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Looking forward to 2022

One of the most dangerous things a keen investor can do is plan a future event as if it were a certainty.  Investing is a close cousin of business management and if you accept business life is inherently risk-prone and dynamic, then you must accept the same as an investor.  But, extrapolations can and must be made.  With that firm caveat in mind, lets take a look forward to 2022 through a glass darkly and attempt to see what can be seen.

The first thing of note is that equity markets are now remarkably buoyant having already factored in a more or less complete recovery in the economy premised on the assumption that there will be no more fundamental economic damage done due to Covid.  Unemployment is obviously set to rise as a few hundred thousand UK workers find, after furlough ends, their jobs already don’t exist any more. 

Markets are looking forward to a significant increase in interest rates and inflation as governments worldwide are expected to seek to erode some of the pain of repaying the mountain of overshoot in government spending due to Covid by allowing inflation to erode the real value of the amount to be repaid.

And then there are residential house prices.  From the beginning of 2021, there has been a frenzy to purchase and move as borrowers look forward with much more confidence than during 2020 fuelled further by employers having become more relaxed about home working meaning purchases away from known centres of business have greatly increased.

For how much longer can we expect to see the property frenzy to continue?  It appears one main factor will drive average residential house prices in 2022: namely, affordability.

The above chart shows the House Price Earnings ratio over time and this clearly indicates residential property purchases are now at a level were even more young people are unable to afford to jump onto the property ladder.  And, with the expected rise in interest rates to come, affordability is, perhaps, set to decline further. If these were the only important driving factors, we could anticipate an early stall in the increase in residential property prices.

To understand the full effect, we must examine the capacity of investment property barons to fill the possible future gap in demand from young people at the bottom of the property ladder.  Here, it must be acknowledged, It is likely that the community of property barons will see a profitable future for them is available by expanding their bank of rental properties to feed the needs of what they and I expect will be an increase in the pool of young renters.  Thus, the most likely outcome is the frenzy in recent activity will abate – think towards the end of the period of concessionary zero Stamp Duty Land Tax this June – to be followed by measured support from property investors sufficient at least to prevent a dip in house prices going forward.

Equity markets are likely to continue to repair in confidence for as long as we avoid major Covid related aftershocks. 

It is perfectly obvious that many Covid mistakes have been made and, although vaccines appear to have come to our rescue, many unspoken risks have been taken by rushing to mass produce Covid vaccines which use promising but insufficiently tested new technologies.

Baring various geopolitical or disease related black swan type events, planet earth appears set to bumble along in 2022 without addressing any of the seriously long phase trends which we arguably should have begun to fix 20 or so years ago – the crises in birth rates and providing a low debt highly productive future for young people being among the most pressing.

Posted in Economy, Financial, Investments, Markets, Property