The question: What will happen (in theory) to the building trade when this looming recession hits?
Your trust in me is touching - if a little misplaced! I may be an economist by training (a very long time ago) and of course, as such, I can predict anything, absolutely anything - except the future. Nobody can predict the future and only a fool tries to do so! But I am absolutely wizzo at predicting the past, so let's start there -
As all the above have pointed out very eloquently, the last two years have been an aberration. People were given money to stay at home and not do anything. It was all freshly printed QE currency and has now become known as helicopter money. And as a recent interview with Mervyn King (ex-chair of the BoE) on Sky News in May, it was a grave mistake based upon a false understanding of MMT (Modern Monetary Theory - or as Pinocchio called it, his Magic Money Tree).
(The reason central banks everywhere made this grave mistake, he said, lies in the way economics is taught today, combined with the way that mathematical economic models are built today. But that is a rather large subject and has younger economists wailing and gnashing their teeth.)
So what happened in the past two years? Well, all that helicopter money began life as bank reserves looking for warm places to nest. And the warmest place to nest is assets, starting with property - homes! This was followed by any and all other assets, such as stocks, bonds and capital goods. Hell, you have to put your money into something!
So the S&P 500 went from $2,300 in March 2020 to end 2021 at $4,766. According to Really-Moving, house prices in England shot up by 17% in 2021.
But people aren't stupid. Unlike the government and the BoE, they know instinctively what happens when governments borrow money that they arithmetically will never be able to pay back and central banks everywhere print fresh supplies of currency to make up the shortfall - inflation. And gobs of it!
"Hey Abigail, our house is now worth double what we paid for it - according to Zoopla, it's shot up by about £70,000 in just one year! I mean, what with all that cash they're giving us and interest rates at rock bottom, I think now is the time to get that new kitchen you always wanted."
And out go the cheap and nasty Beko and Candy appliances and in come the Miele and Bosch machines - and some of that spending gets sidelined for his man-shed and a new laptop. And you get the call to order the machines and build the whole thing, complete with island and double sink and North American white oak worktop with walnut surrounds.
Abigail is happy in her new kitchen and Dave is looking at naughty ladies on his new laptop in his new man-shed (AKA working from home). But now comes all that lose talk on the BBC about recession - and Abigail and Dave ain't stupid. Dave has to go back to work.
And it's bad news at the Toilets-R-Us factory - orders are just not coming in. During the shut-down, all those bogs were flying off the shelves and with at least a quarter of the staff off sick, orders were piling up - and now half have been canceled and management is less than sanguine about the viability of the remaining orders. They may not get paid!
Management is running about with long faces everywhere. Mr. Sprechlie from marketing has just come back from the States and he tells the office staff that the news in the US housing market is a whole lot worse than here.
"And what happens there, happens here shortly afterwards!" he says.
So on the weekend and when Dave has 'finished' looking at those naughty ladies, he looks at some US business reports and into the housing market in particular. He goes through the lot - Bloomberg, CNBC, Stansberry, anything and everything. He types 'US housing market' into YouTube - holy shi1! It's all bad!
One major bank is predicting just a 30% housing price crash, most say it will be even worse! Even Zoopla-equivalent Zillow is predicting a crash. Property investors like Sam Zell and George Gammon are pointing out that well over one million houses are nearing completion in the US and prices are falling. There is an over-supply of mid- to upper-priced houses and that surfeit of supply was fueled by speculators betting on those crazy house prices going to the moon.
Dave is now very worried and phones his economist friend Andrew who points out that as you move East, house volatility falls. UK house prices are nowhere nearly as volatile as in the US because we do not move as often. Go further East and volatility falls even further. In Germany, buying any property incurs high fees and takes a long time. Move to Eastern Europe and people stay in one place for several generations!
You can buy a house and arrange a mortgage in some states in the US in 15 minutes. Here it takes 15 days and in Germany about 15 weeks. We sold a strip of land in Dresden and that took over a year. It took us about 15 weeks to sell a flat in Harrowgate (ages ago) and about 15 days to get our offer accepted and transfer the money for our present place (here in the UK).
So now I'm thinking about the market and UK kitchens in particular - so I phoned up my friend John who fits luxury kitchens. None of that cheapo Wickes and B&Q contract stuff - we're talking tens of thousands here and can easily go to six-figure kitchen builds. We went to school together in about 49BC, so he, like me, is an OF*.
I have just got off the phone to John (he's at a trade fair, doing deals and buying stuff) and he told me that business is booming in the luxury market. His core crew are booked for over a year and he cannot farm out any work to contractors for the next six months, as they too are up to their ears in work. That end of the market is booming!
So I called up Bruce. He does budget contract fittings and repair work for the various chains. Business is definitely beginning to fall off and some of the chains seem to be having cash flow problems as they are now over three months behind with their payments.
OK, so that is hardly a nationwide survey, but as a snapshot, it makes sense. Inflation is really biting and inflation is a direct tax on the poor and the middle classes, i.e. those who rely on the purchasing power of their incomes remaining steady. The rich on the other hand, only convert their wealth into currency when they need to exchange it for something.
If you are wealthy, buying stuff sometimes feels like stealing. You want their precious things and you can give them these silly coloured beads that they call money and they are even grateful to you for buying their grand piano, their car, their land, their house, children, whatever!
A tabletop made out of a giant slab of walnut that has been stored for over ten years and cured and treated for a year - £10,000? So? Yer, we'll have it! It looks nice. A carved granite lintel for the main entrance for £25,000. No problem!
"
Oh, young Rodney said that he wanted to become a record producer, so we got some advice from a broker and bought him a mixing desk designed by some chap called Rupert Neve for £300,000. Rodney is now trying to work out how to use it."
For that end of the market, price is really not an issue. Just how many coloured beads should I give the natives for their island? In 1867, the United States government gave Russia 7.2 million coloured beads that it had printed in exchange for Alaska. That is the equivalent today of about 150 million coloured beads.
So in answer to your question - what the F happens to the building trade when the recession hits? The cheap end comes to a shuddering halt for a while and the top end sobers up a bit, but carries on!
Well, that's what happened in the past anyway.
*Old Fart
