“The fallout from the mini-budget continued to impact the market,” says Nationwide’s chief economist, explaining the 1.4% decline in house prices in November.
There’s never a wrong moment to kick Liz Truss and Kwasi Kwarteng’s excursion into fantasy economics – and, yes, the shambles, and the spike in bond yields, will have been a factor. But let’s not pretend that the mini-budget is the sole cause of falling house values, or that declines will be halted by the subsequent policy U-turn in the Treasury.
The script was set when interest rates started rising 11 months ago, ending the long era of virtually free money. Look at Nationwide’s pretty charts and you can see that the turn coincided with an unnaturally high peak in the price of houses expressed as a multiple of average earnings. At roughly 7 times, the ratio was even higher than the 6.5 times seen in the frothy, pre-banking-crash days of 2007.
There are, then, many more months of “house prices fall” headlines for prospective first-time buyers to look forward to (those in work, that is, and those whose pay rises vaguely keep up with the rate in inflation in goods and services). Key variables include how high mortgage rates go, and for how long; and what happens in the rest in the economy, including how much of our earnings are claimed by energy bills.
“A relatively soft landing is still possible,” says Nationwide. For what it’s worth, the Office for Budget Responsibility last month forecast a fall of 9% between the fourth quarter of this year and the third quarter of 2024. And the thinktank Capital Economics goes for a 12% slump, arguing that “affordability will have to improve substantially before demand can recover and prices bottom out”. Precision is impossible but you get the picture. Whatever the type of landing, it’s some way off.
Thank you, Next
Next’s part-time role as a rehabilitation centre for ailing retail brands continues apace. Joules, which operates at the flowery wellies end of the fashion market, is being rescued from administration in a £34m deal in which Next takes a 74% stake and the chain’s founder, Tom Joule, buys the rest. Next is also bagging the head office in Market Harborough – handily down the road from its own Leicester campus – for £7m.
Joules joins Next’s collection of “partnership” brands that, quietly, has grown quickly. The portfolio now includes Laura Ashley, Victoria’s Secret, Reiss, Gap UK and JoJo Maman Bébé. In most cases, Next takes a majority stake and allows an independent management to get on with the job. Its own contribution is to plug the brands into the Next “total platform” operation, which covers the website, warehousing, marketing and logistics.
The economics of the model look smart. The fees paid by the partnership brands to access the platform may not be huge, but Next will get a proper win if the brands are revitalised via exposure on the UK’s most-viewed fashion websites. In that case, the gain arrives from an increased equity valuation.
The process isn’t guaranteed to succeed every time (though the chances look reasonable with Joules), but the downside is limited while the upside is potentially substantial versus the size of the initial investment. Other big retailers with warehouse capacity, including Marks & Spencer, are playing a similar game. Expect the trend to accelerate.
Asos invites suspicion
It’s a serious governance no-no to move the goalposts on an executive bonus scheme when the game is already under way. Asos, the online fashion firm, has a semi-excuse in that it is in crisis-fighting mode after a series of profit warnings. The company needs to cut costs and staff and shed some of the excess stock that was written down by £100m in October’s full-year numbers.
So, yes, one can see why the board has changed the weighting structure of chief executive José Antonio Ramos Calamonte’s £1.05m bonus scheme. More emphasis has been placed on generating cash and less on meeting turnover and profit targets.
But why didn’t the remuneration committee make the change in October? Three months of the 12-month measurement period have now passed. And why did it invite suspicion by burying the new information in a hard-to-find notice on the corporate website this week? In doing so, the directors have probably guaranteed a row at January’s shareholder meeting. Fast fashion; slow-moving non-execs.