Prediction revisited

Some time back I wrote a bit on the economic prospects of the UK following the gov savings.  I have been thinking about where we are lately.  I did write one update (5-months-on-and-we-have-not-even.html) which seemed to validate my original.  Ok, so I have to admit that none of the predictions were that hard to imagine.  But they still stand and I wonder whether they are going to get better or worse.

I have covered most of the Gov stuff in previous posts.  One thing is clear.  They have only started to stop spending and signs are that things underlying what looks to be not too bad on the surface are far from rosey.  For a start, my business is tanking.  But thats not the point of this blog.  But it is a good indicator of things to come.

A number of indicators have struck me over the last few weeks.  The first is that there is clear evidence that gov savings have been approached in the wrong way.  Rather than looking at transforming to make their 33% in 14/15 they have split it into 3 and look to make 12% each year.  Year 1, remove all contractors (mostly done), stop all projects (mostly done).  For many of the leadership, the first 12% is delivered.  Job done and time to go get your promotion off the back of it.  But next year the next new leader has to make the next 12% without any staff.  The prediction of the loss of many permanent staff has started.  Offering voluntary redundancies has seen many of the more able staff jump ship leaving the rest to pick up the slack.  Not a good position and morale across the board is at all time low (fact).

The last 12% seems very unpleasant as there will be no where to go other than redundancies of vast numbers of civil servants.  But as there seems to be little or no progress on transformation there seems little hope.  One thing is clear, the civil service has not changed (the one thing that was needed) and lots of people's lives will be left in a mess.

The housing market is now starting to look bizarre.  One of my predictions was that the gap between rich and poor would grow.  So I think this is one of the more interesting points.  Lets look at London to start with.  The market is stagnant or dropping for the majority of the bottom end of the market.   However, there is still some strength in the million pound plus bracket.  But not for long.  The rot is spreading and those sitting comfortably will soon be suffering and only the real upper end of the market will maintain value.    One of the results of the sales problem is that demand for rental is now at stupid levels and property owners are cashing in.  Landlords rents are rising and rising.  It is now widely reported that even renting in London is going beyond the reach of the poorer people and even the normally ok professionals in work are going to struggle to pay the rents.  This means that the bottom end of the market will be forced into sharing.

This to me is very worrying.  There are multiple parts to worry about.  The first is that rents at the current levels will greatly diminish the available money to spend on food and drink, clothes etc.  We are starting to see reports of retail slow down.  The rich who own the properties will be making a good return (well beyond mortgage costs) while the renters, refused access to a mortgage will see their disposal income drop and ability to save for the huge deposits greatly reduced. Its a simple vicious circle down.

So what else?  Well, discussions with my commercial office landlord reported an interesting position.  Many of his tenants are going out of business (me included sort of) and leaving.  He is unusual as he is not an investment company (he just lets out unused floors in the building his charity owns).  But his office is not unique and nor will his position be unique.    What we also suffer is the costs of business rates.  Whether we make money or not, rates must be paid.  They were about £1K per month at my place  and rising.  A level that simply cannot be justified or afforded for many in this climate.  So we move out and save that cost and the council gets nothing.  Why nothing?  Well commercial landlords will not reduce their rents.  Simple as that.  They will prefer to leave them all empty for years and wait for times to improve.  So offices and more importantly shops will remain empty.  So the council will get next to nothing for empty properties.  High streets will look empty and the remaining survivors will not get the levels of custom.  Rates and commercial rents never go down and do not parallel the position of the economy.  Its just untenable.

I recall (an anecdote) the story of my barber who worked alone (had been there for 30 years) and his landlord has just upped his rent to £17k per year.  Imagine the number of haircuts he has to do before he even pays his rent.  Then there are utilities and rates and insurance on top.  All of which only go up regardless of the state of the economy.  He was to be forced out.

Any prices that only go up and never down to track an economic climate are fatal.  Anything that does not react to supply and demand simply breaks the model.  And when the model breaks, we find ourselves where we are today.

So, in summary, retail spend dropping, rents going up, availability of mortgages dropping, commercial property prices only going up, utilities going up, unemployment rising, government spending dropping further, private sector unable to absorb the fall out.  With certain parts of the machine stuck in only upward pricing and not able to react to the rising and falling economy will lead to misery.

I think we are not far off a tipping point.  I give it 12 months (next financial year) before the misery really starts to kick in in an unavoidably public manner.  The chancellor's view that they are helping the property market by holding interest rates down is only helpful if you have a mortgage!