Sunday Supplement 22 Jun 25 - Hold on

“It all comes down to interest rates. As an investor, all you're doing is putting up a lump-sum payment for a future cash flow..” - Ray Dalio, macro investor of note. This week’s quote is one about interest rates in a week where both the Federal Reserve and the Bank of England had a rate-setting meeting. Before we go into this week full throttle - Rod Turner and I are running another workshop in July, on Thursday 3rd - Joint Ventures and Mergers and Acquisitions this time around, and it is sure to be a highly popular one - a whistle stop of the agenda: Market dynamics, JV opportunities, and optimal legal structuring for property businesses. Learn the pros and cons of limited companies, share classes, shareholder agreements, and sustainable JV models. Dive into capital structuring, comparing debt vs equity, managing risk, and understanding personal guarantees. Gain insight into property M&A, from due diligence to asset vs share purchases. Apply concepts through two in-depth case studies: acquiring an asset-backed property company and navigating a distressed business sale. Understand strategic disposals, company wind-ups, and how to negotiate under pressure while maximising value. Don’t miss the EARLY BIRD tickets - 10% discount - they are only available for another FEW DAYS and are selling like hotcakes at http://bit.ly/pbwseven Straight to Trumpwatch, then. The first 10 days of July became even more volatile because aside from the 90-day tariff hiatus period ending, we also have the “up to two weeks” period that Mr Trump has designated for making a strike against Iran’s nuclear facilities. I’m not sure if the same tactics work, again and again, especially when aired on the world stage. At some point, a bluff is going to be called, and that point feels like it is coming within the next two weeks. Hold on to your hats. For a bit of distraction, we had some more chat about the “fraud” that has been proven again and again not to have existed in the 2020 election. In reference to the same old tactics, TikTok/ByteDance have had another 90-day extension to find a buyer before facing a ban. Trump mobile was launched, as the world’s first influencer presidency continues to find ways to monetize itself. He also got legal authorization to crack on with the National Guard deployment in California, overruling the Governor. As usual - the primary impact of his actions was volatility, mostly in the stock market, but also in the oil price as a dip in the price reversed very quickly. The major economic news in the US was retail sales down year on year, rates held by the Fed, housing starts below expectations, and a 15-year mortgage rate staying close to 6% with the 30-year at nearer to 7% still (low 6.8s). Be thankful for what we are paying over here at the moment - I’ll go more into the longer-dated bonds and gilts when I round up the Bank of England meeting from this week later on. Let’s switch over to the real time UK property market. Chris Watkin is the mailman - Week 23 is in the postbox. Listings printed 37.6k, a little down on last week’s 39.3k, but are still 5% higher than 2024 YTD and 8% higher than the pre-pandemic market. My “10% more stock than a normal market” ready reckoner is still close enough. 27,400 price reductions, 14% reduced in May, 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. 32% more reductions than the 5 year average, if you take the difference between 14% 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! 28.1k homes sold subject to contract. Healthy is still the watchword. SSTCs are up 8% year on year and 16% 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. There was a net increase in stock of over 40,000 homes on the market in May. May 2018 was similar - the normal number looks more like 10-15k more on a “typical” year. Nothing to read into that just yet, but just how much stock can the market cope with before it turns into a buyers’ market? The 756k number is the highest for many years, and when buyers don’t match sellers, you know what has to give…..price. Am I calling a drop in pricing here? No, but I’m calling not much of an increase - not even keeping up with wages and inflation. I’d expect flat output from Halifax and Nationwide over the coming months. This is strengthened by other price news this week which I will examine in the macro section. Fall throughs are staying below the 7-year average, at 22.8% (last week 23.5%). All relatively normal “noise”. The net sales are still playing ball - 6% up on last year and 11.4% 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

What’s under the Macroscope this week? Inflation is up first of all, my staple for the last 4.5 years. The ONS private rents and house prices report needs a look. Rightmove caused a fuss with their asking prices report this week too, so that squeezes into the same slot. UK Finance also published some interest-only mortgage data, and my report on the most recently available quarter is also outstanding, due to other matters squeezing it out, so let’s catch up on all that. After that I concentrate on the gilts and swaps markets, as will remain a mainstay for many coming months and years.

Inflation, then. Yuck? Well, nothing of any real surprise, and nothing I haven’t been saying for a long time. The fact CPI inflation dipped under 3%, and certainly under 2% in 2024, was just anomalous - simply because ridiculous energy prices came back somewhere near earth. Core inflation, a much better gauge, has not been under 3% since September 2021, and as I keep saying, “3% is the new 2%”, in that it really should be the Government target, and is the accepted number by both business and households (if not more) in their own calculations and expectations. There was also one more embarrassing egg-on-face moment for the ONS as, recently, they admitted that April’s inflation was 3.4% not 3.5%, primarily blamed on the Government reporting the wrong number of vehicles being subject to paying car tax in April. Where do you start? Sigh. So in theory, the May print of 3.4% was a hold, rather than a drop from 3.5%. Importantly all the numbers hit consensus, so there was no real change in the gilt markets - in fact, core CPI inflation at 3.5% (down from 3.8% in April) was 0.1% below the forecast consensus. Small mercies and all that. CPIH - which the ONS prefers, is still 4%, down from 4.1% in April (remember, this includes the cost of housing). This makes it more equivalent to the American CPI, which is not the primary metric in the US (because it isn’t the one the Federal Reserve prefers, which is PCE). Month on month CPIH was 0.2%, much more normalised after Awful April (CPI was the same). Downwards contributions were from transport, more worryingly upwards contributions were from food primarily, and then furniture/household goods. Core CPIH is still above 4% - 4.2% for May, down from 4.5% - core CPI at 3.5% was down from 3.8%. Right direction, core metric still far too high for a 2% world. Services inflation? At CPIH up 5.3%, at CPI up 4.7% (below 5% is a result, to be honest, in recent years). Remember this makes up nearly 50% of the CPI/CPIH numbers in the entire economy. OOH, the owner occupier measure of housing, continued a slow downward trend printing 6.7% for May 2025, down from 6.9%. From a high of 8% at the turn of the year, this is acceptable but still far too high of course and still crushing households when their time comes to get their rent rise or get their re-fixed mortgage. OOH is 17% of CPIH, we learned this month, so about one-sixth of all “true” inflation as the ONS sees it (they vastly prefer CPIH to CPI) is down to housing costs. Sounds like it is in the right ballpark. Food ex-alcohol at 4.4% is a jump of 1% since April. Seems we waited until May to really raise the prices on the supermarket shelves although there’s no doubt that the national insurance and minimum wage rises will be the primary drivers here. This really is the nastiest inflation because it hits the lowest earning households the hardest. It’s the highest print since Feb 2024, when it was on the way down from a peak of 19.2% (peak was March 2023). The root causes were sugar and meat, apparently. Food alone contributed 0.1% to the total inflation rate for May 2025 in just one month, and as a percentage of the overall figure, it contributed 0.4% to CPIH for the year. Housing and household services alone contributed more than 2% to the CPIH inflation rate in May 2025 (2.04%). The biggest contribution it has made since Mid-2023 when energy bills were still driving that, primarily. So - on their own, household and household services are up more than the entire target the Government sets for the Bank of England’s inflation management measures. Get your head around that! The standard international comparison shows we are doing worse than everywhere else on the inflation front - 3.4% is a standout, with no-one else even above 2.5% in terms of our “standard” peers (EU, US, Germany, France). RPI was up 4.3%, for those who have it in leases. Price woe isn’t going away anytime soon, and the Bank of England are forecasting around 3.75% for Q3 2025. A reminder, though - the second biggest beneficiary of inflation is the leveraged property investor, just one behind the Government (because boy, they have some leverage). House price indices for the week, then? Let’s start with the ONS PIPR (Price Index of Private Rents) and house prices. They have rents up 7% to May 2025, down from 7.4% in April, and coming back towards earth as well. Remember they survey existing and new rents, and the split is roughly 4:1 existing to new. The UK house price index also returned to normality - on reflection, I should have commented on the large spike for March’s prices, but didn’t - it completely normalised and went the other way on April’s prices according to the ONS. So for the last 4 reported months the prints have been: January, up 4.1% year-on-year, February up 5.6% year-on-year, March up 7% year-on-year, April up 3.5% year-on-year. If you went from January to April it would not be a big fuss - just an adjustment - but once again the Stamp Duty deadline has messed with the figures. 3.5% is the lowest print since November 2024, but nothing to write home about; simply confirmation that the sideways market has dominated the first half of 2025, although as I’ve said before, when you split it down regionally, the more accurate statement would be that a buoyant Northern market in cheaper stock has counterbalanced an anaemic Southern market with more expensive stock. The regional breakdowns in the report play that out as always - North East now the big leaders in the regional capital growth stakes, up 6.4% year on year, and the South West lagging at 0.9% YOY. London is up to +3.3%, with the much higher prices less influenced by a comparatively small shift in stamp duty and far fewer first time buyers missing out simply because of stamp changes. The East Midlands is doing well still, the North West has cooled to come closer back to the average. If you ignore the SDLT noise - which you might as well - things are still steady, as we know from our real time market updates. Don’t waste emotional energy on clickbait headlines and YouTube videos. Rents wise the North East wins the tables again - +9.7% year on year. London has again come back towards the mean but is still up 7.7% YOY. Yorkshire still lags at +3.7%. The South is still losing to the North here though, with the midlands in the middle - very much like the capital growth charts as a whole. Rightmove threw their spanner towards the works, with -0.3% month on month for June asking prices, which is seasonally unusual (but, in my opinion, still very much an SDLT symptom) - and asking prices are only up 0.8% year-on-year on Rightmove. This is very much feeding into our flat market theory for the next few months, for whatever that is worth. A word on flat markets though - my absolute favourite to trade in. Uncertainty means buyers calm down or hesitate. Vendors who want to sell cannot make a bullish case for a great market - all roads lead to Rome for the calm and measured investor, here. 2019’s flat market was one of the best we’ve ever traded in, as a group. To give you a nice comparison, the average UK house price is £265k according to the ONS (to April 2025), whereas the average UK asking price is £378,240. This is why we don’t pay too much attention to asking prices! Rightmove draw the same conclusions as me, though - higher-priced southern regions and the capital have seen larger price drops; they blame higher SDLT, but I think this is just a continuation of a trend that’s been going on since mortgage rates “normalized”; and they report on more stock being available (as I’ve been doing, thanks to Chris, for months and years now). They describe buyers as “resilient”, and the key core economics data here is: buyer demand up 3%, but supply up 11%. I’m so pleased to see the advice I’ve been giving for months in print here for Rightmove - simply proves the real-time analysis is the way forwards - I quote: “With buyer choice so high the market is very price-sensitive, so pricing realistically is key to selling” Won’t hear me disagreeing. Next is a stat that Chris W will also love - “Rightmove data shows that homes which attract an enquiry on the first day of marketing are 22% more likely to find a buyer than homes which take more than two weeks to receive their first enquiry” - Chris continually refers to overvaluing, which is the cancer of the industry in my opinion - and this shows just how damaging that can be. Rightmove tend to striate into 3 categories - first-timers, second-steppers, and top of the ladder (average asking price c. 700k). The -0.4% in first time buyers is concerning for new build developers, but the -0.8% at the top of the ladder absolutely emphasises what I’m hearing from many when they are trying to sell expensive units at the moment. It’s very difficult. Middle of the road, 350k stock - much less problematic, asking prices down 0.1% on the month. Rightmove do recognise this June blip is simply a reflection of more strength than expected in April and May, and blame the SDLT as I’ve said. It simply looks like a manifestation of what I say very often - the market moves very slowly. That’s one of the reasons I put the amount of effort in that I do - to make sure that my group, and all the Supplement readers and listeners, can benefit in the now rather than waiting for the headlines to report on what’s already been blindingly obvious for weeks, months and sometimes years, and only being able to look back on what might have been is no good to anyone. Rightmove has a weekly mortgage tracker which is reporting 4.61% as the average 5-year fixed (a fairly good proxy to the Bank of England drawn mortgage rate, I’d say) - down from 5.04% last year at the same time. They say “only slightly down” - more on this sort of viewpoint in the deep dive, folks. The “days to secure a buyer” metric, which is a good little temperature gauge of the market, stayed at 59 in April, when the normal months in the past 12 have printed around 60-65, so it still looks “warm neutral” on that basis. Affordability is still looking good on a recent history basis, much as that would upset most apple-carts in the media, and I’ve used that as this week’s image.

How about the mortgage data? UK Finance isn't fast, but what they produce is quite rich, so it is always worth a look. At the end of 2024, there were 541k interest-only (IO) homeowner mortgages outstanding, 18.5% down on the 2023 end number. There were also 174k part-and-part (or partial amortisation) mortgages outstanding, which was 13% down. The total IO stock is down 78% in number since 2012 (when the data was first collected!) and 61% in value. IO loans at over 75% LTV fell by 25.7% in the year, and now are only 5% of the total IO stock, compared to 36% in 2012. IO loans maturing by 2027 shrank by 67k to 120k loans, down 35.8%.

The UKF Director of Mortgages said - customers with interest-only continued to pay on or ahead of schedule, with 150k fewer IO loans on the books than one year before. He notes that very few don’t pay on maturity, and most of those pay within a few months of the end of the term. What’s still outstanding? £116bn IO, £39bn part-part. 570k of these mortgages expire in 2028 or after, and 24k of them are over term (£4bn worth). The majority sit below 50% LTV. Whilst on the UK finance bus, though, worth looking at their recent output too. According to Q1 data published by UKF, the average first-time buyer takes an LTV of 77.1%, at a loan-to-income multiple of 3.58 - this compares to “home movers” who take an average LTV of 64.9%, and have an LTI of 3.21; not dramatically lower, you would note. The size of those two loan markets in Q1 2025 was roughly equivalent - £22.7bn FTBs, £24bn movers. UKF have revised their website including putting some key data behind a fence, which it looks difficult to hop over if you are not a bank. That’s unfortunate - but the reporting seems to have stepped up several notches, and with that in mind I’ll be back to the website to look at some of the more recent reports in more detail, over coming weeks and months. Just quickly, I’ll look at the most recent report on arrears and possessions. Arrears have trended downwards - down 2% on the previous quarter - and down 6% in the BTL sector (mortgages in arrears of >2.5% of the balance, this is). Homeowners the figure is 1.03%, BTL it is 0.61%. Possessions are up - 18% homeowner, 16% BTL - but below the long-term average - this is the typical part of the cycle though. Arrears were trending upwards, now possessions do, but arrears have been trending down for a few quarters now, so soon possessions will also trend downwards. 810 BTLs were repossessed in Q1 2025, to put that into context. OK - the gilts. One of my favourite sort of weeks. We opened at 4.076% yield for the week on the 5y gilt on Monday, and closed at 4.046%, another small down week. Thursday’s close was 4.035%, still above the elusive 4%, which we flirted with the underside of very briefly this week (near Thursday’s close). The inflation figures did very little as we were so near consensus. Nothing to write home about. Thursday’s swap close was 3.702%; the discount from the 5y gilt yield was 33.3 basis points. This has become quite standard in recent months/for over a year now. One month ago the 5y swap was 3.847% yield, one year ago it was 3.823%, for some recent historical context. This puts our best guess of the cost of ltd co mortgage debt at 5.7% or so, and our “safe range” of 6% debt cost being a realistic one to work from. Once again it is a “no option” Deep Dive - I have to put you in the picture of what’s formed more recently as a firmer view in my mind. We are largely ignoring a story that’s in front of our eyes - and whilst it isn’t revolutionary, it is significant. Although my recent LinkedIn polling suggested differently, with it being nearly a 50/50 cut/hold at this meeting, it was another unsurprising result at the top level. The Bank voted to hold the rate. I had this at more like 98%. The individual voting, however, once again moved to a different position than my expectations, although only by one vote. As a reminder, there are 9 people on the committee - 5 internal to the Bank, 4 externals. We know we have 2 committed Doves, now, because we have seen enough votes from Alan Taylor to class him as such (he joined the committee back in September 2024 and any leanings are kept largely “state secrets” as far as what anyone can find on the web) - but we’ve had enough down votes now from him to be confident in this classification. Dr Dhingra has voted down or hold ever since the rates reached 3%, with her primary concern being an anaemic economy (you can see her point). What wasn’t expected, though, was the crossing of the floor by Dave Ramsden (internal member, Deputy Governor of Markets and Banking). Perhaps it should have been expected, by me, because he did the same (was the first to cross the floor to join Dhingra in voting for cuts) back in 2024 before Taylor had joined the MPC. However, this was such an obvious hold I was legitimately surprised, even though I would have had him at 75/25 hold/cut if I’d analysed him individually beforehand, because of his “previous form”. 6-3 was enough for the markets to see it and move the probability of an August cut to 80% from 60% before the meeting. I’d bet against the 80%, at the price, to be honest, although I think a cut is more likely than not. There’s lots to happen in July (see Trumpwatch) and bond markets are already jittery - unless it is well justified (and we aren’t expecting to see lower inflation soon, remember) - then I am not so convinced. It’s closer to 50/50 for me than 80/20, that’s for sure. Anyway - as so often these days - did it move the needle in the gilt markets and mortgage markets? Not at all, as we already know. Not a tiny shred. They traded as they had done all week pretty much. These “filler” meetings fill-in between the quarterly report meetings, and thus they are not overly substantial. There’s no new formal forecast data injected, although of course the Bank does robustly consider developments since the last meeting - and indeed, their summary of them was that UK-weighted global GDP had grown as forecast, tariffs remain uncertain, GDP data had been impacted by tariffs (positively in the UK/EU and negatively in the US, because of Q1 stockpiling), US inflation had fallen a little more than expected, and the UK wage growth and inflation rate was remaining higher than expected. They also noted a 26% increase in the oil price, with gas spot prices up by 11% (this is putting what was a forecasted cut, again, in the price caps, in October, to an expected price rise at this time). They noted flat yields, recovering equities, a weaker dollar, and the Fed’s hold of their rates. They also noted higher expectations for inflation from the Bank’s survey participants, although they note that the “median respondent expects inflation to be at 2% at the end of the forecast period”. They have revised their forecast for Q2 GDP growth to 0.25% - which I still think is wrong, but I am alone, it seems, in predicting -0.1% to 0.1% as a much more accurate range. They note weak PMIs, and poor quality data from the ONS (once again) - particularly on jobs numbers. Just as I did last week, they flagged the 109k May contraction of payrolled employees (estimate) as a big number, but not a certain one until next month’s figures are out. They also noted - as I did - that lots of surveys including the KPMG/REC one which is the most respected, have been noting lower jobs for some time. They are holding on to the 3.5% - 4% for wage rises by the end of the year, which has been predicted by their decision maker panel - usually pretty accurate, but employers are going to need to get on with it - this looks tougher than expected at this point in time with rises still being north of 5% as I type this. The NI shock factor may sort this out on its own, manifesting over 1-3 months, however. They also mention business expectations of their own price inflation of 3.7% in one years’ time and of CPI in 12 months at 3.2%. There’s a clear focus by them on the weakening labour market and this seems like the primary driver for the August cut, as they bang on about “moderating wage increases” without too much real evidence of that. However, the fact that the panel hasn't changed their mind and are still saying 3.5%-4% is enough for them to justify this decision, it seems. They now see inflation at 3.5% in H2 2025, before “falling back towards the target from next year”. Can kicked. The Bank’s second remit behind inflation is unemployment, to the tune that the interest rate influences unemployment, so you’d expect them to be bothered by this, and they say plenty about it, including the drop in vacancies that I noted last week. In the summary, the language they choose is that “there has been substantial disinflation over the past two years, as previous external shocks have receded” - this is true, but not disinflation to target, of course - and pat themselves on the back for minimizing second-round effects and stabilising longer-term inflation expectations. They also note that they are keeping an eye on the wage-price spiral - the cost of living increases have stopped that from happening thus far, but they remain vigilant. This is wise. “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.” is how they close the exec summary. In plain English - these cuts aren’t happening quickly. Now - more of the so-what in the long run, and the picture that’s been forming in my head with some clarity over recent weeks and months. The yield curve. I’ve mentioned it more than a few times over recent years, because of some strange behaviour - although a lot of that shape is now explained, in hindsight, as “risk management” by central banks including the Bank of England. This week’s image is the yield curve currently (the black line) compared to the yield curve from 12 months ago - and this is helpful to show how the story has changed. A quick explainer - the yield curve simply plots the yield of all of the Government bonds, over time - so you have the (annualised) yield on the y-axis versus the duration of the bond on the x-axis (how long it has left to run before maturity, when the bond is redeemed at its face value). Last year showed what’s called an inverted curve. This had been going on for a couple of years. Typically this is a recession precursor - but what all the analysts missed who started calling for one (although in fairness there was (a small) one in the US in 2023, and a tiny non-technical one in the UK in 2024 between May and November) - was that this “risk management” measure of tighter interest rates than the natural rate was exactly that. The market said it was “too high” for borrowing, and that’s why the nearer-term rates were higher than the medium-term rates. Let me translate. The graph shows that 12 months ago, the cheapest debt per annum was the 6-year gilt. Next up, 5 and 7. Good news for borrowers, relatively - although very few were “thankful” for low rates in June 2024. Little did you know. The gilt was just under 4% at 5 years, and is just over 4% today - very little change. The 30-year gilt - much more important in the USA, although it is their own bonds they look at (which are priced very similarly to ours, mostly) - was 4.6% last year, but 5.27% today. The low 5-year rate helped those who wanted 5-year mortgages, and the high 30-year rate does not help the US property market which relies on and generally writes 30-year and 15-year mortgages (7% is pretty painful, as discussed earlier). If you wanted 2-year money a year ago, it was 4.2% on the gilt, which was a big reduction from where it had been when rates were higher. Let me explain the Bank’s role in setting this price. The bank rate is a fair proxy for the 3-month rate (you’ll notice the yield curve I’ve shared starts at 1-year, but in reality it goes back to 1-month and even 1-day). The base rate is usually very very close to the 3-month bond yield - because in 3 months it isn’t expected to change much. It starts the curve. It influences it, of course. So - if you think about it, 2 years has 8 3-month quarters in it. One-eighth is determined by the Bank rate. The other 7/8ths are influenced by it, but not set by it. The further out you get, the less the Bank rate has had an influence on it. In 3-months time, the gilts that are 2-year today, only have 21 months left to run. This is an important concept. So - you could say the Bank sets 1/8th of the 2-year rate. More accurately, the bank rate has a declining influence - but it would be fair to say that the pass-through is somewhere between 70% and 90%, according to a summary of the research in this area. Remember the market will take into account what they expect the Bank to do - this is key. When it comes to the 5-year, that declines to more like 50% to 70%. When it comes to the 30-year - make it more like 25%, or “a few dozen basis points” (less than half a percent of the actual yield). This makes sense - the further out you are, the less you are influenced by the rate set for the next 3 months. In the UK, the forecast period is 3 years, which has to be respected - and the people on the Monetary Policy Committee, other than the Governor who can be controversial and also is there to be shot at, of course, are mostly very highly respected and preeminent economists. So - in terms of the 2-year mortgage market, most of the pricing is done by the Bank of England, directly or indirectly. In the 5-year market, most of it is done by the market. In the 30-year US market - it is almost all the market. Now extend that concept of time, and I’ll help you read the story that the yield curve tells us. If we consider the 1 year and 2 year curves, one year ago - the 1 year yielded 4.65%. The 2 year yielded 4.182%. The overall concept of arbitrage (zero risk trading) then suggests that the expectation, one year ago, of the 1 year bond yield as at today was 3.72%. How do I know that? Well, if I take the 2 year bond, and extrapolate 2 years of returns at 4.182% per year, but then consider that in the first year I would return 4.65%, then the REMAINING year would have to return 3.72% for me to get to 4.182%. What IS the 1-year bond yield today? 3.79%. Not an exact science, then, but a pretty good predictor. When would this really not have worked, at any point in the past? Around the time of a crisis, recession, or black swan style event. Covid. Brexit. The GFC in 2008. Otherwise, it should really be a pretty stable predictor. The longer out we go, the more we are unsure, or the more likely we are to have one of these black swan events. However, you can see how we can get the picture to tell us a mathematical story. In the “normal” world - (remember that?) - we would expect the graph to shape upwards over time. Why? Lock your money away for longer, get a better rate - because it makes up for uncertainty. OK. Seems reasonable. It’s certainly the interest rate savings accounts I was brought up on as a kid. Do you want to use term deposits to lock money away for 5 years or more? Many do, as they are extra rainy day savings - some pay interest payments annually or monthly, of course, some roll up to the end. But - at what gradient would we expect the slope to go upwards? Perhaps not as sharply as today. The “term premium” - the extra money you get for locking money away for longer - is estimated as “between 0% and 1% and often between 0 and 0.5%”. At the moment that premium is more like 1.25% for 20-years or 0.6% for 10-years. Why is it outside of the normal range? Guess……inflation expectations! If you know your principal - the money that buys the bond in the first place - is going to be worth even less than you thought when the bond matures - you demand a better return for it, of course; and demand and supply sets the price in the secondary market (influenced by the Bank of England as discussed). Let’s do our same exercise for the 20-year bond, then. 10-year yield today? 4.543%. 20-year? 5.168%. 10-year yield in 10-years time? 5.8%. That’s the current story. Subject to change, of course. Much more likelihood of a change in 10 years than in 1 year - 10 times as likely, you’d say - or even more. 1 year away is much easier to predict. The further away it gets, the harder it gets. Why the focus on the 10-year yield, here? Because that’s the liquid one, the one that most of the money comes from historically (more than any other time period). It’s the time horizon that the institutions like. So - if that was a reflection of the UK’s average cost of Government debt in 10 years time - that would be problematic, to say the least. Every 1% on top is an extra £28bn a year in interest payments, in today’s money - so an extra 1.5% is another £42bn in 2025 money that the Government spends on servicing debt rather than anything else. Ouch. We need to look at the 5-year, however, for our own purposes. Today, 4.046% as discussed. The 10-year - 4.543%. So - the 5-year in 5 years time? 5%. Let’s say that’s the swap rate too - we have enjoyed a one-third of a percent (roughly) discount on the swap in recent times, but say that’s gone away (we are more likely to preserve a discount based on demand versus supply, at higher rates, you would think - but there’s no guarantee). At a 5% swap rate, without major league efficiencies in financing and applying today’s logic - we’d expect 7% mortgage rates. By my usual calculations, that would see “normal” buy-to-let workable yield be at around 10%, and for a 75% LTV loan, 8.75% yield would be needed in order to be able to get that level of leverage. There’s a huge world of difference between 7% (which we’ve touched over the past few years - at one point I was stacking my deals at 7.25% expected mortgage rates, and I was doing very few deals) - and 5.7% “nominal cost of debt”, where we are today. I’m writing this up and making it “official” because I keep hearing, and keep being told, the same thing. “Interest rates are going downwards”. I’ve been guilty of the same in various talks I’ve given, speculating that rates will be lower in 5 years time. That’s not what the markets are telling us today. The story of today is that rates are increasing over time, and the primary driver is inflation. I said back in 2020 after I analysed previous pandemics - many of them hundreds of years ago - that the inflation rate tended to be around 1% higher for 30 or 40 years. It is only in the past few months that the bond markets have seemed to accept this situation and start to price it in. The other driver, of course, is the massive amount of Government debt that the UK Government has (and this applies to many other countries as well of course, but very much in the USA). So what? Don’t stay in the game waiting for lower interest rates over time - under current conditions they aren’t coming. You are gambling on a recession. Make sure things stack up in 5 years time at 7%. They will need to. Don’t sit and wait for lower rates to refinance - some have been waiting until 2022 and burned some serious money in the process. The market is telling us that’s not coming. I think - as an aside - this also tells us why I am not convinced rates go a lot lower than 4%. There’s easy short-term reasons why they can - because the economy needs some “help” - but that help is usually temporary. It wasn’t in 2009 - noted - but it took an awfully big blowout for that to be the case. If it’s just a few bps on unemployment, or similar - expect a similarly small response to “help out” briefly. Borrowing from the future to support the present day. However, we - not as soon as the US, you wouldn’t think - have got a rough road ahead as we deal with spending too much, not raising enough tax revenue and ultimately not growing enough - a difficult problem to solve and one that won’t be solved under this regime because I think we’ve already seen enough evidence around that. Does this mean house prices won’t go up? Absolutely not. Higher inflation drags them up more, not less. However - a lot depends on regulation, and that’s what I want to talk about next week. A quick post-script this week as I don’t want to wait another week before reporting on this. On the watchlist, very closely, at Propenomix HQ is the OBR monthly commentary on the Public Sector Finances. What happened in May? £600m more borrowing than was forecast. However, April was £3.5bn LESS than the OBR forecast. No other forecasts REALLY matter at all, although the bond markets do care what the IMF, OECD and the likes do say. Current “balance” below forecast, then, is £2.9bn. That’s good news, to be clear, and still means that the October/November budget isn’t carnage “as of right”. It also depends on growth forecasts - and the growth forecasts for the next year that will come into the forecast window: 2030/31 - and the OBR’s growth there (which should be quite bullish, because recent changes like the NPPF changes have impacted GDP upwards - and the “housing bank” makes that “all possible” if you take a positive view of the world!). As we’ve come to the end once more, remember to book your tickets for Thursday 3rd July for the next Property Business Workshop too, on Joint Ventures and Mergers & Acquisitions - another fabulous day of learning and discussion is guaranteed! Hurry, because those EARLY BIRD tickets only have a FEW DAYS left - book here: http://bit.ly/pbwseven 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 - 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. Good luck!

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