the sort of thing Trump could ever come out and say of course - better to let it happen and then blame someone else, even if it was your target. Thankfully, the UK is outside of the tariff crosshairs, at this time, which is why we haven’t been hearing too much. The short term pain is the same, of course - cost structures are increasing, as everyone said they would, meaning inflation on the goods side of the equation. As so often in this section, watching Trump feels like watching an entertainer of average talent cross Niagara falls on a tightrope. Compelling viewing, but not what you want to be watching - what you just feel compelled to watch. Let’s get back onshore - the real time UK property market. Chris Watkin delivers again - Week 26 is now reported on. Listings printed 36.9k, no material change on last week’s 36.7k, but are still 4.7% higher than 2024 YTD and 7.7% higher than the pre-pandemic market. My “10% more stock than a normal market” ready reckoner is still clinging on. We are 14.5% ahead of the 9 year average, but that does include 2020 which pollutes the figures somewhat. We are limping around the mean for this time of year, not forging further forward into even more listings than historically precedent. 27,500 price reductions, 14.1% reduced in June, compared to last year’s 12.1%, April’s 13.4%, and the 5-year average of 10.6%. More stock, more reductions - absolutely and relatively. 33% more reductions than the 5 year average, if you take the difference between 14.1% and 10.6%. “25% more reduced properties than a normal market” also works as a ready reckoner. One in seven properties on the market are being reduced each month (so we are currently running at a little over ONE HUNDRED THOUSAND price reductions per month, to be clear!). Can’t find a deal? Just keep the legwork up and you’ll get there. 26.6k homes sold subject to contract. Healthy is still the watchword. SSTCs are up 7.7% year on year and 15.6% on 2017-19, and still nearly keeping pace with 2022 (which to this point was a very hot market indeed). We went into June with 756,675 homes on the market - as the market got stickier before the pandemic that number was c. 660k, a sellers’ market is more likely to be under 600k. At the end of May 2024, 694k were on the market. It’s a lumpy trend upwards in just May and with this amount of stock on the market, it will be continually hard for prices to surge forward in the coming months - the “flat” feeling will likely manifest in a steady market without much excitement as we head into “summer proper”. The first month which sees fewer on the market that isn’t November or December would be a tell that the glut of stock - provided at least in part by exiting landlords, the “never spoken about” truth of this current market - has reached its peak, but there’s no guarantee that we are there yet. Fall throughs are staying below the 7-year average, at 23.7% (last week 23.2%). All relatively normal “noise”. The net sales are still playing ball - 6% up on last year and 11.1% higher than 2017-19 - not quite at 2022 levels but the stamp cliff will have forced a few more transactions out of bed of course, and as the year progresses then in the absence of any more shocks, things will likely catch up because transactions were significantly “disturbed” by the 2022 budget and the bond markets, of course, in comparison. I always give Chris a weekly shout out here because he’s more prolific than “just” this epic tome he releases weekly on the UK property market - he comes up with some great stats on a regular basis. Drop him a like, subscribe, and all the rest of it and some kind words for his content creation. If you are in the industry and want support in growing your business or to be a more effective communicator/be more in touch with your local market - that’s his core business - give him a shout. The article gets published on the Property Industry Eye website, and the video on his YouTube channel - @christopherwatkin

Here comes this week’s Macro drift, as we head sideways once more (if not a little bit backwards). Halifax released their price index, which wasn’t in line with Nationwide’s last week and the ripples that it caused - we will also look at Zoopla’s price index report in concert. There was the RICS residential market report for June, which we will take a look at. We can’t avoid GDP growth (well, we can, as it turns out - but we better talk about it) - and then our ever-present gilts and swaps.

Last week Nationwide’s 0.8% fall caused a stir, if you recall, although Nationwide themselves distanced themselves from their own index. It was the biggest fall since the last biggest fall, etc. etc. etc. The media jumped on the bandwagon - those who spend their free time willing house prices down, anyway. As discussed - prices are at an inflation adjusted and wage adjusted historical low for this generation. I should make a further qualifying note here - as you know I strive for accuracy, not for soundbytes. This is not to say the cost of living IN a house is at the same low. Energy prices alone are up 50% in 5 years. But they are not a massive percentage of the cost of living in a house - the rent, or the mortgage, are (although for the 36% that own and live in an unencumbered property, the 2 essentials are utilities and council tax, and almost certainly utilities is the highest bill of those two). Halifax were at 0.0% growth for the month. However, they did drop 0.3% last month, let’s remember. They also did retreat a teeny, tiny, bit on their average price, but not enough to even declare a 0.1% drop. This sees the annual house price growth at 2.5% according to Halifax - so we are very much in a 2%-2.5% pattern from the wider cited indices at this time. They also report first-time buyer numbers back to pre-stamp duty change levels - which is a nice stat to have in the books. It is saying that whatever was frontloaded in Q1 2025 levelled out in Q2 - it is believable, as the change was not that huge (only affecting FTBs buying at over 300k) - but that likely encompasses around one quarter or so of FTB properties around the UK (average 225k, standard deviation around 100k, believable numbers that are skewed by London I’m sure). The head of mortgages at Halifax cited resilience, and noted that mortgage approvals and transactions have both picked up (true, as reported here) and that more buyers are returning to the market. Wages are rising, easing affordability pressures (someone else is noticing at least!) and Ms Bryden also cites stabilising interest rates giving people the confidence to plan ahead. That’s one interpretation, although hard to evidence without survey data or the likes. Now the first quote pertaining to my roundup of a couple of weeks back. Over the last two months, we have helped (do we assume we is Halifax alone, or the entire group - probably the latter I suppose given that results are published as a group) an additional 3000 buyers - including more than 1000 first-timers - access a mortgage they wouldn’t have qualified for before. Listen - this is a bit anecdotal, but this is the best we’ve got before there’s a proper UK finance report or similar. If they mean Lloyds, Halifax and the Bank of Scotland combined as a group, and that was a representative change across the sector (and my analysis a couple of weeks back certainly suggested that it was) - then according to April figures, that represents 16.8% of the market of new lending. If that’s the case, then 3000 over 2 months is actually nearly 18,000 more mortgages than otherwise would have been written across the sector, 9,000 a month, or 108,000 per year. Significant, and increasing transactions by the tune of around 10% more transactions than we’d otherwise expect, on its own. There will also be upward pressure on pricing (because of higher demand) on this basis. Let’s not run away here. There will be a bottleneck of such people in the pipeline, and in the early days I’d expect extra volume - but it could easily be an extra 100k mortgages in year one and then start to cut back/dwindle accordingly. This potential kindling to the market has been somewhat quashed this week when the lenders who had asked for a change in the 15% “flow limit” cap - remember, this is the percentage of new loans allowed to be at higher than 4.5x income - was pooh-poohed by the Bank of England’s financial policy committee who pointed out that as of Q1 2025 high-LTI lending was at 9.7% of new flow and projected to rise to about 11% by the end of the year - so their argument is that if it ain’t broke, don’t fix it - or in the typically more conservative Bank of England style, we don’t want a few rogue lenders potentially going above the 15% limit and creating a problem on their own and creating a systemic dependency or land-mine. Sensible stuff, but not the fire under the mortgage market that Labour (in my opinion) secretly wanted. Lenders CAN originate more than 15% however as high-LTI loans, as long as their overall lending flow stays within the 15% boundary (so I would interpret that as looking at their whole lending book overall, not JUST the new loans). I’ve had to use chart A from the FPC report this week to show you the data that the Bank of England is working from when they look at the blockers stopping first time buyers from buying a property. A segue, you will note, but a worthwhile one I hope you will agree. Halifax also noted stretched affordability for those reaching the end of cheaper 5-year fix deals (fair), and a softening job market not being the best for confidence when it comes to stretching into a new property for buyers. However, with the two further base rate cuts priced in by the markets (true, I’m sticking with one for the moment, but it is close) - and the average drawn rate on mortgages now at its lowest since 2023 (again true - it was incredibly low in February 2023 after the ship had really steadied once Truss was gone but not forgotten) - Halifax are pointing to modest house price growth in the second half of the year. I’m still thinking flatness is the likely characteristic of this market until some of these newer higher-loan or lower-stress-test transactions start to land at the land reg, to be honest - a couple of months yet. Let’s see if we have a great Q4 in the housing market. At this point I’d back inflation over house prices for the next couple of quarters……but 2026 could see a different story. Soon people will be stalling because they are worrying about the tax rises to come in the 2025 budget! With Nationwide and Halifax in the book, what did Zoopla say in their most recent report? Sales agreed at the fastest rate in 4 years, but price growth fell to +1.4% with 14% more homes for sale. They do note - as often being the most insightful of the major indices - that house prices are rising more quickly in affordable markets. Is this because this is where investment money is going - where the stress tests and the debt service cover ratios actually stack up for mortgage purposes? They also note falling prices in markets with average values about £500k, for the same reason I believe - because investment money is just leaving those markets, and also, I dare say, because the buyers of those houses are not committing to moving or even to the UK, necessarily, waiting for the next round of (whatevers) from the Chancellor in October/November. Zoopla finishes with a conclusion after my own heart - Setting the right price is essential to achieving a sale. The average time to sell is 45 days, which is unchanged from a year ago, Zoopla says. They are also very flat month to month, and make the same conclusion that Nationwide did last week (or a similar one) - flats are down 0.8% year on year according to Zoopla, whereas terraces are up 2%, semis up 2.5%, and detached houses up 0.9% (with their far higher average values no doubt explaining that, in the context of what’s already been said). Zoopla now has - in the 4 weeks to 16th June 2025 - 8% more new supply than that time period, but 7% more buyer demand - a pretty even set of circumstances. The stock is high, however, and with that supply just still nudging out that demand, it still at the face of it looks like a buyers market at a macro level (just not in cheap, investment friendly stock I’m afraid folks!). Zoopla takes a different position on rate cuts, saying they are “unlikely in coming months”. They are making a mistake here, though, citing current wage rises at 5%. The Bank doesn’t care about those - they care about the expected wage rises over the coming year, which are at 3.5%-4%, which they see as completely palatable. We are still (decent) odds on to cut rates in August at the next Bank of England meeting. They then offer up some regional slicing, which I always like to see. In London, the SE and SW, the stock of homes for sale is between 16% and 19% up. The prices there according to Zoopla are up less than 0.5%. Between the North East and Yorkshire, including Scotland, the North West and the West mids, there are between 0.5% and 5.5% more homes for sale, and the price brackets are 2%-3% (big numbers for Zoopla, who are always quite low on their annual increases - their data must be flawed by working too much from asking prices). How much are the markets with average house prices of £500k+ falling by? 0.2% year on year, according to Zoopla. Don’t get too excited just yet. One last interesting tidbit - 22% of what Zoopla currently have listed has been on the market for the past 6 months or more. As I’ve said before - deals are out there. Sure, some of those are stuck not able to move unless they hit their price - but not all of them. And if they need price, how about negotiating on time terms…….and so the creative deal is introduced! Before I move across from the indices, just one more cheeky segue - or two. S&P Global produces the Halifax Price Index - which I respect a lot less than I respect the PMIs, although with the Halifax HPI, they are restricted in input data of course. There were two further S&P Global reports of interest in the past week - firstly the UK Business outlook - which reported improved profit forecasts supporting “slightly stronger hiring intentions” at UK businesses. Overall this report was mildly positive, and contained sub-headlines like “inflation expectations ease slightly but remain relatively high”. Beautifully British. Sluggardly upwards, let’s settle for. There is mention of the slightly superior (comparatively) current position on tariffs compared to business confidence in other nations (because we are already “sorted” - aren’t we?). S&P also produces a UK regional growth tracker for Natwest (busy bunnies, aren’t they?) - this cites the main drivers of regional growth as the East of England, the South West and London as at the end of Q2, with output inflation easing regionally and jobs being created in - wait for it - Northern Ireland, of course! The business activity index, regionally, looked far better than it did in May if we can trust this as any sort of leading indicator (indeed, the trend change looks similar to the change in PMIs between May and June) - upwards, let’s see July’s! OK - that may be my record number of segues in one of the macro sections. More focus now, I promise, otherwise this will be a 4+ coffee edition of the Supplement! The RICS Residential market survey is up next. This is never fluffy, and if anything, leans to the bearish side. So - in another treacle-laden summary, here we get “sales market activity appears to stabilise, with near-term expectations for sales volumes turning marginally positive”. Woo-hoo, can you contain the excitement? In seriousness, it is more of the same, and the flat summer with a budget “on the river” will surely play out as described here. I’m on the same page as the masses - which always makes me uncomfortable - but for better and more well-researched reasons, I would argue. Buyer demand printed +3%, compared to -22% last time out. The same old story here - Q2 has swept up from the SDLT changes. Agreed sales were still negative but -3%, compared to -25% and -28% for the 2 months prior. 12-month sales volumes expectations are right down though, down to +5% from +25% last time - so suddenly it has gotten better in one month, but won’t get much better over the next 12? As I always say - don’t get too excited over one month’s figures. New sales instructions are still positive, at +3%, and +16% report conducting even more market appraisals over the period compared to last year. This all leads to a print in prices of -7%, but - as you will likely know by now - this very much decomposes when you look at the regionals. You know the drill by now - SE, East and London reporting a decline, the rest reporting better fortunes, especially Northern Ireland, the North West, and according to RICS - Scotland and the East Midlands as well. -10% see growth in the next 3 months, +24% see prices moving upwards in the next 12. Tenant demand was steady, and landlord instructions were printing -21% as that trend just runs on and on. +24% expect rents to be moving upwards in the coming 3 months. Moving swiftly on to Growth, then, as we will need to spend a little time here, in order to set up the Deep Dive correctly. It’s back to Milder May’s figures for the numbers released this week, underwhelming though they were. The expectation was 0.1% in the black, the PMIs suggested (as I said) that -0.1% to 0.1% was the range, and thus that 0.1% was about the most hopeful - and sure enough, -0.1% was printed. The PMIs were much better for June, not that they necessarily correlate month to month, but the overall movement is very close or tends to be. However, there are also revisions to consider rather than us just looking at the -0.1% in isolation (that’s what the mainstream media would do and did do, of course). The miss is never pleasing to the markets in general, although lower growth usually translates to lower bond yields - more on that later, but the basic premise is that - other things being equal, the classic economists’ caveat - lower growth means cutting rates toward the “natural rate” or towards a rate that might help to stimulate the economy. Now - the detail, and the devil, not in that order. There was a large revision to March’s figures of 0.2% - so growth from 0.2% to 0.4%. That is the 0.4% we’ve lost since then, of course, and more on that detail later on. Now the more confusing part - that somehow translates into a quarter showing 0.5% growth “to May”, even though you can see +0.4%, -0.3% and -0.1% as the past 3 months. I hold out hope that the ONS will either explain this each time, or come up with a much better way of letting us lay people know exactly why that looks like such a bunch of swiss cheese when the real “running quarterly total” looks a lot more like a big, fat 0. Now a rarity. Services were up 0.1% in May - but production was down 0.9% and construction down 0.6%, and those were enough to drag that positive into a negative. To put that into the indexed numbers - services put GDP up 0.07%, construction put it down 0.04% and production took it down -0.12%. So - in total, down 0.09% or 0.1% to “us lot”. This looks even more confusing when you put our annual GDP rolling number into the mixer, which is now 0.7%. Miserable or what - or, in line with exactly what the likes of me forecasted whilst other insane organisations were expecting 2% under Labour and their “growth” policies! I will throw NIESR into the mixer here (or more accurately, under the bus) - it is a little unfair, because they can’t be held accountable for the revision, and does that really make me right and them wrong if the numbers were wrong in the first place, but their bullish 0.3% Q2 growth predictions are stuck in the toilet at this time. They still see 0.2% growth for Q2 - which at this point looks brave, since the best estimate for June’s growth would be 0%-0.2% based solely on the PMIs. Yep, two thirds of the data known, current print -0.4%, but the forecast at 0.2% growth - with the other month already having actually happened, and survey data released. Sometimes I give up. Or perhaps this is just why I do what I do. You decide! What’s done well? Information and communication particularly, alongside admin and support service activities. What’s done badly? Financial and Insurance activities, mostly, alongside professional scientific and technical activities. Legal explains a lot of the latter, as I’ve discussed before - with those figures all over the place thanks to the SDLT changes. Another big growth area (6.1% in May 2025) as we recovered from the lull in Awful April just after the deadline. In Construction in May, the specific changes were a fairly large decline in repair and maintenance (2.1% - turns out you don’t fix the roof while the sun is shining) and an increase in new work of 0.6%. We know from the construction PMIs that this was an expected contraction and that housebuilding is currently holding up the suffering civils and commercial parts of the industry. Infrastructure new work continues to come in, though. In a way only the ONS can, they explain the tiny revisions in April’s data as that was last month, but because they’ve also revised March but that WASN’T last month, even though it is a much more significant revision - they don’t even comment on it. Go figure. And they say we need change at the top of UK statistics - there are no words (no, they are numbers - sorry, couldn’t resist). So, we grew, then we shrank. We went spectacularly sideways. To be honest, if we can absorb the October budget as easily as that (and that’s very naive, the real period over which that’s absorbed is about 2 years, the pros at the Bank of England tell me) - that would actually be a great result. Still, business is going to be waiting again and again here for larger investment decisions, and I’ll be reporting on their comments with frustration until late October, whilst buying assets that are being sold off so their former owners can relocate or just give up, at cheaper prices than they otherwise should do. Doesn’t sound too bad, when I frame it like that, does it? Lacklustre stuff at a bad time for the Chancellor and a testing one for the PM. What did the gilts and swaps do, then? Not the week we would have expected on that data. Tariffs and US yields dominated things too much, and the growth figures did NOT put the yields down as we would have expected. This is a bearish sign on bonds, and suggests rising yields over the coming weeks, not falling ones. We opened the week on the 5-year at 3.982% and closed at 4.051% yield. Yaa-boo-sucks. Thursday’s close of 4.033% corresponded to a 5-year swap yield at the close of 3.673% - that 36 basis point discount holding out. One month ago - 3.72%, one year ago 3.822% - so convergence is with us. This is that stability that the mortgage house price indices have been referring to. A very, very slow decline in pay rates indeed at the 5-year level….. So why did we get dragged up - well, because of those tariffs spooking those US markets - and their yields rose and so did ours. Not in control of our own destiny, clearly! This is the rest of July for us, until the deadline that won’t move - so what will happen then to the 60 still in negotiation? Bleurgh. And the longs? The 30s opened the week at 5.343% and rose to 5.437% over the week, steeping that yield curve a tiny bit more than it already was. It’s an uncomfortable rollercoaster up towards 5.5% - the 52 week high on the 30 years is 5.675%, which I just think is an incredible price and north of 5.5% represents wonderful investment opportunities for pension funds in my view. Why did the longs move that little bit more? Well, I’m so glad you asked. If we just tie the bow around this section first - the best price 5y fix limited company no-fee I see at the moment is Paragon at 5.45%, which looks a fairly skinny margin but they do take deposits rather than have to rely on the swap market for their funds, so that is a cheaper and more profitable bank of money for them to rely on. Still - a fair rate that I’d take ASAP if I were you. I can borrow at the price the UK has to pay each year on a 30-year debt obligation. The state of that - how can that be right? Anyway - to the Deep Dive. We can’t let a report like the OBR’s slide out, this week, and not put it under the microscope. In the middle of this week we were delighted by a 152-pager from the OBR, an annual (or indeed more recent) update of “fiscal risks and sustainability”. This is another great example of the Overton window - the focus of the media, which reflects - or sets and influences - the general public, which in turn influences where the politicians focus their attention. Let’s just reset to ground zero and get back to basics with a very politics-lite recap of the past 18 months, with some economics weaved in of course. We went into 2024 doing “better than expected” on the economy, knowing an election was coming within the year. Jeremy Hunt’s efforts in that year were mostly described by me at the time as a “poison pill”, stuffing up whoever got into power next. Labour were a penalty kick. They could have said all sorts of things, but in a moment of what was simply fear from being on the precipice of power which they had not tasted for 14 years at the time, with 80%+ of the party having never done “the job” in Government before, they chose lies and lack of sensibility over taking the opportunity to do something sensible, or a good job. The Conservative rout was very obvious. It was, in the end, even worse than expected, but the markets got their predictions roughly right. I believe the Conservatives were around 30 seats fewer than the spread in the end, but that’s within a tolerable level of prediction let’s face it. The lie spread into two parts - “We will not raise taxes on working people” - with frozen tax thresholds, for example, you can argue that stealth tax is always there, and there was never any scope or intention to change those, before you start on anything else. The actual manifesto wording: “There will be no increases in income tax, VAT, national insurance or corporation tax.” - even more undeniably already broken. Stupid. Ideological at best, but overall, just stupid. Now, zoom out. The tax burden. Yes - it is very bad - and the worst since rebuilding from World War II. Here’s what EVERY commentator gets wrong, in my view. Covid was very, very badly framed by the ruling party at the time. It WAS a 21st Century War. A War against an invisible opponent. At times, the strength of said opponent was genuinely unknown. As that became more obvious, the handling of the entire matter was clunky at best, but - however much waste there was in the spending to combat it, there would be similar wasted spending in a wartime situation - there was always going to need to be a recovery period. Look at the difference between the UK between 1945 and 1960 and the public attitude, and today. It is unbelievable. We carried on rationing for years after the war was over. Now, instead, because of gutless politicians on all sides making poor decisions, we don’t even refer back to it. We GENUINELY wasted the crisis apart from those who lined their pockets during it, telling their mates or pub landlords about contracts when the system had some slack in it. Pathetic, embarrassing, but most of all political mismanagement at the very highest level. This is part of the cancer of politics today. Instead of worrying what the people care about - instead of being a consumer of the Overton window - we lack leadership that can actually SHIFT the window itself. We have lost the ability to forge forward at the top of the Government of whichever colour. It is painful to watch. Back to the tax. The tax burden is bad - far too high in order to stimulate growth in itself. Take the tax and invest it - I’ve no issue with that, if you get it right, and you don’t need to generate great returns to beat even 5.5% bond yields. 7% would be fine, and there are many public sector projects that can return more than 7% IRR, even if we just stuck to housing and infrastructure. But let’s dwell for a moment on income tax. There could be a nice pie chart here, but I prefer ready reckoners, as regulars will know. All the money comes from income tax, national insurance, VAT and then to a lesser extent corporation tax. Forget the rest. That will do us. That’s actually 4 taxes, badly named. Instead an honest system would do the following - combine income tax and employee national insurance, into “Real income tax” - and the levels would be - 0% to £12,570 - 28% from £12,570 to £50,270 - 42% from £50,270 to £150,000 (doesn’t work like that because of the personal allowance being given back, but stick with me) - 47% from £150k upwards. That’s PAYE for you. That “basic rate” if you want to call it that - 28% - the one that the average person pays, and the one that raises a lot of the money (from a percentage perspective) - has flitted between 31% and 33.25% since 2000. Part of the poison pill - a MASSIVE part - that Jeremy Hunt left - was to cut employees’ NI from 12% to 10% to 8% before getting booted. Instead, at the time we need to rebuild more than any of those other years (arguably not including 2009, but I’d argue that we do) - we are at 28% - at the time we can least afford it. This is utter madness. Only a political coward could not point that out and then scramble to get the money from elsewhere. The other thing that combining the taxes would do would be to bring non-working people who pay income tax - pensioners for example - and, yes, including some of us who might take income from multiple sources at levels that avoid employees’ NI contributions - and make everyone subject to the same threshold. It needs to get back to 32% as quickly as possible - personally I’d do it over a 4-year period, 1% a year, so that it took a slice but not all of people’s pay rises each year. I’m being idealistic here - not ideological. Employers’ NI could be renamed something to do with pensions, infrastructure and healthcare. It’s a “good tax” on the larger organisations because it is hard to avoid, whereas they use complex structures to avoid VAT and corporation tax, as many will know. It would raise a LOT more money, and the benefits come in other ways as well. Which ways? Well, it would fairly dramatically shift the yield curve downwards, especially on the longs. Why? Because the books would actually have a fighting chance of balancing again. Long time coming. Everyone benefits (apart from people who have net savings - but even some of those would benefit because they buy goods and services from companies and people who are subject to paying higher interest rates than they need to). 1% would raise about £6.5 billion per year, going upwards each year. That’s £26 billion raised just by going back to where we used to be. That’s not factored in the extra from bringing the non-PAYE income earners into the frame. Mutiny, they cry! Not in 2024 - the electorate would have swallowed it whole, in my opinion. It is solely fear stopping them. Is it that easy today? Well, the first 1% basically pays for the welfare cuts that haven’t happened. The Labour MPs can’t hear of there being a problem if there are double the number of disability/incapacity claims that there were a few years ago. With no appetite to get to the root cause, the headlines wouldn’t look good. Don’t get me wrong - this won’t happen in this parliament. There is not the political courage to do it. Reform hasn't the guts to do it either - they will just rely on some nonsense about growing the economy by 5% a year, which has no precedent whatsoever, and that no respectable organisation will believe (because it won’t happen). Instead, the October budget this year will bring even further speculation, fear, indecision, and selling of assets, as she has to look to pensions, ISAs, and council tax this time round if pretending to keep that manifesto soundbyte alive. That likely concludes why I don’t get into politics, for those that are kind enough to ask or suggest I might be good at it. That’s inherent proof that I wouldn’t be - but I can promise you one thing, I would have courage - because that’s what the country needs. You’d hate me (and you might not like me already) - but you’d hate me for good reasons. “Be the Overton Window” - that’s what I’d have on the wall in the office at Number 10. Or Number 11. Anyway, back to reality. Our 152-page report on fiscal risks and sustainability. It slid out in September 2024 with a whimper. It was limited to the Institute for Fiscal Studies, and parliament, basically. It didn’t even make the supplement, at the time - a true yardstick, I’m sure you’d agree. This time round we had major media coverage, sparking some seriously stark headlines about unsustainability, national debt, pensions, and net zero. What’s changed in that time? A sense that defence spending “probably needs to increase” becoming a firm commitment to get it up by about £30bn in shortish order, and much more than that in the next decade or two (although I’d file those NATO promises under “things that will never happen”). A failed tax raid - effectively - so far. I’ve provided my own analysis before as to how the £25bn in national insurance has probably raised £6bn - £8bn if that, and it could easily be less if you blame a lot of the anaemic growth since the announcement of it on that specific tax rise. The BBC are now publishing headlines from their top economist, Faisal Islam, saying that “Rachel Reeves autumn Budget will see significant tax rises” - that’s not a headline from last year, but from last week. It’s as mainstream as it gets. But let me qualify it - it is another bunch of wrong tax rises, whilst we fiddle to maintain the poison pill tax rate of 28%. The people aren’t helping either; although for that, once again, blame the Government. Simply saving the difference - which is basically what’s been happening, plus some more - means that consumption suffers. The Government is “making” people save, as well, by offering up such poor leadership and direction - people save because they are concerned for the future. Take that away, they will consume, the economy grows - win, win, win. OK - that’s more than just setting the scene. It’s also somewhat cathartic for me, so thanks for staying with it. Don’t worry, we aren’t going to line-by-line 154 pages - I’ll let you enjoy the rest of your day in peace relatively quickly from here. Relatively. Remember, this is written by the OBR and is supposed to be apolitical. They don’t do a bad job of that, in fairness, unlike forecasting for example, which they do a terrible job of. Where does the OBR context start, then? Correctly with the past two decades and what we’ve had to deal with. They separate them into three, although I see little point. The GFC/2008, enough said. The pandemic. Then the energy crisis. The pandemic was significantly responsible for the energy crisis, so I see no need to make that distinction, personally, but I agree in isolation it was a large enough event with a huge debt cost to the state to warrant a special mention. These shocks have strained the public finances. Another British award for understatement there. Since 2000, deficits have averaged just under 5% of GDP. A much more sustainable number - of course - is the actual GDP growth rate, which would come in (depending on who you listen to) at about one third of this. Debt was 98.1% of GDP by March 2024, highest since the early 1960s (AFTER the rebuild after WW2, not before, note!) - and public spending at pretty much 45% of GDP is its highest sustained level since the mid-1970s, where the combination of union power and ridiculous tax rates were busy ruining the economy. The OBR recognises future shocks will come. They will - of course - but if you take a heightened pandemic awareness and a much more robust and sensible financial system since 2008; both of which should be praised, but the latter more than the former - the Government is terrible at prediction but pretty good at reaction, if they have enough time. The OBR then lists shocks, which should not be shocks at all, because there is a list of them. Some have been known from many years: An ageing population (how is this a shock? It is just a dynamic - a big and serious one, but just a dynamic) Climate change - again, hardly a shock - and, in spite of rhetoric like “climate emergency”, it is very much that on a geological timescale, but will take decades to continue to sort out - and has been being discussed for decades prior Geopolitical tensions - more “shocky”, sure, but the reliance of the economy on oil is far, far lower than genuine “oil price shocks” of the 1970s, and one thing Europe seems to have got the memo on - largely - after recent events, is that they need to stick together. I’ve limited worries on this front in terms of first order consequences and being in actual, meaningful wars - but as a “taker” we are always subject to where we import our energy from in physical form. None of those are shocks. They are just day-to-day business for the Government, that we could have been on top of for the past 25 years, but haven’t shown the political gumption to do so. This report writes of an unsustainable path. How bad is it, and how soon will all that happen? This report is looking at the next 50 years. Public spending up from 45% of GDP to over 60%, on the current path - and revenues at 40% of GDP. This sees debt rising rapidly from the late 2030s up to 274% of GDP, which is a meaningless number. It’s not even an attempt at an accurate forecast. But what does the cowardly politician hear here? The late 2030s. Not in my watch. Move on. Taking into account a reasonable number of “shocks and pressures”, all the OBR alternative scenarios see debt moving to over 300% of GDP. There does, in reality, need to be an average spending tightening per decade of 1.5% of GDP for each of the next 5 decades. If you look at that, that is 0.15% of GDP per year. To NOT achieve that is frankly pathetic. But, instead, we have another 4 years planned out where that spending will instead increase, not decrease. How are the big ways to fix this, in the OBR’s eyes? Limiting global temperature rises to less than 2 degrees rather than 3 degrees. The OBR says this will alleviate around 10% of the upward pressure on the debt-to-GDP ratio. I have to be honest. I detest this argument. It still positions the UK as someone who can make a real difference at the global level on climate change policy. It’s just wrongheaded. We are takers of energy markets, and takers of global policy with a small amount of influence these days. Forget history, forget the past - this is reality. What we could do instead is enact any measurable net zero policies that have a net public benefit over a decent time horizon (such as the next 50 years). If the net cost is too high - and we know the sorts of numbers being mentioned here, although the cost you will have heard (£803 billion was this week’s OBR number) is two-thirds lost fuel duty actually, as it goes. The House of Lords recently summarised the cost as about £1.4 trillion, but a net public cost of £344 billion. Guess what I’d do? Pick one of the several ways to recover fuel duty (road pricing, higher road taxes, tax on charging points to be phased in) and plug the gap, but do the investments that created jobs and created value, rather than just heading towards an arbitrary target at all costs when we represent less than 1% of the world’s emissions. You do have to consider the economic loss of not doing anything, but we are not talking here about not doing anything - we are talking about a sensible, fiscally conservative, economic approach which will create more value which will mean we still have a government and a system. The best approach for climate change, as I’ve said before, is for everyone to euthanize themselves - does that make it a strategy worth discussion? Of course not. So let’s have some common sense return to this debate. The OBR moves on to health next - improving the health of the population could reduce the rise in debt by up to 40% of GDP (so, I’m not sure why climate change came before that unless it IS a political agenda, of course, in this independent body) - on that front, I’d look at and measure the success of the sugar tax on drinks and use a similar mechanism to push up the price of the ultra processed nonsense that is at the root cause of the obesity epidemic, and use the extra revenue to fund more awareness, subsidise some healthier alternatives, and in overall education. Productivity is last but not least on the OBR’s list of bullets here. Every 0.1% increase in productivity reduces the rise in the debt-to-GDP ratio by 25 percentage points. Yes, you read that bit right. Should we not have the very smartest people in the country working on this? Should there not be a minister for productivity - and a proper one, with a track record, ideally from the private sector??? Of course there should be. Do you know who is responsible at the moment for productivity? It is split between the “Employment Rights Minister” who you won’t have heard of, the Secretary of State for Science, Innovation and Technology Peter Kyle who you might have heard of, who has also got R&D and AI within his brief - an important role to say the least - and the Business Secretary, Jonny Reynolds, who has no business experience as discussed many times before. How wrong-headed is this? Read it again. 0.1% increase in productivity reduces debt-to-GDP by 25 percentage points. 1% wipes out the whole problem. What the fudge are we actually playing at at the top level in this country? I’m not meaning to minimise this problem. It is huge. Which is exactly why you would want the brightest and the best to be working on it. It dwarfs all other problems in its economic magnitude. It’s worth noting at this point that all of this is based on last year’s output from the OBR. This isn’t even including a single thing that this Government has done, as yet. This is the path left by the last Government. That’s really only a political points scoring note, though, because this path has not improved over the past year in my opinion, and won’t with the lack of political guts that I’ve been talking about today and over recent weeks. The report then goes into further detail about those three areas, in the completely wrong-headed order in which they’ve been placed. Climate change - in the projections here, we see as mentioned that the major loss is the loss in fuel duty. It will need replacing. It also includes carbon tax revenues growing significantly, which will be a drag - it really graphs a set of taxes which currently sit on those who buy fuel, moving them across to those who actually contribute the carbon taxes. The OBR talk a bit about the ingredients of why climate change hurts GDP - reducing labour supply, increasing morbidity and mortality (a HUGE assumption which I think would need justification - there are currently 75 times more excess deaths due to cold rather than heat in the UK - it isn’t just about heat, which is why I hate the phrase “global warming”, but I really would like to see some hard data here); reducing agricultural output and increasing energy costs (but I thought energy was supposed to get cheaper as it was renewable?). To be honest, it sounds like logic that a truck could be driven through - but this is a classic case. Who watches the watchers? Who is scrutinising the OBR here and challenging them or holding them to account? They assume 3% lower GDP in an under 2 degree scenario, and 5% lower GDP in an under 3 degree scenario (this is the increase in global temperatures by the end of this century). They do cite “considerable uncertainty”. It makes me wonder why it is point 1 on their 3-pronged summary here, then? Not political my ear. Yes, they are citing credible studies here, but I don’t see an effort to take the baseline across the board. I also don’t see them mentioning the 99% lack of control the UK has, and the fact that the following 2 points are more significant from an economic perspective. The economic side of climate change tires me, as you might be able to tell! They then go on to list the terrible extra costs. This is a serious part of the executive summary of this report - less than a billion quid, citing things like 0.009% of GDP and 0.006% of GDP on extra flood defences. I can’t get my breath. I can’t give this any more airtime. This results in an increase of 23%-33% of debt to GDP is where the OBR ends up. Or - 0.1% increase in productivity today pays for all of it. Seriously. This is one of the least objective pieces of reporting, and one of the most disgusting pieces of prioritisation I’ve ever seen in a report that is supposed to be commenting on fiscal risks.

Health. Let’s see how we get on there, especially considering our current pathway is to be a national health service with an economy bolted onto the side, with spending being at a quarter of a trillion a year by the end of the decade. Health spending dwarfs all else.

What’s the summary, once again? Life expectancy is down by one year over the past decade. Fantastic news for pensions - but, flippancy aside, an end to improvements in life expectancy. I think controlling for the pandemic would be important here, as a more genuine aside. The real problem though is the gap which is widening between healthy life expectancy and total life expectancy, because when we are unhealthy we cost more than we contribute, or are on the route to doing so. The second order consequences of missing early cancer intervention, for example, were discussed by myself and others at the time of the pandemic when services were restricted or disrupted. The “zoom out” here - in the past 30 years, UK total health expenditure has gone from below 6% to over 11% of GDP. We are now above the advanced economy median. The forecast shows real public health spending (so, after inflation) growing at 3.1% over the next 50 years. This is well above any growth forecast of course, so it just eats growth like Pac-man. Demographic factors and the ageing population only drive 0.6% of this 3.1%, interestingly. Health costs rise sharply at 65, out of interest - but that will vary drastically based on income, also interestingly! This set of calculations is much, much more robust than the climate change calculations which are completely opaque. I’ll stop moaning about those in a minute, but I’m really stunned as to the way this has not been reported on even in “fringe” publications or those who are genuine climate change sceptics, which I’m not! Anyway - back to health, or lack thereof. The assumptions are that public health spending will rise to 14.5% of GDP over the coming 50 years. Then onto the implications. Healthier people are more likely to be employed, earn more, and live longer. Better and worse health scenarios in this forecast lower the deficit by 2.1% of GDP in the better scenario and worsen it by 2.3% of GDP in the worse scenario - a difference of 4.4% of GDP between those two, providing a range. Then the brutal bits. With better health, pension spending is up 0.6% of GDP in mitigation. In the “worse” scenario, it drops by 0.6%. This is almost entirely mitigated by working age welfare spending, however - in the better scenario it is down by 0.5%, and reverses in the worse scenario. This is the participation rate (inactivity, which I talk about all the time in the monthly employment figures discussion) being 1.5% up or down depending on which scenario we are talking about. “Real income tax” as I’m going to call it from now on rises 0.4% in the better scenario, and drops 0.4% in the worse scenario. Other taxes are up 0.5% in the better scenario, and down 0.6% in the worse scenario. You get the message. The actual economy is 0.3% smaller in the better scenario (the perversity of GDP, you are spending less on things you don’t want to spend money on, but that affects the size of the economy) - but overall you can see the net positive benefit to the economy. Make Dr Chris van Tulleken the minister for food, and get on with it. I’m sure he could sort it. That’s (I hope obviously) a bit of a flippant remark, but it wouldn’t be the worst place to start. Jamie Oliver might get his hat in the ring too. Onto the impact - 44% lower debt to GDP in the better health scenario, 49% worse in the worse scenario. 10 times the range difference compared to the climate change scenario. TEN TIMES. How about the overall long-term fiscal projections? This section brings us to a close. Population from 68m in 2022 (shows our confidence in measuring it, using a 2022 figure in a 2025 report) to 82 million in 2074. Birth rate 1.59, compared to the replacement rate of 2.1. In 2022 129k net migration per year was assumed (why, I don’t know) - now they are using the ONS “steady state” figure of 315k per year. Let’s gloss over what recent numbers have been! They do make the point that if net migration was zero, the population would gradually decline to 60 million by 2074. How does the makeup of that population change? Over 65s go from 19% to 27%, so the unsustainable triple lock gets even more difficult to change. This is getting more depressing, isn’t it? The really strong growth is in the very oldest groups (85+). That growing share of the population comes from fewer under 16s (25% in 1974, 20% in 2024, 15% in 2074) and 16-54s (50% in 1974, 49% in 2024, and 45% in 2074). 6% of the population will be over 85, from 2% today and 1% in 1974. Then we get some scary graphs - but, for me, exactly what we should be using in concert with a whole suite of non-economic measures when discussing migration. At what ages are we net fiscal contributors as a whole. It won’t surprise you to learn that it is 20 to 69. From a brutal economic perspective, at least the children generally stay and become those ages and contribute - the net cost of those over 80 is humungous, and this population shape change is the very largest challenge we are facing in this 50 year period, in spite of the ordering of priority in the report. Pension spending goes from 5.2% to 7.9% of GDP under the triple lock and this demographic trend. Sadly they don’t break that down into those two component parts. The results of all of these combined? Net interest spending moves from 2.8% to 11.3% of GDP as the stock of debt rises. No, no, no - this just cannot be allowed to happen! Today’s gilt rates are 0.2% above the assumed long run growth rate of nominal GDP (this is rarely used, remember, because we always talk about GDP as real GDP, inflation adjusted - this is non-adjusted). That 0.2% “premium” is extremely damaging! The smoking ban costs 0.3% of GDP. I detested this policy more than anything else Sunak did. If you want to smoke, smoke. Same for any vices - all we should do is attempt to capture the cost correctly and use it, as a Government, for doing some good and mitigating the cost of such things. If it costs 0.2% of GDP per year, tax it to 0.4%. But for goodness sakes, let people make their choices! You can probably tell where I stand on the drugs debate in general as well……. This conclusion is exactly why there’s been so much fuss here. There are 3 big problems here - one much smaller than the others, and the only one we are doing something about, from an economic perspective. We are ignoring the other two because our leaders are just too cowardly to address them. That really rouses the spirits inside me, as you can probably tell, and I am looking forward to using the small voice in my little corner of the internet to fight against cowardice in leadership going forwards. Now - who wants to fund my campaign? No-one, because you’d be paying more income tax? Well, that’s an assumption and I’d rather not make assumptions - that goes on far too much in these decisions that are worth billions of pounds. But you can likely take a step back and realise - a realist like me is unelectable, even if was deemed to have a good handle on the potential answers. The OBR assumes a recession or equivalent shock every 9 years, and then that grows the path of debt to GDP above 300%, basically adding another 50% over the period. Another good reason to fix the roof when the sun is shining, but also to frame the most recent shock - the pandemic - as the sizable one that it was. There are other scenarios explored - which are interesting. Short-stay migration (50% leaving after 3 years) saves 23% of debt to GDP due to lower welfare and state pension spending. Higher earning migrants (which we’ve tried, but with the wrong policies) would lower debt to GDP by 40% of GDP at the end of the period. It’s still unsustainable changing these things alone, but they do make a lot of sense. Productivity wise. If the public sector was increasing instead of decreasing in productivity, we would see debt down to 65% of GDP rather than 274% of GDP. Yep - stop for a moment. Blowing away even the significant changes in scenarios in the rest of the report. All in on productivity, please. That would be higher productivity but NOT increasing spending by the same amount, just with the nominal growth in earnings in line with inflation or similar. If we did what we usually do - IF we had the productivity growth - it would still be worth a 6000 basis point haircut from 274% of GDP to 214% of GDP - not enough, but still a massive improvement. We need to tighten slightly, but send much better signals to the bond markets. I am bereft at how obvious this is, and how little this is understood by the people in the jobs at number 10 and especially number 11. It’s a tragedy, to be honest. But instead we will have our eyes on the next budget, and I’ll pipe down and buy a ton of stock just like I did in the runup to the last budget, at great prices. Some of you might be spurred into action by my rousing words of hope on house prices in coming years and a market with rising rents - or you will just do what you were going to do anyway. You know what I’ll end by saying anyway. Before I do close, don’t forget to book your SUPER EARLY BIRD tickets to the next Property Business Workshop that Rod and I are running on Wednesday 1st October in central London. This time around - investment metrics and how to run your property business at scale. My favourite topic of all! Book here: http://bit.ly/pbweight Above all - please remember to Keep Calm, ALWAYS listen to or read the Supplement, and Carry On; there will be opportunities abound this year and towards 2030 (and 2074) - the risks around at this time, while they feel significant (the geopolitical ones) are far less meaningful to the UK housing market than they have been for several years - of that I have no doubt. Prices are on the up in the medium term…….Good luck!

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